CNI CHARTER FUNDS, 497, 2000-01-13

CNI CHARTER FUNDS
497, 2000-01-13

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<PAGE>
497(e)
File Nos. 333-16093 and 811-07923

[LOGO]

CALIFORNIA TAX EXEMPT FUND
INSTITUTIONAL CLASS

PROSPECTUS
DATED JANUARY 14, 2000

INVESTMENT MANAGER:
CITY NATIONAL INVESTMENTS
A division of City National Bank

The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary
is a criminal offense.

------------------------------------------------------------------------------

MUTUAL FUND SHARES ARE NOT FDIC INSURED. MUTUAL FUND SHARES ARE
NOT BANK DEPOSITS, NOR ARE THEY OBLIGATIONS OF, OR GUARANTEED BY
CITY NATIONAL BANK. INVESTING IN MUTUAL FUNDS INVOLVES RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
<PAGE>

2
<PAGE>
TABLE OF CONTENTS

<TABLE>
<S> <C>
Overview........................................... 4
OUR GOALS.................................... 4
HOW WE PLAN TO ACHIEVE OUR GOALS............. 4
TYPES OF SECURITIES.......................... 4
CLASSES OF SHARES............................ 5
PRINCIPAL RISKS OF INVESTING IN OUR FUND..... 5
PAST PERFORMANCE............................. 6

Understanding Expenses............................. 7
FEES AND EXPENSES OF THE FUND................ 7
EXAMPLE...................................... 8

Management of the Fund............................. 9
INVESTMENT MANAGER........................... 9
SUB-ADVISER.................................. 9
ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER
AGENT........................................ 10
DISTRIBUTOR.................................. 10

Account Policies................................... 11

Understanding Earnings and Taxes................... 12

How to Buy and Sell Shares......................... 14
HOW TO PLACE AN ORDER........................ 14
BUYING SHARES................................ 15
SELLING SHARES............................... 16

Important Terms to Know............................ 17
KEY DEFINITIONS.............................. 17

For More Information ....................... back cover
</TABLE>

More detailed information on all subjects covered in this simplified prospectus
is contained within the STATEMENT OF ADDITIONAL INFORMATION ("SAI"). Investors
seeking more in-depth explanations of the Fund should request the SAI and review
it before purchasing shares.

3
<PAGE>
OVERVIEW

OUR GOALS

The Fund is a tax exempt money market fund that seeks to preserve your
principal and maintain a high degree of liquidity while providing current
income that is exempt from federal, and to the extent possible,
California personal income tax. Also, the Fund seeks to maintain a $1.00
per share net asset value. The goals of the Fund can only be changed with
shareholder approval.

HOW WE PLAN TO ACHIEVE OUR GOALS

OUR PRINCIPAL STRATEGIES -- We purchase liquid, high-quality, short-term
California municipal money market securities. We invest at least 80% of
the Fund's net assets in municipal money market securities that pay
interest that is expected to be exempt from federal income tax and which
is not a preference item for purposes of the federal alternative minimum
tax (the "AMT"). This may mean that, although we do not intend to, up to
20% of the securities we may invest in may be subject to the AMT. We
invest at least 65% of the Fund's net assets in municipal obligations the
interest on which is exempt from California personal income tax. The
securities must have a maturity period of no more than 397 days and, in
our opinion, present minimal credit risk.

TYPES OF SECURITIES

The Fund invests primarily in money market instruments including:

- Securities that pay interest which is not a preference item for
purposes of the federal alternative minimum tax;

- Municipal obligations that pay interest which is expected to be
exempt from California personal income taxes; and

- High-quality municipal bonds, notes and tax exempt commercial
paper. High-quality bonds are those rated within the two
highest short-term grades by nationally recognized statistical
rating organizations such as Standard & Poor's Ratings Group
and/or Moody's Investors Services.

4
<PAGE>
Please review the SAI for more detailed descriptions of these principal
investments and other securities in which the Fund may invest in addition
to the types of securities described above.

CLASSES OF SHARES

This Prospectus offers Institutional Class shares of the Fund. Only
financial institutions and financial intermediaries may purchase
Institutional Class shares for their own or on behalf of their customers'
accounts. The Fund offers other classes of shares, which are subject to
the same expenses, except they may be subject to different distribution
and/or shareholder servicing costs.

PRINCIPAL RISKS OF INVESTING IN OUR FUND

As with any money market fund, there are risks to investing. We cannot
guarantee that we will meet our investment goals. Here are the principal
risks to consider:

MAINTAINING THE NET ASSET VALUE -- We cannot guarantee that the Fund will
be able to maintain a stable net asset value of $1.00 per share. You may
lose money by investing in the Fund.

NO FEDERAL GUARANTEES -- As with any money market mutual fund, an
investment in the Fund is not a deposit of a bank and is not insured,
guaranteed, or protected by the FDIC, Federal Reserve Board, or any
agency of the U.S. Government.

CALIFORNIA RISK FACTORS -- The Fund may be subject to greater risks than
other tax exempt money market funds that are diversified across issuers
located in a number of states. Because the Fund concentrates its
investments in California municipal securities, the Fund is vulnerable to
changes in California's economy that may lessen the ability of California
municipal bond issuers to pay interest and principal on their bonds.

TAXES -- Although one of the Fund's goals is to provide income exempt
from federal and California state personal income taxes, some of its
income may be subject to the federal alternative minimum tax.

5
<PAGE>
THE EFFECT OF INTEREST RATES -- A money market fund's yield is affected
by interest rate changes. When rates decline, the fund's yield will tend
to be somewhat higher than prevailing market rates. When rates rise, the
fund's yield may tend to be somewhat lower.

ISSUER DEFAULT -- We may not be able to maintain a $1.00 net asset value
if the issuers of securities do not make their principal or interest
payments on time. We attempt to minimize the risk of default by
purchasing only highly-rated securities.

DEFENSIVE INVESTMENTS -- At the discretion of the investment manager or
sub-adviser to the Fund, the Fund may invest up to 100% of its assets in
municipal obligations of states other than California or taxable money
market securities for temporary defensive purposes. Such a stance may
help the Fund minimize or avoid losses during adverse market, economic or
political conditions. During such a period, the Fund may not achieve its
investment goals.

YEAR 2000 -- Many computer systems cannot distinguish the year 2000 from
1900. This is known as the "Year 2000" problem. A computer system's
inability to tell the difference could cause problems with the handling
of securities trades, pricing and account services. Our software vendors
and service providers have assured us, but have not guaranteed, that
their systems will be adapted in time to avoid serious problems. We do
not expect Year 2000 conversion costs to have much impact on the Fund
because these costs are borne primarily by the Fund's vendors and service
providers, and not directly by the Fund. It is also important to keep in
mind that the Year 2000 problem may negatively impact the State of
California and therefore, the municipal obligations and other securities
in which the Fund invests and, by extension, the value of the securities
held by the Fund. Year 2000 problems may manifest themselves after
January 1, 2000. This is a "Year 2000 Readiness Disclosure" within the
meaning of the "Year 2000 Information and Readiness Disclosure Act."

PAST PERFORMANCE

The Fund is a new series of the Trust and has recently commenced
operations. Therefore, no past performance information is available.

If you would like to know the Fund's current seven-day yield, call
1-888-889-0799.

6
<PAGE>
UNDERSTANDING EXPENSES

FEES AND EXPENSES OF THE FUND

This table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. You pay no sales charges or transaction fees for
buying or selling shares of the Fund.

ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
<S> <C> <C>
Management Fee* 0.27%
Other Expenses
Shareholder Servicing Fee 0.25%
Other Fund Expenses** 0.20%
Total Other Expenses** 0.45%
-----
Total Annual Fund Operating Expenses*** 0.72%
</TABLE>

* The "Management Fee" is an annual fee, payable monthly out of the
Fund's net assets.

** Estimated.

*** The "Total Annual Fund Operating Expenses" is an estimate and may be
higher or lower than that outlined above. In any event, the investment
manager has voluntarily agreed to limit its fees or reimburse the Fund
for expenses to the extent necessary to keep Total Annual Fund Operating
Expenses at or below 0.55%. Any waiver of fees or reimbursements may be
repaid to the investment manager within three years after they occur if
such repayments can be achieved within the Fund's current expense limit,
if any, for that year and if certain other conditions are satisfied.

7
<PAGE>
EXAMPLE

The Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other money market funds. It assumes
that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The Example
also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Your actual costs may be
higher or lower. The Example should not be considered a representation of
past or future expenses or performance.

Based on these assumptions your costs would be:

<TABLE>
<S> <C>
1 Year 3 Years
- --------------- -------
$74 $230
</TABLE>

8
<PAGE>
MANAGEMENT OF THE FUND

INVESTMENT MANAGER

City National Bank ("CNB") is the Fund's investment manager. As
investment manager, CNB provides the Fund with investment management
services, including the selection, appointment, and supervision of the
sub-adviser to the Fund. CNB receives 0.27% of average annual net assets
of the Fund for its investment management services.

CNB, founded in the early 1950's, is a federally chartered commercial
bank with approximately $6.9 billion in assets as of September 30, 1999.
It is a wholly-owned subsidiary of City National Corporation ("CNC"), a
New York Stock Exchange listed company. CNB's address is 400 North
Roxbury Drive, Beverly Hills, California 90210.

CNB is applying for an exemptive order from the Securities and Exchange
Commission which would permit it, subject to certain conditions required
by the SEC, to replace the current sub-adviser with a new sub-adviser
with the approval of the Board of Trustees but without obtaining
shareholder approval. Shareholders, however, will be notified of the
change of a sub-adviser and be provided with information regarding the
new sub-adviser. An order from the SEC granting this exemption benefits
shareholders by enabling the Fund to operate in a less costly and more
efficient manner.

SUB-ADVISER

Weiss, Peck & Greer, L.L.C. ("WP&G") currently serves as the Fund's sub-
adviser pursuant to a sub-advisory agreement between the investment
manager and WP&G. Under the sub-advisory agreement, WP&G provides
investment advisory and portfolio management services to the Fund. WP&G
is located at One New York Plaza, New York, New York 10004. WP&G has been
in the investment management business since 1970, and engages in
investment management, venture capital management and management buyouts.
Since its founding, WP&G has been active in managing portfolios of tax
exempt

9
<PAGE>
securities. As of September 30, 1999, WP&G has assets under management
totaling approximately $16.5 billion.

ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT

SEI Investments Mutual Funds Services (the "Administrator") serves as
administrator and fund accountant to the Fund. The Administrator is
located at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI
Investments Fund Management (the "Transfer Agent") serves as transfer
agent for the Fund. The Transfer Agent is located at 530 East Swedesford
Road, Wayne, Pennsylvania 19087. Both can be reached at 1-888-889-0799.

DISTRIBUTOR

SEI Investments Distribution Co. (the "Distributor") serves as the Fund's
distributor pursuant to a distribution agreement with the Fund. The
Distributor is located at One Freedom Valley Drive, Oaks, Pennsylvania,
19456 and can be reached at 1-888-889-0799.

10
<PAGE>
ACCOUNT POLICIES

HOW WE PRICE SHARES -- Shares are priced at NAV which is expected to
remain constant at $1.00. The NAV is calculated by adding the values of
all securities and other assets of the Fund, subtracting the liabilities,
and dividing the net amount by the number of outstanding shares.
Securities are valued at amortized cost, which approximates market value.

WHEN SHARES ARE PRICED -- NAV calculations are made once each day,
usually by 2:00 p.m. Eastern time. Shares may be purchased on any day
that the New York Stock Exchange and the Federal Reserve are open for
business. Shares, however, cannot be purchased by Federal Reserve wire on
days when either the New York Stock Exchange or the Federal Reserve is
closed.

REPORTING FUND PERFORMANCE -- From time to time the Fund may advertise
its yield and effective yield. Performance figures are based upon
historical results and are not intended to indicate future performance.

If you have any questions about the Fund, please call the Fund at
1-888-889-0799.

11
<PAGE>
UNDERSTANDING EARNINGS AND TAXES

DECLARING AND PAYING DIVIDENDS -- Dividends are declared daily and paid
monthly. Dividends are normally paid on the last business day of each
month. Net capital gain, if any, will be paid once a year.

WHEN DO DIVIDENDS ACCRUE? -- Your dividends begin to accrue on the day of
purchase for shares bought before 2:00 p.m. Eastern time. They begin to
accrue on the following day for shares purchased after 2:00 p.m. Eastern
time. You will not be credited with dividends for shares on the day you
sell them.

DISTRIBUTION OPTIONS -- Your dividends will be automatically reinvested
in additional full or fractional shares, unless you instruct the Fund in
writing prior to the date of distribution of your election to receive
payment in cash. Your election will be effective for all dividends and
distributions paid after the Fund receives your written notice. To cancel
your election, please send the Fund another written notice. Proceeds from
distributions will normally be wired to your financial institution on the
business day after distributions are credited to your account.

TAX CONSIDERATIONS -- The Fund intends to distribute substantially all of
its net investment income (including net short-term capital gain) to
shareholders. If, at the close of each quarter of its taxable year, at
least 50% of the value of the Fund's total assets consists of obligations
the interest on which is excludable from gross income for federal income
tax purposes, the Fund may pay "exempt-interest dividends" to its
shareholders. Exempt-interest dividends are excludable from a
shareholder's gross income for federal income tax purposes, but may have
certain collateral federal tax consequences including alternative minimum
tax consequences.

The Fund also intends to qualify to pay dividends to shareholders that
are exempt from California personal income tax ("California
exempt-interest dividends"). The Fund will qualify to pay California
exempt-interest dividends

12
<PAGE>
if (1) at the close of each quarter of the Fund's taxable year, at least
50% of the value of the Fund's total assets consists of obligations the
interest on which would be exempt from California personal income tax if
the obligations were held by an individual ("California tax exempt
obligations") and (2) the Fund continues to qualify as a regulated
investment company. The Fund will notify its shareholders of the amount
of exempt-interest dividends each year.

You will be notified at least annually about the tax consequences of
distributions made each year. BE SURE TO CONSULT YOUR TAX ADVISOR ABOUT
THE SPECIFIC TAX IMPLICATIONS OF YOUR INVESTMENTS. FOR ADDITIONAL
INFORMATION REGARDING TAX CONSIDERATIONS, SEE THE SAI.

BACKUP WITHHOLDING -- You must provide your financial institution with
your social security or tax identification number on your account
application form and specify whether or not you are subject to backup
withholding. Otherwise, you may be subject to backup withholding at a
rate of 31%.

13
<PAGE>
HOW TO BUY AND SELL SHARES

Here are the details you should know about buying and selling shares:

HOW TO PLACE AN ORDER

You may place an order with:

- an approved broker-dealer;

- any other approved financial institution; or

- the transfer agent as described below.

ORDERING THROUGH A BROKER-DEALER OR FINANCIAL INSTITUTION (EACH AN
"AUTHORIZED INSTITUTION") -- You may purchase shares through accounts
with Authorized Institutions that are authorized to place trades in Fund
shares for their customers. If you invest through an Authorized
Institution, you will have to follow its procedures which may be
different from the procedures for investing directly. Your Authorized
Institution may charge a fee for its services, in addition to the fees
charged by the Fund. You will also generally have to address your
correspondence or questions regarding the Fund to your Authorized
Institution.

ORDERING THROUGH THE TRANSFER AGENT -- Financial institutions and
intermediaries may purchase shares of the Fund by placing orders directly
with the Transfer Agent. Financial institutions and intermediaries should
call the Transfer Agent at 1-888-889-0799 for further information and to
coordinate the establishment of an account directly with the Transfer
Agent.

WHEN ORDERS WILL BE COMPLETED -- You may have to transmit purchase or
exchange requests to your Authorized Institution at an earlier time for
your transaction to become effective that day. This allows the Authorized
Institution time to process your request and transmit it to the Fund. For
more information about how to purchase or exchange shares through your
Authorized Institution, you should contact your Authorized Institution
directly.

14
<PAGE>
If we receive your purchase order before 2:00 p.m. Eastern time, the
order will be executed that same day. Orders received after 2:00 p.m.
Eastern time will be executed the following business day. Your shares
will be bought only after we receive a properly completed order with full
payment.

PURCHASE MINIMUMS -- You may buy shares for an initial amount of
$100,000. This is the required minimum account balance. You may buy
additional shares for $1,000 or more.

MINIMUM ACCOUNT BALANCES -- If your account balance drops below $100,000
because of redemptions, the Fund may redeem your shares. However, the
Fund will always give you at least 30 days' written notice to give you
time to add to your account and avoid involuntary redemption of your
shares.

In order to reach or maintain these purchase and account minimums, your
Authorized Institution may aggregate your purchase with the purchases of
its other clients. Further exceptions to the purchase and account
minimums may be made at our discretion.

PAYMENT RESTRICTIONS -- We only accept payments by wire in U.S. funds.
Cash, checks and third-party checks will not be accepted. Consult with
your Authorized Institution about their acceptable methods of payment.

BUYING SHARES

FIRST TIME AND SUBSEQUENT PURCHASES -- If you do not place your order
through the Transfer Agent as explained above, you will have to follow
your Authorized Institution's procedures for transacting with the Fund.
Contact your Authorized Institution for more information.

BY WIRE -- If you order through the Transfer Agent you may call the Fund
at 1-888-889-0799 to buy shares by wire. Wires must be received by us
through the Federal Reserve wire system before it closes (generally,
4:00 p.m. Eastern time) or we will not be able to process your order that
day. If you buy shares through your Authorized Institution, your
Authorized Institution may charge its own wiring fees.

15
<PAGE>
SELLING SHARES

GENERAL INFORMATION -- If you have bought shares through the Transfer
Agent, you may sell those shares by calling the Transfer Agent at
1-888-889-0799. You may also sell your shares through your Authorized
Institution. You will have to follow their procedures. Contact your
Authorized Institution for more information.

GENERAL RESTRICTIONS -- We may suspend the right to sell shares or
postpone payment for a sale of shares when either the New York Stock
Exchange or the Federal Reserve's Fedline System is closed or restricted.
We reserve the right to reject any order that is not received in proper
form. For example, if we are unable to determine how many shares you wish
to sell, we may not execute your order. We will provide you or your
Authorized Institution with notice of any deficiency in your sell request
so that you may correct the deficiency. You will receive the next
calculated NAV once your sell request is corrected.

OTHER REDEMPTION OPTIONS -- Under conditions where cash redemptions are
detrimental to the Fund and its shareholders, we reserve the right to
make redemptions in readily marketable securities other than cash. In
unusual circumstances, the Fund may temporarily suspend the processing of
sell requests, or postpone payments of proceeds for up to seven days, as
permitted by federal securities laws. Please see the SAI for a more
detailed discussion.

CONFIRMING AUTHENTICITY -- We will make every effort to verify that a
telephone order is authentic. To do so, we may:

- ask for a form of personal identification or written
confirmation of instructions; and

- tape record your telephone instructions.

We reserve the right to refuse a telephone order if we cannot reasonably
confirm the authenticity of the instructions.

LIABILITY -- We may be liable for losses from unauthorized or fraudulent
orders only if reasonable steps are not taken to verify a telephone
order's authenticity.

16
<PAGE>
IMPORTANT TERMS TO KNOW

KEY DEFINITIONS

"We", "Us" and "Our" means the CNI Charter California Tax Exempt Fund.

"You" and "Your" means the prospective investor or current shareholder.

"Liquidity" means the ability to turn investments into cash.

"Quality" means the credit rating given to a security by a nationally
recognized rating organization.

"Yield" means the interest rate you would receive if you kept your
investment in the Fund for a year. It is based on the current interest
rate for a trailing seven-day period.

"Effective Yield" means the interest rate, compounded weekly, you would
receive if you kept your investment in the Fund for a year.

17
<PAGE>
FOR MORE INFORMATION

CNI CHARTER CALIFORNIA TAX EXEMPT FUND

Additional information is available free of charge in the STATEMENT OF
ADDITIONAL INFORMATION ("SAI"). The SAI is incorporated by reference (legally
considered part of this document). Additional information about the Fund's
performance is available in the Fund's Annual and Semi-Annual Reports. To
receive a free copy of this Prospectus, the SAI, or the Annual or Semi-Annual
Reports (when available), please contact:

SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
1-888-889-0799

INFORMATION ABOUT THE FUND MAY BE REVIEWED AND COPIED:

- - at the SEC's Public Reference Room in Washington, D.C. at 1-202-942-8090;

- - on the SEC's Internet site at www.sec.gov; or

- - by written request (including duplication fee) to the Public Reference
Section of the SEC, Washington, D.C. 20549-6009 or via email at
[email protected].

FOR THE CURRENT SEVEN-DAY YIELD, OR IF YOU HAVE QUESTIONS ABOUT THE FUND, PLEASE
CALL 1-888-889-0799.

The Fund's Investment Company Act
file number: 811-07923.

[LOGO]

CALIFORNIA
TAX EXEMPT FUND
INSTITUTIONAL CLASS

PROSPECTUS
DATED JANUARY 14, 2000

CNI-F-011-01
<PAGE>
497(e)
File Nos. 333-16093 and 811-07923

[LOGO]

GOVERNMENT FUND
INSTITUTIONAL CLASS
PROSPECTUS
DATED JANUARY 14, 2000

INVESTMENT MANAGER:
CITY NATIONAL INVESTMENTS
A division of City National Bank

------------------------------------------------------------------------------

2
<PAGE>
TABLE OF CONTENTS

Understanding Expenses............................. 7
FEES AND EXPENSES OF THE FUND................ 7
EXAMPLE...................................... 8

Account Policies................................... 11

Understanding Earnings and Taxes................... 12

Important Terms to Know............................ 17
KEY DEFINITIONS.............................. 17

For More Information ....................... back cover
</TABLE>

3
<PAGE>
OVERVIEW

OUR GOALS

The Fund is a money market fund that seeks to preserve your principal and
maintain a high degree of liquidity while providing current income. Also,
the Fund seeks to maintain a $1.00 per share net asset value. The goals
of the Fund can only be changed with shareholder approval.

HOW WE PLAN TO ACHIEVE OUR GOALS

OUR PRINCIPAL STRATEGIES -- We purchase liquid, high-quality, short-term
U.S. government bonds and notes. The securities must have a maturity
period of no more than 397 days and, in our opinion, present minimal
credit risk.

Using a top-down strategy and bottom-up security selection, we seek
securities with an acceptable maturity that are marketable and liquid and
offer competitive yields. We also consider factors such as the
anticipated level of interest rates and the maturity of individual
securities relative to the maturity of the Fund as a whole. The Fund
follows strict Investment Company Act rules about the credit quality,
maturity and diversification of its investments.

TYPES OF SECURITIES

The Fund invests primarily in money market instruments including:

- U.S. Treasury Obligations;

- Obligations issued or guaranteed as to principal and interest
by the agencies or instrumentalities of the U.S. Government;
and

- Repurchase agreements involving these obligations.

Please review the SAI for more detailed descriptions of these principal
investments and other securities in which the Fund may invest in addition
to the types of securities described above.

4
<PAGE>
CLASSES OF SHARES

PRINCIPAL RISKS OF INVESTING IN OUR FUND

As with any money market fund, there are risks to investing. We cannot
guarantee that we will meet our investment goals. Here are the principal
risks to consider:

MAINTAINING THE NET ASSET VALUE -- We cannot guarantee that the Fund will
be able to maintain a stable net asset value of $1.00 per share. You may
lose money by investing in the Fund.

THE EFFECT OF INTEREST RATES -- A money market fund's yield is affected
by interest rate changes. When rates decline, the fund's yield will tend
to be somewhat higher than prevailing market rates. When rates rise, the
fund's yield may tend to be somewhat lower.

5
<PAGE>
DEFENSIVE INVESTMENTS -- The securities in which the Fund invests, and
the strategies described in this Prospectus, are those that the Fund uses
under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, the Fund may invest 100%
of its assets in cash or cash equivalents that would not ordinarily be
consistent with the Fund's investment goals.

YEAR 2000 -- Many computer systems cannot distinguish the year 2000 from
1900. This is known as the "Year 2000" problem. A computer system's
inability to tell the difference could cause problems with the handling
of securities trades, pricing and account services. Our software vendors
and service providers have assured us, but have not guaranteed, that
their systems will be adapted in time to avoid serious problems. We do
not expect Year 2000 conversion costs to have much impact on the Fund
because these costs are borne primarily by the Fund's vendors and service
providers, and not directly by the Fund. It is also important to keep in
mind that the Year 2000 problem may negatively impact the government
securities in which the Fund invests and, by extension, the value of the
securities held by the Fund. Year 2000 problems may manifest themselves
after January 1, 2000. This is a "Year 2000 Readiness Disclosure" within
the meaning of the "Year 2000 Information and Readiness Disclosure Act."

PAST PERFORMANCE

The Fund is a new series of the Trust and has recently commenced
operations. Therefore, no past performance information is available.

If you would like to know the Fund's current seven-day yield, call
1-888-889-0799.

6
<PAGE>
UNDERSTANDING EXPENSES

FEES AND EXPENSES OF THE FUND

This table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. You pay no sales charges or transaction fees for
buying or selling shares of the Fund.

ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
<S> <C> <C>
Management Fee* 0.26%
Other Expenses
Shareholder Servicing Fee 0.25%
Other Fund Expenses** 0.14%
Total Other Expenses** 0.39%
-----
Total Annual Fund Operating Expenses*** 0.65%
</TABLE>

* The "Management Fee" is an annual fee, payable monthly out of the
Fund's net assets.

** Estimated.

*** The "Total Annual Fund Operating Expenses" is an estimate and may be
higher or lower than that outlined above. In any event, the investment
manager has voluntarily agreed to limit its fees or reimburse the Fund
for expenses to the extent necessary to keep Total Annual Fund Operating
Expenses at or below 0.63%. Any waiver of fees or reimbursements may be
repaid to the investment manager within three years after they occur if
such repayments can be achieved within the Fund's current expense limit,
if any, for that year and if certain other conditions are satisfied.

7
<PAGE>
EXAMPLE

Based on these assumptions your costs would be:

<TABLE>
<S> <C>
1 Year 3 Years
- --------------- -------
$66 $208
</TABLE>

8
<PAGE>
MANAGEMENT OF THE FUND

INVESTMENT MANAGER

City National Bank ("CNB") is the Fund's investment manager. As
investment manager, CNB provides the Fund with investment management
services, including the selection, appointment, and supervision of the
sub-adviser to the Fund. CNB receives 0.26% of average annual net assets
of the Fund for its investment management services.

SUB-ADVISER

Wellington Management Company, LLP ("Wellington") currently serves as the
Fund's sub-adviser pursuant to a sub-advisory agreement between the
investment manager and Wellington. Under the sub-advisory agreement,
Wellington provides investment advisory and portfolio management services
to the Fund. Wellington is located at 75 State Street, Boston,
Massachusetts 02109. Wellington and its predecessor organizations have
provided investment advisory service to investment companies since 1928
and to investment counseling clients since 1960. As of September 30,
1999, Wellington had discretionary management authority with respect to
approximately $217 billion in assets.

9
<PAGE>
ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT

DISTRIBUTOR

10
<PAGE>
ACCOUNT POLICIES

WHEN SHARES ARE PRICED -- NAV calculations are made once each day,
usually by 4:30 p.m. Eastern time. Shares may be purchased on any day
that the New York Stock Exchange and the Federal Reserve are open for
business. Shares, however, cannot be purchased by Federal Reserve wire on
days when either the New York Stock Exchange or the Federal Reserve is
closed.

If you have any questions about the Fund, please call the Fund at
1-888-889-0799.

11
<PAGE>
UNDERSTANDING EARNINGS AND TAXES

WHEN DO DIVIDENDS ACCRUE? -- Your dividends begin to accrue on the day of
purchase for shares bought before 4:30 p.m. Eastern time. They begin to
accrue on the following day for shares purchased after 4:30 p.m. Eastern
time. You will not be credited with dividends for shares on the day you
sell them.

12
<PAGE>
BACKUP WITHHOLDING -- You must provide your financial institution with
your social security or tax identification number on your account
application form and specify whether or not you are subject to backup
withholding. Otherwise, you may be subject to backup withholding at a
rate of 31%.

13
<PAGE>
HOW TO BUY AND SELL SHARES

Here are the details you should know about buying and selling shares:

HOW TO PLACE AN ORDER

You may place an order with:

- an approved broker-dealer;

- any other approved financial institution; or

- the transfer agent as described below.

14
<PAGE>
If we receive your purchase order before 4:30 p.m. Eastern time, the
order will be executed that same day. Orders received after 4:30 p.m.
Eastern time will be executed the following business day. Your shares
will be bought only after we receive a properly completed order with full
payment.

PURCHASE MINIMUMS -- You may buy shares for an initial amount of
$100,000. This is the required minimum account balance. You may buy
additional shares for $1,000 or more.

BUYING SHARES

BY WIRE -- If you order through the Transfer Agent you may call the Fund
at 1-888-889-0799 to buy shares by wire. Wires must be received by us
through the Federal Reserve wire system before it closes (generally, 4:00
p.m. Eastern time) or we will not be able to process your order that day.
If you buy shares through your Authorized Institution, your Authorized
Institution may charge its own wiring fees.

15
<PAGE>
SELLING SHARES

CONFIRMING AUTHENTICITY -- We will make every effort to verify that a
telephone order is authentic. To do so, we may:

- ask for a form of personal identification or written
confirmation of instructions; and

- tape record your telephone instructions.

We reserve the right to refuse a telephone order if we cannot reasonably
confirm the authenticity of the instructions.

LIABILITY -- We may be liable for losses from unauthorized or fraudulent
orders only if reasonable steps are not taken to verify a telephone
order's authenticity.

16
<PAGE>
IMPORTANT TERMS TO KNOW

KEY DEFINITIONS

"We", "Us" and "Our" means the CNI Charter Government Fund.

"You" and "Your" means the prospective investor or current shareholder.

"Liquidity" means the ability to turn investments into cash.

"Quality" means the credit rating given to a security by a nationally
recognized rating organization.

"Yield" means the interest rate you would receive if you kept your
investment in the Fund for a year. It is based on the current interest
rate for a trailing seven-day period.

"Effective Yield" means the interest rate, compounded weekly, you would
receive if you kept your investment in the Fund for a year.

17
<PAGE>
FOR MORE INFORMATION

CNI CHARTER GOVERNMENT FUND

Additional information is available free of charge in the STATEMENT OF
ADDITIONAL INFORMATION ("SAI"). The SAI is incorporated by reference (legally
considered part of this document). Additional information about the Fund's
performance is available in the Fund's Annual and Semi-Annual Reports. To
receive a free copy of this Prospectus, the SAI, or the Annual and Semi-Annual
Reports (when available), please contact:

SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
1-888-889-0799

INFORMATION ABOUT THE FUND MAY BE REVIEWED AND COPIED:

- - at the SEC's Public Reference Room in Washington, D.C. at 202-942-8090;

- - on the SEC's Internet site at www.sec.gov; or

- - by written request (including duplication fee) to the Public Reference
Section of the SEC, Washington, D.C. 20549-6009 or via email at
[email protected].

FOR THE CURRENT SEVEN-DAY YIELD, OR IF YOU HAVE QUESTIONS ABOUT THE FUND, PLEASE
CALL 1-888-889-0799.

The Fund's Investment Company Act
file number: 811-07923.

[LOGO]

GOVERNMENT FUND
INSTITUTIONAL CLASS

PROSPECTUS
DATED JANUARY 14, 2000

CNI-F-012-01
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

CNI CHARTER FUNDS
400 North Roxbury Drive, Beverly Hills, California 90210

CNI CHARTER GOVERNMENT FUND
CNI CHARTER CALIFORNIA TAX EXEMPT FUND
Institutional Class of Shares

January 14, 2000

This Statement of Additional Information is not a prospectus. It should be read
in conjunction with each Prospectus dated January 14, 2000, which may be
amended from time to time, for the CNI Charter Government Fund (the "Government
Fund") and the CNI Charter California Tax Exempt Fund (the "California Tax
Exempt Fund", and together with the Government Fund, the "Funds"). The Funds are
diversified investment portfolios of the CNI Charter Funds (the "Trust"), an
open-end, management investment company. The Trust was formerly called the
Berkeley Funds. The Government Fund was formerly called the Berkeley Government
Fund. The California Tax Exempt Fund was formerly called the Berkeley California
Tax Exempt Fund.

To obtain a free copy of the above-referenced prospectuses, please contact SEI
Investments Fund Management (the "Transfer Agent") at 1-888-889-0799.

<PAGE>

TABLE OF CONTENTS

Investment Techniques.........................................................1

Investment Restrictions.......................................................8

Risk Considerations...........................................................11

Management of the Trust.......................................................17

Portfolio Transactions and Turnover...........................................24

Distributions and Taxes.......................................................25

Share Price Calculation.......................................................28

Yield.........................................................................29

Shareholder Service Agreements................................................29

Expenses......................................................................30

General Information...........................................................30

Purchase and Redemption of Shares.............................................31

Other Information.............................................................32

Financial Statements..........................................................32

Appendix- Ratings of Investment Securities..............................Appendix

<PAGE>

INVESTMENT TECHNIQUES

CNI CHARTER CALIFORNIA TAX EXEMPT FUND

The California Tax Exempt Fund's investment objective is to preserve principal
value and maintain a high degree of liquidity while providing current income
exempt from federal and, to the extent possible, California state personal
income taxes. Also, the California Tax Exempt Fund seeks to maintain a $1.00 per
share net asset value. There can be no assurance that the California Tax Exempt
Fund will achieve its investment objectives.

It is a fundamental policy of the California Tax Exempt Fund to invest, under
normal conditions, at least 80% of its net assets in municipal securities that
produce interest that, in the opinion of bond counsel, is exempt from federal
income tax, and the California Tax Exempt Fund will invest, under normal
conditions, at least 80% of its net assets in securities the interest on which
is not a preference item for purposes of the federal alternative minimum tax
(the "AMT"). Under normal conditions, at least 65% of the California Tax Exempt
Fund's assets will be invested in municipal obligations the interest on which is
exempt from California state personal income tax. These constitute municipal
obligations of the State of California and its political subdivisions of
municipal authorities and municipal obligations issued by territories or
possessions of the United States. The California Tax Exempt Fund may invest,
under normal conditions, up to 20% of its net assets in (1) municipal securities
the interest on which is a preference item for purposes of the AMT (although the
California Tax Exempt Fund has no present intention of investing in such
securities); and (2) taxable investments.

The Investment Manager or Sub-adviser will not invest 25% or more of the
California Tax Exempt Fund's assets in municipal securities the interest on
which is derived from revenues of similar type projects. This restriction does
not apply to municipal securities in any of the following categories: public
housing authorities; general obligations of states and localities; state and
local housing finance authorities or municipal utilities systems.

There can be no assurance that the California Tax Exempt Fund will be able to
achieve its investment objective, or that the California Tax Exempt Fund will be
able to maintain a constant $1.00 net asset value per share.

CNI CHARTER GOVERNMENT FUND

The Government Fund's investment objective is to preserve principal value and
maintain a high degree of liquidity. Also, the Government Fund seeks to maintain
a $1.00 per share net asset value. There can be no assurance that the Government
Fund will be able to achieve its investment objective, or that the Government
Fund will be able to maintain a constant $1.00 net asset value per share.

It is a fundamental policy of the Government Fund to invest, under normal
conditions, in (1) U.S. Treasury Obligations; (2) Obligations issued or
guaranteed as to principal and interest by the agencies or instrumentalities of
the U.S. Government; and (3) Repurchase agreements involving these obligations.

<PAGE>

PERMITTED INVESTMENTS

BANK NOTES. The Funds may invest in bank notes, which are unsecured promissory
notes representing debt obligations that are issued by banks in large
denominations.

BANKERS' ACCEPTANCES. The Funds may invest in Bankers' acceptances. Bankers'
acceptances are bills of exchange or time drafts drawn on and accepted by a
commercial bank. Bankers' acceptances are issued by corporations to finance the
shipment and storage of goods. Maturities are generally six months or less.

CERTIFICATES OF DEPOSIT. The Funds may invest in certificates of deposit.
Certificates of deposit are interest-bearing instruments with specific
maturities. They are issued by banks and savings and loan institutions in
exchange for the deposit of funds and normally can be traded in the secondary
market prior to maturity. Certificates of deposit with penalties for early
withdrawal will be considered illiquid.

COMMERCIAL PAPER. The Funds may invest in commercial paper and other securities
that are issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended
(the "1933 Act")("Section 4(2) paper"). Federal securities laws restrict the
disposition of Section 4(2) paper. Section 4(2) paper generally is sold to
institutional investors such as the Fund who agree that they are purchasing the
paper for investment and not for public distribution. Any resale of Section 4(2)
paper by the purchaser must be in an exempt transaction and may only be
accomplished in accordance with Rule 144A under the 1933 Act. Section 4(2)
paper normally may be resold to other institutional investors such as the Funds
through or with the assistance of the issuer or investment dealers who make a
market in the Section 4(2) paper, thus providing liquidity. Because it is not
possible to predict with assurance exactly how this market for Section 4(2)
paper sold and offered under Rule 144A will continue to develop, the Investment
Manager, or Sub-advisers, pursuant to guidelines approved by the Trust's Board
of Trustees, will monitor the Funds' investments in these securities, focusing
on such important factors as, among others, valuation, liquidity, and
availability of information.

EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES. The Government Fund
may invest in Eurodollar certificates of deposit and foreign securities. Before
investing in Eurodollar certificates of deposit, the Fund will consider their
marketability, possible restrictions on international currency transactions, and
any regulations imposed by the domicile country of the foreign issuer.
Eurodollar certificates of deposit may not be subject to the same regulatory
requirements as certificates of deposit issued by U.S. banks, and associated
income may be subject to the imposition of foreign taxes, including withholding
taxes.

Investments in securities of foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political,
and legal developments, including expropriation of assets or nationalization,
imposition of withholding taxes on dividend or interest payments, and possible
difficulty in obtaining and enforcing judgments against foreign entities.
Furthermore, issuers of foreign securities are subject to different, often less
comprehensive, accounting, reporting, and disclosure requirements than domestic
issuers. The securities of some foreign companies and foreign securities markets
are less liquid and at times more volatile than securities of comparable U.S.
companies and U.S. securities markets. Foreign brokerage commissions and other
fees are also generally higher than in the United States. There are also special
tax considerations which apply to securities of foreign issuers and securities
principally traded overseas. All such securities will be U.S. dollar
denominated.

<PAGE>

FIXED INCOME SECURITIES. The Funds may invest in fixed income securities. Fixed
income securities are debt obligations issued by corporations, municipalities
and other borrowers. The market value of the Funds' fixed income investments
will change in response to interest rate changes and other factors. During
periods of falling interest rates, the values of outstanding fixed income
securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. Changes by recognized rating
agencies in the rating of any fixed income security and in the ability of an
issuer to make payments of interest and principal also affect the value of these
investments. Changes in the value of portfolio securities will not necessarily
affect cash income derived from these securities, but will affect the Funds' net
asset value.

FUTURES AND OPTIONS ON FUTURES. The Funds may engage in futures and options on
futures. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. An option on a futures contract gives the
purchaser the right, in exchange for a premium, to assume a position in a
futures contract at a specified exercise price during the term of the option.
The Funds may use futures contracts and related options for bona fide hedging
purposes, to offset changes in the value of securities held or expected to be
acquired or be disposed of, to minimize fluctuations in foreign currencies, or
to gain exposure to a particular market or instrument. The Funds will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures contracts that are traded on national futures exchanges.

An index futures contract is a bilateral agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to a specified dollar
amount times the difference between the bond index value at the close of trading
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the bonds comprising the index is made:
generally contracts are closed out prior to the expiration date of the contract.

In order to avoid leveraging and related risks, when the Funds invest in futures
contracts, the Funds will cover positions by depositing an amount of cash or
liquid securities equal to the market value of the futures positions held, less
margin deposits, in a segregated account and that amount will be
marked-to-market on a daily basis.

The Funds may enter into futures contracts and options on futures contracts
traded on an exchange regulated by the Commodities Futures Trading Commission
("CFTC"), so long as, to the extent that such transactions are not for "bona
fide hedging purposes," the aggregate initial margin and premiums on such
positions (excluding the amount by which such options are in the money) do not
exceed 5% of the Funds' net assets.

There are risks associated with these activities, including the following:(1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates, (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Funds and the prices of
futures and options on futures, (3) there may not be a liquid secondary market
for a futures contract or option, (4) trading restrictions or limitations may be
imposed by an exchange and (5) government regulations may restrict trading in
futures contracts and options on futures.

The Funds may buy and sell futures contracts and related options to manage
exposure to changing interest rates and securities prices. Some strategies
reduce the Funds' exposure to price fluctuations, while others tend to increase
market exposure. Futures and options on futures can be volatile instruments and
involve certain risks that could negatively impact the Funds' return.

<PAGE>

No price is paid upon entering into futures contracts. Instead, the Fund
would be required to deposit an amount of cash or U.S. Treasury securities
known as "initial margin." Subsequent payments, called "variation margin," to
and from the broker, would be made on a daily basis as the value of the
future position varies (a process known as "marked to market"). The margin is
in the nature of performance bond or good-faith deposit on a futures contract.

Futures and options on futures are taxable instruments. With respect to the
California Tax Exempt Fund, the California Tax Exempt Fund may not invest more
than 20% of its net asset value in these taxable instruments.

INVESTMENT COMPANY SHARES. The Funds may invest in shares of other investment
companies, to the extent permitted by applicable law and subject to certain
restrictions set forth in this Statement of Additional Information. These
investment companies typically incur fees that are separate from those fees
incurred directly by the Funds. The Funds' purchase of such investment company
securities results in the layering of expenses, such that shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees, in addition to paying Fund
expenses. Under applicable regulations, the Funds are prohibited from acquiring
the securities of another investment company if, as a result of such
acquisition: (1) the Fund owns more than 3% of the total voting stock of the
other company; (2) securities issued by any one investment company represent
more than 5% of the Fund's total assets; or (3) securities (other than treasury
stock) issued by all investment companies represent more than 10% of the total
assets of the Fund.

MUNICIPAL SECURITIES. The California Tax Exempt Fund may invest in municipal
securities. Municipal securities consist of (1) debt obligations issued by or on
behalf of public authorities to obtain funds to be used for various public
facilities, for refunding outstanding obligations, for general operating
expenses and for lending such funds to other public institutions and facilities,
and (2) certain private activity and industrial development bonds issued by or
on behalf of public authorities to obtain funds to provide for the construction,
equipment, repair or improvement of privately operated facilities.

General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the venues of a project or facility,
tolls from a toll bridge, for example. Certificates of participation represent
an interest in an underlying obligation or commitment such as an obligation
issued in connection with a leasing arrangement. The payment of principal and
interest on private activity and industrial development bonds generally is
dependent solely on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment.

Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes and participation
interests in municipal notes. Municipal bonds include general obligation bonds,
revenue or special obligation bonds, private activity and industrial development
bonds and participation interests in municipal bonds.

MUNICIPAL LEASES. The California Tax Exempt Fund may invest in municipal leases.
The California Tax Exempt Fund may invest in instruments, or participations in
instruments, issued in connection with lease obligations or installment purchase
contract obligations of municipalities ("municipal lease obligations"). Although
municipal lease obligations do not constitute general obligations of the issuing
municipality, a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate funds for, and make the payments due under

<PAGE>

the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses, which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose in the relevant years.
Municipal lease obligations are a relatively new form of financing, and the
market for such obligations is still developing. Municipal leases will be
treated as liquid only if they satisfy criteria set forth in guidelines
established by the Board of Trustees, and there can be no assurance that a
market will exist or continue to exist for any municipal lease obligation.

MUNICIPAL NOTES. The California Tax Exempt Fund may invest in municipal notes.
Municipal notes consist of general obligation notes, tax anticipation notes
(notes sold to finance working capital needs of the issuer in anticipation of
receiving taxes on a future date), revenue anticipation notes (notes sold to
provide needed cash prior receipt of expected non-tax revenues from a specific
source), bond anticipation notes, tax and revenue anticipation notes,
certificates of indebtedness, demand notes, and construction loan notes. The
maturities of the instruments at the time of issue will generally range from
three months to one year.

MUNICIPAL BONDS. The California Tax Exempt Fund may invest in municipal bonds.
Municipal bonds are debt obligations issued to obtain funds for various public
purposes. The California Tax Exempt Fund may purchase private activity or
industrial development bonds if the interest paid is exempt from federal income
tax. These bonds are issued by or on behalf of public authorities to raise money
to finance various privately-owned or -operated facilities for business and
manufacturing, housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit systems, ports,
parking or sewage or solid waste disposal facilities, as well as certain other
categories. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property so financed as security
for such payment.

REPURCHASE AGREEMENTS. The Funds may engage in repurchase agreements. Repurchase
agreements are agreements under which securities are acquired from a securities
dealer or bank subject to resale on an agreed upon date and at an agreed upon
price which includes principal and interest. The Funds or their agents will have
actual or constructive possession of the securities held as collateral for the
repurchase agreement. The Funds bear a risk of loss in the event the other party
defaults on its obligations and the Funds are delayed or prevented from
exercising their right to dispose of the collateral securities, or if the Funds
realize a loss on the sale of the collateral securities. The Investment Manager
or Sub-advisers will enter into repurchase agreements on behalf of a Fund only
with financial institutions deemed to present minimal risk of bankruptcy during
the term of the agreement based on guidelines established and periodically
reviewed by the Board of Trustees. These guidelines currently permit the Funds
to enter into repurchase agreements only with approved banks and primary
securities dealers, as recognized by the Federal Reserve Bank of New York, which
have minimum net capital of $100 million, or with a member bank of the Federal
Reserve System. Repurchase agreements are considered to be loans collateralized
by the underlying security. Repurchase agreements entered into by the Funds will
provide that the underlying security at all times shall have a value at least
equal to 102% of the price stated in the agreement. This underlying security
will be marked to market daily. The Investment Manager or Sub-advisers will
monitor compliance with this requirement. Under all repurchase agreements
entered into by the Funds, the Custodian or its agent must take possession of
the underlying collateral. However, if the seller defaults, the Funds could
realize a loss on the sale of the underlying security to the extent the proceeds
of the sale are less than the resale price. In addition, even though the
Bankruptcy Code provides protection for most repurchase agreements, if the
seller should be involved in bankruptcy or insolvency proceedings, the Funds

<PAGE>

may incur delays and costs in selling the security and may suffer a loss of
principal and interest if the Funds are treated as unsecured creditors.
Repurchase agreements, in some circumstances, may not be tax exempt.

RULE 144A SECURITIES. Rule 144A under the 1933 Act establishes a safe harbor
from the registration requirements of the 1933 Act for resales of certain
securities to qualified institutional buyers. Institutional markets for
restricted securities sold pursuant to Rule 144A in many cases provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment to satisfy share redemption orders. Such markets might
include automated systems for the trading, clearance and the settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified buyers interested in purchasing Rule 144A
eligible restricted securities, however, could adversely affect the
marketability of such portfolio securities and result in the a Fund's inability
to dispose of such securities promptly or at favorable prices.

The Board of Trustees may, in the future, delegate the function of making
day-to-day determination of liquidity to a Fund's Investment Manager or
Sub-adviser pursuant to guidelines approved by the Board. The Investment Manager
or Sub-adviser will take into account a number of factors in reaching liquidity
decisions, including, but not limited to: (1) the frequency of trades for the
security, (2) the number of dealers that quote prices for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers, and (5) the nature of the security and how
trading is effected (E.G., the time needed to see the security, how bids are
solicited, and the mechanics of transfer.) To the extent the Investment Manager
or Sub-adviser, according to the guidelines approved by the Board, determines a
Rule 144A eligible security to be liquid, such a security would not be subject
to a Fund's percentage limit on illiquid securities investment.

STANDBY COMMITMENTS AND PUT TRANSACTIONS. The California Tax Exempt Fund
reserves the right to engage in standby commitments and put transactions. The
Investment Manager and Sub-adviser have the authority to purchase securities at
a price which would result in a yield to maturity lower than that generally
offered by the seller at the time of purchase when the Fund can simultaneously
acquire the right to sell the securities back to the seller, the issuer, or a
third party (the "writer") at an agreed-upon price at any time during a stated
period or on a certain date. Such a right is generally denoted as a "standby
commitment" or a "put." The purpose of engaging in transactions involving puts
is to maintain flexibility and liquidity to permit the California Tax Exempt
Fund to meet redemptions and remain as fully invested as possible in municipal
securities. The right to put the securities depends on the writer's ability to
pay for the securities at the time the put is exercised. The California Tax
Exempt Fund would limit its put transactions to institutions which the
Investment Manager or Sub-adviser believes present minimum credit risks, and the
Investment Manager or Sub-adviser would use its best efforts to initially
determine and continue to monitor the financial strength of the sellers of the
options by evaluating their financial statements and such other information as
is available in the marketplace. It may, however, be difficult to monitor the
financial strength of the writers because adequate current financial information
may not be available. In the event that any writer is unable to honor a put for
financial reasons, the Fund would be a general creditor (I.E., on a parity with
all other unsecured creditors) of the writer. Furthermore, particular provisions
of the contract between the California Tax Exempt Fund and the writer may excuse
the writer from repurchasing the securities; for example, a change in the
published rating of the underlying securities or any similar event that has an
adverse effect on the issuer's credit or a provision in the contract that the
put will not be exercised except in certain special cases, for example, to
maintain portfolio liquidity. The

<PAGE>

California Tax Exempt Fund could, however, at any time sell the underlying
portfolio security in the open market or wait until the portfolio security
matures, at which time it should realize the full par value of the security.

The securities purchased subject to a put, may be sold to third persons at any
time, even though the put is outstanding, but the put itself, unless it is an
integral part of the security as originally issued, may not be marketable or
otherwise assignable. Therefore, the put would have value only to the California
Tax Exempt Fund. Sale of the securities to third parties or lapse of time with
the put unexercised may terminate the right to put the securities. Prior to the
expiration of any put option, the California Tax Exempt Fund could seek to
negotiate terms for the extension of such an option. If such a renewal cannot be
negotiated on terms satisfactory to the California Tax Exempt Fund, the
California Tax Exempt Fund could, of course, sell the security. The maturity of
the underlying security will generally be different from that of the put.

TAX EXEMPT COMMERCIAL PAPER. The Funds may invest in tax exempt commercial
paper. Tax exempt commercial paper is unsecured short-term obligations issued by
a government or political sub-division. It is not currently expected that the
Funds will invest more than 5% of their net assets in tax exempt commercial
paper.

TIME DEPOSITS. The Funds may invest in time deposits. Time deposits are
non-negotiable receipts issued by a bank in exchange for the deposit of funds.
Like a certificate of deposit, a time deposit earns a specified rate of interest
over a definite period of time; however, it cannot be traded in the secondary
market. Time deposits with a withdrawal penalty are considered to be illiquid
securities.

U.S. GOVERNMENT AGENCY OBLIGATIONS. The Funds may invest in U.S. agency
obligations. Various agencies of the U.S. Government issue obligations,
including, the Export/Import Bank of the United States, Farmers Home
Administration, Federal Farm Credit Bank, Federal Housing Administration, GNMA,
Maritime Administration, Small Business Administration, and the Tennessee Valley
Authority. The Funds may purchase securities guaranteed by GNMA which represent
participation in Veterans Administration and Federal Housing Administration
backed mortgage pools. Obligations of instrumentalities of the U.S. Government
include securities issued by, among others, Federal Home Loan Banks, HLMC,
Federal Intermediate Credit Banks, Federal Land Banks, Fannie Mae and the U.S.
Postal Service. Some of these securities are supported by the full faith and
credit of the U.S. Treasury (I.E., GNMA), others are supported by the right of
the issuer to borrow from the Treasury. Guarantees of principal by agencies or
instrumentalities of the U.S. Government may be a guarantee of payment at the
maturity of the obligation so that in the event of a default prior to maturity
there might not be a market and thus no means of realizing the value of the
obligation prior to maturity.

VARIABLE AND FLOATING RATE INSTRUMENTS. The Funds may invest in variable and
floating rate instruments. Certain of the obligations purchased by the Funds may
carry variable or floating rates of interest and may involve a conditional or
unconditional demand feature. Such obligations may include variable amount
master demand notes. Such instruments bear interest at rates which are not
fixed, but which vary with changes in specified market rates or indices. The
interest rates on these securities may be reset daily, weekly, quarterly or at
some other interval, and may have a floor or ceiling on interest rate changes.
There is a risk that the current interest rate on such obligations may not
accurately reflect existing market interest rates. A demand instrument with a
demand notice period exceeding seven days may be considered illiquid if there is
no secondary market for such security.

<PAGE>

WHEN-ISSUED SECURITIES. The Funds may invest in when-issued securities. These
securities involve the purchase of debt obligations on a when-issued basis, in
which case delivery and payment normally take place within 45 days after the
date of commitment to purchase. These securities are subject to market
fluctuation due to changes in market interest rates, and it is possible that the
market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. Delivery of
and payment for these securities may occur a month or more after the date of the
purchase commitment. Each Fund will maintain with the custodian a separate
account with liquid securities or cash in an amount at least equal to these
commitments. The interest rate realized on these securities is fixed as of the
purchase date, and no interest accrues to the Fund before settlement. Although
the Funds generally purchase securities on a when-issued or forward commitment
basis with the intention of actually acquiring securities for their portfolios,
the Funds may dispose of a when-issued security or forward commitment prior to
settlement if the Investment Manager or Sub-adviser deems it appropriate to do
so.

The Funds will only make commitments to purchase obligations on a when-issued
basis with the intention of actually acquiring the securities, but may sell them
before the settlement date. The when-issued securities are subject to market
fluctuation, and no interest accrues to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.

BORROWING POLICY. The Funds may not borrow money except as a temporary measure
for extraordinary or emergency purposes, and then only in an amount up to
one-third of the value of total assets in order to meet redemption requests
without immediately selling any portfolio securities. The Funds will not borrow
for leverage purposes or purchase securities or make investments while
borrowings are outstanding. If for any reason the current value of the total
assets of a Fund falls below an amount equal to three times the amount of
indebtedness for money borrowed, the Fund will, within three days, (not
including Sundays and holidays), reduce its indebtedness to the extent necessary
to meet that limitation. Any borrowings under this provision will not be
collateralized.

INVESTMENT RESTRICTIONS

EXCEPT AS OTHERWISE NOTED WITH AN *, THE RESTRICTIONS BELOW ARE
NONFUNDAMENTAL AND CAN BE CHANGED WITHOUT APPROVAL OF THE HOLDERS OF A MAJORITY
OF THE OUTSTANDING VOTING SECURITIES (AS DEFINED IN THE INVESTMENT COMPANY ACT
OF 1940, AS AMENDED, [THE "1940 ACT"]) OF THE FUNDS. THE FUNDS MAY NOT:

(1) *Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or
instrumentalities) if, as a result thereof, more than 5% of the
value of its assets would be invested in the securities of such
issuer.

(2) Purchase more than 10% of any class of securities of any issuer.
All debt securities and all preferred stocks are each
considered as one class.

<PAGE>

(3) *Concentrate 25% or more of the value of its total assets in any
one industry; provided, however, that a Fund may invest up to 100%
of its assets in certificates of deposit or bankers' acceptances
issued by domestic branches of U.S. banks and U.S. branches of
foreign banks (which the Fund has determined to be subject to the
same regulation as U.S. banks), or obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities in
accordance with its investment objective and policies.

(4) Enter into repurchase agreements if, as a result thereof, more than
10% of its net assets valued at the time of the transaction would
be subject to repurchase agreements maturing in more than seven
days and invested in securities restricted as to disposition under
the federal securities laws (except commercial paper issued under
Section 4(2) of the Securities Act of 1933). The Funds will invest
no more than 10% of net assets in illiquid securities.

(5) Invest more than 5% of its total assets in securities restricted as
to disposition under the federal securities laws (except (i)
commercial paper issued under Section 4(2) of the Securities Act of
1933 and (ii) liquid Rule 144A-eligible restricted securities).

(6) *Invest in commodities or commodity contracts, futures contracts,
real estate or real estate limited partnerships, although it may
invest in securities which are secured by real estate and
securities of issuers which invest or deal in real estate.

(7) Invest for the purpose of exercising control or management of
another issuer.

(8) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization, or
acquisition of assets, or as may otherwise be permitted by a
Prospectus and the 1940 Act.

(9) *Make loans to others (except through the purchase of debt
obligations or repurchase agreements in accordance with its
investment objectives and policies).

(10) *Borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of
the value of its total assets in order to meet redemption requests
without immediately selling any portfolio securities. A Fund will
not borrow for leverage purposes or purchase securities or make
investments while borrowings are outstanding. Any borrowings by a
Fund will not be collateralized. If for any reason the current
value of the total assets of a Fund falls below an amount equal to
three times the amount of indebtedness for money borrowed, the Fund
will, within three business days, reduce its indebtedness to the
extent necessary to meet that limitation.

(11) Write, purchase, or sell puts, calls, or combinations thereof
except as otherwise noted in this Statement of Additional
Information.

(12) Make short sales of securities or purchase any securities on
margin, except to obtain such short-term credits as may be
necessary for the clearance of transactions.

<PAGE>

(13) *Underwrite securities issued by others, except to the extent it
may be deemed to be an underwriter under the federal securities
laws in connection with the disposition of securities from its
investment portfolio.

(14) *Issue senior securities as defined in the 1940 Act.

(15) Invest in interests or leases in oil, gas or other mineral
exploration or development programs.

Except for restrictions (3), (4) and (10), if a percentage restriction is
adhered to at the time of investment, a later increase in percentage resulting
from a change in values or net or total assets will not be considered a
violation of that restriction.

The Funds will only purchase securities that the Investment Manager or
Sub-advisers have determined, according to procedures approved by the Board and
factors set forth in Rule 2a-7 under the 1940 Act, to present minimal credit
risk and which are First Tier or Second Tier Securities (otherwise referred to
as "Eligible Securities"). An Eligible Security is:

(1) a security with a remaining maturity of 397 days or less: (a) that
is rated by the requisite nationally recognized statistical rating
organizations ("NRSROs") designated by the Securities and Exchange
Commission (the "SEC") (currently Moody's Investors Service
("Moody's"), Standard & Poor's Ratings Group ("S&P"), Duff and
Phelps Credit Rating Co. ("Duff"), Fitch Investors Service, Inc.
("Fitch"), Thomson BankWatch, and, with respect to debt issued by
banks, bank holding companies, United Kingdom building societies,
broker-dealers and broker-dealers' parent companies, and
bank-supported debt, IBCA Limited and its affiliate, IBCA, Inc.) in
one of the two highest rating categories for short-term debt
obligations (two NRSROs are required but one rating suffices if
only one NRSRO rates the security), or (b) that itself was unrated
by any NRSRO, but was issued by an issuer that has outstanding a
class of short-term debt obligations (or any security within that
class) meeting the requirements of subparagraph 1(a) above that is
of comparable priority and security;

(2) a security that at the time of issuance was a long-term security
but has a remaining maturity of 397 days or less, and whose issuer
received a rating within one of the two highest rating categories
from the requisite NRSROs for short-term debt obligations with
respect to a class of short-term debt obligations (or any security
within that class) that is now comparable in priority and security
with the subject security; or

(3) a security not rated by an NRSRO but deemed by the Investment
Manager, pursuant to guidelines adopted by the Trust's Board of
Trustees, to be of comparable quality to securities described in
(1) and (2) above and to represent minimal credit risk.

A First Tier Security is any Eligible Security that carries (or if other
relevant securities issued by its issuer carry) top NRSRO ratings from at
least two NRSROs (a single top rating suffices if only one NRSRO rates the
security), that has been determined by the Investment Manager, pursuant to
guidelines adopted by the Trust's Board of Trustees, to be of comparable
quality to such a security, that is a security issued by a registered
investment company that is a money market

<PAGE>

fund, or that is a U.S. government security (a "Government security"). A
Second Tier Security is any other Eligible Security.

Each Fund will limit its investments in the First Tier Securities of any one
issuer to no more than 5% of its total assets. (Repurchase agreements
collateralized by non-Government securities will be taken into account when
making this calculation.) Moreover, the Fund's total holdings of Second Tier
Securities will not exceed 5% of its total assets, with investment in the
Second Tier Securities of any one issuer being limited to the greater of 1%
of the Fund's total assets or $1 million. In addition, the underlying
securities involved in repurchase agreements collateralized by non-Government
securities will be First Tier Securities at the time the repurchase
agreements are executed.

RISK CONSIDERATIONS

GENERAL RISKS TO CONSIDER

The Funds' portfolios will be affected by general changes in interest rates
which will result in increases or decreases in the market value of the
obligations held by the Funds. The market value of the obligations in the
Funds' portfolios can be expected to vary inversely to changes in prevailing
interest rates. Investors also should recognize that, in periods of declining
interest rates, the Funds' yields will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates, the Funds'
yields will tend to be somewhat lower. Also, when interest rates are falling,
the inflow of net new money to the Funds from the continuous sale of their
shares will likely be invested in portfolio instruments producing lower
yields than the balance of the portfolios, thereby reducing the Funds'
current yields. In periods of rising interest rates, the opposite can be
expected to occur. In addition, securities in which the Funds may invest may
not yield as high a level of current income as might be achieved by investing
in securities with less liquidity and safety and longer maturities.

The value of commercial paper and other securities in the Funds' portfolios
may be adversely affected by the inability of the issuers (or related
supporting institutions) to make principal or interest payments on the
obligations in a timely manner. As discussed above, the Funds will invest in
securities which the Investment Manager or Sub-adviser has determined,
according to procedures approved by the Board, and factors set forth under
Rule 2a-7 under the Investment Company Act of 1940, to present minimal credit
risk. The ratings assigned to commercial paper and other corporate
obligations, as well as the guidelines approved by the Trust's Board of
Trustees, are intended to enable the Investment Manager or Sub-adviser to
minimize the credit risk with respect to the securities in the Funds'
portfolios, but there can be no absolute assurance that the Investment
Manager will be successful in this regard. If issuer defaults nevertheless
occur respecting a sufficiently large portion of the Funds' portfolios, the
Funds may be unable to maintain stable net asset values of $1.00 per share.

The Funds' performance also may be affected by changes in market or economic
conditions and other circumstances affecting the financial services industry.
Government regulation of banks, savings and loan associations, and finance
companies may limit both the amounts and types of loans and other financial
commitments these entities can make and the interest rates and fees they can
charge. The profitability of the financial services industry, which is
largely dependent on the availability and, cost of capital funds, has
fluctuated in response to volatility in interest rate levels. In addition,
the financial services industry is subject to risks resulting from general
economic conditions and the potential exposure to credit losses.

<PAGE>

CALIFORNIA TAX EXEMPT FUND - SPECIFIC RISKS

The ability of issuers to pay interest on, and repay principal of, California
municipal securities ("California Municipal Securities") may be affected by
(1) amendments to the California Constitution and related statutes that limit
the taxing and spending authority of California government entities, and
related civil actions, (2) a wide variety of California laws and regulations,
and (3) the general financial condition of the State of California.

There could be economic, business or political developments which might
affect all Municipal Securities of a similar type. To the extent that a
significant portion of the Fund's assets are invested in Municipal Securities
payable from revenues on similar projects, the Fund will be subject to the
risks presented by such projects to a greater extent than it would be if the
Fund's assets were not so invested. Moreover, in seeking to attain its
investment objective the Fund may invest all or any part of its assets in
Municipal Securities that are industrial development bonds.

Under normal conditions, the Fund will be fully invested in obligations which
produce income exempt from federal income tax and California state personal
income tax. Accordingly, the Fund will have considerable investments in
California Municipal Securities. As a result, the Fund will be more
susceptible to factors which adversely affect issuers of California
obligations than a mutual fund which does not have as great a concentration
in California municipal obligations.

An investment in the California Tax Exempt Fund will be affected by the many
factors that affect the financial condition of the State of California. For
example, financial difficulties of the State of California, its counties,
municipalities and school districts that hinder efforts to borrow and credit
ratings are factors which may affect the Fund.

The Fund's concentration in California municipal bonds may expose
shareholders to additional risks. In particular, the Fund will be vulnerable
to any development in California's economy that may weaken or jeopardize the
ability of California municipal-bond issuers to pay interest and principal on
their bonds. Although the Fund's objective is to provide income exempt from
federal and California State personal income taxes, some of its income may be
subject to the alternative minimum tax.

HISTORICAL PERSPECTIVE. The information set forth below is a general summary
intended to give a recent historical description. It is not a discussion of
any specific factors that may affect any particular issuer of California
Municipal Securities. The information is not intended to indicate continuing
or future trends in the condition, financial or otherwise, of the State of
California. Such information is derived from official statements utilized in
connection with securities offerings of the State of California that have
come to the attention of the Trust and were available prior to the date of
this Statement of Additional Information. Such information has not been
independently verified by the California Tax Exempt Fund.

Because the California Tax Exempt Fund expects to invest substantially all of
its assets in California Municipal Securities, it will be susceptible to a
number of complex factors affecting the issuers of California Municipal
Securities, including national and local political, economic, social,
environmental and regulatory policies and conditions. The Fund cannot predict
whether or to what extent such factors or other factors may affect the
issuers of California Municipal Securities, the market value or marketability
of such securities or the ability of the respective issuers of such
securities acquired by the Fund to pay interest on, or principal of, such
securities. The creditworthiness of obligations issued by local California
issuers may be unrelated to the

<PAGE>

creditworthiness of obligations issued by the State of California, and there
is no responsibility on the part of the State of California to make payments
on such local obligations. There may be specific factors that are applicable
in connection with investment in the obligations of particular issuers
located within California, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable.

From mid-1990 to late 1993, California suffered the most severe recession in
the State since the 1930s. Construction, manufacturing (especially
aerospace), exports and financial services, among other industries, have been
severely affected. Since the start of 1994, however, California's economy has
been on a steady recovery. The rate of economic growth in California in 1997,
in terms of job gains, exceeded that of the rest of the United States. The
State added nearly 430,000 non-farm jobs during 1997. In 1996 California
surpassed its pre-recession employment peak of 12.7 million jobs. The
unemployment rate, while still higher than the national average, fell to 5.9%
in early 1998, compared to over 10 percent during the recession. Many of the
new jobs were created in such industries as computer services, software
design, motion pictures and high technology manufacturing. Business services,
export trade and other manufacturing also experienced growth. All major
economic regions of the State grew. The rate of employment growth for the Los
Angeles region indicates that its growth has almost caught up with that in
the San Francisco bay region on a population share basis. The unsettled
financial situation occurring in certain Asian economies may adversely affect
the State's export-related industries and, therefore, the State's rate of
economic growth.

The recession severely affected State revenues while the State's health and
welfare costs were increasing. Consequently, the State had a lengthy period
of budget imbalance; the State's accumulated budget deficit approached $2.8
billion at its peak at June 30, 1993. A consequence of the large budget
deficits has been that the State depleted its available cash resources and
had to use a series of external borrowings to meet its cash needs. With the
end of the recession, the State's financial condition has improved in the
1995-96, 1996-97 and 1997-98 fiscal years, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and
continued spending restraint. As of June 30, 1997, the State's budget reserve
had a positive cash balance of $461 million. No deficit borrowing has
occurred at the end of the last three fiscal years and the State's cash flow
borrowing was limited to $3 billion in 1997-98.

In each of these the 1995-96 and 1996-97 fiscal years, the State budget
contained the following major features:

1. Expenditures for K-14 schools grew significantly, as new revenues
were directed to school spending under Proposition 98;

2. The budgets restrained health and welfare spending levels and
attempted to reduce General Fund spending by calling for greater
support from the federal government. The State also attempted to
shift to the federal government a larger share of the cost of
incarceration and social services for illegal immigrants. Federal
support never reached the levels anticipated when the budgets were
enacted. These funding shortfalls were filled, however, by revenue
collections which exceeded expectations;

3. General Fund support for the University of California and
California State Universities grew by an average of 5.2 percent and
3.3 percent per year, respectively, and there were no increases in
student fees;

<PAGE>

4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons were
approved for construction, however;

5. There were no tax increases and, starting January 1, 1997, there
was a 5 percent cut in corporate taxes. The suspension of the
Renters Tax Credit was continued.

As noted, the economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated.

On August 18, 1997, the Governor signed the 1997-98 Budget Act. The Budget Act
anticipates General Fund revenues and transfers of $52.5 billion (a 6.8 percent
increase over the final 1996-97 levels), and expenditures of $52.8 billion (an
8.0 percent increase from the 1996-97 levels). On a budgetary basis, the budget
reserve (SFEU) is projected to decrease from $408 million at June 30, 1997, to
$112 million at June 30, 1998. The Budget Act also includes Special Fund
expenditures of $14.4 billion (as against estimated Special Fund revenues of
$14.0 billion), and $2.1 billion of expenditures from various Bond Funds.
Following enactment of the Budget Act, the State implemented its annual cash
flow borrowing program, issuing $3 billion of notes which mature on June 30,
1998.

The following are major features of the 1997-98 Budget Act:

1. For the second year in a row, the Budget contains a large increase
in funding for K-14 education, reflecting strong revenues which
have exceeded initial budgeted amounts. Part of the nearly $1.75
billion in increased spending is allocated to prior fiscal years;

2. The Budget Act reflects a $1.235 billion pension case judgment
payment, and returns funding of the State's pension contribution to
the quarterly basis existing prior to the deferral actions
invalidated by the courts;

3. Continuing the third year of a four-year "compact" which the State
Administration has made with higher education units, funding from
the General Fund for the University of California and California
State University has increased by about 6 percent ($121 million and
$107 million, respectively), and there was no increase in student
fees;

4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels;

5. Health and welfare costs are contained, continuing generally the
grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program;

6. Unlike prior years, this Budget Act does not depend on uncertain
federal budget actions. About $300 million in federal funds,
already included in the federal FY

<PAGE>

1997 and 1998 budgets, are included in the Budget Act, to offset
incarceration costs for illegal immigrants;

7. The Budget Act contains no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving
approximately $500 million.

After enactment of the Budget Act, and prior to the end of the Legislative
Session on September 13, 1997, the Legislature and the Governor reached certain
agreements related to State expenditures and taxes. The Legislature passed a
bill restoring $203 million of education-related expenditures which the Governor
had vetoed in the original Budget Act, based on agreement with the Governor on
an education testing program. The Legislature also passed a bill to restore $48
million of welfare cost savings which had been part of earlier legislation
vetoed by the Governor. The Legislature also passed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the legislation signed by the Governor are a variety of
phased-in tax cuts, conformity with certain provisions of the federal tax reform
law passed earlier in the year, and reform of funding for county trial courts,
with the State to assume greater financial responsibility.

The May 1998 Revision to the Governor's proposed budget increases the General
Fund revenue forecast by nearly $1.8 billion in 1997-98 and $2.5 billion in
1998-99. The May Revision provides for a balanced budget and a budget reserve
for economic uncertainties of $1.6 billion. In the May Revision the
administration proposed, among other things, a two-step reduction in the State's
vehicle license fee (VLF) which, when fully phased in, would reduce State
revenues by more than $3 billion annually. Since VLF is a primary source of
revenue for local governments, the May Revision proposed continuous
appropriation from the General Fund to replace that loss in revenues.

The VLF proposal met significant opposition in the Legislature and continuing
disagreement over the nature and extent of the proposed tax cut delayed final
adoption of the 1998-99 budget. Local government concern about the potential
impact of the VLF proposal on local government revenues underscores the extent
to which California county and other local government budgets are affected by
State budget decisions beyond their control.

The Governor signed the 1998-99 Budget Act on August 21, 1998. The 1998-99
Budget Act is based on projected General Fund revenues and transfers of $57.0
billion (after giving effect to various tax reductions enacted in 1997 and
1998), a 4.2% increase from the revised 1997-98 figures. Special Fund revenues
were estimated at $14.3 billion. The revenue projections were based on the
Governor's May Revision to the 1998-99 Budget and may be overstated in light of
the possible effect on California's economic growth of worsening economic
problems in various international markets.

The Budget Act provides authority for expenditures of $57.3 billion from the
General Fund (a 7.3% increase from 1997-98), $14.7 billion from Special Funds,
and $3.4 billion from bond funds. The Budget Act projects a balance in the SFEU
at June 30, 1999 of $1.255 billion, a little more than 2% of General Fund
revenues. The Budget Act assumes the State will carry out its normal inta-year
cash flow borrowing in the amount of $1.7 billion.

YEAR 2000. In October 1997 the Governor issued Executive Order W-163-97 stating
that Year 2000 solutions would be a State priority and requiring each agency of
the State, no later than December 31, 1998, to address Year 2000 problems in
their essential systems and protect those systems from corruption by
non-compliant systems, in accordance with the Department of

<PAGE>

Information Technology's California 2000 Program. There can be no assurance
that steps being taken by state or local government agencies with respect to
the Year 2000 problem will be sufficient to avoid any adverse impact upon the
budgets or operations of those agencies or upon the Trust.

Because of the deterioration in the State's budget and cash situation, the
State's credit ratings have been reduced. Since late 1991, all three major
nationally recognized statistical rating organizations have lowered their
ratings for general obligation bonds of the State from the highest ranking of
"AAA" to "A+" by S&P, "A1" by Moody's and "A+" by Fitch Investors Services,
Inc. However, prior to the October 8, 1997, sale of $1 billion in general
obligation bonds, Fitch raised California's general obligation bond rating
from "A+" to "AA-", however S&P and Moody's did not follow suit, confirming
those ratings at "A+" and "A1", respectively. It is not presently possible to
determine whether, or the extent to which, Moody's, S&P or Fitch will change
such ratings in the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State, and there is no
obligation on the part of the State to make payment on such local obligations
in the event of default.

CONSTITUTIONAL AND STATUTORY LIMITATIONS. Article XIII A of the California
Constitution (which resulted from the voter approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to exceed two percent) or decreases, in the consumer
price index or comparable local data, or to reflect reductions in property
value caused by substantial damage, destruction or other factors, or when
there is a "change in ownership" or "new construction".

Constitutional challenges to Article XIII A to date have been unsuccessful.
In 1992, the United States Supreme Court ruled that notwithstanding the
disparate property tax burdens that Proposition 13 might place on otherwise
comparable properties, those provisions of Proposition 13 do not violate the
Equal Protection Clause of the United States Constitution. In response to the
significant reduction in local property tax revenue caused by the passage of
Proposition 13, the State enacted legislation to provide local governments
with increased expenditures from the General Fund. This fiscal relief has
ended.

Article XIII B of the California Constitution generally limits the amount of
appropriations of the State and of local governments to the amount of
appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes"
of the State and/or local government exceed its appropriations limit, the
excess revenues must be rebated. Certain expenditures, including debt service
on certain bonds and appropriations for qualified capital outlay projects,
are not included in the appropriations limit.

In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California Supreme Court recently
upheld the Proposition 62 requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election

<PAGE>

on the issue. This recent decision may invalidate other taxes that have been
imposed by local governments in California and make it more difficult for
local governments to raise taxes. In 1988 and 1990, California voters
approved initiatives known as Proposition 98 and Proposition 111,
respectively. These initiatives changed the State's appropriations limit
under Article XIII B to (1) require that the State set aside a prudent
reserve fund for public education, and (2) guarantee a minimum level of State
funding for public elementary and secondary schools and community colleges.

In November 1996, California voters approved Proposition 218. The initiative
applied the provisions of Proposition 62 to all entities, including charter
cities. It requires that all taxes for general purposes obtain a simple
majority popular vote and that taxes for special purposes obtain a two-thirds
majority vote. Prior to the effectiveness of Proposition 218, charter cities
could levy certain taxes such as transient occupancy taxes and utility user's
taxes without a popular vote. Proposition 218 will also limit the authority
of local governments to impose property-related assessments, fees and
charges, requiring that such assessments be limited to the special benefit
conferred and prohibiting their use for general governmental services.
Proposition 218 also allows voters to use their initiative power to reduce or
repeal previously authorized taxes, assessments, fees and charges.

The effect of constitutional and statutory changes and of budget developments
on the ability of California issuers to pay interest and principal on their
obligations remains unclear, and may depend on whether a particular bond is a
general obligation or limited obligation bond (limited obligation bonds being
generally less affected). There is no assurance that any California issuer
will make full or timely payments of principal or interest or remain solvent.
For example, in December 1994, Orange County filed for bankruptcy.

Certain tax-exempt securities in which a Fund may invest may be obligations
payable solely from the revenues of specific institutions, or may be secured
by specific properties, which are subject to provisions of California law
that could adversely affect the holders of such obligations. For example, the
revenues of California health care institutions may be subject to state laws,
and California law limits the remedies of a creditor secured by a mortgage or
deed of trust on real property.

In addition, it is impossible to predict the time, magnitude, or location of
a major earthquake or its effect on the California economy. In January 1994,
a major earthquake struck the Los Angeles area, causing significant damage in
a four-county area. The possibility exists that another such earthquake could
create a major dislocation of the California economy.

The California Tax Exempt Fund's concentration in California Municipal
Securities provides a greater level of risk than a fund that is diversified
across numerous states and municipal entities.

MANAGEMENT OF THE TRUST

OFFICERS AND TRUSTEES

The officers and trustees of the Trust, their principal occupations during the
past five years, and their affiliations, if any, with the Investment Manager are
as follows:

<PAGE>

<TABLE>
<CAPTION>
NAME AGE POSITION WITH PRINCIPAL OCCUPATION FOR THE
THE TRUST PAST FIVE YEARS

- ------------------------------------------- ------- ----------------- ---------------------------------------
<S> <C> <C> <C>
Irwin G. Barnet, Esq. 61 Trustee An attorney and a principal of
Sanders, Barnet, Goldman, Simons Sanders, Barnet, Goldman, Simons &
& Mosk Mosk, a law firm.
1901 Avenue of the Stars, Suite 850
Los Angeles, California 90067
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C> <C>
Maria D. Hummer, Esq.* 54 Trustee An attorney with Manatt, Phelps &
Manatt, Phelps & Phillips, LLP Phillips and Chair of the Land Use
11355 West Olympic Boulevard Section of that law firm.
Los Angeles, California 90064

Victor Meschures, CPA 61 Trustee A Certified Public Accountant with
Meschures, Campeas, Thompson & Meschures, Campeas, Thompson &
Snyder, LLP Snyder, LLP, an accounting firm
760 North La Cienega Boulevard
Los Angeles, California 90069

William R. Sweet 61 Trustee Retired; formerly, Executive Vice
81 Tiburon Road President, The Bank of California
Tiburon, California 94920 (1985-1996)

James R. Wolford 45 Trustee Senior Vice President and Chief
Bixby Ranch Company Financial Officer, Bixby Ranch
3010 Old Ranch Parkway, Suite 100 Company, an owner, operator and
Seal Beach, California 90740 developer of real estate.

Mark Nagle 39 President and President, Vice President and
SEI Investments Chief Controller, Funds Accounting; Vice
One Freedom Valley Drive Executive President of the Administrator and
Oaks, Pennsylvania 19456 Officer Distributor (1996-Present); BiSYS Fund
Services, Vice President of Fund
Accounting (1995-1996); Fidelity
Investments, Senior Vice President
(1981-1995).

Christopher Salfi 35 Controller and Accounting Director of SEI
SEI Investments Chief Investments Mutual Fund Services,
One Freedom Valley Drive Operating Fund Accounting Director, Fund
Oaks, Pennsylvania 19456 Officer Accounting Manager (1994-Present);
Investment Accounting Manager
(1993-1994).

Lydia A. Gavalis, Esq. 35 Vice President Vice President and Assistant
SEI Investments and Assistant Secretary of the Administrator and
One Freedom Valley Drive Secretary the Distributor (1998-Present);
Oaks, Pennsylvania 19456 Assistant General Counsel and
Director of Arbitration, Philadelphia
Stock Exchange (1989-1998)
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C> <C>
Lynda J. Striegel, Esq. 50 Vice President Vice President and Assistant
SEI Investments and Assistant Secretary of the Administrator and
One Freedom Valley Drive Secretary Distributor (1998-Present); Senior
Oaks, Pennsylvania 19456 Asset Management Counsel, Barnett
Banks, Inc. (1997-1998); Partner,
Groom and Nordberg, Chartered
(1996-1997); Associate General
Counsel, Riggs Bank, N.A. (1991-1995).

James R. Foggo, Esq. 35 Vice President Vice President and Assistant
SEI Investments and Assistant Secretary of the Administrator and
One Freedom Valley Drive Secretary Distributor (1998-Present);
Oaks, Pennsylvania 19456 Associate, Paul Weiss, Rifkind,
Wharton & Garrison (1998);
Associate, Baker & McKenzie
(1995-1998); Associate, Battle
Fowler LLP (1993-1995).

Kevin P. Robins, Esq. 38 Vice President Senior Vice President and General
SEI Investments and Assistant Counsel of the Administrator and
One Freedom Valley Drive Secretary Distributor (1994-Present)
Oaks, Pennsylvania 19456

Edward T. Searle, Esq. 45 Vice President Vice President and Assistant
SEI Investments and Assistant Secretary of the Administrator and
One Freedom Valley Drive Secretary Distributor (1999-Present);
Oaks, Pennsylvania 19456 Associate, Drinker, Biddle & Reath LLP
(1998-1999); Associate, Ballard, Spahr,
Andrews & Ingersoll, LLP (1995-1998).
</TABLE>

*This individual is considered an interested person of the Trust as defined in
Section 2(a)(19) of the 1940 Act.

The address of each individual listed above, unless otherwise indicated, is 400
North Roxbury Drive, Beverly Hills, California 90210.

COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FROM REGISTRANT(2) AND FUND COMPLEX
NAME, POSITION REGISTRANT PAID TO DIRECTORS

- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Irwin G. Barnet $4,000 $4,000
Trustee

Maria D. Hummer $4,000 $4,000
Trustee
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
Victor Meschures $4,000 $4,000
Trustee

William R. Sweet $4,000 $4,000
Trustee

James R. Wolford $4,000 $4,000
Trustee

</TABLE>
---------------------
(1) Estimated for current fiscal year.

INVESTMENT MANAGER

The Trust and City National Bank ("Investment Manager") have entered into an
Investment Management Agreement as of April 1, 1999. The Investment Manager
provides a continuous investment program including general investment and
economic advice regarding the Fund's investment strategies, manages the fund's
investment portfolio and provides other services necessary to the operation of
the Funds and the Trust. The Investment Manager is exempt from registering as an
investment adviser under the Investment Advisers Act of 1940, because of its
status as a bank. City National Bank, founded in the early 1950's, is a
federally chartered commercial bank with approximately $6.9 billion in assets as
of September 30, 1999. It is a wholly-owned subsidiary of City National
Corporation ("CNC"), a New York Stock Exchange listed company.

The Investment Management Agreement will be in effect for a two-year term from
its effective date, and thereafter will continue in effect for one-year terms,
subject to annual approval by: (1) the Trust's Board of Trustees or (2) a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund, In either event, the continuance must also be approved
by a majority of the Trust's Board of Trustees who are not parties to the
Investment Management Agreement, or interest persons (as defined in the 1940
Act) of any such party, by vote cast in person at a meeting called for the
purpose of voting on such approval. The Investment Management Agreement may be
terminated at any time upon 60-days notice by either party, or by a majority
vote of the outstanding shares of a Fund, and will terminate automatically upon
assignment (as defined in the 1940 Act).

Pursuant to the Investment Management Agreement, the Investment Manager is
entitled to receive as an annual fee, payable monthly, of 0.27% of average daily
net assets from the California Tax Exempt Fund and 0.26% from the Government
Fund of average daily net assets.

The Investment Manager provides the Funds with investment management services,
including the selection, appointment, and supervision of the Sub-adviser to each
Fund. The Investment Manager may, in the future, and after having secured the
necessary SEC approval, change the Sub-adviser to each Fund according to certain
procedures without soliciting shareholders' approval.

The Investment Management Agreement allows the Investment Manager voluntarily to
waive its fees payable under the Investment Management Agreement and to
reimburse all or a portion of a Fund's expenses. The Investment Management
Agreement further provides that the Investment Manager may seek reimbursement of
any reductions made to its management fee and any

<PAGE>

payments by the Investment Manager of operating expenses that a Fund is
obligated to pay within a three-year period following such reduction or
payment, subject to a Fund's ability to effect such reimbursement and remain
in compliance with any applicable expense limitations. The Investment Manager
will generally seek reimbursement for the oldest of any reductions and/or
waivers before payment by a Fund for fees and expenses for the current year.
Such reimbursement may be paid prior to a Fund's payment of current expenses
if so requested by the Investment Manager even if such payment may require
the Investment Manager to waive or reduce its current fees under the
Investment Management Agreement or to pay current Fund expenses.

SUB-ADVISER TO THE GOVERNMENT FUND

The Trust and Wellington Management Company, LLP (the "Sub-adviser" or
"Wellington Management") have entered into a sub-advisory agreement (the
"Sub-advisory Agreement"). Wellington Management serves as investment adviser
to the Government Fund. The Sub-advisory Agreement provides that the
Sub-adviser shall not be protected against any liability to the Trust or its
shareholders by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from the reckless disregard
of its obligations or duties thereunder.

The continuance of the Sub-advisory Agreement with respect to the Government
Fund after the first two (2) years of the Sub-advisory Agreement must be
specifically approved at least annually (1) by the vote of a majority of the
outstanding shares of the Government Fund or by the Trustees, and (2) by the
vote of a majority of the Trustees who are not parties to the Sub-advisory
Agreement or "interested persons" of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval. The Sub-advisory
Agreement will terminate automatically in the event of its assignment, and is
terminable at any time without penalty by the Adviser, the Trust's Board of
Trustees or, by a vote of the majority of the outstanding voting securities of
the Government Fund, on 60 days' written notice to the Sub-adviser, or by the
Sub-adviser on 90 days' written notice to the Trust.

The Sub-adviser is entitled to a fee for its investment advisory services,
which is accrued daily and paid monthly at the following annual rates: .075%
of the combined daily net assets of the Government Fund up to $500 million
and .02% of such net assets in excess of $500 million. Wellington Management
may voluntarily waive portions of its fees, although such waiver is not
expected to affect the Government Fund's total operating expenses, due to the
nature of the Investment Manager's fee waivers. Wellington Management may
terminate its waiver at any time.

Wellington Management is located at 75 State Street, Boston, Massachusetts
02109. Wellington Management and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. As of September 30, 1999, Wellington
Management had discretionary management authority with respect to
approximately $217 billion in assets.

SUB-ADVISER TO THE CALIFORNIA TAX EXEMPT FUND

The Trust and Weiss, Peck & Greer, L.L.C. (the "Sub-adviser" or "WP&G") have
entered into a Sub-advisory agreement (the "Sub-advisory Agreement"). The
Sub-advisory Agreement provides that each Investment Manager or Sub-adviser
shall not be protected against any liability to the Trust or its shareholders by
reason of willful misfeasance, bad faith or gross negligence on

<PAGE>

its part in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.

WP&G serves as an investment adviser to the California Tax Exempt Fund. WP&G
invests the assets of the California Tax Exempt Fund, and continuously
reviews, supervises and administers the investment program of the California
Tax Exempt Fund. WP&G is a limited liability company founded as a limited
partnership in 1970, and engages in investment management, venture capital
management and management buyouts. WP&G has been active since its founding in
managing portfolios of tax exempt securities. As of September 30, 1999, total
assets under management were approximately $16.5 billion. The principal
business address of WP&G is One New York Plaza, New York, New York 10004.

The continuance of the Sub-advisory Agreement after the first two (2) years
must be specifically approved at least annually (1) by the vote of a majority
of the outstanding shares of the California Tax Exempt Fund or by the
Trustees, and (2) by the vote of a majority of the Trustees who are not
parties to such Sub-advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Sub-advisory Agreement will terminate automatically in the
event of its assignment, and is terminable at any time without penalty by the
Adviser, the Trust's Board of Trustees or, by a vote of the majority of the
outstanding voting securities of the California Tax Exempt Fund, on 60 days'
written notice to the Sub-adviser, or by the Sub-adviser on 90 days' written
notice to the Trust.

The Sub-adviser is entitled to a fee for its investment advisory services,
which is accrued daily and paid monthly at the following annual rates: .05%
of the average daily net assets of the California Tax Exempt Fund up to $500
million, .04% between $500 million and $1 billion and .03% of net assets in
excess of $1 billion.

PRINCIPAL UNDERWRITER

SEI Investments Distribution Co. (the "Distributor"), a wholly-owned
subsidiary of SEI Investments, and the Trust are parties to a distribution
agreement (the "Distribution Agreement") with respect to shares of the Funds.
The Distributor receives no compensation of distribution of shares of the
Funds. The Distribution Agreement shall remain in effect for a period of two
years after the effective date of the Distribution Agreement and is renewable
annually. The Distribution Agreement will terminate automatically in the
event of its assignment and may be terminated by the Distributor, by a
majority vote of the Trustees who are not interested persons and have no
financial interest in the Distribution Agreement or by a majority of the
outstanding voting securities of the Trust upon not less than 60 days' prior
written notice by either party.

TRANSFER AGENT

Pursuant to a Transfer Agency Agreement, SEI Investments Fund Management,
(the "Transfer Agent") located at 530 East Swedesford Road Wayne,
Pennsylvania 19087 serves as transfer agent for the Funds. The Transfer Agent
provides information and services to the Funds' shareholders which include
reporting share ownership, sales, and dividend activity (and associated tax
consequences), responding to daily inquiries, and effecting the transfer of
the Funds' shares. It furnishes such office space and equipment, telephone
facilities, personnel, and informational literature distribution as is
necessary or appropriate in providing transfer agency information and
services.

CUSTODIAN AND FUND ACCOUNTANT

Pursuant to a Custodian Agreement, First Union National Bank serves as the
Custodian (the "Custodian") of the Funds' assets. Under the terms of the
Custodian Agreement, the Custodian holds and administers the securities and
cash in the Funds' portfolios.

<PAGE>

INDEPENDENT ACCOUNTANTS AND REPORTS TO SHAREHOLDERS

The Trust's independent accountants, KPMG LLP, audit and report on the annual
financial statements of the Funds and review the Funds' federal income tax
returns. KPMG LLP may also perform other professional accounting, auditing,
tax, and advisory services when engaged to do so by the Trust. Shareholders
will be sent audited annual and unaudited semi-annual financial statements.
The address of KPMG LLP is 725 South Figueroa Street, Los Angeles 90017.

LEGAL COUNSEL

The validity of the shares of beneficial interest offered hereby will be
passed upon by Paul, Hastings, Janofsky & Walker LLP, 345 California Street,
Suite 2900, San Francisco, California 94104.

PORTFOLIO TRANSACTIONS AND TURNOVER

PORTFOLIO TRANSACTIONS

Portfolio transactions are undertaken principally to: pursue the objective of
the Funds in relation to movements in the general level of interest rates;
invest money obtained from the sale of the Funds' shares; reinvest proceeds
from maturing portfolio securities; and meet redemptions of the Funds'
shares. Portfolio transactions may increase or decrease the yields of the
Funds depending upon management's ability correctly to time and execute them.

The Investment Manager or Sub-advisers, in effecting purchases and sales of
portfolio securities for the account of the Funds, seeks to obtain best price
and execution. Subject to the supervision of the Board of Trustees, the
Investment Manager or Sub-advisers generally selects broker-dealers for the
Funds primarily on the basis of the quality and reliability of services
provided, including execution capability and financial responsibility.

When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager or Sub-adviser may, in its discretion,
utilize the services of broker-dealers that provide it with investment
information and other research resources. Such resources may also be used by
the Investment Manager or Sub-advisor when providing advisory services to
other investment advisory clients, including other mutual funds.

The Trust expects that purchases and sales of portfolio securities will
usually be principal transactions. Securities will normally be purchased
directly from the issuer or from an underwriter or market maker for the
securities.

Purchases from underwriters will include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers serving as market
makers will include the spread between the bid and asked prices.

Investment decisions for the Funds are reached independently from those for
other accounts managed by the Investment Manager or Sub-adviser. Such other
accounts may also make investments in instruments or securities at the same
time as the Funds. On occasions when the Investment Manager or Sub-adviser
determines the purchase or sale of a security to be in the best

<PAGE>

interest of the Funds as well as of other clients, the Investment Manager or
Sub-adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in an attempt to obtain
the most favorable price or lower brokerage commissions and the most
efficient execution. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be made by
the Investment Manager or Sub-adviser in the manner it considers to be the
most equitable under the circumstances and consistent with its fiduciary
obligations to the Funds and to its other participating clients. In some
cases this procedure may affect the size or price of the position obtainable
for the Funds.

PORTFOLIO TURNOVER

Because securities with maturities of less than one year are excluded from
required portfolio turnover rate calculations, the Funds' portfolio turnover
rates for reporting purposes are expected to be zero.

DISTRIBUTION AND TAXES

DISTRIBUTIONS

On each day that the Funds' net asset values per share are determined (each a
"Business Day"), the Funds' net investment incomes are declared as of the
close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
time) as a dividend to shareholders of record as of the last calculation of
net asset value prior to the declaration and to shareholders investing on
that day subject to the following conditions: (1) receipt of the purchase
order by the Transfer Agent before 1:30 p.m. Eastern time; and (2) payment in
immediately available funds wired to the Transfer Agent by the close of
business the same day. Shareholders will receive dividends in additional shares
unless they elect to receive cash. Dividends will normally be reinvested
monthly in full and fractional shares of the Fund at the net asset value on the
last Business Day of each month. If cash payment is requested, checks will
normally be mailed on the Business Day following the dividend reinvestment
date. The Funds will pay shareholders who redeem all of their shares all
dividends accrued to the time of the redemption within seven days after the
redemption.

The Funds calculate dividends based on daily net investment income. For this
purpose, the net investment income of the Funds consist of: (1) accrued
interest income, plus or minus amortized discount or premium, less (2)
accrued expenses allocated to the Funds. If the Funds realize any capital
gains, they will be distributed at least once during the year as determined
by the Board of Trustees. Any realized capital losses to the extent not
offset by realized capital gains will be carried forward up to eight years.
It is not anticipated that the Funds will realize any long-term capital
gains. Expenses of the Trust are accrued daily. Should the net asset values
of the Funds deviate significantly from market value, the Board of Trustees
could decide to value the investments at market value, and any unrealized
gains and losses could affect the amount of the Funds' distributions.

<PAGE>

FEDERAL INCOME TAXES

It is the policy of the Funds to qualify for taxation, and to elect to be
taxed, as "regulated investment companies" by meeting the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
In order to so qualify, the Funds will distribute each year substantially all
of their investment company taxable income (if any), their net
exempt-interest income (if any), and their net capital gains (if any), and
will seek to meet certain other requirements. Such qualification relieves the
Funds of liability for federal income taxes to the extent the Funds' earnings
are distributed. By following this policy, the Funds expect to eliminate or
reduce to a nominal amount the federal income tax to which they are subject.

In order to qualify as regulated investment companies, the Funds must, among
other things, annually (1) derive at least 90% of their gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks, securities, foreign currencies or
other income (including gains from options, futures or forward contracts)
derived with respect to their business of investing in stocks, securities or
currencies, and (2) diversify holdings so that at the end of each quarter of
their taxable years (i) at least 50% of the market value of the Funds' total
assets is represented by cash or cash items, U.S. Government securities,
securities of other regulated investment companies and other securities
limited, in respect of any one issuer, to a value not greater than 5% of the
value of the Funds' total assets and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies) or of two
or more issuers that the Funds control, within the meaning of the Code, and
that are engaged in the same, similar or related trades or businesses. If the
Funds qualify as regulated investment companies, they will not be subject to
federal income tax on the part of their net investment income and net
realized capital gains, if any, which they distribute to shareholders,
provided that the Funds meet certain minimum distribution requirements. To
comply with these requirements, the Funds must distribute annually at least
(1) 90% of "investment company taxable income" (as that term is defined in
the Code), and (2) 90% of the excess of (i) tax exempt interest income over
(ii) certain deductions attributable to that income (with certain
exceptions), for their taxable years. The Funds intend to make sufficient
distributions to shareholders to meet these requirements.

If either Fund fails to distribute in a calendar year (regardless of whether
it has a non-calendar taxable year) at least 98 percent of its (1) ordinary
income for such year; and (2) capital gain net income for the one-year period
ending on October 31 of that calendar year (or later if the Fund is permitted
so to elect and so elects), plus any undistributed ordinary income or capital
gain from the prior year, the Fund will be subject to a nondeductible 4%
excise tax on the undistributed amounts. The Funds intend generally to make
distributions sufficient to avoid imposition of this excise tax.

Any distributions declared by the Funds in October, November, or December to
shareholders of record during those months and paid during the following
January are treated, for tax purposes, as if they were received by each
shareholder on December 31 of the year declared. The Funds may adjust their
schedules for the reinvestment of distributions for the month of December to
assist in complying with the reporting and minimum distribution requirements
of the Code.

The Funds do not expect to realize any significant amount of long-term
capital gain. However, any distributions by the Funds of long-term capital
gain will be taxable to the shareholders as long-term capital gain,
regardless of how long a shareholder has held Fund shares.

<PAGE>

The Funds may engage in investment techniques that may alter the timing and
character of the Funds' incomes. The Funds may be restricted in their use of
these techniques by rules relating to qualifying as regulated investment
companies.

The Funds may invest in some Variable Rate Demand Securities which have a
feature entitling the purchaser to resell the securities at a specified
amount (a "put option"). The Internal Revenue Service (the "IRS") has issued
a revenue ruling to the effect that, under specified circumstances, a
regulated investment company will be the owner of tax exempt municipal
obligations acquired with a put option. The IRS subsequently announced that
it will not ordinarily issue an advance letter ruling as to the identity of
the true owner of property in cases involving the sale of securities (or
participation interests therein) if the purchaser has the right to cause the
security (or participation interest therein) to be purchased by the seller or
a third party. The Funds intend to take the position that they are the owner
of any securities with respect to which they also hold a put option.

The Funds will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder (1) who fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) who provides an incorrect taxpayer identification number; (3)
who is subject to withholding for failure to properly report to the IRS all
payments of interest or dividends; or (4) who fails to provide a certified
statement that he or she is not subject to "backup withholding." This "backup
withholding" is not an additional tax and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.

The foregoing discussion relates only to federal income tax law as applicable
to U.S. citizens or residents. Foreign shareholders (I.E., nonresident alien
individuals and foreign corporations, partnerships, trusts and estates)
generally are subject to U.S. withholding tax at the rate of 30% (or a lower
tax treaty rate) on distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains and any gains from the sale or disposition of shares of the
Funds generally are not subject to U.S. taxation, unless the recipient is an
individual who meets the Code's definition of "resident alien." Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the U.S. In addition, the tax consequences to a foreign
shareholder entitled to claim the benefits of a tax treaty may be different
than those described above. Distributions by the Funds may also be subject to
state, local and foreign taxes, and their treatment under applicable tax laws
may differ from the U.S. federal income tax treatment.

The information above is only a summary of some of the tax considerations
generally affecting the Funds and their shareholders. No attempt has been
made to discuss individual tax consequences and this discussion should not be
construed as applicable to all shareholders' tax situations. Investors should
consult their own tax advisors to determine the suitability of the Fund and
the applicability of any state, local, or foreign taxation. Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Foreign
shareholders should consider, in particular, the possible application of U.S.
withholding taxes on certain taxable distributions from the Fund at rates up
to 30% (subject to reduction under certain income tax treaties).

CALIFORNIA INCOME TAX

The California Tax Exempt Fund intends to qualify to pay dividends to
shareholders that are exempt from California personal income tax ("California
exempt-interest dividends"). The Fund will qualify to pay California
exempt-interest dividends if (1) at the close of each quarter of the Fund's
taxable year, at least 50 percent of the value of the Fund's total assets
consists of

<PAGE>

obligations the interest on which would be exempt from California personal
income tax if the obligations were held by an individual ("California Tax
Exempt Obligations"), and (2) the Fund continues to qualify as a regulated
investment company.

If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to shareholders will be considered California exempt-interest
dividends if they meet certain requirements. The Fund will notify its
shareholders of the amount of exempt-interest dividends each year.

Corporations subject to California franchise tax that invest in the Fund may
not be entitled to exclude California exempt-interest dividends from income.

Dividend distributions that do not qualify for treatment as California
exempt-interest dividends (including those dividend distributions to
shareholders taxable as long-term capital gains for federal income tax
purposes) will be taxable to shareholders at ordinary income tax rates for
California personal income tax purposes to the extent of the Fund's earnings
and profits.

Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of shares of the Fund will not be deductible for California
personal income tax purposes if the Fund distributes California
exempt-interest dividends.

The foregoing is a general, abbreviated summary of certain of the provisions
of the California Revenue and Taxation Code presently in effect as they
directly govern the taxation of Shareholders subject to California personal
income tax. These provisions are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions. Shareholders are advised to consult with their own tax
advisers for more detailed information concerning California tax matters.
Paul, Hastings, Janofsky & Walker LLP has expressed no opinion in respect
thereof.

SHARE PRICE CALCULATION

The Funds value portfolio instruments at amortized cost, which means they are
valued at their acquisition cost, as adjusted for amortization of premium or
discount, rather than at current market value. Calculations are made to
compare the value of the Funds' investments at amortized cost with market
values. Market valuations are obtained by using actual quotations provided by
market makers, estimates of market value, or values obtained from yield data
relating to classes of money market instruments published by reputable
sources at the bid prices for the instruments. The amortized cost method of
valuation seeks to maintain a stable $1.00 per share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of a shareholder's interest.

If a deviation of 1/2 of 1% or more were to occur between the net asset value
per share calculated by reference to market values and a Fund's $1.00 per
share net asset value, or if there were any other deviation that the Board of
Trustees of the Trust believed may result in a material dilution or other
unfair results to investors or existing shareholders, the Board of Trustees
is required to cause the Funds to take such action as it deems appropriate to
eliminate or reduce to the extent reasonably practicable such dilution or
unfair results. If the Funds' net asset values per share (computed using
market values) declined, or were expected to decline, below $1.00 (computed

<PAGE>

using amortized cost), the Board of Trustees might temporarily reduce or
suspend dividend payments in an effort to maintain the net asset value at
$1.00 per share. As a result of such reduction or suspension of dividends or
other action by the Board of Trustees, an investor would receive less income
during a given period than if such a reduction or suspension had not taken
place. Such action could result in investors receiving no dividends for the
period during which they hold their shares and receiving, upon redemption, a
price per share lower than that which they paid. On the other hand, if the
Funds' net asset values per share (computed using market values) were to
increase, or were anticipated to increase above $1.00 (computed using
amortized cost), the Board of Trustees might supplement dividends in an
effort to maintain the net asset value at $1.00 per share.

YIELD

If you would like to know the current seven-day yield of either of the Funds,
you may call 1-888-889-0799. The historical performance of the Funds may be
shown in the form of yield and effective yield. These measures of performance
are described below.

YIELD

Yield refers to the net investment income generated by a hypothetical
investment in the Funds over a specific seven-day period. This net investment
income is then annualized, which means that the net investment income
generated during the seven-day period is assumed to be generated in each
seven-day period over an annual period, and is shown as a percentage of the
investment.

EFFECTIVE YIELD

Effective yield is calculated similarly, but the net investment income earned
by the investment is assumed to be compounded weekly when annualized. The
effective yield will be slightly higher than the yield due to this
compounding effect.

TAX EXEMPT YIELD

A tax equivalent yield demonstrates the taxable yield necessary to produce an
after-tax yield equivalent to that of a fund that invests in tax exempt
obligations. The tax equivalent yield for the California Tax Exempt Fund is
computed by dividing that portion of the current yield (or effective yield)
of the California Tax Exempt Fund that is tax exempt by one minus a stated
income tax rate and adding the quotient to that portion (if any) of the yield
of the California Tax Exempt Fund that is not tax exempt.

SHAREHOLDER SERVICE AGREEMENTS

The Investment Manager has entered into a Shareholder Services Agreement with
the Trust. Pursuant to the Shareholder Services Agreement, the Investment
Manager will provide, or will arrange for others to provide, certain
specified shareholder services to shareholders of the Funds. As compensation
for the provision of such services, the Fund will pay the Investment Manager
a fee of up to 0.25% of the Funds' average daily net assets on an annual
basis, payable monthly. The Investment Manager will pay certain banks, trust
companies, broker-dealers, and other institutions (each a "Participating
Organization") out of the fees the Investment Manager receives

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from the Funds under the Shareholder Services Agreement to the extent that
the Participating Organization performs shareholder servicing functions for
the Funds with respect to shares of the Funds owned from time to time by
customers of the Participating Organization. In certain cases, the Investment
Manager may also pay a fee, out of its own resources and not out of the
service fee payable under the Shareholder Services Agreement, to a
Participating Organization for providing other administrative services to its
customers who invest in the Funds.

Pursuant to the Shareholder Services Agreement, the Investment Manager will
provide or arrange with a Participating Organization for the provision of the
following shareholder services: responding to shareholder inquiries;
processing purchases and redemptions of the Funds' shares, including
reinvestment of dividends; assisting shareholders in changing dividend
options, account designations, and addresses; transmitting proxy statements,
annual reports, prospectuses, and other correspondence from the Funds to
shareholders (including, upon request, copies, but not originals, of regular
correspondence, confirmations, or regular statements of account) where such
shareholders hold shares of the Funds registered in the name of the
Investment Manager, a Participating Organization, or their nominees; and
providing such other information and assistance to shareholders as may be
reasonably requested by such shareholders.

The Investment Manager may also enter into agreements with Participating
Organizations that process substantial volumes of purchases and redemptions
of shares of the Funds for their customers. Under these arrangements, the
Transfer Agent will ordinarily maintain an omnibus account for a
Participating Organization and the Participating Organization will maintain
sub-accounts for its customers for whom it processes purchases and
redemptions of shares. A Participating Organization may charge its customers
a fee, as agreed upon by the Participating Organization and the customer, for
the services it provides. Customers of participating Organizations should
read the Funds' Prospectuses in conjunction with the service agreement and
other literature describing the services and related fees provided by the
Participating Organization to its customers prior to any purchase of shares.

EXPENSES

The Trust pays the expenses of its operations, including: the fees and
expenses of independent accountants, counsel and the custodian; the cost of
reports and notices to shareholders; the cost of calculating net asset value;
registration fees; the fees and expenses of qualifying the Trust and its
shares for distribution under federal and state securities laws; and
membership dues in the Investment Company Institute and, or other industry
association membership dues.

GENERAL INFORMATION

The Trust was organized as a business trust under the laws of Delaware on
October 28, 1996 and may issue an unlimited number of shares of beneficial
interest or classes of shares in one or more separate series. Currently, the
Trust offers shares of nine series - two of which are described in this
Statement of Additional Information. The Trust's Board of Trustees may
authorize the issuance of shares of additional series or classes of shares of
beneficial interest if it deems it desirable.

The Funds described in this Statement of Additional Information each have
three classes of shares. This Statement of Additional Information describes
the Institutional Class of shares for each Fund. Generally, the only
financial institutions and financial intemediaries may purchase Institutional
Class shares for their own or on behalf of their customer accounts. The other
classes are subject to the same expenses, except that they may be subject to
different distribution and/or shareholder servicing costs.

The Trust is generally not required to hold shareholder meetings. However, as
provided in its Agreement and Declaration of Trust and its Bylaws,
shareholder meetings may be called by the

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Trustees for the purpose as may be prescribed by law, the Agreement and
Declaration of Trust, or the Bylaws, or for the purpose of taking action upon
any other matter deemed by the Trustees to be necessary or desirable
including changing fundamental policies, electing or removing Trustees, or
approving or amending an investment advisory agreement. In addition, a
Trustee may be removed by shareholders at a special meeting called upon
written request of shareholders owning in the aggregate at least 10% of the
outstanding shares of the Trust.

Each Trustee serves until the next meeting of shareholders, if any, called
for the purpose of electing trustees and until the election and qualification
of his or her successor or until death, resignation, declaration of
bankruptcy or incompetence by a court of competent jurisdiction, or removal
by a majority vote of the shares entitled to vote (as described below) or of
a majority of the Trustees. In accordance with the 1940 Act (1) the Trust
will hold a shareholder meeting for the election of trustees when less than a
majority of the trustees have been elected by shareholders, and (2) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled
by a vote of the shareholders.

The Agreement and Declaration of Trust provides that one-third of the shares
entitled to vote shall be a quorum for the transaction of business at a
shareholders' meeting, except when a larger quorum is required by applicable
law, by the Bylaws or by the Agreement and Declaration of Trust, and except
that where any provision of law, of the Agreement and Declaration of Trust,
or of the Bylaws permits or requires that (1) holders of any series shall
vote as a series, then a majority of the aggregate number of shares of that
series entitled to vote shall be necessary to constitute a quorum for the
transaction of business by that series; or (2) holders of any class shall
vote as a class, then a majority of the aggregate number of shares of that
class entitled to vote shall be necessary to constitute a quorum for the
transaction of business by that class. Any lesser number shall be sufficient
for adjournments. Any adjourned session or sessions may be held, within a
reasonable time after the date set for the original meeting, without the
necessity of further notice. The Agreement and Declaration of Trust
specifically authorizes the Board of Trustees to terminate the Trust (or any
of its investment portfolios) by notice to the shareholders without
shareholder approval.

For further information, please refer to the registration statement and
exhibits for the Trust on file with the SEC in Washington, D.C. and available
upon payment of a copying fee. The statements in the Prospectuses and this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.

PURCHASE AND REDEMPTION OF SHARES

The Funds' minimum initial investment is $100,000. Subsequent investments of
$1,000 or more may be made. These minimum requirements may be changed at any
time and are not applicable to certain types of investors. Exceptions to the
minimum investment requirements may be made at the discretion of the
Investment Manager including, without limitation, for employees or affiliates
of the Investment Manager or investors who are, or are related to or
affiliated with, clients of the Investment Manager. The Funds will accept
investments in cash only in U.S. dollars.

The Trust reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order in-kind
by making payment in readily marketable

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securities chosen by the Funds and valued as they are for purposes of
computing the Funds' net asset values. However, the Trust has elected to
commit itself to pay in cash all requests for redemption by any Shareholder
of record, limited in amount with respect to each Shareholder during any
90-day period to the lesser of: (1) $250,000, or (2) one percent of the net
asset value of the Funds at the beginning of such period. If payment is made
in securities, a shareholder may incur transaction expenses in converting
these securities into cash.

To minimize administrative costs, share certificates will not be issued.
Records of share ownership are maintained by the Transfer Agent.

Investors should remember that it may be difficult to complete transactions
by telephone during periods of drastic economic or market changes, when phone
lines may become busy with calls from other investors. If you want to buy or
sell shares but have trouble reaching the Funds by telephone, you may want to
use another method for completing a transaction, even though an alternative
procedure may mean that completing your transaction may take a longer period
of time.

The Funds may be required to withhold federal income tax at a rate of 31%
(backup withholding) from dividend payments, distributions, and redemption
proceeds if a shareholder fails to furnish the Funds with his/her certified
social security or tax identification number. The shareholder also must
certify that the number is correct and that he/she is not subject to backup
withholding. The certification is included as part of the share purchase
application form. If the shareholder does not have a social security number,
he/she should indicate on the purchase form that an application to obtain the
number is pending. The Funds are required to withhold taxes if a number is
not delivered within seven days.

OTHER INFORMATION

The Prospectuses of the Funds and this Statement of Additional Information do
not contain all the information included in the Registration Statement filed
with the SEC under the Securities Act of 1933, as amended, with respect to
the securities offered by the Prospectuses.

Certain portions of the Registration Statement have been omitted from the
Prospectuses and this Statement of Additional Information pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in
Washington, D.C.

Statements contained in the Prospectuses or in this Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in
all respects by such reference.

FINANCIAL STATEMENTS

There are no audited financial statements for the Funds because the Funds
have been in operation for less than one year.

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APPENDIX - RATINGS OF INVESTMENT SECURITIES

I. COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE

Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers (or related supporting institutions) of commercial paper with
this rating are considered to have a superior ability to repay
short-term promissory obligations. Issuers (or related supporting
institutions) of securities rated Prime-2 are viewed as having a strong
capacity to repay short-term promissory obligations. This capacity will
normally be evidenced by many of the characteristics of issuers whose
commercial paper is rated Prime-1, but to a lesser degree.

STANDARD & POOR'S CORPORATION

A S&P A-1 commercial paper rating indicates either an overwhelming or
very strong degree of safety regarding timely payment of principal and
interest. Issues determined to possess overwhelming safety
characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is strong, but the relative degree of safety
is not as high as for issues designated A-1.

II. SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS

MOODY'S INVESTORS SERVICE

Short-term notes and variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality,
enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad based access to the market for
refinancing. Obligations rated MIG-2/VMIG-2 are of high quality and
enjoy ample margins of protection, although not as large as those of
the top rated securities.

STANDARD & POOR'S CORPORATION

A S&P SP-1 rating indicates that the subject securities' issuer has a
very strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus (+)
designation. S&P's determination that an issuer has a satisfactory
capacity to pay principal and interest is denoted by a SP-2 rating.

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III. BONDS

MOODY'S INVESTORS SERVICE

Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or extraordinarily stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of these issues. Bonds carrying an Aa designation are deemed
to be of high quality by all standards. Together with Aaa rated bonds,
they comprise what are generally known as high grade bonds. Aa bonds
are rated lower than the best bonds because they may enjoy relatively
lower margins of protections, fluctuations of protective elements may
be of greater amplitude or there may be other factors present which
make them appear to be subject to somewhat greater long-term risks.

STANDARD & POOR'S CORPORATION

AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal.
An AA rating denotes a bond whose issuer has a very strong capacity to
pay interest and repay principal and differs from an AAA rating only in
small degree.