As filed with the Securities and Exchange Commission on March 8, 2007
Registration No. 333-140100
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
| ý | PRE-EFFECTIVE AMENDMENT NO. 1 |
| ¨ | POST-EFFECTIVE AMENDMENT NO. |
CNI CHARTER FUNDS
(Exact Name of Registrant as Specified in Charter)
400 North Roxbury Drive, Beverly Hills, CA 90210
(Address of Principal Executive Offices)
(800) 708-8881
(Registrant’s Telephone Number)
William J. Souza, Esq.
400 North Roxbury Drive
Beverly Hills, California 90210
(Name and Address of Agent for Service)
with copies to:
Michael Glazer
Paul, Hastings, Janofsky & Walker, LLP
515 South Flower Street
Los Angeles, California 90071
Approximate Date of Proposed Public Offering: As soon as practicable after the Registration Statement becomes effective under the Securities Act of 1933.
It is proposed that this filing shall become effective on April 7, 2007, pursuant to Rule 488 under the Securities Act of 1933, as amended, or on such earlier date as the Commission shall declare this Registration Statement effective pursuant to that Rule.
No filing fee is due because the Registrant will be deemed to have registered an indefinite number of shares under the Securities Act of 1933 pursuant to Section 24(f) under the Investment Company Act of 1940, upon the effective date of the Registrant’s registration statement on Form N-1A.
CNI CHARTER FUNDS
400 North Roxbury Drive
Beverly Hills, California 90210
1-888-889-0799
Dear Shareholder:
We are seeking your approval of the proposed reorganization of the Technology Growth Fund series (the “Tech Fund”) of CNI Charter Funds (the “Trust”) into the Large Cap Growth Equity Fund series (the “Growth Fund”) of the Trust. City National Asset Management, Inc. (“CNAM, Inc.”) is the investment adviser for both Funds. You are being asked to approve the proposed reorganization at a Special Meeting of Shareholders to be held on March 28, 2007 (the “Meeting”).
This reorganization is being proposed, among other reasons, to reduce the annual operating expenses borne by shareholders of the Tech Fund. The Growth Fund has significantly more assets than the Tech Fund ($51,240,276 compared to $2,841,571 as of December 31, 2006). It also has a significantly lower annual expense ratio (0.99% compared to 1.19% for Institutional Class shareholders and 1.24% compared to 1.49% for Class A shareholders for the year ended December 31, 2006). The investment objective of each of the Tech Fund and the Growth Fund is to provide capital appreciation by investing primarily in U.S. corporations and U.S. dollar denominated American Depository Receipts of foreign corporations with the potential for growth. However, the Tech Fund seeks to achieve its objective by investing primarily in companies which engage in technology-focused businesses. Although the Growth Fund does not share this focus, each Fund invests primarily in large capitalization companies, and CNAM, Inc. uses the same methods of quantitative and fundamental analysis in selecting stocks for the two Funds. The reorganization will be structured to be tax-free to both Funds and their shareholders. There will be no dilution of your investment.
If the proposed reorganization is approved by shareholders, at the close of business on April 13, 2007, the Tech Fund will transfer its assets to the Growth Fund and the Growth Fund will assume the liabilities of the Tech Fund. On that date, you will receive shares of the Growth Fund of the same class and equal in aggregate net asset value to the value of your shares of the Tech Fund.
CNAM, Inc. will bear the costs of the proposed reorganization, including legal, accounting and transfer agent costs. Enclosed are various materials, including a Combined Prospectus and Proxy Statement and proxy ballot for the Meeting. The materials will provide you with detailed information about the proposed reorganization. CNAM, Inc. and the Board of Trustees of the Trust believe the reorganization is in the best interests of the shareholders of both Funds. The Board of Trustees and I urge you to vote in favor of the proposed reorganization.
Your vote is important. Please take a moment now to sign and return your green proxy card in the enclosed postage paid return envelope. If we do not hear from you after a reasonable amount of time you may receive a telephone call from us, reminding you to vote your shares.
Sincerely,
/s/ Vernon C. Kozlen
| Vernon C. Kozlen |
| President |
CNI CHARTER FUNDS
TECHNOLOGY GROWTH FUND
400 North Roxbury Drive
Beverly Hills, California 90210
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on March 28, 2007
A special meeting of Shareholders of the Technology Growth Fund series (the “Tech Fund”) of CNI Charter Funds (the “Trust”) will be held on March 28, 2007, at 9:00 a.m. Pacific Time, at 400 North Roxbury Drive, Beverly Hills, California 90210. The meeting will be held for the following purposes:
1. Reorganization of the Tech Fund. For the shareholders of the Tech Fund to consider and vote on a proposed reorganization of the Fund into the Large Cap Growth Equity Fund series of the Trust and the subsequent dissolution of the Tech Fund.
2. Other Business. To consider and act upon such other business as may properly come before the meeting or any adjournments.
The Board of Trustees of the Trust has unanimously approved the proposed reorganization. Please read the accompanying Combined Prospectus and Proxy Statement for a more complete discussion of the proposal.
Shareholders of the Tech Fund of record as of the close of business on January 31, 2007 are entitled to notice of, and to vote at, the special meeting or any adjournment thereof.
You are invited to attend the special meeting. If you cannot do so, please complete and return the accompanying proxy in the enclosed postage paid return envelope as promptly as possible. This is important for the purpose of ensuring a quorum at the special meeting. You may revoke your proxy at any time before it is exercised by signing and submitting a revised proxy, by giving written notice of revocation to the Trust at any time before the proxy is exercised, or by voting in person at the special meeting.
By Order of the Board of Trustees,
/s/ Vernon C. Kozlen
| Vernon C. Kozlen |
President
March 7, 2007
CNI CHARTER FUNDS
COMBINED PROSPECTUS AND PROXY STATEMENT
The Board of Trustees of CNI Charter Funds (the “Trust”) is soliciting the enclosed proxies in connection with a special meeting (the “Meeting”) of shareholders of the Technology Growth Fund series (the “Tech Fund”) of the Trust.
The Meeting will be held on March 28, 2007 at 9:00 a.m. Pacific Time at 400 North Roxbury Drive, Beverly Hills, California 90210. The Meeting is being called to consider the proposed reorganization of the Tech Fund into the Large Cap Growth Equity Fund series (the “Growth Fund”) of the Trust and the subsequent dissolution of the Tech Fund, and to transact such other business as may properly come before the meeting or any adjournments thereof. Each of the Tech Fund and the Growth Fund is referred to herein as a “Fund” and collectively, the “Funds.” Shareholders of record of the Tech Fund as of January 31, 2007 will be entitled to vote at the Meeting.
The Trust is an open-end management investment company (referred to generally as a “mutual fund”). The Trust’s offices are located at 400 North Roxbury Drive, Beverly Hills, California 90210. The Trust’s phone number is 1-888-889-0799.
This Combined Prospectus and Proxy Statement (the “Prospectus/Proxy Statement”) is furnished to the shareholders of the Tech Fund on behalf of the Board of Trustees of the Trust in connection with the solicitation of voting instructions for the Meeting. It is being mailed to shareholders of the Tech Fund on or about March 7, 2007. The prospectus for the Growth Fund (the “Prospectus”) accompanies and is incorporated into this Prospectus/Proxy Statement. This Prospectus/Proxy Statement and the Prospectus set forth concisely the information about the Growth Fund and the proposed reorganization that Tech Fund shareholders should know before voting on the reorganization. You should retain them for future reference.
Additional information about the Tech Fund and the Growth Fund is included in their Prospectuses and Statement of Additional Information dated January 31, 2007, which are incorporated by reference herein. Additional information is also set forth in the Statement of Additional Information dated March 7, 2007 relating to this Prospectus/Proxy Statement, which is also incorporated by reference herein. The Trust will furnish you, at your request and without charge, a copy of the Statement of Additional Information and/or the most recent annual or semi-annual report for the Funds. You can request copies by calling 1-888-889-0799 or by writing to SEI Investments Distribution Co., One Freedom Valley Drive, Oaks, Pennsylvania 19456. As described herein, additional information about the Trust has been filed with the Securities and Exchange Commission (the “SEC”).
The SEC has not approved or disapproved these securities or passed on the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Dated: March 7, 2007.
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS/PROXY STATEMENT | 1 |
PROPOSED REORGANIZATION | 6 |
VOTING AND MEETING PROCEDURES | 11 |
GENERAL INFORMATION | 13 |
TAX MATTERS | 14 |
FINANCIAL STATEMENTS | 14 |
INFORMATION FILED WITH THE SECURITIES |
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AND EXCHANGE COMMISSION | 14 |
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SUMMARY OF PROSPECTUS/PROXY STATEMENT
Proposed Reorganization
The Board of Trustees of the Trust (the “Board”) has called the Meeting to allow shareholders of the Tech Fund to consider and vote on the proposed reorganization of the Tech Fund into the Growth Fund (the “Reorganization”). The Board met on December 7, 2006 to discuss the proposal, and approved the Reorganization, subject to the approval of the Tech Fund’s shareholders. The independent trustees – i.e., those trustees who are not “interested persons” of the Trust as that term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”), unanimously approved the Reorganization.
The proposed Reorganization involves the transfer of substantially all of the assets and liabilities of the Tech Fund to the Growth Fund in exchange for shares of the Growth Fund. The transfer of assets by the Tech Fund will occur at their current market value, and shares of the Growth Fund to be issued to the Tech Fund will be valued at their current net asset value, as determined in accordance with the Trust’s valuation procedures. Following this distribution, shares of the Growth Fund will be distributed to shareholders of the Tech Fund and the Tech Fund will be dissolved.
As a result of the proposed Reorganization, each shareholder of the Tech Fund will receive full and fractional shares of the Growth Fund equal in aggregate value at the time of the exchange to the aggregate value of such shareholder’s shares of the Tech Fund. The Reorganization is expected to constitute a tax-free exchange of shares for the Tech Fund shareholders, which means that no gain or loss will be recognized by the Tech Fund, the Growth Fund, or the shareholders of the Tech Fund or Growth Fund as a result of the Reorganization.
City National Asset Management, Inc. (“CNAM, Inc.”) serves as the investment adviser for, and has identical responsibilities with respect to, each Fund. Each Fund is a diversified fund, which means that it is limited as to amounts of issuers it may own with respect to 75% of its assets. The investment objective of each Fund is to provide capital appreciation by investing primarily in U.S. corporations and U.S. dollar denominated American Depository Receipts of foreign corporations with the potential for growth. However, the Tech Fund seeks to achieve its objective by investing primarily in companies which engage in technology-focused businesses. Although the Growth Fund does not share this focus, each Fund invests primarily in large capitalization companies. CNAM, Inc. uses the same methods of quantitative and fundamental analysis in selecting stocks for both Funds, and each Fund is subject to the same fundamental and non-fundamental investment policies as set forth in the Trust’s Statement of Additional Information.
Each of the Tech Fund and Growth Fund is subject to “market” risk, which is the risk that Fund shareholders may be exposed to a sudden decline in a holding’s share price or an overall decline in the stock market, and “manager” risk, which is the risk that CNAM, Inc.’s assessment of companies whose securities are held in the Fund may prove incorrect, resulting in losses or poor performance. In addition, the Tech Fund is subject to technology risk, which means that the Fund may be susceptible to greater risk than a fund that invests in a broader range of portfolio securities, and single stock risk, which is the risk that volatility in the price of a stock in which the Fund has a significant holding will have a larger proportionate impact on the net asset value of
the Fund. In addition to “market” risk and “manager” risk, the Growth Fund is subject to risks associated with investments in foreign securities.
The Board believes that the proposed Reorganization is in the best interests of each Fund and its shareholders, and that the interests of the shareholders of the Funds will not be diluted as a result of the proposed Reorganization. Because CNAM, Inc. charges a lower investment advisory fee to manage the Growth Fund than to manage the Tech Fund, and because the Growth Fund has significantly more assets than the Tech Fund and is therefore able to share certain operating expenses across a larger pool of assets, the Growth Fund has lower annual expense ratios (as a percentage of average net assets) than the Tech Fund. Accordingly, based upon information provided to the Board by CNAM, Inc. and the Trust’s administrator, the Board believes that the proposed Reorganization will reduce the annual operating expenses currently paid by the Tech Fund’s shareholders.
CNAM, Inc., rather than the shareholders of the Tech Fund, will bear the costs of the proposed Reorganization, including legal, accounting and transfer agent costs.
Comparison of Investment Objectives and Principal Strategies
The investment objective and principal strategies of each Fund are set forth in the following table.
| Tech Fund | Growth Fund |
Investment Objectives | The Fund seeks to provide long-term capital appreciation by investing primarily in U.S. corporations and U.S. dollar denominated American Depository Receipts of foreign corporations with the potential for growth which engage in technology-focused businesses. | The Fund seeks to provide capital appreciation by investing in large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations with the potential for growth.
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Principal Strategies | The Fund purchases a diversified portfolio, at least 80% of which consists of equity securities of U.S. corporations of any size and U.S. dollar denominated American Depository Receipts of foreign corporations of any size that are engaged in the production, distribution and development of products or services based on technology and which CNAM, Inc. believes should benefit significantly from advances or improvements in technology. | The Fund purchases a diversified portfolio, at least 80% of which consists of equity securities of large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations. |
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Principal Strategies (cont.) | Although the Fund will generally invest primarily in large capitalization companies, the Fund may also invest a significant portion of its assets in companies with smaller capitalizations. Small capitalization companies and large capitalization companies are defined for this purpose as companies with market capitalizations at the time of purchase in the range of those market capitalizations of companies included in the Russell 3000 Technology Index (over time the range varies, and was $108 million to $293 billion as of December 31, 2006).
| Large corporations are defined for this purpose as companies with market capitalizations at the time of purchase in the range of those market capitalizations of companies included in the S&P 500/Citigroup Growth Index (over time the range varies, and was $1.3 billion to $427 billion as of December 31, 2006). |
| CNAM, Inc. uses a combination of quantitative and fundamental analysis to select companies with share price growth potential that may not be recognized by the market at large. The Fund will be diversified across a number of industries within the technology area, and will not concentrate its investments in any particular group of related industries. Nevertheless, the Fund may hold a significant portion of its assets in specific technology-related industries. | CNAM, Inc. uses a combination of quantitative and fundamental analysis to select companies with share price growth potential that may not be recognized by the market at large. Although the Fund is not an index fund, CNAM, Inc. seeks to manage the portfolio’s overall risk characteristics to be similar to those of the S&P 500/Citigroup Growth Index.
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Comparison of Principal Investment Risks
The principal risks to which investments in the Tech Fund and the Growth Fund are subject are set forth below.
Each of the Tech Fund and the Growth Fund is subject to “manager” risk, which is the risk that CNAM, Inc.’s assessment of companies whose securities are held by the Fund may prove incorrect, resulting in losses or poor performance, and “market” risk, which is the risk that the Fund may expose you to a sudden decline in a holding's share price or an overall decline in the stock market. As with any stock fund, the value of your investment in the relevant Fund will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies in which the Fund invests. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. Each Fund is also subject to the risk that its principal market segment - technology growth stocks in the case of the Tech Fund, and large capitalization growth stocks in the case of the Growth Fund - may underperform other equity market segments or the market as a whole.
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In connection with its focus on technology companies, the Tech Fund is subject to “technology” and “single stock” risk. As the Growth Fund has historically invested to a greater degree in foreign issuers than the Tech Fund, it is subject to “foreign securities” risk. These risks are described in the following table.
Tech Fund
| Growth Fund |
TECHNOLOGY RISK - Companies in the rapidly changing fields of technology face special risks. For example, their products or services may not prove commercially successful or may become obsolete quickly. Technology companies may also be subject to rapidly changing and uncertain governmental regulation and policies which may have a material adverse effect on these companies. Additionally, companies in this area may be subject to high research and development expenses and intense competitive pressures, and are dependent upon consumer and business acceptance of new technologies. Because of these risks, the value of the Fund's shares may be susceptible to greater risk and market fluctuation than an investment in a fund that invests in a broader range of portfolio securities not concentrated in any particular area. The Fund is not an appropriate investment for individuals who are not long-term investors and who, as their primary objective, require safety of principal or stable income from their investments. | FOREIGN SECURITIES RISK - Foreign stocks tend to be more volatile than U.S. stocks, and are subject to risks that are not typically associated with domestic stocks. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. |
SINGLE STOCK RISK - Consistent with its designation as a diversified mutual fund, the Fund may invest up to 25% of its total assets in common stock issued by a single company. For example, as of the Fund's most recent fiscal year end, 8% of the Fund's net assets were invested in common stock of Microsoft Corporation. As with any mutual fund, whether diversified or not, volatility in the price of an individual security will have a proportionate impact on the volatility of the net asset value of the Fund. The impact of volatility in the price of an individual security on the net asset value of the Fund depends on how widely the Fund diversifies its investments among the various companies it holds. Accordingly, the more that the Fund invests its assets in the stock of a single company, the larger proportionate impact any change in the value of such stock will have on the net asset value of the Fund. |
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Comparison of Shareholder Rights
Because each Fund is a series of the Trust, the Reorganization will not affect the rights and privileges of shareholders of any class of the Tech Fund. For instance, after the
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Reorganization shareholders of each class of the Growth Fund will have the same exchange, purchase and redemption privileges as shareholders of the same class of the Tech Fund prior to the Reorganization.
Comparison of Distribution
Because each Fund is a series of the Trust, shares of any class of the Growth Fund are distributed in the same way as shares of the same class of the Tech Fund, and the method of their distribution will not be affected by the Reorganization.
Comparison of Purchase and Redemption Procedures
Because each Fund is a series of the Trust, the Reorganization will not affect the purchase and redemption procedures of any class of the Tech Fund. After the Reorganization, shareholders of the Growth Fund will continue to be able to exchange their shares for shares of the same class of all other series of the Trust.
Comparison of Fees and Expenses
The types of fees and expenses of the Growth Fund are the same as those of the Tech Fund. CNAM, Inc. receives investment advisory fees of 0.65% and 0.85% of average daily net assets from the Growth Fund and Tech Fund, respectively, for serving as their investment adviser. The fees are accrued daily and paid monthly.
The following table shows the fees and expenses for the Tech Fund and the Growth Fund, and the fees and expenses of the Growth Fund on a pro forma basis after giving effect to the proposed Reorganization, for the year ended September 30, 2006, except as stated in footnote (2) below. As shown in the table, the fees and expenses of the Growth Fund, on a pro forma basis after giving effect to the proposed Reorganization, are expected to stay the same as the current fees of the Growth Fund.
| Tech Fund |
| Pro Forma | |||
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Class A |
Institutional |
Class A |
Institutional |
Class A |
Institutional |
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Annual Fund Operating Expenses (expenses that are deducted from |
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Management Fee(1) | 0.85% | 0.85% | 0.65% | 0.65% | 0.65% | 0.65% |
Distribution (12b-1) Fees | 0.30% | None | 0.25% | None | 0.25% | None |
Other Expenses(2) | 0.34% | 0.34% | 0.35% | 0.35% | 0.35% | 0.35% |
Total Annual Fund Operating Expenses (2)(3) | 1.49% | 1.19% | 1.25% | 1.00% | 1.25% | 1.00% |
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(1) | The “Management Fee” is an annual fee, payable monthly out of the Fund’s net assets. |
(2) | Other Fund Expenses for each class of the Tech Fund, Growth Fund and pro forma Growth Fund includes a 0.25% shareholder servicing fee. Other Fund Expenses and Total Annual Fund Operating Expenses for the Tech Fund have been restated to reflect expense estimates for the current fiscal year and the completed recovery by CNAM, Inc. of previously reduced fees. |
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| Expenses for the Tech Fund have been restated to reflect expense estimates for the current fiscal year and the completed recovery by CNAM, Inc. of previously reduced fees. |
(3) | CNAM, Inc. has voluntarily agreed to limit its fees or reimburse the Technology Growth Fund for expenses to the extent necessary to keep the Class A and Institutional Class Total Annual Fund Operating Expenses at or below 1.50% and 1.20%, respectively. CNAM, Inc. has voluntarily agreed to limit its fees or reimburse the Growth Fund for expenses to the extent necessary to keep the Class A and Institutional Class Total Annual Fund Operating Expenses at or below 1.30% and 1.05%, respectively. Any fee reductions or reimbursements may be repaid to CNAM, Inc. within three years after they occur if such repayments can be achieved within the Fund’s then current expense limit, if any, for that year and if certain other conditions are satisfied, including approval by the Trust’s Board of Trustees. CNAM, Inc. may terminate its voluntary agreement to limit its fees at any time. |
The examples set forth below are intended to help you compare the cost of investing in the Tech Fund, the Growth Fund, and on a pro forma basis, in the Growth Fund after giving effect to the Reorganization, and also to help you compare these costs with the cost of investing in other mutual funds. The examples assume that you invest $10,000 in the relevant Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The examples also assume that your investment has a 5% return each year, that all dividends and other distributions are reinvested and that total operating expenses for the Fund are those shown in the tables above. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
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Institutional Class | 1 Year
| 3 Years
| 5 Years
| 10 Years
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Tech Fund: | $121 | $378 | $654 | $1,443 |
Growth Fund: | $102 | $318 | $552 | $1,225 |
Pro Forma Combined Growth Fund: | $102 | $318 | $552 | $1,225 |
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Class A | 1 Year
| 3 Years
| 5 Years
| 10 Years
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Tech Fund: | $152 | $471 | $813 | $1,779 |
Growth Fund: | $127 | $397 | $686 | $1,511 |
Pro Forma Combined Growth Fund: | $127 | $397 | $686 | $1,511 |
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PROPOSED REORGANIZATION
The Board of Trustees of the Trust has approved a plan to reorganize the Tech Fund into the Growth Fund. To proceed, we need the approval of the shareholders of the Tech Fund. The following pages outline the important details of the proposed Reorganization.
Why Do We Want to Reorganize the Funds?
CNAM, Inc. proposed the Reorganization to the Board, and the Board is recommending the Reorganization to you, among other reasons to reduce the annual operating expenses borne by shareholders of the Tech Fund. The Growth Fund has significantly more assets and a significantly lower expense ratio than the Tech Fund. Because CNAM, Inc.’s investment advisory fee with respect to the Growth Fund (0.65% of average net assets) is less than its fee with respect to the Tech Fund (0.85% of average net assets), and because certain operating expenses of the Growth Fund are shared across a larger pool of assets, CNAM, Inc. and the Board
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anticipate that if the Reorganization is approved, shareholders of the Tech Fund will bear lower expense ratios as shareholders of the Growth Fund than they did as shareholders of the Tech Fund. Further, CNAM, Inc. has voluntarily agreed to limit its fees or reimburse the Growth Fund for expenses to the extent necessary to keep the Class A and Institutional Class total annual fund operating expenses at or below 1.30% and 1.05%, respectively, which are lower than CNAM, Inc.’s expense limits of 1.50% and 1.20% for the Class A and Institutional Class shares of the Tech Fund.
The Reorganization will be structured to be tax-free to both Funds and their shareholders, and the Funds will receive a consent and opinion of counsel to this effect in connection with the closing of the Reorganization. There will be no dilution of your investment.
Based upon their evaluation of the relevant information presented to them, and in light of their fiduciary duties under federal and state law, the Board has determined that the Reorganization is in the best interests of shareholders of the Tech Fund and the Growth Fund. In approving the Reorganization, the Board considered the terms and conditions of a proposed Agreement and Plan of Reorganization between the Trust on behalf of the Tech Fund and the Trust on behalf of the Growth Fund (the “Reorganization Agreement”) and the following factors, among others:
(1) The assets of the Tech Fund are small ($2,842,571 as of December 31, 2006) and its prospects for further growth are not good. In recommending the Reorganization to the Board, CNAM, Inc. considered the market for stocks of technology companies, noting that at the time of inception of the Tech Fund in October 2000, technology stocks accounted for approximately 32% of the market capitalization of the S&P 500 Index, as compared to approximately 16% as of December 2006. CNAM, Inc. also pointed out that the Tech Fund’s benchmark, the Russell 3000 Technology Index, has depreciated by approximately 12.8% per year over the same six-year period.
(2) Because the investment advisory fee charged by CNAM, Inc. to the Growth Fund is significantly less than CNAM, Inc.’s fee with respect to the Tech Fund, and because certain operating expenses will be shared across a larger pool of assets, as a result of the Reorganization shareholders of the Tech Fund would bear lower expense ratios as shareholders of the Growth Fund.
(3) The two Funds have similar investment objectives, strategies and risks, except for those associated with the focus of the Tech Fund in technology companies and those associated with the focus of the Growth Fund in large capitalization companies. In considering the proposed Reorganization, the Board noted that although the Tech Fund permits greater flexibility than the Growth Fund with respect to the range of market capitalization of companies in which the Funds can invest, a significant portion of the assets of the Tech Fund (approximately 62% as of December 31, 2006) was invested in large cap stocks, and that as of that date, nine of the Tech Fund’s ten largest holdings were also held by the Growth Fund.
(4) The Growth Fund and Tech Fund are managed by the same investment adviser, CNAM, Inc. Furthermore, the other services and privileges available to the shareholders of the Growth Fund will be the same as those available to Tech Fund shareholders.
| (5) | CNAM, Inc. will pay the expenses of the Reorganization. |
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(6) The interests of the Funds’ shareholders will not be diluted as a result of the Reorganization. The assets and liabilities of the Tech Fund will be transferred to the Growth Fund in exchange for shares of beneficial interest of the Growth Fund having a total value equal to the value of the assets the Tech Fund transferred to the Growth Fund (net of any liabilities). However, all known liabilities of the Tech Fund will be paid before the closing of the Reorganization, and it is therefore anticipated that no liabilities of the Tech Fund will be transferred to the Growth Fund. The exchange will take place at net asset value and there will be no sales charge or other charge imposed as a result of the Reorganization. The Tech Fund and the Growth Fund are subject to the same pricing and valuation procedures.
(7) There will be no adverse federal income tax consequences of the Reorganization, other than the loss of certain of the Tech Fund’s tax loss carryforwards, as the Reorganization is structured to qualify as a tax-free exchange.
After consideration of the factors mentioned above and other relevant information, at a meeting held on December 7, 2006 the Board determined that the Reorganization is in the best interests of the Funds and their shareholders, unanimously approved the Reorganization Agreement and directed that it be submitted to shareholders for approval. The Board unanimously recommends that shareholders vote “FOR” approval of the Reorganization.
How Will We Accomplish the Reorganization?
The Reorganization Agreement, a copy of which is attached to this Prospectus/Proxy Statement as Exhibit A, spells out the terms and conditions of the Reorganization. If the shareholders of the Tech Fund approve the Reorganization, the Reorganization essentially will involve the following steps, which will occur substantially simultaneously:
| • | First, the Tech Fund will transfer all of its assets and liabilities to the Growth Fund. |
| • | Second, in exchange for the assets transferred to the Growth Fund, the Tech Fund will receive shares of beneficial interest of the Growth Fund having a total value equal to the value of the assets the Tech Fund transferred to the Growth Fund (net of any liabilities). |
| • | Third, the Tech Fund will distribute the shares of the Growth Fund which it receives to its shareholders and the Tech Fund will dissolve. |
| • | Fourth, the Growth Fund will open an account for each shareholder of the Tech Fund and will credit the shareholder with shares of the Growth Fund of the same class and having the same total value as the Tech Fund shares that he or she owned on the date of the Reorganization. Share certificates will not be issued. |
In essence, shareholders of the Tech Fund who vote their shares in favor of the Reorganization are electing to redeem their shares of the Tech Fund at net asset value and reinvest the proceeds in shares of the Growth Fund at net asset value without recognition of taxable gain or loss for federal income tax purposes.
Pursuant to the Reorganization Agreement, the number of Growth Fund shares to be issued to the Tech Fund will be computed as of 4:00 PM Eastern time on the date preceding the
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closing date of the Reorganization in accordance with the regular practice of the Funds. The effectiveness of the Reorganization is contingent upon, among other things, obtaining approval of the shareholders of the Tech Fund.
CNAM will bear the costs of the proposed Reorganization, including legal, accounting and transfer agent costs. These costs will not be borne by the shareholders of either Fund.
If the Reorganization is approved by the Tech Fund’s shareholders, it will take place as soon as feasible. Management of the Trust believes this should be accomplished by April 13, 2007. However, at any time before the closing the Board may decide not to proceed with the Reorganization if, in the judgment of the Board, termination of the Reorganization would not have a material adverse effect on the shareholders of the Tech Fund or the Growth Fund. At any time prior to or after approval of the Reorganization by the Tech Fund’s shareholders, with Board approval, the President of the Trust may by written agreement amend any provision of the Reorganization Agreement, including substantive as well as ministerial changes, without the approval of shareholders, so long as such approval is not required by law and any such amendment will not have a material adverse effect on the benefits intended under the Reorganization Agreement to the shareholders of the Tech Fund or the Growth Fund. Similarly, any of the terms or conditions of the Reorganization Agreement may be waived by the Board if, in its judgment such action or waiver will not have a material adverse effect on the benefits intended under the Reorganization Agreement to the shareholders of the Tech Fund or the Growth Fund. In approving any such amendment, granting any such waiver or terminating the Reorganization, the Board will be subject to its fiduciary duties to, and will consider the best interests of, the Funds’ shareholders.
Are There Material Differences Between the Tech Fund and the Growth Fund?
The differences in the investment objectives, principal strategies and principal risks of the Tech Fund and the Growth Fund are as described above. As each Fund is a series of the Trust, there are no material differences between the rights of their respective shareholders. None of the Funds’ service providers, including CNAM, Inc. as investment adviser, will change in connection with the Reorganization.
Federal Income Tax Consequences of the Reorganization
When the Reorganization takes place, the Trust will receive a consent and opinion of Paul, Hastings, Janofsky & Walker LLP that the reorganization will qualify as a “reorganization” within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the “Code”), with each of the Tech Fund and Growth Fund being a “party to a reorganization” within the meaning of Section 368 of the Code. As a result, the Reorganization will be tax-free for federal income tax purposes for each Fund and its shareholders. The adjusted federal tax basis of your Growth Fund shares following the Reorganization will be the same as the adjusted basis of your Tech Fund shares before the Reorganization.
Immediately prior to the Reorganization, the Tech Fund will have unutilized capital loss carryforwards of approximately $1,500,000. The final amount of unutilized capital loss carryforwards for the Tech Fund is subject to change and will not be finally determined until the closing date of the Reorganization. The Growth Fund’s ability to use this capital loss carryforward in the future will be limited because the Tech Fund will be treated as having undergone an ownership change under Section 382 of the Code. As a result, the Growth Fund will
| -9- |
be able to use such capital loss carryforwards in any year only up to an amount generally equal to the product of (i) the value of the Tech Fund on the date of the Reorganization and (ii) the long-term tax-exempt rate as of that date, as published by the Internal Revenue Service (“IRS”). Based on these limitations, approximately $720,000 of the Tech Fund’s $1,500,000 capital loss carryforward is expected to expire unutilized as a result of the Reorganization. The estimated $780,000 balance of the Tech Fund’s capital loss carryforward will be shared by the Growth Fund shareholders as well as the Tech Fund shareholders.
The Trust has not sought, and will not seek, a private ruling from the IRS with respect to the federal income tax consequences of the Reorganization. The opinion of counsel with respect to certain federal income tax consequences of the Reorganization is not binding on the IRS and does not preclude the IRS from adopting a contrary position. Shareholders should consult their own tax advisers concerning the potential tax consequences of the reorganization to them, including any applicable foreign, state or local income tax consequences.
How Will the Capitalization of the New Funds Compare with the Corresponding Existing Funds?
The following table sets forth as of January 31, 2007: (i) the capitalization of each Fund and (ii) the pro forma capitalization of the Growth Fund, as adjusted to give effect to the Reorganization.
Tech Fund | Class A Shares | Institutional Class Shares | Total of All Class |
|
|
|
|
Aggregate Net Assets | $1,511,573 | $1,375,236 | $2,886,809 |
Shares Outstanding | 338,458 | 303,264 | 641,722 |
Net Asset Value Per Share | $4.47 | $4.53 | N/A |
|
|
|
|
Growth Fund | Class A | Institutional Class Shares | Total of All Class |
|
|
|
|
Aggregate Net Assets | $11,953,496 | $40,249,421 | $52,202,917 |
Shares Outstanding | 1,460,342 | 4,865,850 | 6,326,192 |
Net Asset Value Per Share | $8.19 | $8.27 | N/A |
|
|
|
|
Combined Pro forma Growth Fund | Class A | Institutional Class Shares | Total of All Class |
|
|
|
|
Aggregate Net Assets | $13,465,069 | $41,624,657 | $55,089,726 |
Shares Outstanding | 1,644,905 | 5,032,142 | 6,677,047 |
Net Asset Value Per Share
| $8.19
| $8.27
| N/A |
N/A= Not Applicable
Description of the Securities to be Issued
The Trust is registered with the SEC as an open-end management investment company and its Trustees are authorized to issue an unlimited number of shares of beneficial interest in each separate series, including the Growth Fund. Shares of each series of the Trust represent equal proportionate interests in the assets of that series only and have identical voting, dividend, redemption, liquidation, and other rights. All shares issued are fully paid and non-assessable, and shareholders have no preemptive or other rights to subscribe to any additional shares.
| -10- |
VOTING AND MEETING PROCEDURES
How to Vote
This proxy is being solicited by the Board of Trustees of the Trust. You can vote by mail or in person at the Meeting.
To vote by mail, sign and send us the enclosed Proxy voting card in the postage paid return envelope provided. If you vote by Proxy, you can revoke your Proxy by notifying the Secretary of the Trust in writing, or by returning a Proxy with a later date. You also can revoke a Proxy by voting in person at the Meeting. Even if you plan to attend the Meeting and vote in person, please return the enclosed Proxy card. This will help us ensure that an adequate number of shares are present at the Meeting.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSED REORGANIZATION.
Proxy Solicitation
In addition to the solicitation of proxies by mail, officers and employees of the Trust and CNAM, Inc., without additional compensation, may solicit proxies in person or by telephone. CNAM, Inc. will reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for the costs of forwarding soliciting materials to beneficial owners of shares entitled to vote at the Meeting.
Quorum Requirements
The presence in person or by proxy of one third of the outstanding shares of the Tech Fund entitled to vote will constitute a quorum for the Meeting. If a quorum is not present, sufficient votes are not received by the date of the Meeting, or the holders of shares present in person or by proxy determine to adjourn the Meeting for any other reason, a person named as proxy may propose one or more adjournments from time to time to permit further solicitation of proxies. The Fund will count all shares represented by proxies that reflect abstentions and “broker non-votes” (i.e., shares held by brokers or nominees as to which instructions have not been received from the beneficial owners or the person entitled to vote, and the broker or nominee does not have discretionary voting power on the matter) as shares that are present and entitled to vote for purposes of determining a quorum. A majority of shares represented at the meeting can adjourn the meeting. The persons named as proxies will vote “FOR” adjournment with respect to a proposal those proxies which they are entitled to vote in favor of the proposal, and will vote those proxies they are required to vote against the proposal “AGAINST” such an adjournment. Abstentions and “broker non-votes” will have no effect on the outcome of a vote on adjournment.
Vote Required
Approval of the Reorganization requires the affirmative vote of the lesser of (i) 67% or more of the Tech Fund shares present or represented at the meeting, if shareholders of more than 50% of all shares of the Tech Fund are present or represented by proxy, or (ii) more than 50% of all shares of the Tech Fund.
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The Fund will count the number of votes cast “for” approval of the Reorganization to determine whether sufficient affirmative votes have been cast. Assuming the presence of a quorum, abstentions and broker non-votes have the effect of negative votes.
If the shareholders of the Tech Fund do not approve the Reorganization or the Reorganization is not completed for any other reason, the Tech Fund will continue its current form of operation until the Board determines what further action, if any, to recommend to the shareholders of the Fund.
Shareholders Entitled to Vote
Shareholders of the Funds at the close of business on January 31, 2007 will be entitled to be present and vote at the Meeting. Shareholders are entitled to one vote for each share held and fractional votes for fractional shares held. As of that date, 641,722 shares of the Tech Fund (338,458 Class A shares and 303,264 Institutional Class shares) were outstanding.
As of January 31, 2007, City National Bank (“CNB”), which is affiliated with CNAM, Inc., may be deemed to control the Tech Fund by virtue of owning 47.26% of the outstanding shares of the Fund. As of that date, NFS LLC owned of record on behalf of the Howard M. Brandes Family Trust 28.66% of the outstanding shares of the Tech Fund. As of that date, CNB also owned of record 73.10% of the outstanding shares of the Growth Fund. CNB is a national banking association located at 400 North Roxbury Drive, Beverly Hills, California 90210 and is a wholly-owned subsidiary of City National Corporation. These control relationships will continue to exist until such time as each of the above-described share ownerships represents 25% or less of the outstanding shares of the respective Fund. Through the exercise of voting rights with respect to shares of the Fund, the controlling person set forth above may be able to determine the outcome of shareholder voting on matters for which approval of shareholders is required.
The following table shows, to the knowledge of management of the Trust, the percentage of the total shares of each class of the Tech Fund and the Growth Fund owned of record at the close of business of January 31, 2007 by persons owning of record more than 5% of the outstanding shares of the respective class. The table also shows each such shareholder’s estimated percentage ownership of the same class of the combined Growth Fund, as adjusted to give effect to the Reorganization, based on such shareholder’s present holdings.
Tech Fund Shareholder |
Class |
Percentage of | Percentage of
|
City National Bank
| Institutional | 68.41% | 94.21% |
City National Bank
| Institutional | 31.59% | 5.09% |
| -12- |
NFS LLC FEBO
| A | 54.33% | 6.09% |
NFS LLC FEBO
| A | 5.25% | 0.59% |
|
Class |
Percentage of | Percentage of
|
City National Bank
| Institutional | 94.99% | 94.21% |
The Trustees and officers of the Trust as a group owned beneficially less than 1% of each of the Tech Fund’s and the Growth Fund’s outstanding shares as of January 31, 2007.
GENERAL INFORMATION
The persons named in the accompanying Proxy will vote in each case as directed in the Proxy, but in the event an executed Proxy without instructions is received by the Trust, they intend to vote FOR the proposed Reorganization and may vote in their discretion with respect to other matters that may be presented to the Meeting.
Other Matters to Come Before the Meeting
Management of the Trust does not know of any matters to be presented at the Meeting other than those described in this Prospectus/Proxy Statement. If other business should properly come before the Meeting, the Proxy holders will vote on them in accordance with their best judgment.
Shareholder Proposals
The Meeting is a special meeting of shareholders of the Tech Fund. The Trust is not required, nor does it intend, to hold regular annual meetings of the Fund’s shareholders. If such a meeting is called, any shareholder who wishes to submit a proposal for consideration at the
| -13- |
meeting should submit the proposal promptly to the Secretary of the Trust. Any proposal to be considered for submission to shareholders must comply with applicable federal and state laws.
TAX MATTERS
Certain legal matters concerning the tax consequences of the Reorganization will be passed upon by Paul, Hastings, Janofsky & Walker LLP, 515 South Flower Street, Los Angeles, California 90071.
FINANCIAL STATEMENTS
The audited annual financial statements and financial highlights of the Tech Fund and the Growth Fund for the year ended September 30, 2006 are incorporated by reference into the Statement of Additional Information to this Combined Prospectus and Proxy Statement. The audited annual financial statements and financial highlights have been audited by KPMG LLP, independent registered public accountants, to the extent indicated in their report thereon, and have been incorporated by reference in reliance upon such report given upon the authority of such firm as an expert in accounting and auditing. Pro forma financial statements are not included since the net asset value of the Tech Fund does not exceed ten percent of the net asset value of the Growth Fund, as of January 8, 2007.
INFORMATION FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
Additional information about the Tech Fund and the Growth Fund is included in their Prospectuses and Statement of Additional Information dated January 31, 2007, which are incorporated by reference herein. The Commission file numbers for the Trust’s registration statement containing the current Prospectuses and Statement of Additional Information for the Funds, dated January 31, 2007, are Registration No. 811-07923 and Registration No. 333-16093. Additional information about the Funds may also be obtained from the Trust’s Annual Report for the fiscal year ended September 30, 2006, which has been filed with the SEC. Copies of the Prospectus, Statement of Additional Information, and Annual Report for the Funds may be obtained without charge by calling the Fund at 1-888-889-0799. The Funds are subject to certain informational requirements of the Securities Exchange Act of 1934 and the 1940 Act, and in accordance with such requirements file reports, proxy statements, and other information with the SEC. Once available, these materials may be inspected and copied:
• At the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549;
• By writing to the SEC’s Public Reference Branch, Office of Consumer Affairs and Information, 450 Fifth Street, N.W., Washington, D.C. at rates prescribed by the SEC;
| • | By e-mail request to publicinfo@sec.gov (for a duplicating fee); and |
• On the SEC’s EDGAR database on the SEC’s Internet Web site at http://www.sec.gov.
*****
| -14- |
SHAREHOLDERS ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
| -15- |
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (this “Agreement”) is made as of this 7th day of March, 2007, by and between CNI Charter Funds, a Delaware statutory trust (the “Trust”), on behalf of its Technology Growth Fund (the “Technology Fund”), and the Trust on behalf of its Large Cap Growth Equity Fund (the “Growth Fund”).
WHEREAS, the parties wish to enter into a plan of reorganization (the “Plan”) which will consist, among other things, of the transfer of assets of the Technology Fund to the Growth Fund in exchange for shares of the Growth Fund (the “Shares”), and the distribution of the Shares by the Technology Fund to its shareholders in connection with the dissolution of Fund.
WHEREAS, the Board of Trustees of the Trust, including a majority of the Trustees who are not “interested persons” of the Trust, as defined in the Investment Company Act of 1940, as amended (the “1940 Act”), has determined that the Plan is in the best interests of the shareholders of the Technology Fund and the Growth Fund, respectively, and that their interests would not be diluted as a result of the transactions contemplated thereby.
NOW THEREFORE, in consideration of the agreements contained in this Agreement, the parties agree as follows:
Article 1
Transfer of Assets and Liabilities
1.1 Transfer of Assets and Liabilities. Subject to the terms and conditions set forth herein, on the Closing Date (as hereafter defined) the Technology Fund shall transfer all of its assets to the Growth Fund. In exchange therefor, the Growth Fund shall assume all of the liabilities of the Technology Fund and deliver to the Technology Fund a number of Class A and Institutional Class Shares which is equal to (i) the aggregate net asset value attributable to each such Class of shares of the Technology Fund at the close of business on the day preceding the Closing Date, divided by (ii) the net asset value per share of such Class of shares of the Growth Fund outstanding at the close of business on the day preceding the Closing Date.
1.2 Liquidation of Technology Fund. Subject to the terms and conditions set forth herein, on the Closing Date the Technology Fund shall liquidate and shall distribute pro rata to each Class of its shareholders of record in proportion to their respective numbers of shares of each Class held by such shareholders, determined as of the close of business on the day preceding the Closing Date, the same Class of Shares received by the Technology Fund pursuant to Section 1.1.
1.3 No Issuance of Share Certificates. The Technology Fund shall accomplish the liquidation and distribution provided for herein by opening accounts on the books of the Growth Fund in the names of its shareholders and transferring to its
-1- |
shareholders the Shares credited to the account of the Technology Fund on the books of the Growth Fund. No certificates evidencing Shares shall be issued.
1.4 Time and Date of Valuation. The number of Shares to be issued by the Growth Fund to the Technology Fund shall be computed as of 4:00 p.m. (Eastern time) on the date preceding the Closing Date in accordance with the regular practices of the Technology Fund, the Growth Fund and the Trust.
1.5 Closing Time and Place. The Closing Date shall be April 13, 2007, or such later date on which all of the conditions set forth in Article 2 have been fulfilled or otherwise waived by the parties hereto, but in any event not later than June 15, 2007, or such later date as the parties may mutually agree. All acts taking place on the Closing Date shall be deemed to be taking place simultaneously as of the commencement of business on the Closing Date, unless otherwise provided. The closing of the reorganization contemplated by the Plan (the “Closing”) shall be held at 10:00 a.m. (Pacific time) at the offices of Paul, Hastings, Janofsky & Walker LLP, 515 South Flower Street, Los Angeles, California 90071, or such other time and/or place as the parties may mutually agree.
1.6 Delay of Valuation. If on the day preceding the Closing Date (a) the primary trading market for portfolio securities of either party is closed to trading or trading thereon is restricted, or (b) trading or the reporting of trading is disrupted so that an accurate appraisal of the value of the net assets of either party and an accurate calculation of the number of shares held by each shareholder is impracticable, the Closing Date shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored.
1.7 Termination of Technology Fund. As promptly as practicable after the Closing, the Technology Fund shall dissolve.
Article 2
Conditions Precedent to the Effectiveness of the Reorganization
The respective obligation of each party to effect the reorganization contemplated by this Agreement is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions:
2.1 Shareholder Approval. On or prior to the Closing Date, the shareholders of the Technology Fund shall have approved the transactions contemplated by this Agreement in accordance with the provisions of Delaware law and the 1940 Act.
2.2 No Injunctions or Restraints. On the Closing Date, no action, suit or other proceeding shall be pending before any court or government agency which seeks to restrain or prohibit or obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby.
2.3 Consents. All consents of the other party and all other consents, orders and permits of Federal, state and local regulatory authorities deemed necessary by the Trust to permit consummation, in all material respects, of the transactions contemplated herein shall have been obtained, except where failure to obtain any such consent, order or
-2- |
permit would not involve a risk of a material adverse effect on the assets or properties of either party or the Trust.
2.4 Effective Registration Statement. The Form N-1A Registration Statement of the Trust and the Form N-14 Registration Statement of the Trust with respect to the Shares shall continue to be effective and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated.
2.5 Tax Opinion. The parties shall have received an opinion of Paul, Hastings, Janofsky & Walker LLP substantially to the effect that for Federal income tax purposes:
| (a) | The transfer of substantially all of the Technology Fund’s assets to the Growth Fund in exchange for Shares and the assumption of the Technology Fund’s stated liabilities, and the distribution of the Shares to the Technology Fund’s shareholders in liquidation of the Technology Fund, will constitute a “reorganization” (the “Reorganization”) within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and the Technology Fund and the Growth Fund each are a “party to a “reorganization” within the meaning of Code Section 368(b); |
| (b) | No gain or loss will be recognized by the Growth Fund upon the receipt of the assets of the Technology Fund in exchange for Shares and the assumption of the liabilities of the Technology Fund, if any; |
| (c) | No gain or loss will be recognized by the Technology Fund upon the transfer of its assets to, and the assumption of its stated liabilities by, the Growth Fund in exchange for Shares and the assumption by the Growth Fund of the Technology Fund’s stated liabilities; |
| (d) | No gain or loss will be recognized by any shareholder of the Technology Fund upon the exchange of its Technology Fund shares for Shares; |
| (e) | The tax basis of each of the assets of the Technology Fund transferred to the Growth Fund will be the same as the tax basis of each such asset to the Technology Fund immediately prior to the Reorganization; |
| (f) | The adjusted tax basis of the Shares received by each Technology Fund shareholder pursuant to the Reorganization will be the same as the adjusted tax basis of the Technology Fund shares held by that shareholder immediately prior to the Reorganization; |
| (g) | The holding period of each of the assets of the Technology Fund acquired by the Growth Fund will include the period during which such asset was held by the Technology Fund; and |
-3- |
| (h) | The holding period of the Shares to be received by each Technology Fund shareholder will include the period during which the Technology Fund shares exchanged therefor were held by such shareholder, provided that such Technology Fund shares were held as capital assets on the date of the Reorganization. |
2.6 Covenants, Representations and Warranties. Each party shall have performed all of its covenants set forth in Article 4, and its representations and warranties set forth in Article 3 shall be true and correct in all material respects on and as of the Closing Date as if made on such date, and the President of the Trust shall have executed a certificate to such effect.
2.7 Statement of Assets and Liabilities. The Technology Fund shall have delivered to the Trust on the Closing Date a statement of its assets and liabilities, prepared in accordance with generally accepted accounting principles consistently applied, together with a certificate of its Treasurer or Assistant Treasurer as to its portfolio securities and the federal income tax basis and holding period as of the Closing Date.
Article 3
Representations and Warranties
The parties represent and warrant as follows:
3.1 Structure and Standing. Each party represents and warrants that it is duly organized as a series of a statutory trust, validly existing and in good standing under the laws of the State of Delaware, and has the power to own all of its properties and assets and conduct its business.
3.2 Power. Each party represents and warrants that it has full power and authority to enter into and perform its obligations under this Agreement; the execution, delivery and performance of this Agreement has been duly authorized by all necessary action of the Board of Trustees of the Trust; this Agreement does not violate, and its performance will not result in violation of, any provision of the Declaration of Trust of the Trust, or any agreement, instrument or other undertaking to which it is a party or by which it is bound; and this Agreement constitutes its valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally and court decisions with respect thereto.
3.3 Litigation. Each party represents and warrants that no litigation or administrative proceeding or investigation of or before any court or governmental body is currently pending against it and, to the best of its knowledge, none is threatened against it or any of its properties or assets, which, if adversely determined, would materially and adversely affect its financial condition or the conduct of its business; it knows of no facts which might form the basis for the institution of such proceedings; and it is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions herein contemplated.
-4- |
3.4 Fund Assets. The Technology Fund represents and warrants that on the Closing Date the assets received by the Growth Fund from the Technology Fund will be delivered to the Growth Fund as provided in Section 1.1 free and clear of all liens, pledges, security interests, charges or other encumbrances of any nature whatsoever created by the Technology Fund and without any restriction upon the transfer thereof, except for such liabilities assumed as provided in Section 1.1.
3.5 The Shares. The Growth Fund represents and warrants that on the Closing Date (a) the Shares to be delivered to the Technology Fund as contemplated in this Agreement will be duly authorized, validly issued, fully paid and nonassessable; (b) no shareholder of the Growth Fund or any other series of the Trust has any preemptive right to subscription or purchase in respect thereof; (c) the Technology Fund will acquire the Shares free and clear of all liens pledges, security interests, charges or other encumbrances of any nature whatsoever created by the Trust and without any restriction on the transfer thereof; and (d) the Shares will be duly qualified for offering to the public in all of the states of the United States in which such qualification is required or an exemption from such requirement shall have been obtained.
3.6 Tax Status and Filings. Each party represents and warrants that it has satisfied the requirements of Subchapter M of the Code for treatment as a regulated investment company and has elected to be treated as such; it has filed or furnished all federal, state, and other tax returns and reports required by law to have been filed or furnished, and it has paid or made provision for payment of, so far as due, all federal, state and other taxes, interest and penalties; that no such return is currently being audited; and that no assessment has been asserted with respect to any such returns or reports.
3.7 Accuracy of Information. Each party represents and warrants that all information furnished by it to the other party for use in any documents which may be necessary in connection with the transactions contemplated by this Agreement will be accurate and complete and will comply in all material respects with federal securities and other laws and regulations applicable thereto.
3.8 Acquisition of the Shares. The Technology Fund represents and warrants that the Shares it acquires pursuant to this Agreement are not being acquired for the purpose of making any distribution thereof, except in accordance with the terms of this Agreement.
3.9 Financial Statements. Each party represents and warrants that its Statement of Assets and Liabilities as of September 30, 2006 provided to the other party has been prepared in accordance with generally accepted accounting principles consistently applied, and fairly reflects the financial condition of such party as of such date, and there are no known contingent liabilities of such party as of such date not disclosed therein.
3.10 No Adverse Changes. Each party represents and warrants that since September 30, 2006, there has not been any material adverse change in its financial condition, assets, liabilities or business other than changes occurring in the ordinary course of business except as otherwise disclosed in writing to and accepted by the other
-5- |
party (for the purposes of this paragraph, a decline in net asset value per share of a party shall not constitute a material adverse change).
3.11 Proxy Statement. Each party represents and warrants that the Combined Proxy Statement and Prospectus contained in the Registration Statement on Form N-14 to be used in connection with the transaction contemplated hereby (only insofar as it relates to such party) will, on its effective date and on the Closing Date, not contain any untrue statement of material fact with respect to such party or omit to state a material fact required to be stated therein with respect to such party or necessary to make the statements therein with respect to such party, in light of the circumstances under which such statements were made, not materially misleading.
Article 4
Covenants
4.1 Conduct of Business. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date, each party shall operate its business in the ordinary course except as contemplated by this Agreement.
4.2 Shareholder Meeting. The Technology Fund shall call a special meeting of its shareholders as soon as possible for the purpose of considering the reorganization contemplated by this Agreement.
4.3 Preparation of Combined Prospectus and Proxy Statement. As soon as reasonably practicable after the execution of this Agreement, the Growth Fund shall prepare and file a combined prospectus and proxy statement with respect to the reorganization with the United States Securities and Exchange Commission in form and substance satisfactory to both parties, and shall use its best efforts to provide that the combined prospectus and proxy statement can be distributed to the shareholders of the Technology Fund as promptly as thereafter as practicable. As soon a reasonably practicable, the parties shall also prepare and file any other related filings required under applicable state securities laws.
4.4 Fees and Expenses. Whether or not this Agreement is consummated, each party shall bear its respective costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby.
4.5 Provision of Documents. Each party agrees that it will, from time to time as and when reasonably requested by the other party, provide or cause to be provided to the other party such information, execute and deliver or cause to be executed and delivered to the other party such documents, and take or cause to be taken such further action, as the other party may deem necessary in order to carry out the intent of this Agreement.
4.6 Technology Fund Liabilities. The Technology Fund will use its best efforts to discharge all of its financial liabilities and obligations prior to the Closing Date.
Article 5
Termination, Amendment and Waiver
-6- |
5.1 Termination. This Agreement may be terminated by resolution of the Board of Trustees of the Trust at any time prior to the Closing Date, if
| (a) | either party shall have breached any material provision of this Agreement; or |
| (b) | circumstances develop that, in the opinion of such Board, make proceeding with the Plan inadvisable; or |
| (c) | any governmental body shall have issued an order, decree or ruling having the effect of permanently enjoining, restraining or otherwise prohibiting the consummation of this Agreement. |
5.2 Effect of Termination. In the event of any termination pursuant to Section 5.1, there shall be no liability for damage on the part of either party to the other party.
5.3 Amendment. This Agreement contains the entire agreement of the parties with respect to the reorganization contemplated by the Plan and may be amended prior to the Closing Date by the parties in writing at any time; provided, however, that there shall not be any amendment that by law requires approval by the shareholders of a party without obtaining such approval.
5.4 Waiver. At any time prior to the Closing Date, any of the terms or conditions of this Agreement may be waived by the Board of Trustees of the Trust if, in its judgment after consultation with legal counsel, such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the shareholders of the Technology Fund or the Growth Fund, respectively.
Article 6
General Provisions
6.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
6.2 Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by either party without the written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person other than the parties hereto and their respective successors and assigns any rights or remedies under or by reason of this Agreement.
6.3 Recourse. All persons dealing with the Growth Fund or the Technology Fund must look solely to the property of the Growth Fund or the Technology Fund for the enforcement of any claims against the Growth Fund or the Technology Fund, respectively, as neither the trustees, directors, officers, agents nor shareholders of the Growth Fund or the Technology Fund assume any personal liability for obligations entered into on behalf of the Growth Fund or the Technology Fund, respectively.
-7- |
6.4 Notices. Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by prepaid telegraph, telecopy or certified mail addressed to either party at:
CNI Charter Funds
400 North Roxbury Drive
Beverly Hills, CA 90210
Attn: Vernon C. Kozlen
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
515 S. Flower St.
Los Angeles, CA 90071
Attn: Michael Glazer.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and attested on its behalf by its duly authorized representatives as of the date first above written.
CNI CHARTER FUNDS, on behalf of its Technology Growth Fund Series
| By: _______________________________ |
| Vernon C. Kozlen |
| President |
CNI CHARTER FUNDS, on behalf of
its Large Cap Growth Equity Fund Series
| By: ________________________________ |
| Vernon C. Kozlen |
| President |
-8- |
CNI CHARTER FUNDS
400 North Roxbury Drive
Beverly Hills, CA 90210
STATEMENT OF ADDITIONAL INFORMATION
March 7, 2007
This Statement of Additional Information (the “SAI”) is not a prospectus but should be read in conjunction with the Combined Proxy Statement/Prospectus dated March 7, 2007 (“Prospectus”), for the Special Meeting of Shareholders of the Technology Growth Fund series (the “Tech Fund”) of CNI Charter Funds (the “Trust”), a Delaware statutory trust, to be held on March 28, 2007. Copies of the Prospectus may be obtained at no charge by calling the Trust at 1-888-889-0799.
This SAI, relating specifically to the proposed reorganization of the Tech Fund into the Large Cap Growth Fund series (the “Growth Fund”) of the Trust, consists of this cover page and the following described documents, each of which is incorporated by reference herein:
| 1. | The Statement of Additional Information of the Trust dated January 31, 2007 filed on January 29, 2007 (Registration No. 333-16093); and |
| 2. | The Annual Report to Shareholders of the Trust for the period ended September 30, 2006 filed on December 4, 2006. |
Pro forma financial statements are not included since the net asset value of the Tech Fund does not exceed ten percent of the net asset value of the Growth Fund, as of January 8, 2007.
PART C
OTHER INFORMATION
Item 15 | Indemnification |
Please see Article VI of the Registrant’s By-Laws, previously filed as an Exhibit. Pursuant to Rule 484 under the Securities Act of 1933, as amended, the Registrant furnishes the following undertaking:
“Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.”
Notwithstanding the provisions contained in the Registrant’s By-Laws, in the absence of authorization by the appropriate court on the merits pursuant to Sections 4 and 5 of Article VI of said By-Laws, any indemnification under said Article shall be made by Registrant only if authorized in the manner provided in either subsection (a) or (b) of Section 6 of said Article VI.
Item 16 | Exhibits |
(1) | Agreement and Declaration of Trust. |
(1) Form of Agreement and Declaration of Trust. (A)
(2) Form of Amendment to the Agreement and Declaration of Trust.(B)
(3) Certificate of Amendment to the Certificate of Trust.(B)
(2) | By-Laws: |
(1) By-Laws dated October 25, 1996.(A)
(2) Amendment to the By-Laws of the Trust.(B)
(3) | Not Applicable. |
(4) | Form of Agreement and Plan of Reorganization. (J) |
(5) | See the Declaration of Trust referenced in Item (16)(1) herein and the By-Laws referenced in Item (16)(2) herein. |
(6) | Investment Management Agreements: |
(1) Form of Investment Management Agreement with City National Asset Management, Inc.(B)
(2) Schedule to Investment Management Agreement with City National Asset Management, Inc.(C)
(3) Form of Investment Management Agreement with CCM Advisors, LLC.(I)
(4) Form of Expense Limitation Agreement with CCM Advisors, LLC.(I)
(5) Investment Sub-Advisory Agreement between City National Asset Management, Inc. and Credit Suisse Asset Management, LLC with respect to High Yield Bond Fund.(I)
(6) Investment Sub-Advisory Agreement between City National Asset Management, Inc. and Reed, Conner & Birdwell, LLC with respect to RCB Small Cap Value Fund.(I)
(7) Form of Investment Manager Agreement between CCM Advisors, LLC and AMBS Investment Counsel, LLC with respect to AHA Diversified Equity Fund. (J)
(8) Form of Investment Manager Agreement between CCM Advisors, LLC and SKBA Capital Management, LLC with respect to AHA Diversified Equity Fund. (J)
(9) Form of Investment Manager Agreement between CCM Advisors, LLC and Freeman Associates Investment Management LLC with respect to AHA Balanced Fund.(I)
(10) Form of Investment Manager Agreement between CCM Advisors, LLC and Freeman Associates Investment Management LLC with respect to AHA Diversified Equity Fund.(I)
(11) Form of Investment Manager Agreement between CCM Advisors, LLC and SKBA Capital Management, LLC with respect to AHA Socially Responsible Equity Fund.(I)
(12) Form of Investment Manager Agreement between CCM Advisors, LLC and Patterson Capital Corporation with respect to AHA Limited Maturity Fixed Income Fund.(I)
(13) Form of Investment Manager Agreement between CCM Advisors, LLC and Robert W. Baird & Co. Incorporated with respect to AHA Full Maturity Fixed Income Fund.(I)
(14) Form of Investment Manager Agreement between CCM Advisors, LLC and Robert W. Baird & Co. Incorporated with respect to AHA Balanced Fund.(I)
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(15) Form of Investment Manager Agreement between CCM Advisors, LLC and City National Asset Management, Inc. with respect to AHA Limited Maturity Fixed Income Fund.(I)
(7) | Form of Distribution Agreement.(B) |
(8) | Not Applicable. |
(9) | Form of Custody Agreement.(B) |
(1) Form of Supplement to Custody Agreement.(C)
(2) Form of Amendment to Custody Agreement.(H)
| (3) Form of Amendment and Assignment of Custody Agreement. (J) |
(10) | Distribution Plans. |
(1) Form of Rule 12b-1 Plan.(I).
(2) Form of Share Marketing Agreement.(B)
(3) Amended and Restated Multiple Class Plan.(I)
(11) | Legal Counsel’s Opinion and Consent – filed herewith as Exhibit A. |
(12) | Form of Tax Opinion and Consent of Counsel – filed herewith as Exhibit B. |
(13) | Other Material Contracts: |
(1) Form of Administrative Services Agreement.(B)
(i) Schedule to Administrative Services Agreement.(D)
(ii) Form of Supplement to Administrative Services Agreement.(C)
(iii) Form of Amendment to Administrative Services Agreement.(H)
(2) Form of Transfer Agent Agreement.(B)
(i) Schedule to Transfer Agent Agreement.(I)
(ii) Form of Supplement to Transfer Agent Agreement. (C)
(iii) Form of Amendment to Transfer Agency Agreement. (G)
(iv) Form of Amendment to Transfer Agency Agreement. (H)
(iv) Form of Sub-Transfer Agent Agreement.(I)
(3) Form of Shareholder Services Agreement.(E)
| (4) | Securities Lending Agency Agreement.(J) |
(14) | Other Opinions – Independent Auditors’ Consent. |
(1) KPMG, LLP – filed herewith as Exhibit C.
(15) | Not Applicable. |
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(16) | Powers of Attorney – filed herewith as Exhibit D. |
(17) | (1) Form of Proxy Card – filed herewith as Exhibit E. |
(2) Prospectuses of the Large Cap Growth Equity Fund, Large Cap Value Equity Fund, RCB Small Cap Value Fund, Corporate Bond Fund, Government Bond Fund, California Tax Exempt Bond Fund and High Yield Bond Fund series of the Trust dated January 31, 2007 filed on January 29, 2007 (Registration No. 333-16093) – filed herewith as Exhibit F.
(3) Statement of Additional Information of the Trust dated January 31, 2007 filed on January 29, 2007 (Registration No. 333-16093) – filed herewith as Exhibit G.
(4) Annual Report to Shareholders of the Trust for the period ended September 30, 2006 filed on December 4, 2006 – filed herewith as Exhibit H.
-------------------------------------------
(A) | Previously filed as an exhibit to Registrant’s Registration Statement on Form N-1A (333–16093) on November 14, 1996 and incorporated herein by reference. |
(B) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 8 (333–16093) on May 3, 1999 and incorporated herein by reference. |
(C) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 21 (333-16093) on January 28, 2003 and incorporated herein by reference. |
(D) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 18 (333-16093) on August 3, 2001 and incorporated herein by reference. |
(E) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 19 (333-16093) on October 1, 2001 and incorporated herein by reference. |
(F) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 13 (333–16093) on February 28, 2000 and incorporated herein by reference. |
(G) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 22 (333–16093) on January 28, 2004 and incorporated herein by reference. |
(H) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 24 (333–16093) on January 28, 2005 and incorporated herein by reference. |
(I) | Previously filed as an exhibit to Registrant’s Post-Effective Amendment No. 26 (333–16093) on May 13, 2005 and incorporated herein by reference. |
(J) | Previously filed as an exhibit to Registrant’s Registration Statement on Form N-14 (333-140100) on January 19, 2007 and incorporated herein by reference. |
Item 17 | Undertakings |
(1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, the reoffering prospectus will contain the information called for by
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the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.
(3) The undersigned registrant undertakes to file as part of a post-effective amendment to the registration statement an executed copy of the form of tax opinion and consent of counsel referenced in Item 16(12) above as soon as practicable after the closing of the reorganization of the Technology Growth Fund into the Large Cap Growth Equity Fund.
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SIGNATURES
As required by the Securities Act of 1933, as amended, this registration statement has been signed on behalf of the registrant, in the City of Beverly Hills, and State of California on the 8th day of March, 2007.
CNI CHARTER FUNDS
| By: | /s/ Vernon C. Kozlen |
Vernon C. Kozlen
President, Chief Executive Officer
As required by the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signatures |
| Title | Date |
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/s/ Vernon C. Kozlen |
| President & | March 8, 2007 |
/s/ Eric Kleinschmidt |
| Controller & Chief Operating Officer | March 8, 2007 |
/s/ Irwin G. Barnet* |
| Trustee | March 8, 2007 |
/s/ Victor Meschures* |
| Trustee | March 8, 2007 |
| | Trustee |
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/s/ James R. Wolford* |
| Trustee | March 8, 2007 |
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Exhibit A
[LETTERHEAD OF PAUL, HASTINGS, JANOFSKY & WALKER LLP]
March 7, 2007 | 27244.00010 |
CNI Charter Funds
400 North Roxbury Drive
Beverly Hills, California 90212
Re: | CNI Charter Funds: Large Cap Growth Fund |
Ladies and Gentlemen:
We have acted as counsel to CNI Charter Funds, a Delaware statutory trust (the “Trust”), in connection with its Registration Statement filed on Form N–14 with the Securities and Exchange Commission (the “Registration Statement”) relating to the issuance by the Trust of shares of beneficial interest (the “Shares”) of the Large Cap Growth Fund, a series of the Trust (the “Fund”).
In connection with this opinion, we have assumed the authenticity of all records, documents and instruments submitted to us as originals, the genuineness of all signatures, the legal capacity of all natural persons and the conformity to the originals of all records, documents and instruments submitted to us as copies. We have based our opinion on the following:
(a) the Trust’s Certificate of Trust (the “Certificate of Trust”) as filed with the Delaware Secretary of State on October 28, 1996, and the amendments thereto filed with the Delaware Secretary of State on February 11, 1998 and April 27, 1999, certified to us by an officer of the Trust as being a true and correct copy of the Certificate of Trust and in effect on the date hereof;
(b) the Trust’s Agreement and Declaration of Trust dated October 25, 1996 (the “Declaration of Trust”), certified to us by an officer of the Trust as being a true and correct copy of the Declaration of Trust and in effect on the date hereof;
(c) the Trust’s Bylaws (the “Bylaws”), certified to us by an officer of the Trust as being a true and correct copy of the Bylaws and in effect on the date hereof;
(d) resolutions of the Trust’s Board of Trustees adopted on December 9, 1999, authorizing the establishment of the Fund and the issuance of the Shares, certified to us by an officer of the Trust as being true and complete and in full force and effect on the date hereof;
CNI Charter Funds
March 7, 2007
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(e) a copy of the Registration Statement as filed with the Securities and Exchange Commission; and
(f) a certificate of an officer of the Trust as to certain factual matters relevant to this opinion.
Our opinion below is limited to the federal law of the United States of America and the Chapter 38 of Title 12 of the Delaware Code (the “Delaware Statutory Trust Act”). We are not licensed to practice law in the State of Delaware, and we have based our opinion below solely on our review of the Delaware Statutory Trust Act and the case law interpreting the Delaware Statutory Trust Act as reported in Delaware Laws Affecting Business Entities (Aspen Publishers, Inc., 2006 Fall Edition). We have not undertaken a review of other Delaware law or of any administrative or court decisions in connection with rendering this opinion. We disclaim any opinion as to any law other than that of the United States of America and the statutory trust law of the State of Delaware as described above, and we disclaim any opinion as to any statute, rule, regulation, ordinance, order or other promulgation of any regional or local governmental authority.
Based on the foregoing and our examination of such questions of law as we have deemed necessary and appropriate for the purpose of this opinion, and assuming that (i) all of the Shares will be sold for consideration at their net asset value on the date of their issuance in accordance with statements in the Registration Statement and in accordance with the Declaration of Trust, (ii) all consideration for the Shares will be actually received by the Fund, and (iii) all applicable securities laws will be complied with, then it is our opinion that, when issued and sold by the Fund, the Shares will be legally issued, fully paid and nonassessable.
This opinion is rendered to the Trust and its shareholders in connection with the Registration Statement on Form N-14 with respect to the Fund and is solely for the benefit of the Trust and its shareholders. This opinion may not be relied upon by the Trust and its shareholders for any other purpose or relied upon by any other person, firm, corporation or other entity for any purpose, without our prior written consent. We disclaim any obligation to advise the Trust and its shareholders of any developments in areas covered by this opinion that occur after the date of this opinion.
We hereby consent to (i) the reference of our firm as Legal Counsel in the Registration Statement, and (ii) the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
Exhibit B
DRAFT
[LETTERHEAD OF PAUL, HASTINGS, JANOFSKY & WALKER LLP]
(213) 683-6000
______________, 2007 |
|
CNI Charter Funds
400 North Roxbury Drive
Beverly Hills, CA 90210
Re: | Reorganization of: | (1) Technology Growth Fund and |
Ladies and Gentlemen:
You have requested our opinion with respect to certain federal income tax matters in connection with the reorganization by and between Technology Growth Fund (the “Old Fund”), a series fund of CNI Charter Funds, a Delaware statutory trust (“CNI”), and Large Cap Growth Equity Fund (the “New Fund”), a series fund of CNI. This opinion is rendered in connection with the transaction described in the Agreement and Plan of Reorganization dated _____________, 2007 (the “Reorganization Agreement”), by CNI for itself and on behalf of the Old Fund and by CNI for itself and on behalf of the New Fund, and adopts the applicable defined terms therein.
This letter and the opinion expressed herein are for delivery to CNI and may be relied upon only by CNI and its shareholders. This opinion also may be disclosed by CNI or any of its shareholders in connection with an audit or other administrative proceeding before the Internal Revenue Service (the “Service”) affecting CNI or any of its shareholders or in connection with any judicial proceeding relating to the federal, state or local tax liability of CNI or any of its shareholders. In addition, we hereby consent to the filing of this opinion as an exhibit to the registration statement of CNI on Form N-14 pursuant to the Securities Act of 1933, as amended, in connection with the registration of securities required to be issued by CNI by the Reorganization Agreement.
The opinions rendered herein are issued in accordance with United States Treasury Department Circular 230, revised as of June 20, 2005 (“Circular 230”). This opinion is intended to be a “covered opinion,” as defined in Circular 230.
A. | Assumptions and Representations |
For purposes of this opinion we have assumed the truth and accuracy of the following facts:
CNI was duly created pursuant to its Agreement and Declaration of Trust for the purpose of acting as a management investment company under the Investment Company Act of
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1940, as amended (the “1940 Act”), and is validly existing under the laws of Delaware. CNI is registered as an investment company classified as an open-end management company under the 1940 Act.
The New Fund is a series fund of CNI duly established under the laws of the State of Delaware and is validly existing under the laws of that State. The New Fund has an authorized capital of an unlimited number of shares and each outstanding share of the New Fund is fully transferable and has full voting rights.
The Old Fund is a series fund of CNI duly established under the laws of the State of Delaware and is validly existing under the laws of that State. It has an authorized capital of an unlimited number of shares and each outstanding share is fully transferable and has full voting rights.
For what has been represented as valid business purposes, the following transaction (the “Transaction”) will take place in accordance with the laws of the State of Delaware and pursuant to the Reorganization Agreement:
(a) On the date of the closing (the “Closing Date”), the Old Fund will transfer substantially all of its assets to the New Fund. Solely in exchange therefor, the New Fund will assume all of the liabilities of the Old Fund and deliver to the Old Fund a number of voting shares of the New Fund equal to the net asset value of the shares of the Old Fund.
(b) The Old Fund will then liquidate and distribute all of the shares received from the New Fund (the “New Shares”) to its shareholders in proportion to their respective interests in the Old Fund in exchange for their shares in the Old Fund.
(c) The Old Fund will then wind up and dissolve as soon as practicable thereafter, and its legal existence as a series fund of CNI will be terminated.
In rendering the opinion set forth below, we have examined and relied upon the following, assuming the truth and accuracy of any statements contained therein:
(1) the Reorganization Agreement and
(2) such other documents, records and instruments as we have deemed necessary in order to enable us to render the opinion referred to in this letter.
For purposes of rendering the opinion set forth below, we have in addition relied upon the following representations by the New Fund and the Old Fund, as applicable:
(A) The fair market value of the New Shares received by each shareholder of the Old Fund will be approximately equal to the fair market value of the shares of the Old Fund
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surrendered in the exchange. The shareholders of the Old Fund will receive no consideration other than New Shares in exchange for shares in the Old Fund.
(B) There is no plan or intention by the New Fund or any person related to the New Fund, as defined in section 1.368-1(e)(3) of the Treasury Regulations, to acquire or redeem any of the shares of the New Fund issued in the Transaction either directly or through any transaction, agreement, or arrangement with any other person; provided, however, that certain redemptions will occur in the ordinary course of the New Fund’s business as an open-end investment company, as required by section 22(e) of the 1940 Act. For this purpose, section 1.368-1(e)(3) of the Treasury Regulations generally provides that two corporations are related if they are members of the same affiliated group (i.e., one or more chains of corporations connected through stock ownership with a common parent corporation where: (i) stock with at least 80% of the total voting power and value of each corporation in the chain is owned directly by one or more of the other corporations in the chain; and (ii) the common parent owns directly stock with at least 80% of the voting power and value of at least one of the corporations in the chain for consolidated return purposes (“Affiliated Group Relationship”) or if one corporation owns stock possessing at least 50% or more of the voting power or value of the other corporation (“Parent-Subsidiary Relationship”)).
(C) During the five-year period ending on the Closing Date, neither the Old Fund nor any person related to the Old Fund by having a Parent-Subsidiary Relationship will have directly or through any transaction, agreement, or arrangement with any other person, (i) acquired shares of the Old Fund with consideration other than shares of the New Fund or the Old Fund or (ii) redeemed or made distributions with respect to the Old Fund shares; provided, however, that certain redemptions have occurred in the ordinary course of the Old Fund’s business as an open-end investment company as required by section 22(e) of the 1940 Act and were made in the ordinary course of the Old Fund’s business as a qualified regulated investment company.
(D) Prior to the Transaction, neither the New Fund nor any person related to the New Fund (i.e., having either an Affiliated Group Relationship or a Parent-Subsidiary Relationship with the New Fund) will have owned shares of the Old Fund.
(E) The aggregate value of the acquisitions, redemptions, and distributions discussed in paragraphs (B) and (C) above will not exceed 50% of the value (without giving effect to the acquisitions, redemptions, and distributions made in the ordinary course of the New Fund’s business as an open-end investment company as required by the 1940 Act) of the proprietary interest in the Old Fund on the effective date of the Transaction.
(F) The New Fund will acquire at least 90% of the fair market value of the net assets and at least 70% of the fair market value of the gross assets held by the Old Fund immediately prior to the Transaction. For purposes of this representation, amounts, if
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any, used by the Old Fund to pay its reorganization expenses, amounts paid by the Old Fund to shareholders who receive cash or other property (including any payments to dissenters), and all redemptions and distributions (except for distributions and redemptions occurring in the ordinary course of the Old Fund’s business as an investment company) made by the Old Fund immediately preceding the transfer have been included as assets of the Old Fund held immediately prior to the Transaction.
(G) On the Closing Date and at all times prior to the Closing Date, the New Fund did not have and has not had any plan or intention to sell or otherwise dispose of any of the assets of the Old Fund acquired in the Transaction, except for dispositions (i) made in the ordinary course of its business as a series of a qualified regulated investment company and (ii) the proceeds of which were used in accordance with the New Fund’s investment objectives.
(H) The New Fund has no plan or intention to reacquire any of its shares issued in the Transaction, except for acquisitions made in the ordinary course of its business as a series of an investment company pursuant to the provisions of section 22(e) of the 1940 Act.
(I) In pursuance of the Reorganization Agreement, the Old Fund will distribute as soon as practicable the shares of the New Fund they receive in the Transaction.
(J) The stated liabilities of the Old Fund assumed by the New Fund plus the liabilities to which the assets are subject were incurred by the Old Fund in the ordinary course of its business and are associated with the assets transferred.
(K) The fair market value of the assets of the Old Fund transferred to the New Fund will equal or exceed the sum of the liabilities assumed by the New Fund, plus the amount of liabilities, if any, to which the transferred assets are subject.
(L) The total adjusted bases of the assets of the Old Fund transferred to the New Fund will equal or exceed the sum of the stated liabilities to be assumed by the New Fund, plus the amount of liabilities, if any, to which the transferred assets are subject.
(M) Following the Transaction, the New Fund will continue the historic business of the Old Fund or use a significant portion of the Old Fund’s historic business assets in a business.
(N) There is no intercorporate indebtedness existing between the Old Fund and the New Fund that was issued, acquired, or will be settled at a discount.
(O) The Old Fund is not under the jurisdiction of a court in a case under Title 11 of the United States Code or a receivership, foreclosure or similar proceeding in a federal or state court.
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(P) The investment adviser to the Old Fund will pay or assume only those expenses of the New Fund, the Old Fund and the shareholders of the Old Fund that are solely and directly related to the transaction in accordance with the guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187 (such as legal and accounting expenses, appraisal fees, administrative costs, security underwriting and registration fees and expenses, and transfer agents’ fees and expenses). Otherwise, the New Fund, the Old Fund and the shareholders of the Old Fund will pay their respective expenses, if any, incurred in connection with the Transaction.
(Q) The Old Fund and the New Fund each meet the requirements of a regulated investment company set forth in Code Section 368(a)(2)(F).
(R) The Old Fund and the New Fund have each elected to be taxed as a “regulated investment company” (“RIC”) under Code Section 851 and, for all of the taxable periods (including the last short taxable period ending on the date of the Transaction for the Old Fund), have qualified for the special tax treatment afforded regulated investment companies under the Code.
(S) No cash is being transferred to the shareholders of the Old Fund in lieu of fractional shares of the New Fund.
(T) Following the Transaction, the Old Fund, the New Fund, and, to the best knowledge of the management of the Old Fund, the shareholders of the Old Fund, will comply with the information reporting, record retention and return filing requirements set forth in section 1.368-3 of the Treasury Regulations.
(U) There are no dissenters’ rights in the Transaction.
(V) Neither the Old Fund nor one or more of its shareholders, or any combination thereof, will control (within the meaning of Code Section 368(a)(2)(H), which provides that control means ownership of shares possessing at least 50% of the total combined voting power of all classes of shares entitled to vote, or at least 50% of the total value of all classes of shares) the New Fund immediately after the transfer.
(W) To the best knowledge of the management of the Old Fund, there is no plan or intention by the shareholders of the Old Fund who own five percent (5%) or more of the Old Fund shares to sell, exchange, or otherwise dispose of a number of shares of the New Fund received in the Transaction that would reduce the Old Fund shareholders’ ownership of the New Fund shares to a number of shares having a value, as of the date of the Transaction, of less than 50% of the value of all the formerly outstanding shares of the Old Fund as of the same date. For purposes of this representation, shares of the Old Fund exchanged for cash or other property will be treated as outstanding shares of the Old Fund on the date of the Transaction. Additionally, shares of the Old Fund and
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shares of the New Fund held by the Old Fund’s shareholders and otherwise sold, redeemed or disposed of prior to or subsequent to the Transaction will be treated as outstanding shares of the Old Fund on the date of the Transaction.
B. | Characterization as a Reorganization |
Code Section 354(a) provides that stockholders of a corporation that is a party to a “reorganization” will not recognize gain or loss on the exchange, in pursuance of the plan of reorganization, of their shares for shares in another corporation that is also a party to the reorganization. Pursuant to Code Section 358(a)(1), the basis of the shares of the acquiring corporation to the shareholders of the target will be the same as the basis of such shareholders in their shares of target’s stock, decreased by any money or boot received in the exchange, and increased by any gain recognized on the exchange. Pursuant to Code Section 1223(1), a shareholder’s holding period in target stock surrendered is tacked to the holding period of such shareholder in the stock of an acquiring corporation.
Code Section 361(a) provides that a corporation that is a party to a reorganization will not recognize gain or loss if it exchanges property for stock in another corporation that is also a party to the reorganization. Pursuant to Code Section 362(b), the basis of property acquired by a corporation in a reorganization, shall be the same as it would be in the hands of the transferor, increased by any gain recognized. Pursuant to Code Section 1223(2), if a taxpayer receives carryover basis with respect to acquired property, such taxpayer shall also inherit the holding period of the transferor. Code Section 381 generally provides that in reorganizations where Code Section 361 applies, the acquiring corporation will succeed to certain tax attributes of the transferor.
A “reorganization” for this purpose is defined in Code Section 368(a). In particular, Code Section 368(a)(1)(C), the so-called “C reorganization,” includes in the definition of a reorganization an “acquisition by one corporation, in exchange solely for all or a part of its voting stock... of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other shall be disregarded.” As a result of the Transaction, the New Fund will acquire substantially all of the assets of the Old Fund in exchange for shares of the New Fund and will assume the liabilities of the Old Fund.
Code Section 368(a)(2)(F) provides that a transaction involving an investment company will not be considered a reorganization unless the investment company is a RIC, a real estate investment trust, or certain other investment corporations. Each Old Fund and the New Fund has elected to be taxed as a RIC.
Code Section 368(a)(2)(G) requires that the acquired corporation in a C reorganization must distribute the stock, securities and other property it receives in pursuance of the plan
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of reorganization. The Old Fund will be distributing to its shareholders all the shares of the New Fund received in the Transaction, after which the Old Fund will liquidate.
Treasury Regulations Section 1.368-1(b) provides that, in general, continuity of business enterprise and continuity of interest are required for a reorganization. The New Fund intends to continue the business of the Old Fund as a regulated investment company, and there is no intention that the shareholders of the Old Fund will dispose of their interests other than in the ordinary course of business of the New Fund as an open-end investment company.
As a further qualification for all forms of reorganization, Treasury Regulations Section 1.368-1(c) provides generally that a scheme, device or plan that has no business or corporate purpose is not a plan of reorganization and thus will not qualify as a reorganization for purposes of Code Sections 354 and 361. The purpose and effect of the Transaction is to take advantage of various economies of scale and allow the funds to operate more efficiently. Management thus anticipates that the Transaction will provide long-term benefits to the shareholders of the Old Fund.
Based on the above, it is our opinion that the Transaction will constitute a “reorganization” within the meaning of Code Section 368(a)(1)(C) and thus the federal tax consequences of a reorganization described above should flow to the New Fund and to the shareholders of the Old Fund.
C. | Overall Conclusion |
Our opinion set forth in this letter is based upon the Code, regulations of the Treasury Department, published administrative announcements and rulings of the Service and court decisions, all as of the date of this letter. Based on the foregoing facts and representations, and provided that the Transaction will take place in accordance with the terms of the Reorganization Agreement, and further provided that the Old Fund distribute the shares of the New Fund received in the Transaction as soon as practicable, we are of the opinion that:
(a) The transfer of substantially all of the Old Fund’s assets to the New Fund in exchange for the New Shares and the assumption of the Old Fund’s stated liabilities, and the distribution of the New Shares to the Old Fund shareholders in liquidation of the Old Fund, will constitute a “reorganization” (the “Reorganization”) within the meaning of Code Section 368(a), and the New Fund and the Old Fund each are a “party to a reorganization” within the meaning of Code Section 368(b);
(b) No gain or loss will be recognized by the New Fund upon the receipt of the assets of the Old Fund solely in exchange for the New Shares and the assumption of the stated liabilities of the Old Fund, if any;
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(c) No gain or loss will be recognized by the Old Fund upon the transfer of its assets to, and the assumption of its stated liabilities by, the New Fund in exchange for the New Shares and the assumption by the New Fund of the Old Fund’s stated liabilities;
(d) No gain or loss will be recognized by any shareholder of the Old Fund upon the exchange of its Old Fund shares for the New Shares;
(e) The tax basis of each of the assets of the Old Fund transferred to the New Fund will be the same as the tax basis of each such asset to the Old Fund immediately prior to the Reorganization;
(f) The adjusted tax basis of the New Shares received by each Old Fund shareholder pursuant to the Reorganization will be the same as the adjusted tax basis of the Old Fund shares held by that shareholder immediately prior to the Reorganization;
(g) The holding period of the each of the assets of the Old Fund acquired by the New Fund will include the period during which such asset was held by the Old Fund; and
(h) The holding period of the New Shares to be received by each Old Fund shareholder will include the period during which the Old Fund shares exchanged therefor were held by such shareholder, provided that such Old Fund shares were held as capital assets on the date of the Reorganization.
The opinion set forth above represents our conclusions as to the application of federal income tax law existing as of the date of this letter to the Transaction described above, and we can give no assurance that legislative enactments, administrative changes or court decisions may not be forthcoming that would require modifications or revocations of our opinion expressed herein. Moreover, there can be no assurance that positions contrary to our opinion will not be taken by the Service, or that a court considering the issues would not hold contrary to such opinion. Further, the opinion set forth above represents our conclusions based upon the documents and facts referred to above. Any material amendments to such documents or changes in any significant facts would affect the opinion referred to herein. Although we have made such inquiries and performed such investigation as we have deemed necessary to fulfill our professional responsibilities, we
CNI Charter Funds | DRAFT |
______________, 2007
Page 9
have not undertaken an independent investigation of the facts referred to in this letter.
We express no opinion as to any federal income tax issue or other matter except those set forth above.
Very truly yours,
PAUL, HASTINGS, JANOFSKY & WALKER LLP
Exhibit C
Consent of Independent Registered Public Accounting Firm
The Shareholders and Board of Trustees of
CNI Charter Funds:
We consent to the incorporation by reference, in this registration statement on Form N-14, of our reports dated November 22, 2006 on the statements of assets and liabilities of the CNI Charter Funds, comprised of the Large Cap Value Equity Fund, the Large Cap Growth Equity Fund, the RCB Small Cap Value Fund, the Technology Growth Fund, the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund, the High Yield Bond Fund, the Prime Money Market Fund, the Government Money Market Fund, and the California Tax Exempt Money Market Fund (collectively, “the Funds”), including the schedule of investments, as of September 30, 2006, and the related statements of operations for the year then ended and the changes in net assets for each of the years in the two-year period then ended, and financial highlights for each of the years or periods indicated therein. These financial statements and financial highlights and our reports thereon are included in the Annual Reports of the Funds as filed on Form N-CSR.
We also consent to the references to our firm under the headings “Other Service Providers” and "Financial Statements" in the Statement of Additional Information.
Philadelphia, Pennsylvania
March 7, 2007
Exhibit D
POWER OF ATTORNEY
FOR
SECURITIES AND EXCHANGE COMMISSION
AND RELATED FILINGS
________________________________
Each of the undersigned Trustees and Officers of CNI CHARTER FUNDS (the “Trust”) hereby appoints SOFIA ROSALA and VERNON KOZLEN (with full power to each of them to act alone), his or her attorney–in–fact and agent, in all capacities, to execute and to file any documents relating to the Registration Statement of the Trust on Form N–14 (Registration No. 333-140100) under the Investment Company Act of 1940, under the Securities Act of 1933, and under the laws of all states and other domestic and foreign jurisdictions, including any and all amendments thereto, covering the registration statement and the sale of shares by the Trust, including all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority, including applications for exemptive orders rulings or filings of proxy materials. Each of the undersigned grants to each of said attorneys full authority to do every act necessary to be done in order to effectuate the same as fully, to all intents and purposes, as he could do if personally present, thereby ratifying all that said attorneys–in–fact and agents may lawfully do or cause to be done by virtue hereof.
Each undersigned Trustee hereby executes this Power of Attorney as of this 28th day of February, 2007.
/s/ Irwin G. Barnet |
Irwin G. Barnet |
Trustee |
/s/ Victor Meschures |
Victor Meschures |
Trustee |
________________
William R. Sweet
Trustee
/s/ James R. Wolford |
James R. Wolford |
Trustee |
Exhibit E
PROXY CARD
CNI CHARTER FUNDS
TECHNOLOGY GROWTH FUND
This proxy is solicited by the Board of Trustees of CNI Charter Funds (the “Trust”) for use at a special meeting of shareholders of the Technology Growth Fund (the “Fund”) to be held on March 28, 2007.
The undersigned hereby appoints Valerie Y. Lewis and Richard A. Weiss, and each of them, as attorneys and proxies of the undersigned, with the power of substitution and resubstitution, to attend, and to vote all shares of the Fund at the above-referenced meeting of shareholders and any adjournment or adjournments thereof, and to vote all shares of the Fund that the undersigned may be entitled to vote with respect to the following proposals in accordance with the specifications indicated, if any, and with all the powers which the undersigned would possess if personally present, hereby revoking any prior proxy to vote at such meeting. The undersigned hereby acknowledges receipt of the notice of special meeting of shareholders of the Fund and the combined proxy statement and prospectus dated March 7, 2007.
Note: Please sign exactly as name(s) appear(s) hereon. Corporate or partnership proxies should be signed in full corporate or partnership name by an authorized officer. Each joint owner should sign personally. When signing as a fiduciary, please give full title as such.
__________________________________ | __________________________________ |
Signature | Signature of joint owner, if any |
_____________________________, 2007
Date
VOTE THIS PROXY CARD TODAY!
This proxy will be voted as specified below with respect to the action to be taken on each of the following proposals. In the absence of any specification, this proxy will be voted in favor of each proposal. The Board of Trustees recommends that you vote FOR each of the proposals below.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS.
Example: x
1. To approve the Agreement and Plan of Reorganization whereby the Technology Growth Fund of CNI Charter Funds (the “Trust”) will be reorganized into the Large Cap Growth Equity Fund series of the Trust.
| FOR | AGAINST | ABSTAIN |
| / / | / / | / / |
2. | In their discretion, on any other matter that may properly come before the meeting. |
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Exhibit F - -------------------------------------------------------------------------------- CNI CHARTER FUNDS(SM) [LOGO OMITTED](R) [GRAPHIC OMITTED] Institutional Class Large Cap Growth Equity Fund Large Cap Value Equity Fund RCB Small Cap Value Fund Corporate Bond Fund Government Bond Fund California Tax Exempt Bond Fund High Yield Bond Fund PROSPECTUS DATED JANUARY 31, 2007 - --------------------------------------------------------------------------------[GRAPHIC OMITTED] CNI CHARTER FUNDS(SM) [LOGO OMITTED](R) PROSPECTUS DATED JANUARY 31, 2007 Institutional Class Large Cap Growth Equity Fund Large Cap Value Equity Fund RCB Small Cap Value Fund Corporate Bond Fund Government Bond Fund California Tax Exempt Bond Fund High Yield Bond Fund INVESTMENT MANAGER: City National Asset Management, Inc. - -------------------------------------------------------------------------------- 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 INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. MUTUAL FUND SHARES ARE NOT BANK DEPOSITS, NOR ARE THEY OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY CITY NATIONAL BANK. INVESTING IN MUTUAL FUNDS INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. table of contents THE FUNDS Large Cap Growth Equity Fund (the "Large Cap Growth Fund")...........................................1 Large Cap Value Equity Fund (the "Large Cap Value Fund")............................................3 RCB Small Cap Value Fund...................................................5 Corporate Bond Fund........................................................8 Government Bond Fund......................................................10 California Tax Exempt Bond Fund...........................................13 High Yield Bond Fund......................................................16 MANAGEMENT OF THE FUNDS.......................................................19 ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS............................22 HOW TO BUY, SELL AND EXCHANGE SHARES..........................................23 DIVIDENDS AND TAXES ..........................................................27 FINANCIAL HIGHLIGHTS .........................................................29 IMPORTANT TERMS TO KNOW.......................................................36 PRIVACY PRINCIPLES............................................................37 FOR MORE INFORMATION..................................................back cover 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 Funds described herein should request the SAI and review it before purchasing shares. This Prospectus offers Institutional Class shares of the Large Cap Growth Fund, the Large Cap Value Fund, the RCB Small Cap Value Fund, the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund and the High Yield Bond Fund (each a "Fund" and together, the "Funds"), series of CNI Charter Funds. Only financial institutions and financial intermediaries may purchase Institutional Class shares for their own accounts or on behalf of their customers. The Funds offer other classes of shares which are subject to the same management fees and other expenses but may be subject to different distribution fees, shareholder servicing fees and/or sales loads. large cap growth fund OUR GOAL The Large Cap Growth Fund seeks to provide capital appreciation by investing in large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations with the potential for growth. The goal of the Large Cap Growth Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of equity securities of large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations. Large corporations are defined for this purpose as companies with market capitalizations at the time of purchase in the range of those market capitalizations of companies included in the S&P 500/Citigroup Growth Index (over time the range varies, and was $1.3 billion to $427 billion as of December 31, 2006). We use a combination of quantitative and fundamental analysis to select companies with share price growth potential that may not be recognized by the market at large. Although the Large Cap Growth Fund is not an index fund, we seek to manage the portfolio's overall risk characteristics to be similar to those of the S&P 500/Citigroup Growth Index. PRINCIPAL RISKS OF INVESTING IN THE LARGE CAP GROWTH FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goal. The Large Cap Growth Fund will expose you to risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - By investing in stocks, the Large Cap Growth Fund may expose you to a sudden decline in a holding's share price or an overall decline in the stock market. In addition, as with any stock fund, the value of your investment will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The Large Cap Growth Fund is also subject to the risk that its principal market segment, large capitalization growth stocks, may underperform other equity market segments or the market as a whole. FOREIGN SECURITIES - Foreign stocks tend to be more volatile than U.S. stocks, and are subject to risks that are not typically associated with domestic stocks. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Institutional Class shares of the Large Cap Growth Fund for the indicated periods. Of course, the Large Cap Growth Fund's past performance (before and after taxes) does not necessarily indicate how the Large Cap Growth Fund will perform in the future. CNI CHARTER FUNDS | PAGE 1 This bar chart shows the performance of the Large Cap Growth Fund's Institutional Class shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] -10.10% -21.91% 23.17% 5.89% 3.00% 8.70% ---------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 13.36% -14.64% (Q4 2001) (Q2 2002) This table shows the Large Cap Growth Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of companies similar to those held by the Fund. Since Inception Large Cap Growth Fund One Year Five Years (1/14/00) - -------------------------------------------------------------------------------- Return Before Taxes 8.70% 2.66% -2.77% Return After Taxes on Distributions(1) 8.60% 2.62% -2.80% Return After Taxes on Distributions and Sale of Fund Shares(1) 5.65% 2.27% -2.34% S&P 500/Citigroup Growth Index(2) 11.01% 1.87% -3.38%(3) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) The index comparison shown begins on January 31, 2000. FEES AND EXPENSES OF THE LARGE CAP GROWTH FUND This table describes the fees and expenses you may pay if you buy and hold Institutional Class shares of the Large Cap Growth Fund. You pay no sales charges or transaction fees for buying or selling Institutional Class shares of the Large Cap Growth Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.65% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.00% * The "Management Fee" is an annual fee, payable monthly out of the Large Cap Growth Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE LARGE CAP GROWTH FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP INSTITUTIONAL CLASS TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.05%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Large Cap Growth Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Large Cap Growth Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Institutional Class shares of the Large Cap Growth 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 Large Cap Growth Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $102 $318 $552 $1,225 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 2 large cap value fund OUR GOALS The Large Cap Value Fund seeks to provide capital appreciation and moderate income consistent with current returns available in the marketplace by investing in large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations which are undervalued. The goals of the Large Cap Value Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of equity securities of large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations. Large corporations are defined for this purpose as companies with market capitalizations at the time of purchase in the range of those market capitalizations of companies included in the S&P 500/Citigroup Value Index (over time the range varies, and was $1.3 billion to $387 billion as of December 31, 2006). We use a combination of quantitative and fundamental analysis to select companies with share price growth potential that may not be recognized by the market at large. Although the Large Cap Value Fund is not an index fund, we seek to manage the portfolio's overall risk characteristics to be similar to those of the S&P 500/Citigroup Value Index. PRINCIPAL RISKS OF INVESTING IN THE LARGE CAP VALUE FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The Large Cap Value Fund will expose you to risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - By investing in stocks, the Large Cap Value Fund may expose you to a sudden decline in a holding's share price or an overall decline in the stock market. In addition, as with any stock fund, the value of your investment will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The Large Cap Value Fund is also subject to the risk that its principal market segment, large capitalization value stocks, may underperform other equity market segments or the market as a whole. FOREIGN SECURITIES - Foreign stocks tend to be more volatile than U.S. stocks, and are subject to risks that are not typically associated with domestic stocks. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Institutional Class shares of the Large Cap Value Fund for the indicated periods. Of course, the Large Cap Value Fund's past performance (before and after taxes) does not necessarily indicate how the Large Cap Value Fund will perform in the future. CNI CHARTER FUNDS | PAGE 3 This bar chart shows the performance of the Large Cap Value Fund's Institutional Class shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] -11.78% -20.07% 32.90% 13.43% 7.91% 20.15% ---------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 18.81% -19.54% (Q2 2003) (Q3 2002) This table shows the Large Cap Value Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of companies similar to those held by the Fund. Since Inception Large Cap Value Fund One Year Five Years (1/14/00) - -------------------------------------------------------------------------------- Return Before Taxes 20.15% 9.33% 5.29% Return After Taxes on Distributions(1) 18.66% 8.62% 4.41% Return After Taxes on Distributions and Sale of Fund Shares(1) 14.19% 7.91% 4.25% S&P 500/Citigroup Value Index(2) 20.80% 10.43% 6.72%(3) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) The index comparison shown begins on January 31, 2000. FEES AND EXPENSES OF THE LARGE CAP VALUE FUND This table describes the fees and expenses you may pay if you buy and hold Institutional Class shares of the Large Cap Value Fund. You pay no sales charges or transaction fees for buying or selling Institutional Class shares of the Large Cap Value Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.62% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 0.97% * The "Management Fee" is an annual fee, payable monthly out of the Large Cap Value Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE LARGE CAP VALUE FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP INSTITUTIONAL CLASS TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.00%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Large Cap Value Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Large Cap Value Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Institutional Class shares of the Large Cap Value 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 Large Cap Value Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $99 $309 $536 $1,190 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 4 rcb small cap value fund OUR GOAL The RCB Small Cap Value Fund seeks capital appreciation primarily through investment in smaller U.S. corporations which are considered undervalued. The goal of the RCB Small Cap Value Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of equity securities of smaller U.S. corporations. Smaller corporations are defined for this purpose as companies with market capitalizations at the time of purchase in the range of $50 million to $5 billion. The overall investment philosophy of the RCB Small Cap Value Fund involves a value-oriented focus on preservation of capital over the long term and a "bottom-up" approach, analyzing companies on their individual characteristics, prospects and financial conditions. We determine the universe of potential companies for investment through a systematic screening of companies for attractive valuation characteristics and the prospects of fundamental changes, as well as information we derive from a variety of sources, including, but not limited to, regional brokerage research, trade publications and industry conferences. We evaluate companies within this universe for fundamental characteristics such as: o Return on capital trends; o Cash flow and/or earnings growth; o Free cash flow; o Balance sheet integrity; and o Intrinsic value analysis. Our research effort also includes an investigation of the strength of the business franchises of these companies and the commitment of management to shareholders through direct contacts and company visits. Factors that may cause the sale of the RCB Small Cap Value Fund's portfolio holdings include disappointment in management or changes in the course of business, changes in a company's fundamentals, or our assessment that a particular company's stock is extremely overvalued. A 15% or greater decline in a company's stock price as compared to its industry peer group would result in an intensive re-evaluation of the holding and a possible sale. The RCB Small Cap Value Fund anticipates that it will have a low rate of portfolio turnover. This means that the RCB Small Cap Value Fund has the potential to be a tax-efficient investment, as low turnover should result in the realization and the distribution to shareholders of lower capital gains. This anticipated lack of frequent trading should also lead to lower transaction costs, which could help to improve performance. PRINCIPAL RISKS OF INVESTING IN THE RCB SMALL CAP VALUE FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goal. The RCB Small Cap Value Fund will expose you to risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - By investing in stocks, the RCB Small Cap Value Fund may expose you to a sudden decline in a holding's share price or an overall decline in the stock market. In addition, as with any stock fund, the value of your investment in the RCB Small Cap Value Fund will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of CNI CHARTER FUNDS | PAGE 5 individual companies. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The RCB Small Cap Value Fund is also subject to the risk that its principal market segment, small capitalization value stocks, may underperform other equity market segments or the market as a whole. SMALLER CAPITALIZED COMPANIES - The RCB Small Cap Value Fund primarily invests in smaller capitalized companies. We believe that smaller capitalized companies generally have greater earnings and sales growth potential than larger capitalized companies. The level of risk will be increased to the extent that the RCB Small Cap Value Fund has significant exposure to smaller capitalized or unseasoned companies (those with less than a three-year operating history). Investments in smaller capitalized companies may involve greater risks, such as limited product lines, markets and financial or managerial resources. In addition, the securities of smaller capitalized companies may have few market makers, wider spreads between their quoted bid and asked prices, and lower trading volume, resulting in greater price volatility and less liquidity than the securities of larger capitalized companies. Further, the RCB Small Cap Value Fund may hold a significant percentage of a company's outstanding shares, which means that the RCB Small Cap Value Fund may have to sell such investments at discounts from quoted prices. FOCUS - The RCB Small Cap Value Fund holds a relatively small number of securities positions, each representing a relatively large portion of the RCB Small Cap Value Fund's capital. Losses incurred in such positions could have a material adverse effect on the RCB Small Cap Value Fund's overall financial condition. The RCB Small Cap Value Fund's performance may also differ materially from the relevant benchmarks, which hold many more stocks than the RCB Small Cap Value Fund and may be focused on different sectors or industries than the RCB Small Cap Value Fund. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Institutional Class shares of the RCB Small Cap Value Fund for the indicated periods. Of course, the RCB Small Cap Value Fund's past performance (before and after taxes) does not necessarily indicate how the RCB Small Cap Value Fund will perform in the future. Institutional Class shares of the RCB Small Cap Value Fund commenced operations on October 3, 2001. In the bar chart and the performance table, performance results for the period from October 1, 2001 through October 2, 2001 are for the Class R shares of the RCB Small Cap Value Fund, which were initially issued in connection with the reorganization of the RCB Small Cap Fund (the "Predecessor Fund") on October 1, 2001. Performance results for the period before October 1, 2001 are for the Predecessor Fund, which commenced operations on September 30, 1998. Institutional Class shares' annual returns would have been substantially similar to those of the Class R shares because shares of each Class are invested in the same portfolio of securities, and differ only to the extent that the expenses of Institutional Class shares are lower because they do not include Class R shares' Rule 12b-1 fees and expenses. Therefore, performance would have been higher than that of the Class R shares. Class R shares of the RCB Small Cap Value Fund are not offered by this Prospectus. CNI CHARTER FUNDS | PAGE 6 This bar chart shows the performance of the RCB Small Cap Value Fund's Institutional Class shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 17.85% 12.87% 21.46% -10.60% 48.26% 19.69% -1.37% 13.74% ------------------------------------------------------------------------ 1999 2000 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 27.87% -20.19% (Q2 2003) (Q3 2002) This table shows the average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of indices comprised of companies similar to those held by the Fund. RCB Small Cap Since Inception Value Fund One Year Five Years (9/30/98) - -------------------------------------------------------------------------------- Return Before Taxes 13.74% 12.22% 17.05% Return After Taxes on Distributions(1) 13.48% 11.94% 16.58% Return After Taxes on Distributions and Sale of Fund Shares(1) 9.27% 10.67% 15.14% Russell 2000 Index(2) 18.37% 11.39% 11.21% Russell 2000 Value Index(2) 23.48% 15.37% 14.59% Russell 2500 Value Index(2) 20.18% 15.51% 14.59% (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. FEES AND EXPENSES OF THE RCB SMALL CAP VALUE FUND This table describes the fees and expenses you may pay if you buy and hold Institutional Class shares of the RCB Small Cap Value Fund. You pay no sales charges or transaction fees for buying or selling Institutional Class shares of the RCB Small Cap Value Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.85% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.11% Total Other Expenses 0.36% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.21% * The "Management Fee" is an annual fee, payable monthly out of the RCB Small Cap Value Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE RCB SMALL CAP VALUE FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP INSTITUTIONAL CLASS TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.24%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the RCB Small Cap Value Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the RCB Small Cap Value Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Institutional Class shares of the RCB Small Cap Value 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 RCB Small Cap Value Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $123 $384 $665 $1,466 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 7 corporate bond fund OUR GOALS The Corporate Bond Fund seeks to provide current income (as the primary component of a total return intermediate duration strategy) by investing in a diversified portfolio of fixed income securities. The goals of the Corporate Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio of fixed income securities, at least 80% of which consists of investment grade corporate notes, bonds and debentures that are nationally traded, including U.S. government and agency securities and corporate issues of domestic and international companies denominated in U.S. dollars. We may also purchase mortgage backed and asset backed instruments whose maturities and durations are consistent with an intermediate-term strategy. We actively manage the average duration of the portfolio in accordance with our expectations of interest rate changes as driven by economic trends. The average duration of the portfolio will typically range from two to six years. We will typically invest in corporate issues with a minimum credit rating from Moody's Investors Service or Standard & Poor's Corporation of Baa or BBB, mortgage backed and asset backed instruments with a minimum rating of Aa or AA and corporate commercial paper issued by issuers with a minimum credit rating of A1 or P1. We may retain a security after it has been downgraded below the minimum credit rating if we determine that it is in the best interests of the Corporate Bond Fund. The Corporate Bond Fund may also invest in the shares of money market mutual funds whose objectives are consistent with those of the Corporate Bond Fund. PRINCIPAL RISK OF INVESTING IN THE CORPORATE BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The Corporate Bond Fund may expose you to certain risks that could cause you to lose money. The principal risk to consider is: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities more volatile than higher rated securities. The average duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the Corporate Bond Fund is subject to the risk that its market segment, fixed income securities, may underperform other fixed income market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the Corporate Bond Fund. Changes in the financial condition of issuers also may adversely affect the value of the Corporate Bond Fund's securities. The Corporate Bond Fund may invest in bonds rated below investment grade, which involve greater risks of default or downgrade and are more volatile than investment grade securities. The Corporate Bond Fund is not a money market fund. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Institutional Class shares of the Corporate Bond Fund for the indicated periods. Of course, the Corporate Bond Fund's past performance (before and after taxes) does not necessarily indicate how the Corporate Bond Fund will perform in the future. CNI CHARTER FUNDS | PAGE 8 This bar chart shows the performance of the Corporate Bond Fund's Institutional Class shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 8.49% 7.51% 5.29% 2.40% 1.29% 3.72% ----------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 4.49% -2.59% (Q3 2001) (Q2 2004) This table shows the Corporate Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. Since Inception Corporate Bond Fund One Year Five Years (1/14/00) - -------------------------------------------------------------------------------- Return Before Taxes 3.72% 4.02% 5.45% Return After Taxes on Distributions(1) 2.23% 2.41% 3.54% Return After Taxes on Distributions and Sale of Fund Shares(1) 2.40% 2.50% 3.52% Lehman Intermediate U.S. Corporate Index(2) 4.57% 5.45% 6.72%(3) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) The index comparison shown begins on January 31, 2000. FEES AND EXPENSES OF THE CORPORATE BOND FUND This table describes the fees and expenses you may pay if you buy and hold Institutional Class shares of the Corporate Bond Fund. You pay no sales charges or transaction fees for buying or selling Institutional Class shares of the Corporate Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.40% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 0.75% * The "Management Fee" is an annual fee, payable monthly out of the Corporate Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE CORPORATE BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP INSTITUTIONAL CLASS TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 0.75%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Corporate Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Corporate Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Institutional Class shares of the Corporate Bond 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 Corporate Bond Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $77 $240 $417 $930 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 9 government bond fund OUR GOALS The Government Bond Fund seeks to provide current income (as the primary component of a total return intermediate duration strategy) by investing primarily in U.S. Government securities. The goals of the Government Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of U.S. Government securities either issued or guaranteed by the U.S. Government or its agencies or instrumentalities. We may also purchase mortgage backed and asset backed instruments issued by the U.S. Government or government sponsored agencies whose maturity and duration are consistent with an intermediate-term strategy. In certain cases, securities issued by government-sponsored agencies may not be guaranteed or insured by the U.S. Government. We actively manage the average duration of the portfolio in accordance with our expectations of interest rate changes as driven by economic trends. The average duration of the portfolio will typically range from two to six years. The Government Bond Fund may also invest in the shares of money market mutual funds whose objectives are consistent with those of the Government Bond Fund. PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The Government Bond Fund may expose you to certain risks that could cause you to lose money. The principal risks to consider are: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities more volatile than higher rated securities. The average duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the Government Bond Fund is subject to the risk that its market segment, government fixed income securities, may underperform other fixed income market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the Government Bond Fund. Changes in the financial condition of issuers also may adversely affect the value of the Government Bond Fund's securities. The Government Bond Fund may invest in bonds rated below investment grade, which involve greater risks of default or downgrade and are more volatile than investment grade securities. The Government Bond Fund is not a money market fund. CNI CHARTER FUNDS | PAGE 10 GOVERNMENT-SPONSORED ENTITIES RISK - Although the Government Bond Fund invests in securities issued by government-sponsored entities, such as mortgage-related securities, such securities may not be guaranteed or insured by the U.S. Government and may only be supported by the credit of the issuing agency. For example, the Federal National Mortgage Association guarantees full and timely payment of all interest and principal of its pass-through securities, and the Federal Home Loan Mortgage Corporation guarantees timely payment of interest and ultimate collection of principal of its pass-through securities, but such securities are not backed by the full faith and credit of the U.S. Government. The principal and interest on Government National Mortgage Association ("GNMA") pass-through securities are guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. In order to meet its obligations under a guarantee, GNMA is authorized to borrow from the U.S. Treasury with no limitations as to amount. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Institutional Class shares of the Government Bond Fund for the indicated periods. Of course, the Government Bond Fund's past performance (before and after taxes) does not necessarily indicate how the Government Bond Fund will perform in the future. This bar chart shows the performance of the Government Bond Fund's Institutional Class shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 7.58% 8.71% 1.22% 1.65% 1.50% 3.71% ---------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 4.74% -1.39% (Q3 2001) (Q2 2004) This table shows the Government Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. Since Inception Government Bond Fund One Year Five Years (1/14/00) - -------------------------------------------------------------------------------- Return Before Taxes 3.71% 3.32% 4.80% Return After Taxes on Distributions(1) 2.26% 2.02% 3.22% Return After Taxes on Distributions and Sale of Fund Shares(1) 2.39% 2.10% 3.17% Lehman Intermediate U.S. Government Bond Index(2) 3.83% 3.92% 5.59%(3) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) The index comparison shown begins on January 31, 2000. CNI CHARTER FUNDS | PAGE 11 FEES AND EXPENSES OF THE GOVERNMENT BOND FUND This table describes the fees and expenses you may pay if you buy and hold Institutional Class shares of the Government Bond Fund. You pay no sales charges or transaction fees for buying or selling Institutional Class shares of the Government Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.43% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 0.78% * The "Management Fee" is an annual fee, payable monthly out of the Government Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE GOVERNMENT BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP INSTITUTIONAL CLASS TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 0.70%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Government Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Government Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Institutional Class shares of the Government Bond 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 Government Bond Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your cost would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $80 $249 $433 $966 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 12 california tax exempt bond fund OUR GOALS The California Tax Exempt Bond Fund seeks to provide current income exempt from federal and California state income tax (as the primary component of a total return strategy) by investing primarily in California municipal bonds. The goals of the California Tax Exempt Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a portfolio, at least 80% of which consists of investment grade, intermediate-term municipal bond obligations, including general obligation bonds, revenue bonds, notes and obligations issued by the State of California and its agencies, by various counties, cities and regional or special districts in California, and by various other sectors in the municipal bond market. The California Tax Exempt Bond Fund may also invest in short-term tax exempt commercial paper, floating rate notes or the shares of money market mutual funds whose objectives are consistent with those of the California Tax Exempt Bond Fund. The California Tax Exempt Bond Fund invests at least 80% of its net assets in intermediate-term, high quality municipal bonds and notes, and at least 80% of its total assets in debt securities, the interest from which is expected to be exempt from federal and California state personal income taxes. We actively manage the average duration of the portfolio in accordance with our expectations of interest rate changes as driven by economic trends. The average duration of the portfolio will typically range from three to eight years. We will typically invest in issues with a minimum credit rating from Moody's Investors Service or Standard & Poor's Corporation of Baa or BBB, issues carrying credit enhancements such as insurance by the major bond insurance companies with an underlying minimum credit rating of Baa or BBB and short term notes with a rating from Moody's of MIG1 or VMIG1 or from Standard & Poor's of SP1 or A1. We may retain a security after it has been downgraded below the minimum credit rating if we determine that it is in the best interests of the California Tax Exempt Bond Fund. PRINCIPAL RISKS OF INVESTING IN THE CALIFORNIA TAX EXEMPT BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The California Tax Exempt Bond Fund may expose you to certain risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities more volatile than higher rated securities. The average duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the California Tax Exempt Bond Fund is subject to the risk that its market segment, municipal debt securities, may underperform other market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the California Tax Exempt Bond Fund. Changes in the financial condition of issuers also may adversely affect the value of the California Tax Exempt Bond Fund's securities. The California Tax Exempt Bond Fund may invest in bonds rated below investment grade, which involve greater risks of default or downgrade and are more volatile than investment grade securities. The California Tax Exempt Bond Fund is not a money market fund. CNI CHARTER FUNDS | PAGE 13 GOVERNMENT RISK - State and local governments rely on taxes and, to some extent, revenues from private projects financed by municipal securities to pay interest and principal on municipal debt. Poor statewide or local economic results, changing political sentiments, legislation, policy changes or voter-based initiatives at the state or local level, erosion of the tax base or revenues of the state or one or more local governments, seismic or other natural disasters, or other economic or credit problems affecting the state generally or a particular issuer may reduce tax revenues and increase the expenses of California municipal issuers, making it more difficult for them to meet their obligations. Actual or perceived erosion of the creditworthiness of California municipal issuers may also reduce the value of the California Tax Exempt Bond Fund's holdings. NON-DIVERSIFICATION - The California Tax Exempt Bond Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the California Tax Exempt Bond Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, and may experience increased volatility due to its investments in those securities. In addition, the California Tax Exempt Bond 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. See the SAI for more detailed information regarding California developments. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Institutional Class shares of the California Tax Exempt Bond Fund for the indicated periods. Of course, the California Tax Exempt Bond Fund's past performance (before and after taxes) does not necessarily indicate how the California Tax Exempt Bond Fund will perform in the future. This bar chart shows the performance of the California Tax Exempt Bond Fund's Institutional Class shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 3.99% 8.37% 3.02% 2.21% 1.46% 3.35% ----------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 4.33% -1.85% (Q3 2002) (Q2 2004) This table shows the California Tax Exempt Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. California Tax Since Inception Exempt Bond Fund One Year Five Years (1/14/00) - -------------------------------------------------------------------------------- Return Before Taxes 3.35% 3.65% 4.32% Return After Taxes on Distributions(1) 3.35% 3.47% 4.14% Return After Taxes on Distributions and Sale of Fund Shares(1) 3.21% 3.48% 4.11% Lehman CA Intermediate - Short Municipal Index(2) 3.62% 3.91% 4.65%(3) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) The index comparison shown begins on January 31, 2000. CNI CHARTER FUNDS | PAGE 14 FEES AND EXPENSES OF THE CALIFORNIA TAX EXEMPT BOND FUND This table describes the fees and expenses you may pay if you buy and hold Institutional Class shares of the California Tax Exempt Bond Fund. You pay no sales charges or transaction fees for buying or selling Institutional Class shares of the California Tax Exempt Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.27% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 0.62% * The "Management Fee" is an annual fee, payable monthly out of the California Tax Exempt Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE CALIFORNIA TAX EXEMPT BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP INSTITUTIONAL CLASS TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 0.50%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the California Tax Exempt Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the California Tax Exempt Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Institutional Class shares of the California Tax Exempt Bond 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 California Tax Exempt Bond Fund's expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $63 $199 $346 $774 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 15 high yield bond fund OUR GOAL The High Yield Bond Fund seeks to maximize total return by investing primarily in fixed income securities rated below investment grade (i.e., "junk bonds"). The goal of the High Yield Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of fixed income securities rated below investment grade, including corporate bonds and debentures, convertible and preferred securities and zero coupon obligations. We may also invest in fixed income securities rated below investment grade that are issued by governments and agencies, both U.S. and foreign. We may also invest in equity securities. We seek to invest in securities that offer a high current yield as well as total return potential. In an effort to control risks, we purchase investments diversified across issuers, industries and sectors. The average maturity of the High Yield Bond Fund's investments will vary. There is no limit on the maturity or on the credit quality of any security. PRINCIPAL RISKS OF INVESTING IN THE HIGH YIELD BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goal. The High Yield Bond Fund may expose you to certain risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities (such as those in which the High Yield Bond Fund primarily invests) more volatile than higher rated securities. The average maturity and duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the High Yield Bond Fund is subject to the risk that its market segment, high yield fixed income securities, may underperform other market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the High Yield Bond Fund. Changes in the financial condition of issuers could have a material adverse effect on the value of the High Yield Bond Fund's securities. The High Yield Bond Fund is not a money market fund. HIGH YIELD ("JUNK") BONDS - High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities. High yield bonds involve a greater risk of price declines than investment grade securities due to actual or perceived changes in an issuer's creditworthiness. In addition, issuers of high yield bonds may be more susceptible than other issuers to economic downturns, which may result in a weakened capacity of the issuer to make principal or interest payments. High yield bonds are subject to a greater risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could have a substantial adverse effect on the market value of the security. CNI CHARTER FUNDS | PAGE 16 FOREIGN SECURITIES - The High Yield Bond Fund may invest in foreign securities. Foreign investments may be subject to risks that are not typically associated with investing in domestic securities. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. The High Yield Bond Fund may invest in foreign securities denominated in foreign currencies, whose value may decline against the U.S. dollar. EQUITY SECURITIES - The value of the High Yield Bond Fund's equity investments will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Institutional Class shares of the High Yield Bond Fund for the indicated periods. Of course, the High Yield Bond Fund's past performance (before and after taxes) does not necessarily indicate how the High Yield Bond Fund will perform in the future. This bar chart shows the performance of the High Yield Bond Fund's Institutional Class shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 9.40% 2.38% 19.65% 11.35% 1.30% 9.58% ----------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 8.11% -3.17% (Q4 2001) (Q2 2002) This table shows the High Yield Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. Since Inception High Yield Bond Fund One Year Five Years (1/14/00) - -------------------------------------------------------------------------------- Return Before Taxes 9.58% 8.65% 7.59% Return After Taxes on Distributions(1) 6.75% 5.53% 4.20% Return After Taxes on Distributions and Sale of Fund Shares(1) 6.14% 5.50% 4.35% Citigroup High Yield Market Index(2) 11.55% 10.16% 7.29%(3) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) The index comparison shown begins on January 31, 2000. CNI CHARTER FUNDS | PAGE 17 FEES AND EXPENSES OF THE HIGH YIELD BOND FUND This table describes the fees and expenses you may pay if you buy and hold Institutional Class shares of the High Yield Bond Fund. You pay no sales charges or transaction fees for buying or selling Institutional Class shares of the High Yield Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.75% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.10% * The "Management Fee" is an annual fee, payable monthly out of the High Yield Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE HIGH YIELD BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP INSTITUTIONAL CLASS TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.00%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the High Yield Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the High Yield Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Institutional Class shares of the High Yield Bond 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 High Yield Bond Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $112 $350 $606 $1,340 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 18 management of the funds INVESTMENT MANAGER City National Asset Management, Inc. ("CNAM") provides the Funds with investment management services. CNAM's address is City National Center, 400 North Roxbury Drive, Beverly Hills, California 90210. CNAM is a wholly owned subsidiary of City National Bank ("CNB"), a federally chartered commercial bank founded in the early 1950s with approximately $5.2 billion in assets as of December 31, 2006. CNB is itself a wholly owned subsidiary of City National Corporation, a New York Stock Exchange listed company. CNB has provided trust and fiduciary services, including investment management services, to individuals and businesses for over 40 years. CNB currently provides investment management services to individuals, pension and profit sharing plans, endowments and foundations. As of December 31, 2006, CNB and its affiliates had approximately $48.6 billion in assets under administration, which includes $27.8 billion in assets under management. CNAM received for its investment management services a fee at the annual rate of 0.65% of average daily net assets of the Large Cap Growth Fund, 0.62% of average daily net assets of the Large Cap Value Fund, 0.85% of average daily net assets of the RCB Small Cap Value Fund, 0.40% of average daily net assets of the Corporate Bond Fund, 0.36% of average daily net assets of the Government Bond Fund, 0.16% of average daily net assets of the California Tax Exempt Bond Fund and 0.66% of average daily net assets of the High Yield Bond Fund for the fiscal year ended September 30, 2006. These fees reflect fee waivers or reimbursements of fees waived by CNAM in prior years. A discussion regarding the basis of the Board of Trustees' approval of the Funds' investment advisory agreement with CNAM is available in the Funds' Semi-Annual Report for the most recent fiscal period ended March 31. PORTFOLIO MANAGERS Richard A. Weiss and Brian L. Garbe serve as portfolio managers for the Large Cap Value Fund and Large Cap Growth Fund. Rodney J. Olea and William C. Miller serve as portfolio managers for the Corporate Bond Fund. Rodney J. Olea and Paul C. Single serve as portfolio managers for the Government Bond Fund. Rodney J. Olea and Alan Remedios serve as portfolio managers for the California Tax Exempt Bond Fund. RICHARD A. WEISS is President and Chief Investment Officer of CNAM. Mr. Weiss has nearly two decades of investment management experience and has designed and implemented quantitatively disciplined equity, fixed income, and international investment strategies. Prior to joining the Funds' predecessor investment manager, CNB, in 1999, Mr. Weiss was Executive Vice President and Chief Investment Officer at Sanwa Bank California. Mr. Weiss holds a Master's in Business Administration ("MBA"), with an emphasis in Finance and Econometrics from the University of Chicago, and an undergraduate degree in Finance from The Wharton School at the University of Pennsylvania. BRIAN L. GARBE is Senior Vice President and Director of Research of CNAM. Mr. Garbe has over 15 years of experience in the investment field and currently oversees the creation, analysis and production of asset allocation, sector rotation and stock selection strategies for CNAM. Prior to joining CNB in 1999, Mr. Garbe was Vice President and Director of Research at Sanwa Bank California. Mr. Garbe holds an MBA from the Anderson Graduate School of Management at University of California, Los Angeles ("UCLA") and an undergraduate degree in Applied Mathematics from UCLA. CNI CHARTER FUNDS | PAGE 19 RODNEY J. OLEA is Senior Vice President and Director of Fixed Income of CNAM. Mr. Olea has over 20 years of portfolio management experience and currently oversees the creation, analysis, and management of taxable and tax-free fixed income portfolios and bond selection strategies for CNAM. Mr. Olea has been with CNB since 1994. Mr. Olea has a degree in Economics from UCLA. WILLIAM C. MILLER, JR. is Vice President and Senior Fixed Income Portfolio Manager for CNAM. Mr. Miller has over 10 years of investment management experience and specializes in the research, analysis, and selection of fixed income securities. Prior to joining CNB in 2001, Mr. Miller was Investment Officer with Fiduciary Trust International of California and, from 1995 to 1998, was an Associate with Pacific Investment Management Company. Mr. Miller, a Chartered Financial Analyst, holds a Bachelor's degree with a concentration in Finance from California State University, Fullerton. PAUL C. SINGLE is Vice President and Senior Fixed Income Portfolio Manager for CNAM. Mr. Single has over 23 years of institutional investment management experience and specializes in investment grade taxable fixed income securities. Prior to joining CNB in 2003, Mr. Single was Principal and Portfolio Manager of Wells Capital Management. ALAN REMEDIOS is Vice President and Senior Fixed Income Portfolio Manager for CNAM. Mr. Remedios has over 16 years of investment management experience and specializes in the research, analysis, and selection of fixed income securities for CNAM. Prior to joining CNB in 1999, Mr. Remedios was Vice President and Portfolio Manager at U.S. Trust Company. Mr. Remedios, a Chartered Financial Analyst, holds a degree in Finance from California State Polytechnic University. SUB-ADVISORS REED CONNER & BIRDWELL LLC ("RCB"), a wholly owned subsidiary of City National Corporation, currently serves as the RCB Small Cap Value Fund's sub-advisor, providing investment advisory and portfolio management services pursuant to a sub-advisory agreement with CNAM. RCB's address is 11111 Santa Monica Blvd., Suite 1700, Los Angeles, California 90025. As of December 31, 2006, RCB managed assets of approximately $3.66 billion for individual and institutional investors. RCB and its predecessor have been engaged in the investment advisory business for over 45 years. Jeffrey Bronchick, Executive Vice President, Principal and Chief Investment Officer and Thomas D. Kerr, Principal and Vice President, Portfolio Management and Research, are principally responsible for the management of the RCB Small Cap Value Fund. They have been associated with RCB or its predecessor since 1989 and 1994, respectively. A discussion regarding the basis of the Board of Trustees' approval of CNAM's sub-advisory agreement with RCB is available in the Funds' Semi-Annual Report for the most recent fiscal period ended March 31. HALBIS CAPITAL MANAGEMENT (USA), INC. ("Halbis Capital USA") currently serves as the High Yield Bond Fund's sub-advisor, providing investment advisory and portfolio management services pursuant to a sub-advisory agreement with CNAM. Halbis Capital USA's principal offices are located at 452 Fifth Avenue, New York, NY 10018. It was formed in June, 2005, and is a wholly-owned subsidiary of Halbis Capital Management (UK), Ltd., which in turn is ultimately a part of HSBC Group, plc, one of the world's largest banking and financial services organizations. Halbis Capital USA provides investment advisory services relating to U.S. fixed income, high yield fixed income, emerging markets fixed income and alternative investment products. Halbis Capital USA is one of a number of HSBC Group subsidiaries (collectively referred to as "HSBC Group Investment CNI CHARTER FUNDS | PAGE 20 Businesses") engaged in investment advisory and fund management activities in many countries throughout the world. As of December 31, 2006, HSBC Group Investment Businesses managed assets of approximately $328.5 billion worldwide, and Halbis Capital USA managed assets of approximately $7.6 billion. The High Yield Bond Fund is managed by Richard J. Lindquist, CFA, a Managing Director and the head of the high yield management team at Halbis Capital USA. The high yield management team, including Mr. Lindquist, joined HSBC Investments May 1, 2005. Mr. Lindquist was previously a Managing Director and the head of the high yield management team at Credit Suisse Asset Management, LLC ("CSAM"). He joined CSAM in 1995 as a result of the acquisition of CS First Boston Investment Management, where he had been since 1989. Previously, he managed high yield portfolios at Prudential Insurance Company of America and a high yield mutual fund at T. Rowe Price Associates. Mr. Lindquist holds a BS in Finance from Boston College and an MBA in Finance from the University of Chicago Graduate School of Business. A discussion regarding the basis of the Board of Trustees' approval of CNAM's sub-advisory agreement with Halbis Capital USA is available in the Funds' Annual Report for the fiscal year ended September 30, 2005. OTHER SUB-ADVISORS. Under current law, the appointment of a new sub-advisor generally would require the approval of a Fund's shareholders. Although CNAM does not currently intend to replace any of the current sub-advisors, the Funds have received an exemptive order from the Securities and Exchange Commission (the "SEC"). This order would permit CNAM, subject to certain conditions required by the SEC, to replace any sub-advisor, other than RCB, with a new unaffiliated, third-party sub-advisor with the approval of the Board of Trustees but without obtaining shareholder approval. Shareholders, however, will be notified of any change in any of the sub-advisors and be provided with information regarding the new sub-advisor. An order from the SEC granting this exemption benefits shareholders by enabling the Funds to operate in a less costly and more efficient manner. CNAM has the ultimate responsibility to monitor any sub-advisors and recommend their hiring, termination and replacement. CNAM may also terminate any sub-advisor and assume direct responsibility for the portfolio management of that Fund with the approval of the Board of Trustees but without obtaining shareholder approval. ADMINISTRATOR SEI Investments Global Funds Services (the "Administrator") serves as administrator and fund accountant to the Funds. The Administrator is located at One Freedom Valley Drive, Oaks, Pennsylvania 19456. DISTRIBUTOR SEI Investments Distribution Co. (the "Distributor") serves as the Funds' distributor pursuant to a distribution agreement with the Funds. The Distributor is located at One Freedom Valley Drive, Oaks, Pennsylvania 19456 and can be reached at 1-888-889-0799. SHAREHOLDER SERVICING FEES The Funds have adopted a shareholder service plan that allows the Funds to pay fees to broker-dealers and other financial intermediaries (including CNB) for services provided to Institutional Class shareholders. Because these fees are paid out of the Funds' assets continuously, over time these fees will increase the cost of your investment. Shareholder servicing fees under that plan, as a percentage of average daily net assets, are 0.25% for Institutional Class shares of the Funds, a portion or all of which may be received by CNB or its affiliates. CNI CHARTER FUNDS | PAGE 21 additional investment strategies and related risks The following risks of the Funds referred to below are related to investment strategies that are material but not fundamental strategies of the Funds. These risks are in addition to the principal risks of the Funds discussed above. See risks described with respect to each Fund under the section entitled "The Funds." FOREIGN SECURITIES - The Large Cap Growth Fund, the Large Cap Value Fund, the RCB Small Cap Value Fund and the High Yield Bond Fund may invest in foreign securities. Foreign investments may be subject to risks that are not typically associated with investing in domestic companies. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign stock markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. These foreign securities may be denominated in foreign currencies, whose value may decline against the U.S. dollar. DEFENSIVE INVESTMENTS - The strategies described in this prospectus are those the Funds use under normal circumstances. At the discretion of each Fund's portfolio managers, we may invest up to 100% of the Fund's assets in cash or cash equivalents for temporary defensive purposes. No Fund is required or expected to take such a defensive posture. But if used, such a stance may help a Fund minimize or avoid losses during adverse market, economic or political conditions. During such a period, a Fund may not achieve its investment objective. For example, should the market advance during this period, a Fund may not participate as much as it would have if it had been more fully invested. PORTFOLIO TURNOVER - Each Fund will sell a security when its portfolio manager believes it is appropriate to do so, regardless of how long a Fund has owned that security. Buying and selling securities generally involves some expense to a Fund, such as commissions paid to brokers and other transaction costs. By selling a security, a Fund may realize taxable capital gains that it will subsequently distribute to shareholders. Generally speaking, the higher a Fund's annual portfolio turnover, the greater its brokerage costs and the greater the likelihood that it will realize taxable capital gains. On the other hand, a Fund may from time to time realize commission costs in order to engage in tax minimization strategies if the result is a greater enhancement to the value of a Fund share than the transaction cost to achieve it. Increased brokerage costs may adversely affect a Fund's performance. Also, unless you are a tax-exempt investor or you purchase shares through a tax-deferred account, the distribution of capital gains may affect your after-tax return. Annual portfolio turnover of 100% or more is considered high. SECTOR CONCENTRATION - From time to time a Fund may invest a significant portion of its total assets in various industries in one or more sectors of the economy. To the extent a Fund's assets are invested in a sector of the economy, the Fund will be subject to market and economic factors impacting companies in that sector. SMALLER CAPITALIZED COMPANIES - The RCB Small Cap Value Fund will invest in smaller capitalized companies. CNAM believes that smaller capitalized companies generally have greater earnings and sales growth potential than larger capitalized companies. The level of risk will be increased to the extent that a Fund has significant exposure to smaller capitalized or unseasoned companies (those with less than a three-year operating history). Investments in smaller capitalized companies may involve greater risks, such as limited product lines, markets and financial or managerial resources. In addition, the securities of smaller capitalized companies may have few market makers, wider spreads between their quoted bid and asked prices, and lower trading volume, resulting in greater price volatility and less liquidity than the securities of larger capitalized companies. CNI CHARTER FUNDS | PAGE 22 how to buy, sell and exchange shares Here are the details you should know about how to purchase, sell (sometimes called "redeem") and exchange shares: Shares of the Funds are offered only through approved broker-dealers or other financial institutions (each an "Authorized Institution"). Your Authorized Institution is responsible for maintaining your individual account records, processing your order correctly and promptly, keeping you advised regarding the status of your individual account, confirming your transactions and ensuring that you receive copies of the Funds' prospectuses. You will also generally have to address your correspondence or questions regarding the Funds to your Authorized Institution. HOW TO BUY SHARES To purchase shares of a Fund, you should contact your Authorized Institution and follow its procedures, including acceptable methods of payment and deadlines for receipt by the Authorized Institution of your share purchase instructions. Your Authorized Institution may charge a fee for its services, in addition to the fees charged by the Funds. A Fund may reject any purchase order if it is determined that accepting the order would not be in the best interest of the Fund or its shareholders. FOREIGN INVESTORS The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. CUSTOMER IDENTIFICATION AND VERIFICATION To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. What this means to you: when you open an account, your Authorized Institution will ask you for certain information, which includes your name, address, date of birth, and other information that will allow us to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account. Please contact your Authorized Institution for more information. The Funds are required by law to reject your investment if the required identifying information is not provided. In certain instances, the Authorized Institution is required to collect documents on behalf of the Funds to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity. Attempts to collect missing information required on the application will be performed by contacting you. If this information is unable to be obtained within a timeframe established in the sole discretion of the Funds, your application will be rejected. Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the net asset value per share next-determined after receipt of your application in proper form. However, the Funds reserve the right to close your account if it is unable to verify your identity. Attempts to verify your identity will be performed within a timeframe established in the sole discretion of the Funds. If the Funds are unable to verify your identity, the Funds reserve the right to liquidate your account at the then-current day's price and remit proceeds to you via check. The Funds reserve the CNI CHARTER FUNDS | PAGE 23 further right to hold your proceeds until clearance of your original check. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications. ANTI-MONEY LAUNDERING PROGRAM Customer identification and verification is part of the Funds' overall obligation to deter money laundering under Federal law. The Funds have adopted an Anti-Money Laundering Compliance Program designed to prevent the Funds from being used for money laundering or the financing of terrorist activities. In this regard, the Funds reserve the right to (i) refuse, cancel or rescind any purchase or exchange order, (ii) freeze any account and/or suspend account services or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Funds or in cases when the Funds are requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds. HOW TO SELL SHARES You may sell your shares only through your Authorized Institution. To sell shares of a Fund, you should contact your Authorized Institution and follow its procedures, including deadlines for receipt by the Authorized Institution of your share redemption instructions. Your Authorized Institution may charge a fee for its services, in addition to the fees charged by the Funds. Normally, the Funds will make payment on your redemption request as promptly as possible after receiving your request, but it may take up to seven business days. We generally pay sale (redemption) proceeds in cash. However, under conditions where cash redemptions are detrimental to a Fund and its shareholders, we reserve the right to make redemptions in readily marketable securities rather than cash (a "redemption in kind"). It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would probably have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. The Funds may suspend your right to redeem your shares if the New York Stock Exchange (the "NYSE") or the Federal Reserve restricts trading, the SEC declares an emergency or for other reasons, as permitted by federal securities laws. Please see the SAI for a more detailed discussion. HOW TO EXCHANGE SHARES You may exchange Institutional Class shares of a Fund for Institutional Class shares of any other CNI Charter Fund in which you are eligible to invest on any business day. When you exchange shares, you are really selling your shares and buying other shares, so your sale price and purchase price will be based on the price or net asset value ("NAV") of the relevant Funds next calculated after we receive your exchange request. To exchange shares of a Fund, you should contact your Authorized Institution. FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES The Funds' Board of Trustees has adopted policies and procedures with respect to frequent purchases and redemptions of Fund shares. The Funds discourage short-term or other excessive trading (such as market timing) into and out of the Funds because such trading may harm performance by disrupting portfolio management strategies and by increasing expenses. The Funds do not accommodate frequent purchases and redemptions of Fund shares and reserve the right to restrict, reject or cancel, CNI CHARTER FUNDS | PAGE 24 without any prior notice, any purchase or exchange order, including transactions representing excessive trading and transactions accepted by any shareholder's Authorized Institution. SEI Investments Management Corporation (d.b.a. SEI Institutional Transfer Agency), transfer agent to the Funds (the "Transfer Agent"), has procedures in place designed to detect and prevent market timing activity. CNAM also participates in the enforcement of the Funds' market timing prevention policy by monitoring transaction activity in the Funds. CNAM and the Transfer Agent currently monitor for various patterns in trading activity in client accounts, including omnibus accounts, such as a purchase and sale of shares of a Fund (a "round trip") within 30 days, multiple round trips within several months, and four exchanges per quarter. These parameters are subject to change. Shareholders seeking to engage in excessive trading practices may use a variety of strategies to avoid detection and, despite the efforts of the Funds to prevent excessive trading, there is no guarantee that the Funds or their transfer agents will be able to identify such shareholders or curtail their trading practices. The ability of the Funds and their agents to detect and curtail excessive trading practices may also be limited by operational systems and technological limitations. In addition, the Funds receive purchase, exchange and redemption orders through financial intermediaries and cannot always know or reasonably detect excessive trading which may be facilitated by these intermediaries or by their use of omnibus account arrangements. However, the Funds' distributor has received assurances from each financial intermediary which sells shares of the Funds that it has procedures in place to monitor for excessive trading. GENERAL INFORMATION How and when we calculate each Fund's NAV determines the price at which you will buy or sell shares. We calculate the NAV of each Fund as of the close of trading on the NYSE every day the NYSE is open. Shares may be purchased or sold on any day that the NYSE is open for business. The Funds reserve the right to open for business on days the NYSE is closed but the Federal Reserve Bank of New York is open. Shares, however, cannot be purchased or sold by Federal Reserve wire on days when either the NYSE or Federal Reserve is closed. The NYSE usually closes at 4:00 p.m. Eastern time on weekdays, except for holidays. On any business day when the Bond Market Association (the "BMA") recommends that the securities markets close early, each of the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund and the High Yield Bond Fund (each a "Bond Fund") reserves the right to close at or prior to the BMA recommended closing time. If a Bond Fund does so, it will not grant same business day credit for purchase and redemption orders received after the Bond Fund's closing time and credit will be given to the next business day. If we receive your purchase, redemption or exchange order from your Authorized Institution before close of trading on the NYSE, we will price your order at that day's NAV. If we receive your order after close of trading on the NYSE, we will price your order at the next day's NAV. In some cases, however, you may have to transmit your request to your Authorized Institution by an earlier time in order for your request to be effective that day. This allows your Authorized Institution time to process your request and transmit it to the Funds before close of trading on the NYSE. CNI CHARTER FUNDS | PAGE 25 HOW WE CALCULATE NAV NAV for one share of a Fund is the value of that share's portion of the net assets (i.e., assets less liabilities) of that Fund. We calculate each Fund's NAV by dividing the total net value of its assets by the number of outstanding shares. We base the value of each Fund's investments on its market value, usually the last price reported for each security before the close of the market that day. A market price may not be available for securities that trade infrequently. If market prices are not readily available or considered to be unreliable, fair value prices may be determined by the Funds' Fair Value Committee in good faith using methods approved by the Board of Trustees. For instance, if trading in a security has been halted or suspended or a security has been delisted from a national exchange, a security has not been traded for an extended period of time, or a significant event with respect to a security occurs after the close of the market or exchange on which the security principally trades and before the time the Funds calculate NAV, the Fair Value Committee will determine the security's fair value. In determining the fair value of a security, the Fair Value Committee will consider CNAM's (or the relevant sub-advisor's) valuation recommendation and information supporting the recommendation, including factors such as the type of security, last trade price, fundamental analytical data relating to the security, forces affecting the market in which the security is purchased and sold, the price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant factors. Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value to price securities may value those securities higher or lower than another fund using market quotations or fair value to price the same securities. There can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. The NAV may vary for different share classes of the same Fund. More details about how we calculate the NAV for each Fund are in the SAI. PURCHASE AND ACCOUNT BALANCE MINIMUMS There are no minimum purchase or minimum shareholder account balance requirements; however, you will have to comply with the purchase and account balance minimums of your Authorized Institution. The Funds may require each Authorized Institution to meet certain aggregate investment levels before it may open an account with the Funds on behalf of its customers. Contact your Authorized Institution for more information. CNI CHARTER FUNDS | PAGE 26 dividends and taxes DIVIDENDS For the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund and the High Yield Bond Fund, we will declare investment income daily and distribute it monthly as a dividend to shareholders. For the Large Cap Growth Fund and the Large Cap Value Fund, we will declare and distribute investment income, if any, quarterly as a dividend to shareholders. For the RCB Small Cap Value Fund, we will declare and distribute investment income, if any, annually as a dividend to shareholders. The Funds make distributions of capital gains, if any, at least annually. If you own Fund shares on a Fund's record date, you will be entitled to receive the distribution. Following their fiscal year end (September 30), the Funds may make additional distributions to avoid the imposition of a tax. We will automatically reinvest your dividends and capital gains distributions in additional full or fractional shares, unless you instruct your Authorized Institution in writing prior to the date of the dividend or distribution of your election to receive payment in cash. Your election will be effective for all dividends and distributions paid after your Authorized Institution receives your written notice. To cancel your election, please send your Authorized Institution written notice. Proceeds from dividends or distributions will normally be wired to your Authorized Institution on the business day after dividends or distributions are credited to your account. TAXES PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below, we have summarized some important tax issues that affect the Funds and their shareholders. This summary is based on current tax laws, which may change. Each Fund will distribute substantially all of its net investment income and capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, unless you invest solely through a tax-advantaged account such as an IRA or a 401(k) plan. Distributions you receive from a Fund may be taxable whether or not you reinvest them in the Funds. Income distributions are generally taxable at ordinary income tax rates. Capital gains distributions are generally taxable at the rates applicable to capital gains. EACH SALE OR EXCHANGE OF FUND SHARES IS A TAXABLE EVENT. Capital gains may be taxable at different rates depending upon the length of time a Fund holds its assets. We will inform you about the character of any dividends and capital gains upon payment. After the close of each calendar year, we will advise you of the tax status of distributions. Any redemption of a Fund's shares or any exchange of a Fund's shares for another Fund will be treated as a sale, and any gain on the transaction may be taxable. You must provide your Authorized 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 28%. CNI CHARTER FUNDS | PAGE 27 If you plan to purchase shares of a Fund, check if it is planning to make a distribution in the near future. If you do not check, and you buy shares of the Fund just before a distribution, you will pay full price for the shares but receive a portion of your purchase price back as a taxable distribution. This is called "buying a dividend." Unless you hold the Fund in a tax-deferred account, you will have to include the distribution in your gross income for tax purposes, even though you may have not participated in the Fund's appreciation. The California Tax Exempt Bond Fund intends to continue paying what the Internal Revenue Code of 1986, as amended (the "Code"), calls "exempt-interest dividends" to shareholders by maintaining, as of the close of each quarter of its taxable year, at least 50% of the value of its assets in California municipal bonds. If that Fund satisfies this requirement, any distributions paid to shareholders from its net investment income will be exempt from federal income tax, to the extent that that Fund derives its net investment income from interest on municipal bonds. Any distributions paid from other sources of net investment income, such as market discounts on certain municipal bonds, will be treated as ordinary income by the Code. More information about taxes is contained in the SAI. CNI CHARTER FUNDS | PAGE 28 financial highlights The following financial highlights tables are intended to help you understand the Funds' financial performance. For each of the Funds, information for the years or periods indicated below has been audited by KPMG LLP, whose report, along with the Funds' financial statements, are included in the Funds' 2006 Annual Report (available upon request; see the back cover of this Prospectus). Information presented in the financial highlights tables is for an Institutional Class share outstanding throughout each period. The total return figures in the tables represent the rate an investor would have earned (or lost) on an Institutional Class investment in each Fund (assuming reinvestment of all dividends and distributions). LARGE CAP GROWTH FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003(1) Sept. 30, 2002 - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 7.43 $ 6.76 $ 6.37 $ 5.25 $ 6.36 - -------------------------------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) 0.02 0.04 0.01 0.01 -- Net Realized and Unrealized Gains (Losses) on Securities 0.32 0.67 0.38 1.12 (1.11) - -------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.34 0.71 0.39 1.13 (1.11) - -------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.02) (0.04) (0.00)(2) (0.01) -- - -------------------------------------------------------------------------------------------------------------------------------- Total Dividends (0.02) (0.04) (0.00)(2) (0.01) -- - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 7.75 $ 7.43 $ 6.76 $ 6.37 $ 5.25 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 4.59% 10.55% 6.20% 21.51% (17.45%) Net Assets End of Period (000's) $ 35,842 $ 34,164 $ 25,575 $ 22,249 $ 14,195 Ratio of Expenses to Average Net Assets(3) 0.99% 0.98% 1.01% 1.05% 1.05% Ratio of Net Investment Income (Loss) to Average Net Assets 0.27% 0.57% 0.10% 0.16% (0.04%) Ratio of Expenses to Average Net Assets (Excluding Waivers & Recaptured Fees) 1.00% 1.00% 1.01% 1.03% 1.09% Portfolio Turnover Rate 34% 27% 50% 43% 31% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Amount represents less than $0.01 per share. (3) Ratio includes waivers and previously waived investment advisory fees recovered. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 29 LARGE CAP VALUE FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 9.54 $ 8.77 $ 7.41 $ 6.04 $ 7.63 - -------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.13 0.10 0.08 0.07 0.07 Net Realized and Unrealized Gains (Losses) on Securities 1.21 1.13 1.36 1.37 (1.47) - -------------------------------------------------------------------------------------------------------------------------------- Total from Operations 1.34 1.23 1.44 1.44 (1.40) - -------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.13) (0.10) (0.08) (0.07) (0.07) Distributions from Realized Capital Gains (0.39) (0.36) -- -- (0.12) - -------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.52) (0.46) (0.08) (0.07) (0.19) - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.36 $ 9.54 $ 8.77 $ 7.41 $ 6.04 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 14.50% 14.39% 19.40% 24.03% (18.88%) Net Assets End of Period (000's) $ 92,946 $ 42,974 $ 38,344 $ 33,016 $ 23,325 Ratio of Expenses to Average Net Assets(2) 0.96% 0.96% 0.97% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets 1.36% 1.12% 0.92% 1.12% 0.90% Ratio of Expenses to Average Net Assets (Excluding Waivers & Recaptured Fees) 0.97% 0.97% 0.97% 1.00% 1.05% Portfolio Turnover Rate 31% 34% 36% 39% 42% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment advisory fees recovered. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 30 RCB SMALL CAP VALUE FUND Year ended Year ended Year ended Year ended Period ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003(1) Sept. 30, 2002(2) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 28.58 $ 27.30 $ 21.92 $ 15.06 $ 17.11 - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) 0.06 0.07 0.06 (0.04) (0.07) Net Realized and Unrealized Gains (Losses) on Securities 0.05 2.58 5.40 6.90 (1.98) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.11 2.65 5.46 6.86 (2.05) - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.07) -- -- -- -- Distributions from Realized Capital Gains (0.37) (1.37) (0.08) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.44) (1.37) (0.08) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 28.25 $ 28.58 $ 27.30 $ 21.92 $ 15.06 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 0.40% 9.87% 24.97% 45.55% (11.98%) Net Assets End of Period (000's) $ 13,435 $ 13,975 $ 8,955 $ 6,236 $ 1,768 Ratio of Expenses to Average Net Assets(3)(4) 1.20% 1.18% 1.21% 1.24% 1.24% Ratio of Net Investment Income (Loss) to Average Net Assets(3) 0.20% 0.26% 0.23% (0.20%) (0.46%) Ratio of Expenses to Average Net Assets (Excluding Waivers & Recaptured Fees)(3) 1.21% 1.20% 1.20% 1.24% 1.28% Portfolio Turnover Rate 66% 41% 40% 65% 39% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) RCB Small Cap Value Fund Institutional Class shares commenced operations on October 3, 2001. (3) Annualized for periods less than one year. (4) Ratio includes waivers and previously waived investment advisory fees recovered. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 31 CORPORATE BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 10.27 $ 10.60 $ 10.89 $ 10.65 $ 10.72 - -------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.42 0.40 0.41 0.46 0.53 Net Realized and Unrealized Gains (Losses) on Securities (0.10) (0.27) (0.18) 0.24 0.09 - -------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.32 0.13 0.23 0.70 0.62 - -------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.42) (0.40) (0.41) (0.46) (0.53) Distributions from Realized Capital Gains -- (0.06) (0.11) -- (0.16) - -------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.42) (0.46) (0.52) (0.46) (0.69) - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.17 $ 10.27 $ 10.60 $ 10.89 $ 10.65 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 3.19% 1.26% 2.15% 6.74% 6.06% Net Assets End of Period (000's) $ 55,290 $ 51,193 $ 47,080 $ 42,256 $ 40,807 Ratio of Expenses to Average Net Assets(2) 0.75% 0.75% 0.75% 0.75% 0.75% Ratio of Net Investment Income to Average Net Assets 4.14% 3.80% 3.82% 4.30% 5.04% Ratio of Expenses to Average Net Assets (Excluding Waivers) 0.75% 0.76% 0.79% 0.78% 0.82% Portfolio Turnover Rate 25% 25% 57% 66% 55% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment advisory fees recovered. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 32 GOVERNMENT BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003(1) Sept. 30, 2002 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 10.40 $ 10.62 $ 10.93 $ 11.02 $ 10.80 - --------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.41 0.31 0.25 0.36 0.44 Net Realized and Unrealized Gains (Losses) on Securities (0.12) (0.16) (0.17) (0.07) 0.34 - --------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.29 0.15 0.08 0.29 0.78 - --------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.41) (0.31) (0.25) (0.37) (0.44) Distributions from Realized Capital Gains -- (0.06) (0.14) (0.01) (0.12) - --------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.41) (0.37) (0.39) (0.38) (0.56) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.28 $ 10.40 $ 10.62 $ 10.93 $ 11.02 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 2.89% 1.42% 0.81% 2.68% 7.53% Net Assets End of Period (000's) $ 35,671 $ 28,132 $ 20,901 $ 15,596 $ 14,502 Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% Ratio of Net Investment Income to Average Net Assets 4.04% 2.98% 2.39% 3.26% 4.11%(2) Ratio of Expenses to Average Net Assets (Excluding Waivers) 0.78% 0.79% 0.81% 0.81% 0.86% Portfolio Turnover Rate 62% 58% 169% 54% 70% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratios reflect the impact of significant changes in average net assets and the effects of annualization. CNI CHARTER FUNDS | PAGE 33 CALIFORNIA TAX EXEMPT BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 10.26 $ 10.41 $ 10.60 $ 10.83 $ 10.50 - --------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.29 0.28 0.27 0.31 0.36 Net Realized and Unrealized Gains (Losses) on Securities 0.03 (0.11) (0.06) (0.04) 0.41 - --------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.32 (0.17) 0.21 0.27 0.77 - --------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.29) (0.28) (0.27) (0.31) (0.35) Distributions from Realized Capital Gains (0.04) (0.04) (0.13) (0.19) (0.09) - --------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.33) (0.32) (0.40) (0.50) (0.44) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.25 $ 10.26 $ 10.41 $ 10.60 $ 10.83 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 3.18% 1.65% 2.00% 2.63% 7.58% Net Assets End of Period (000's) $ 26,074 $ 22,768 $ 17,789 $ 14,546 $ 16,147 Ratio of Expenses to Average Net Assets(2) 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of Net Investment Income to Average Net Assets 2.85% 2.70% 2.55% 2.91% 3.33% Ratio of Expenses to Average Net Assets (Excluding Waivers) 0.62% 0.63% 0.65% 0.65% 0.70% Portfolio Turnover Rate 0.43% 54% 51% 68% 90% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment advisory fees recovered. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 34 HIGH YIELD BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 9.04 $ 9.31 $ 8.95 $ 8.16 $ 8.57 - --------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.68 0.71 0.72 0.76 0.83 Net Realized and Unrealized Gains (Losses) on Securities (0.08) (0.27) 0.36 0.79 (0.40) - --------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.60 0.44 1.08 1.55 0.43 - --------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.68) (0.71) (0.72) (0.76) (0.84) - --------------------------------------------------------------------------------------------------------------------------------- Total Dividends (0.68) (0.71) (0.72) (0.76) (0.84) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 8.96 $ 9.04 $ 9.31 $ 8.95 $ 8.16 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 6.90% 4.85% 12.47% 19.75% 4.80% Net Assets End of Period (000's) $ 20,887 $ 22,588 $ 22,860 $ 13,387 $ 10,020 Ratio of Expenses to Average Net Assets(2) 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets 7.58% 7.71% 7.87% 8.84% 9.48% Ratio of Expenses to Average Net Assets (Excluding Waivers) 1.10% 1.11% 1.14% 1.13% 1.18% Portfolio Turnover Rate 23% 46% 35% 36% 30% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment advisory fees recovered. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 35 important terms to know QUALITY -- the credit rating given to a security by a nationally recognized statistical rating organization. YIELD -- the interest rate you would receive if you kept your investment in a Fund for a year. It is based on the current interest rate for a trailing seven-day period. EFFECTIVE YIELD -- the interest rate, compounded weekly, you would receive if you kept your investment in a Fund for a year. DURATION -- the sensitivity of a debt security to changes in interest rates. It takes into account both interest payments and payment at maturity. S&P 500/CITIGROUP GROWTH INDEX -- measures the performance of all of the stocks in the Standard & Poor's 500 that are classified as growth stocks. A proprietary methodology is used to score constituents, which are weighted according to their market capitalization. S&P 500/CITIGROUP VALUE INDEX -- measures the performance of all of the stocks in the Standard & Poor's 500 that are classified as value stocks. A proprietary methodology is used to score constituents, which are weighted according to their market capitalization. RUSSELL 2000 INDEX -- measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which measures the performance of the 3,000 largest U.S. companies based on total market capitalization. RUSSELL 2000 VALUE INDEX -- measures the performance of those Russell 2000 companies that have low price-to-book ratios and low forecasted growth values. The Index is reconstituted annually effective the last Friday of June each year. The Index is designed so that approximately 50% of the Russell 2000 market capitalization is in the Value Index. RUSSELL 2500 VALUE INDEX -- measures the performance of those Russell 2500 companies (the 2,500 smallest companies in the Russell 3000 Index) that have low price-to-book ratios and low forecasted growth values. The Index is rebalanced annually effective the last Friday of June each year. The Index is designed so that approximately 50% of the Russell 2500 market capitalization is in the Value Index. LEHMAN INTERMEDIATE U.S. CORPORATE INDEX -- comprised of fixed income securities issued by corporations which have a fixed rate coupon, have between 1 and 10 years to maturity, at least $150 million par outstanding, an investment grade rating from Moody's Investors Service (Baa3 or better), and are publicly registered. The composition of the Index is rebalanced monthly to include the universe of securities meeting the above criteria. LEHMAN INTERMEDIATE U.S. GOVERNMENT BOND INDEX -- comprised of securities issued by the U.S. Government and U.S. Government agencies which have a fixed rate coupon have between 1 and 10 years to maturity, and at least $150 million par outstanding. The composition of the Index is rebalanced monthly to include the universe of securities meeting the above criteria. LEHMAN CA INTERMEDIATE-SHORT MUNICIPAL INDEX -- comprised of California state-specific municipal issues which have a fixed rate coupon, have between 1 and 10 years to maturity, an investment grade rating from Moody's Investors Service (Baa3 or better), and are publicly registered. The individual issues must also have at least $5 million par outstanding and be part of a deal of $50 million or more. The composition of the Index is rebalanced monthly to include the universe of securities meeting the above criteria. CITIGROUP HIGH YIELD MARKET INDEX -- comprised of cash-pay deferred-interest and Rule 144A bonds with remaining maturities of at least one year and a minimum amount outstanding of U.S. $100 million The issuers are domiciled in either the United States or Canada. CNI CHARTER FUNDS | PAGE 36 privacy principles CNI Charter Funds and its affiliates know our shareholders expect and rely upon us to maintain the confidentiality and privacy of all of the information about them in our possession and control. Maintaining the trust and confidence of our shareholders is our highest priority. We have adopted and published the CNI Charter Funds Statement of Privacy Principles to guide our conduct when we collect, use, maintain or release shareholder information and to assist our shareholders and others to better understand our privacy practices in general and as they apply to nonpublic personal information in particular. Certain information regarding the Funds' Privacy Principles is summarized below. We will obey all applicable laws respecting the privacy of nonpublic personal information and will comply with the obligations of the law respecting nonpublic personal information provided to us. We collect, use and retain the information, including nonpublic personal information, about our shareholders and prospective shareholders that we believe is necessary for us to understand and better meet their financial needs and requests, to administer and maintain their accounts, to provide them with our products and services, to anticipate their future needs, to protect them and us from fraud or unauthorized transactions, and to meet legal requirements. We may share information regarding our shareholders with our affiliates as permitted by law because some of our products and services are delivered through or in conjunction with our affiliates. We instruct our colleagues to limit the availability of all shareholder information within our organization to those colleagues responsible for servicing the needs of the shareholder and those colleagues who reasonably need such information to perform their duties and as required or permitted by law. We do provide shareholder information, including nonpublic personal information, to our vendors and other outside service providers whom we use when appropriate or necessary to perform and enhance our shareholder services. When we provide shareholder information to anyone outside our organization, we only do so as required or permitted by law. We require all of our vendors and service providers who receive shareholder information from us to agree to maintain the information in confidence, to limit the use and dissemination of the information to the purpose for which it is provided and to abide by the law. To the extent permitted by law, we undertake to advise a shareholder of any government or other legal process served on us requiring disclosure of information about that shareholder. Except as stated above, we limit our disclosure of nonpublic personal information to third parties to the following circumstances: (i) when requested to do so by the shareholder; (ii) when necessary, in our opinion, to effect, administer, or enforce a shareholder initiated transaction; and (iii) when required or permitted to do so by law or regulation, including authorized requests from government agencies and if we are the victim of fraud or otherwise suffer loss caused by the unlawful act of the shareholder. A full copy of CNI Charter Funds' Statement of Privacy Principles is available at WWW.CNICHARTERFUNDS.COM. Should you have any questions regarding the Funds' Privacy Principles, please contact your investment professional or the Funds at 1-888-889-0799. CNI CHARTER FUNDS | PAGE 37 For More Information CNI CHARTER FUNDS 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). In the Funds' Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Additional information about the Funds' investments is available in the Funds' 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 Funds may be reviewed and copied: o at the SEC's Public Reference Room in Washington, D.C. at 1-202-942-8090; o on the EDGAR database on the SEC's Internet site at www.sec.gov; or o by written request (including duplication fee) to the Public Reference Section of the SEC, Washington, D.C. 20549-6009 or by electronic request at publicinfo@sec.gov. For the current seven-day yield, or if you have questions about the Funds, please call 1-888-889-0799. The Funds' Investment Company Act file number: 811-07923. CNI-PS-004-0600 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS(SM) [LOGO OMITTED](R) [GRAPHIC OMITTED] Class A Large Cap Growth Equity Fund Large Cap Value Equity Fund RCB Small Cap Value Fund Corporate Bond Fund Government Bond Fund California Tax Exempt Bond Fund High Yield Bond Fund PROSPECTUS DATED JANUARY 31, 2007 - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] CNI CHARTER FUNDS(SM) [LOGO OMITTED](R) PROSPECTUS DATED JANUARY 31, 2007 Class A Large Cap Growth Equity Fund Large Cap Value Equity Fund RCB Small Cap Value Fund Corporate Bond Fund Government Bond Fund California Tax Exempt Bond Fund High Yield Bond Fund INVESTMENT MANAGER: City National Asset Management, Inc. - -------------------------------------------------------------------------------- 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 INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. MUTUAL FUND SHARES ARE NOT BANK DEPOSITS, NOR ARE THEY OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY CITY NATIONAL BANK. INVESTING IN MUTUAL FUNDS INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. table of contents THE FUNDS Large Cap Growth Equity Fund (the "Large Cap Growth Fund") ..........................................1 Large Cap Value Equity Fund (the "Large Cap Value Fund") ...........................................3 RCB Small Cap Value Fund ..................................................5 Corporate Bond Fund .......................................................8 Government Bond Fund .....................................................10 California Tax Exempt Bond Fund ..........................................13 High Yield Bond Fund .....................................................16 MANAGEMENT OF THE FUNDS ......................................................19 ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS ...........................23 HOW TO BUY, SELL AND EXCHANGE SHARES .........................................24 DIVIDENDS ....................................................................27 TAXES ........................................................................28 FINANCIAL HIGHLIGHTS .........................................................29 IMPORTANT TERMS TO KNOW ......................................................36 PRIVACY PRINCIPLES ...........................................................37 FOR MORE INFORMATION .................................................back cover 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 Funds described herein should request the SAI and review it before purchasing shares. This Prospectus offers Class A shares of the Large Cap Growth Fund, the Large Cap Value Fund, the RCB Small Cap Value Fund, the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund and the High Yield Bond Fund (each a "Fund" and together, the "Funds"), series of CNI Charter Funds. Class A shares are intended for individual investors, partnerships, corporations, and other accounts that have diversified investment needs. The Funds offer other classes of shares which are subject to the same management fees and other expenses but may be subject to different distribution fees, shareholder servicing fees and/or sales loads. large cap growth fund OUR GOAL The Large Cap Growth Fund seeks to provide capital appreciation by investing in large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations with the potential for growth. The goal of the Large Cap Growth Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio at least 80% of which consists of equity securities of large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations. Large corporations are defined for this purpose as companies with market capitalizations at the time of purchase in the range of those market capitalizations of companies included in the S&P 500/Citigroup Growth Index (over time the range varies, and was $1.3 billion to $427 billion as of December 31, 2006). We use a combination of quantitative and fundamental analysis to select companies with share price growth potential that may not be recognized by the market at large. Although the Large Cap Growth Fund is not an index fund, we seek to manage the portfolio's overall risk characteristics to be similar to those of the S&P 500/Citigroup Growth Index. PRINCIPAL RISKS OF INVESTING IN THE LARGE CAP GROWTH FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goal. The Large Cap Growth Fund will expose you to risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - By investing in stocks, the Large Cap Growth Fund may expose you to a sudden decline in a holding's share price or an overall decline in the stock market. In addition, as with any stock fund, the value of your investment will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The Large Cap Growth Fund is also subject to the risk that its principal market segment, large capitalization growth stocks, may underperform other equity market segments or the market as a whole. FOREIGN SECURITIES - Foreign stocks tend to be more volatile than U.S. stocks, and are subject to risks that are not typically associated with domestic stocks. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Class A shares of the Large Cap Growth Fund for the indicated periods. Of course, the Large Cap Growth Fund's past performance (before and after taxes) does not necessarily indicate how the Large Cap Growth Fund will perform in the future. CNI CHARTER FUNDS | PAGE 1 This bar chart shows the performance of the Large Cap Growth Fund's Class A shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] -10.25% -22.28% 22.96% 5.74% 2.81% 8.41% ------------------------------------------------------------------------ 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 13.43% -14.85% (Q4 2001) (Q2 2002) This table shows the Large Cap Growth Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of companies similar to those held by the Fund. Since Large Cap Growth Fund One Year Five Years Inception - -------------------------------------------------------------------------------- Return Before Taxes 8.41% 2.41% -3.01%(3) Return After Taxes on Distributions(1) 8.39% 2.39% -3.02%(3) Return After Taxes on Distributions and Sale of Fund Shares(1) 5.46% 2.05% -2.52%(3) S&P 500/Citigroup Growth Index(2) 11.01% 1.87% -3.38%(4) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) Since January 14, 2000. Class A shares commenced operations on March 28, 2000. Prior to March 28, 2000, performance for Class A shares is based on the performance of the Institutional Class shares of the Large Cap Growth Fund. Institutional Class shares, which were first offered on January 14, 2000, are not offered in this prospectus. However, because they are invested in the same portfolio of securities, the annual returns for the two classes would be substantially similar. The performance of the Institutional Class shares does not reflect the Class A shares' Rule 12b-1 fees and expenses. With those adjustments, performance would be lower than as shown above. (4) The index comparison shown begins on January 31, 2000. FEES AND EXPENSES OF THE LARGE CAP GROWTH FUND This table describes the fees and expenses you may pay if you buy and hold Class A shares of the Large Cap Growth Fund. You pay no sales charges or transaction fees for buying or selling Class A shares of the Large Cap Growth Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.65% Distribution (12b-1) Fees 0.25% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.25% * The "Management Fee" is an annual fee, payable monthly out of the Large Cap Growth Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE LARGE CAP GROWTH FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP CLASS A TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.30%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Large Cap Growth Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Large Cap Growth Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Class A shares of the Large Cap Growth 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 Large Cap Growth Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $127 $397 $686 $1,511 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 2 large cap value fund OUR GOALS The Large Cap Value Fund seeks to provide capital appreciation and moderate income consistent with current returns available in the marketplace by investing in large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations which are undervalued. The goals of the Large Cap Value Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of equity securities of large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations. Large corporations are defined for this purpose as companies with market capitalizations at the time of purchase in the range of those market capitalizations of companies included in the S&P 500/Citigroup Value Index (over time the range varies, and was $1.3 billion to $387 billion as of December 31, 2006). We use a combination of quantitative and fundamental analysis to select companies with share price growth potential that may not be recognized by the market at large. Although the Large Cap Value Fund is not an index fund, we seek to manage the portfolio's overall risk characteristics to be similar to those of the S&P 500/Citigroup Value Index. PRINCIPAL RISKS OF INVESTING IN THE LARGE CAP VALUE FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The Large Cap Value Fund will expose you to risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - By investing in stocks, the Large Cap Value Fund may expose you to a sudden decline in a holding's share price or an overall decline in the stock market. In addition, as with any stock fund, the value of your investment will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The Large Cap Value Fund is also subject to the risk that its principal market segment, large capitalization value stocks, may underperform other equity market segments or the market as a whole. FOREIGN SECURITIES - Foreign stocks tend to be more volatile than U.S. stocks, and are subject to risks that are not typically associated with domestic stocks. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Class A shares of the Large Cap Value Fund for the indicated periods. Of course, the Large Cap Value Fund's past performance (before and after taxes) does not necessarily indicate how the Large Cap Value Fund will perform in the future. CNI CHARTER FUNDS | PAGE 3 This bar chart shows the performance of the Large Cap Value Fund's Class A shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] -12.07% -20.40% 32.82% 13.07% 7.66% 19.88% ------------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 18.75% -19.59% (Q2 2003) (Q3 2002) This table shows the Large Cap Value Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of companies similar to those held by the Fund. Since Large Cap Value Fund One Year Five Years Inception - -------------------------------------------------------------------------------- Return Before Taxes 19.88% 9.06% 5.05%(3) Return After Taxes on Distributions(1) 18.49% 8.41% 4.23%(3) Return After Taxes on Distributions and Sale of Fund Shares(1) 14.03% 7.71% 4.08%(3) S&P 500/Citigroup Value Index(2) 20.80% 10.43% 6.72%(4) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) Since January 14, 2000. Class A Shares commenced operations on April 13, 2000. Prior to April 13, 2000, performance for Class A shares is based on the performance of the Institutional Class shares of the Large Cap Value Fund. Institutional Class shares, which were first offered on January 14, 2000, are not offered in this prospectus. However, because they are invested in the same portfolio of securities, the annual returns for the two classes would be substantially similar. The performance of the Institutional Class shares does not reflect the Class A shares' Rule 12b-1 fees and expenses. With those adjustments, performance would be lower than as shown above. (4) The index comparison shown begins on January 31, 2000. FEES AND EXPENSES OF THE LARGE CAP VALUE FUND This table describes the fees and expenses you may pay if you buy and hold Class A shares of the Large Cap Value Fund. You pay no sales charges or transaction fees for buying or selling Class A shares of the Large Cap Value Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.62% Distribution (12b-1) Fees 0.25% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.22% * The "Management Fee" is an annual fee, payable monthly out of the Large Cap Value Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE LARGE CAP VALUE FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP CLASS A TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.25%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Large Cap Value Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Large Cap Value Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Class A shares of the Large Cap Value 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 Large Cap Value Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $124 $387 $670 $1,477 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 4 rcb small cap value fund OUR GOAL The RCB Small Cap Value Fund seeks capital appreciation primarily through investment in smaller U.S. corporations which are considered undervalued. The goal of the RCB Small Cap Value Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of equity securities of smaller U.S. corporations. Smaller corporations are defined for this purpose as companies with market capitalizations at the time of purchase in the range of $50 million to $5 billion. The overall investment philosophy of the RCB Small Cap Value Fund involves a value-oriented focus on preservation of capital over the long term and a "bottom-up" approach, analyzing companies on their individual characteristics, prospects and financial conditions. We determine the universe of potential companies for investment through a systematic screening of companies for attractive valuation characteristics and the prospects of fundamental changes, as well as information we derive from a variety of sources, including, but not limited to, regional brokerage research, trade publications and industry conferences. We evaluate companies within this universe for fundamental characteristics such as: o Return on capital trends; o Cash flow and/or earnings growth; o Free cash flow; o Balance sheet integrity; and o Intrinsic value analysis. Our research effort also includes an investigation of the strength of the business franchises of these companies and the commitment of management to shareholders through direct contacts and company visits. Factors that may cause the sale of the RCB Small Cap Value Fund's portfolio holdings include disappointment in management or changes in the course of business, changes in a company's fundamentals, or our assessment that a particular company's stock is extremely overvalued. A 15% or greater decline in a company's stock price as compared to its industry peer group would result in an intensive re-evaluation of the holding and a possible sale. The RCB Small Cap Value Fund anticipates that it will have a low rate of portfolio turnover. This means that the RCB Small Cap Value Fund has the potential to be a tax-efficient investment, as low turnover should result in the realization and the distribution to shareholders of lower capital gains. This anticipated lack of frequent trading should also lead to lower transaction costs, which could help to improve performance. PRINCIPAL RISKS OF INVESTING IN THE RCB SMALL CAP VALUE FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goal. The RCB Small Cap Value Fund will expose you to risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - By investing in stocks, the RCB Small Cap Value Fund may expose you to a sudden decline in a holding's share price or an overall decline in the stock market. In addition, as with any stock fund, the value of your investment in the RCB Small Cap Value Fund will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies. In addition, individual CNI CHARTER FUNDS | PAGE 5 companies may report poor results or be negatively affected by industry and/or economic trends and developments. The RCB Small Cap Value Fund is also subject to the risk that its principal market segment, small capitalization value stocks, may underperform other equity market segments or the market as a whole. SMALLER CAPITALIZED COMPANIES - The RCB Small Cap Value Fund primarily invests in smaller capitalized companies. We believe that smaller capitalized companies generally have greater earnings and sales growth potential than larger capitalized companies. The level of risk will be increased to the extent that the RCB Small Cap Value Fund has significant exposure to smaller capitalized or unseasoned companies (those with less than a three-year operating history). Investments in smaller capitalized companies may involve greater risks, such as limited product lines, markets and financial or managerial resources. In addition, the securities of smaller capitalized companies may have few market makers, wider spreads between their quoted bid and asked prices, and lower trading volume, resulting in greater price volatility and less liquidity than the securities of larger capitalized companies. Further, the RCB Small Cap Value Fund may hold a significant percentage of a company's outstanding shares, which means that the RCB Small Cap Value Fund may have to sell such investments at discounts from quoted prices. FOCUS - The RCB Small Cap Value Fund holds a relatively small number of securities positions, each representing a relatively large portion of the RCB Small Cap Value Fund's capital. Losses incurred in such positions could have a material adverse effect on the RCB Small Cap Value Fund's overall financial condition. The RCB Small Cap Value Fund's performance may also differ materially from the relevant benchmarks, which hold many more stocks than the RCB Small Cap Value Fund and may be focused on different sectors or industries than the RCB Small Cap Value Fund. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Class A shares of the RCB Small Cap Value Fund for the indicated periods. Of course, the RCB Small Cap Value Fund's past performance (before and after taxes) does not necessarily indicate how the RCB Small Cap Value Fund will perform in the future. Class A Shares of the RCB Small Cap Value Fund commenced operations on October 3, 2001. In the bar chart and the performance table, performance results for the period from October 1, 2001 through October 2, 2001 are for the Class R shares of the RCB Small Cap Value Fund, which were initially issued in connection with the reorganization of the RCB Small Cap Fund (the "Predecessor Fund") on October 1, 2001. Performance results for the period before October 1, 2001 are for the Predecessor Fund, which commenced operations on September 30, 1998. Class A shares' annual returns would have been substantially similar to those of the Class R shares because shares of each Class are invested in the same portfolio of securities. Class R shares of the RCB Small Cap Value Fund are not offered by this Prospectus. CNI CHARTER FUNDS | PAGE 6 This bar chart shows the performance of the RCB Small Cap Value Fund's Class A shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 17.85% 12.87% 21.52% -10.80% 47.81% 19.42% -1.61% 13.46% - ------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 27.83% -20.21% (Q2 2003) (Q3 2002) This table shows the average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of indices comprised of companies similar to those held by the Fund. RCB Small Cap Since Inception Value Fund One Year Five Years (9/30/98) - -------------------------------------------------------------------------------- Return Before Taxes 13.46% 11.94% 16.89% Return After Taxes on Distributions(1) 13.21% 11.67% 16.41% Return After Taxes on Distributions and Sale of Fund Shares(1) 9.09% 10.42% 14.98% Russell 2000 Index(2) 18.37% 11.39% 11.21% Russell 2000 Value Index(2) 23.48% 15.37% 14.59% Russell 2500 Value Index(2) 20.18% 15.51% 14.59% (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. FEES AND EXPENSES OF THE RCB SMALL CAP VALUE FUND This table describes the fees and expenses you may pay if you buy and hold Class A shares of the RCB Small Cap Value Fund. You pay no sales charges or transaction fees for buying or selling Class A shares of the RCB Small Cap Value Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.85% Distribution (12b-1) Fees 0.25% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.11% Total Other Expenses 0.36% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.46% * The "Management Fee" is an annual fee, payable monthly out of the RCB Small Cap Value Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE RCB SMALL CAP VALUE FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP CLASS A TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.49%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the RCB Small Cap Value Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the RCB Small Cap Value Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Class A shares of the RCB Small Cap Value 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 RCB Small Cap Value Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $149 $462 $797 $1,746 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 7 corporate bond fund OUR GOALS The Corporate Bond Fund seeks to provide current income (as the primary component of a total return intermediate duration strategy) by investing in a diversified portfolio of fixed income securities. The goals of the Corporate Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio of fixed income securities, at least 80% of which consists of investment grade corporate notes, bonds and debentures that are nationally traded, including U.S. government and agency securities and corporate issues of domestic and international companies denominated in U.S. dollars. We may also purchase mortgage backed and asset backed instruments whose maturities and durations are consistent with an intermediate term strategy. We actively manage the average duration of the portfolio in accordance with our expectations of interest rate changes as driven by economic trends. The average duration of the portfolio will typically range from two to six years. We will typically invest in corporate issues with a minimum credit rating from Moody's Investors Service or Standard & Poor's Corporation of Baa or BBB, mortgage backed and asset backed instruments with a minimum rating of Aa or AA and corporate commercial paper issued by issuers with a minimum credit rating of A1 or P1. We may retain a security after it has been downgraded below the minimum credit rating if we determine that it is in the best interests of the Corporate Bond Fund. The Corporate Bond Fund may also invest in the shares of money market mutual funds whose objectives are consistent with those of the Corporate Bond Fund. PRINCIPAL RISK OF INVESTING IN THE CORPORATE BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The Corporate Bond Fund may expose you to certain risks that could cause you to lose money. The principal risk to consider is: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities more volatile than higher rated securities. The average duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the Corporate Bond Fund is subject to the risk that its market segment, fixed income securities, may underperform other fixed income market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the Corporate Bond Fund. Changes in the financial condition of issuers also may adversely affect the value of the Corporate Bond Fund's securities. The Corporate Bond Fund may invest in bonds rated below investment grade, which involve greater risks of default or downgrade and are more volatile than investment grade securities. The Corporate Bond Fund is not a money market fund. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Class A shares of the Corporate Bond Fund for the indicated periods. Of course, the Corporate Bond Fund's past performance (before and after taxes) does not necessarily indicate how the Corporate Bond Fund will perform in the future. CNI CHARTER FUNDS | PAGE 8 This bar chart shows the performance of the Corporate Bond Fund's Class A shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 8.22% 7.34% 5.03% 2.14% 0.94% 3.57% --------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 4.42% -2.56% (Q3 2001) (Q2 2004) This table shows the Corporate Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. Since Corporate Bond Fund One Year Five Years Inception - -------------------------------------------------------------------------------- Return Before Taxes 3.57% 3.78% 5.26%(3) Return After Taxes on Distributions(1) 2.16% 2.27% 3.39%(3) Return After Taxes on Distributions and Sale of Fund Shares(1) 2.30% 2.35% 3.37%(3) Lehman Intermediate U.S. Corporate Index(2) 4.57% 5.45% 6.72%(4) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) Since January 14, 2000. Class A shares commenced operations on April 13, 2000. Prior to April 13, 2000, performance for Class A shares is based on the performance of the Institutional Class shares of the Corporate Bond Fund. Institutional Class shares, which were first offered on January 14, 2000, are not offered in this prospectus. However, because they are invested in the same portfolio of securities, the annual returns for the two classes would be substantially similar. The performance of the Institutional Class shares does not reflect the Class A shares' Rule 12b-1 fees and expenses. With those adjustments, performance would be lower than as shown above. (4) The index comparison shown begins on January 31, 2000. FEES AND EXPENSES OF THE CORPORATE BOND FUND This table describes the fees and expenses you may pay if you buy and hold Class A shares of the Corporate Bond Fund. You pay no sales charges or transaction fees for buying or selling Class A shares of the Corporate Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.40% Distribution (12b-1) Fees 0.25% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.00% * The "Management Fee" is an annual fee, payable monthly out of the Corporate Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE CORPORATE BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP CLASS A TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.00%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Corporate Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Corporate Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Class A shares of the Corporate Bond 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 Corporate Bond Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $102 $318 $552 $1,225 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 9 government bond fund OUR GOALS The Government Bond Fund seeks to provide current income (as the primary component of a total return intermediate duration strategy) by investing primarily in U.S. Government securities. The goals of the Government Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of U.S. Government securities either issued or guaranteed by the U.S. Government or its agencies or instrumentalities. We may also purchase mortgage backed and asset backed instruments issued by the U.S. Government or government sponsored agencies whose maturity and duration are consistent with an intermediate term strategy. In certain cases, securities issued by government-sponsored agencies may not be guaranteed or insured by the U.S. Government. We actively manage the average duration of the portfolio in accordance with our expectations of interest rate changes as driven by economic trends. The average duration of the portfolio will typically range from two to six years. The Government Bond Fund may also invest in the shares of money market mutual funds whose objectives are consistent with those of the Government Bond Fund. PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The Government Bond Fund may expose you to certain risks that could cause you to lose money. The principal risks to consider are: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities more volatile than higher rated securities. The average duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the Government Bond Fund is subject to the risk that its market segment, government fixed income securities, may underperform other fixed income market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the Government Bond Fund. Changes in the financial condition of issuers also may adversely affect the value of the Government Bond Fund's securities. The Government Bond Fund may invest in bonds rated below investment grade, which involve greater risks of default or downgrade and are more volatile than investment grade securities. The Government Bond Fund is not a money market fund. CNI CHARTER FUNDS | PAGE 10 GOVERNMENT-SPONSORED ENTITIES RISK - Although the Government Bond Fund invests in securities issued by government-sponsored entities, such as mortgage-related securities, such securities may not be guaranteed or insured by the U.S. Government and may only be supported by the credit of the issuing agency. For example, the Federal National Mortgage Association guarantees full and timely payment of all interest and principal of its pass-through securities, and the Federal Home Loan Mortgage Corporation guarantees timely payment of interest and ultimate collection of principal of its pass-through securities, but such securities are not backed by the full faith and credit of the U.S. Government. The principal and interest on Government National Mortgage Association ("GNMA") pass-through securities are guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. In order to meet its obligations under a guarantee, GNMA is authorized to borrow from the U.S. Treasury with no limitations as to amount. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Class A shares of the Government Bond Fund for the indicated periods. Of course, the Government Bond Fund's past performance (before and after taxes) does not necessarily indicate how the Government Bond Fund will perform in the future. This bar chart shows the performance of the Government Bond Fund's Class A shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 7.27% 8.56% 1.33% 1.40% 1.15% 3.44% -------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 4.51% -1.54% (Q3 2001) (Q2 2004) This table shows the Government Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. Since Government Bond Fund One Year Five Years Inception - -------------------------------------------------------------------------------- Return Before Taxes 3.44% 3.14% 4.57%(3) Return After Taxes on Distributions(1) 2.09% 1.94% 3.05%(3) Return After Taxes on Distributions and Sale of Fund Shares(1) 2.22% 2.00% 3.00%(3) Lehman Intermediate U.S. Government Bond Index(2) 3.83% 3.92% 5.59%(4) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) Since January 14, 2000. Class A shares commenced operations on April 13, 2000. Prior to April 13, 2000, performance for Class A shares is based on the performance of the Institutional Class shares of the Government Bond Fund. Institutional Class shares, which were first offered on January 14, 2000, are not offered in this prospectus. However, because they are invested in the same portfolio of securities, the annual returns for the two classes would be substantially similar. The performance of the Institutional Class shares does not reflect the Class A shares' Rule 12b-1 fees and expenses. With those adjustments, performance would be lower than as shown above. (4) The index comparison shown begins on January 31, 2000. CNI CHARTER FUNDS | PAGE 11 FEES AND EXPENSES OF THE GOVERNMENT BOND FUND This table describes the fees and expenses you may pay if you buy and hold Class A shares of the Government Bond Fund. You pay no sales charges or transaction fees for buying or selling Class A shares of the Government Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.43% Distribution (12b-1) Fees 0.25% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.03% * The "Management Fee" is an annual fee, payable monthly out of the Government Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE GOVERNMENT BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP CLASS A TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 0.95%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the Government Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the Government Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Class A shares of the Government Bond 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 Government Bond Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $105 $328 $569 $1,259 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 12 california tax exempt bond fund OUR GOALS The California Tax Exempt Bond Fund seeks to provide current income exempt from federal and California state income tax (as the primary component of a total return strategy) by investing primarily in California municipal bonds. The goals of the California Tax Exempt Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a portfolio, at least 80% of which consists of investment grade, intermediate-term municipal bond obligations, including general obligation bonds, revenue bonds, notes and obligations issued by the State of California and its agencies, by various counties, cities and regional or special districts in California, and by various other sectors in the municipal bond market. The California Tax Exempt Bond Fund may also invest in short-term tax exempt commercial paper, floating rate notes or the shares of money market mutual funds whose objectives are consistent with those of the California Tax Exempt Bond Fund. The California Tax Exempt Bond Fund invests at least 80% of its net assets in intermediate-term, high quality municipal bonds and notes, and at least 80% of its total assets in debt securities, the interest from which is expected to be exempt from federal and California state personal income taxes. We actively manage the average duration of the portfolio in accordance with our expectations of interest rate changes as driven by economic trends. The average duration of the portfolio will typically range from three to eight years. We will typically invest in issues with a minimum credit rating from Moody's Investors Service or Standard & Poor's Corporation of Baa or BBB, issues carrying credit enhancements such as insurance by the major bond insurance companies with an underlying minimum credit rating of Baa or BBB and short term notes with a rating from Moody's of MIG1 or VMIG1 or from Standard & Poor's of SP1 or A1. We may retain a security after it has been downgraded below the minimum credit rating if we determine that it is in the best interests of the California Tax Exempt Bond Fund. PRINCIPAL RISKS OF INVESTING IN THE CALIFORNIA TAX EXEMPT BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goals. The California Tax Exempt Bond Fund may expose you to certain risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities more volatile than higher rated securities. The average duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the California Tax Exempt Bond Fund is subject to the risk that its market segment, municipal debt securities, may underperform other market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the California Tax Exempt Bond Fund. Changes in the financial condition of issuers also may adversely affect the value of the California Tax Exempt Bond Fund's securities. The California Tax Exempt Bond Fund may invest in bonds rated below investment grade, which involve greater risks of default or downgrade and are more volatile than investment grade securities. The California Tax Exempt Bond Fund is not a money market fund. CNI CHARTER FUNDS | PAGE 13 GOVERNMENT RISK - State and local governments rely on taxes and, to some extent, revenues from private projects financed by municipal securities to pay interest and principal on municipal debt. Poor statewide or local economic results, changing political sentiments, legislation, policy changes or voter-based initiatives at the state or local level, erosion of the tax base or revenues of the state or one or more local governments, seismic or other natural disasters, or other economic or credit problems affecting the state generally or a particular issuer may reduce tax revenues and increase the expenses of California municipal issuers, making it more difficult for them to meet their obligations. Actual or perceived erosion of the creditworthiness of California municipal issuers may also reduce the value of the California Tax Exempt Bond Fund's holdings. NON-DIVERSIFICATION - The California Tax Exempt Bond Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the California Tax Exempt Bond Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, and may experience increased volatility due to its investments in those securities. In addition, the California Tax Exempt Bond 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. See the SAI for more detailed information regarding California developments. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Class A shares of the California Tax Exempt Bond Fund for the indicated periods. Of course, the California Tax Exempt Bond Fund's past performance (before and after taxes) does not necessarily indicate how the California Tax Exempt Bond Fund will perform in the future. This bar chart shows the performance of the California Tax Exempt Bond Fund's Class A shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 3.95% 8.08% 2.85% 1.94% 1.20% 3.08% ------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 4.26% -1.91% (Q3 2002) (Q2 2004) This table shows the California Tax Exempt Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. California Tax Exempt Since Bond Fund One Year Five Years Inception - -------------------------------------------------------------------------------- Return Before Taxes 3.08% 3.41% 4.11%(3) Return After Taxes on Distributions(1) 3.08% 3.23% 4.35%(3) Return After Taxes on Distributions and Sale of Fund Shares(1) 2.94% 3.23% 4.31%(3) Lehman CA Intermediate - Short Municipal Index(2) 3.62% 3.91% 4.65%(4) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) Since January 14, 2000. Class A shares commenced operations on April 13, 2000. Prior to April 13, 2000, performance for Class A shares is based on the performance of the Institutional Class shares of the California Tax Exempt Bond Fund. Institutional Class shares, which were first offered on January 14, 2000, are not offered in this prospectus. However, because they are invested in the same portfolio of securities, the annual returns for the two classes would be substantially similar. The performance of the Institutional Class shares does not reflect the Class A shares' Rule 12b-1 fees and expenses. With those adjustments, performance would be lower than as shown above. (4) The index comparison shown begins on January 31, 2000. CNI CHARTER FUNDS | PAGE 14 FEES AND EXPENSES OF THE CALIFORNIA TAX EXEMPT BOND FUND This table describes the fees and expenses you may pay if you buy and hold Class A shares of the California Tax Exempt Bond Fund. You pay no sales charges or transaction fees for buying or selling Class A shares of the California Tax Exempt Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.27% Distribution (12b-1) Fees 0.25% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 0.87% * The "Management Fee" is an annual fee, payable monthly out of the California Tax Exempt Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE CALIFORNIA TAX EXEMPT BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP CLASS A TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 0.75%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the California Tax Exempt Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the California Tax Exempt Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Class A shares of the California Tax Exempt Bond 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 California Tax Exempt Bond Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performances. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $89 $278 $482 $1,073 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 15 high yield bond fund OUR GOAL The High Yield Bond Fund seeks to maximize total return by investing primarily in fixed income securities rated below investment grade (I.E., "junk bonds"). The goal of the High Yield Bond Fund can only be changed with shareholder approval. PRINCIPAL STRATEGY We purchase a diversified portfolio, at least 80% of which consists of fixed income securities rated below investment grade, including corporate bonds and debentures, convertible and preferred securities and zero coupon obligations. We may also invest in fixed income securities rated below investment grade that are issued by governments and agencies, both U.S. and foreign. We may also invest in equity securities. We seek to invest in securities that offer a high current yield as well as total return potential. In an effort to control risks, we purchase investments diversified across issuers, industries and sectors. The average maturity of the High Yield Bond Fund's investments will vary. There is no limit on the maturity or on the credit quality of any security. PRINCIPAL RISKS OF INVESTING IN THE HIGH YIELD BOND FUND As with any mutual fund, there are risks to investing. We cannot guarantee that we will meet our investment goal. The High Yield Bond Fund may expose you to certain risks that could cause you to lose money. Here are the principal risks to consider: MARKET RISK - The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, fixed income securities will decrease in value if interest rates rise and vice versa, with lower rated securities (such as those in which the High Yield Bond Fund primarily invests) more volatile than higher rated securities. The average maturity and duration of these securities affects risk as well, with longer term securities generally more volatile than shorter term securities. In addition, the High Yield Bond Fund is subject to the risk that its market segment, high yield fixed income securities, may underperform other market segments or the markets as a whole. Economic or political changes may adversely affect the ability of issuers to repay principal and to make interest payments on securities owned by the High Yield Bond Fund. Changes in the financial condition of issuers could have a material adverse effect on the value of the High Yield Bond Fund's securities. The High Yield Bond Fund is not a money market fund. HIGH YIELD ("JUNK") BONDs - High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities. High yield bonds involve a greater risk of price declines than investment grade securities due to actual or perceived changes in an issuer's creditworthiness. In addition, issuers of high yield bonds may be more susceptible than other issuers to economic downturns, which may result in a weakened capacity of the issuer to make principal or interest payments. High yield bonds are subject to a greater risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could have a substantial adverse effect on the market value of the security. CNI CHARTER FUNDS | PAGE 16 FOREIGN SECURITIES - The High Yield Bond Fund may invest in foreign securities. Foreign investments may be subject to risks that are not typically associated with investing in domestic securities. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. The High Yield Bond Fund may invest in foreign securities denominated in foreign currencies, whose value may decline against the U.S. dollar. EQUITY SECURITIES - The value of the High Yield Bond Fund's equity investments will fluctuate on a day-to-day and a cyclical basis with movements in the stock market, as well as in response to the activities of individual companies. In addition, individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. PAST PERFORMANCE The bar chart and the performance table that follow illustrate some of the risks and volatility of an investment in the Class A shares of the High Yield Bond Fund for the indicated periods. Of course, the High Yield Bond Fund's past performance (before and after taxes) does not necessarily indicate how the High Yield Bond Fund will perform in the future. This bar chart shows the performance of the High Yield Bond Fund's Class A shares based on a calendar year. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 9.20% 2.07% 19.16% 11.13% 1.00% 9.25% --------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter Worst Quarter 8.03% -3.24% (Q4 2001) (Q2 2002) This table shows the High Yield Bond Fund's average annual total returns for the periods ending December 31, 2006. The table also shows how the Fund's performance compares with the returns of an index comprised of fixed income securities similar to those held by the Fund. Since Inception High Yield Bond Fund One Year Five Years (1/14/00) - -------------------------------------------------------------------------------- Return Before Taxes 9.25% 8.32% 7.26% Return After Taxes on Distributions(1) 6.54% 5.33% 4.00% Return After Taxes on Distributions and Sale of Fund Shares(1) 5.94% 5.30% 4.15% Citigroup High Yield Market Index(2) 11.55% 10.16% 7.29%(3) (1) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. (2) Reflects no deduction for fees, expenses or taxes. (3) The index comparison shown begin on January 31, 2000. CNI CHARTER FUNDS | PAGE 17 FEES AND EXPENSES OF THE HIGH YIELD BOND FUND This table describes the fees and expenses you may pay if you buy and hold Class A shares of the High Yield Bond Fund. You pay no sales charges or transaction fees for buying or selling Class A shares of the High Yield Bond Fund. ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) Management Fee* 0.75% Distribution (12b-1) Fees 0.30% Other Expenses Shareholder Servicing Fee 0.25% Other Fund Expenses 0.10% Total Other Expenses 0.35% - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses** 1.40% * The "Management Fee" is an annual fee, payable monthly out of the High Yield Bond Fund's net assets. ** THE INVESTMENT MANAGER HAS VOLUNTARILY AGREED TO LIMIT ITS FEES OR REIMBURSE THE HIGH YIELD BOND FUND FOR EXPENSES TO THE EXTENT NECESSARY TO KEEP CLASS A TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR AT OR BELOW 1.30%. Any fee reductions or reimbursements may be repaid to the investment manager within 3 years after they occur if such repayments can be achieved within the High Yield Bond Fund's then current expense limit, if any, for that year and if certain other conditions are satisfied. EXAMPLE The Example is intended to help you compare the cost of investing in the High Yield Bond Fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 in Class A shares of the High Yield Bond 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 High Yield Bond Fund's operating expenses remain the same. The Example should not be considered a representation of past or future expenses or performance. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $143 $443 $766 $1,680 - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 18 management of the funds INVESTMENT MANAGER City National Asset Management, Inc. ("CNAM") provides the Funds with investment management services. CNAM's address is City National Center, 400 North Roxbury Drive, Beverly Hills, California 90210. CNAM is a wholly owned subsidiary of City National Bank ("CNB"), a federally chartered commercial bank founded in the early 1950s with approximately $5.2 billion in assets as of December 31, 2006. CNB is itself a wholly owned subsidiary of City National Corporation, a New York Stock Exchange listed company. CNB has provided trust and fiduciary services, including investment management services, to individuals and businesses for over 40 years. CNB currently provides investment management services to individuals, pension and profit sharing plans, endowments and foundations. As of December 31, 2006, CNB and its affiliates had approximately $48.6 billion in assets under administration, which includes $27.8 billion in assets under management. CNAM received for its investment management services a fee at the annual rate of 0.65% of average daily net assets of the Large Cap Growth Fund, 0.62% of average daily net assets of the Large Cap Value Fund, 0.85% of average daily net assets of the RCB Small Cap Value Fund, 0.40% of average daily net assets of the Corporate Bond Fund, 0.36% of average daily net assets of the Government Bond Fund, 0.16% of average daily net assets of the California Tax Exempt Bond Fund and 0.66% of average daily net assets of the High Yield Bond Fund for the fiscal year ended September 30, 2006. These fees reflect fee waivers or reimbursements of fees waived by CNAM in prior years. A discussion regarding the basis of the Board of Trustees' approval of the Funds' investment advisory agreement with CNAM is available in the Funds' Semi-Annual Report for the most recent fiscal period ended March 31. PORTFOLIO MANAGERS Richard A. Weiss and Brian L. Garbe serve as portfolio managers for the Large Cap Value Fund and the Large Cap Growth Fund. Rodney J. Olea and William C. Miller serve as portfolio managers for the Corporate Bond Fund. Rodney J. Olea and Paul C. Single serve as portfolio managers for the Government Bond Fund. Rodney J. Olea and Alan Remedios serve as portfolio managers for the California Tax Exempt Bond Fund. RICHARD A. WEISS is President and Chief Investment Officer of CNAM. Mr. Weiss has nearly two decades of investment management experience and has designed and implemented quantitatively disciplined equity, fixed income, and international investment strategies. Prior to joining the Funds' predecessor investment manager, CNB, in 1999, Mr. Weiss was Executive Vice President and Chief Investment Officer at Sanwa Bank California. Mr. Weiss holds a Master's in Business Administration ("MBA"), with an emphasis in Finance and Econometrics from the University of Chicago, and an undergraduate degree in Finance from The Wharton School at the University of Pennsylvania. BRIAN L. GARBE is Senior Vice President and Director of Research of CNAM. Mr. Garbe has over 15 years of experience in the investment field and currently oversees the creation, analysis and production of asset allocation, sector rotation and stock selection strategies for CNAM. Prior to joining CNB in 1999, Mr. Garbe was Vice President and Director of Research at Sanwa Bank California. Mr. Garbe holds an MBA from the Anderson Graduate School of Management at University of California, Los Angeles ("UCLA") and an undergraduate degree in Applied Mathematics from UCLA. CNI CHARTER FUNDS | PAGE 19 RODNEY J. OLEA is Senior Vice President and Director of Fixed Income of CNAM. Mr. Olea has over 20 years of portfolio management experience and currently oversees the creation, analysis, and management of taxable and tax-free fixed income portfolios and bond selection strategies for CNAM. Mr. Olea has been with CNB since 1994. He has a degree in Economics from UCLA. WILLIAM C. MILLER, JR. is Vice President and Senior Fixed Income Portfolio Manager for CNAM. Mr. Miller has over 10 years of investment management experience and specializes in the research, analysis, and selection of fixed income securities. Prior to joining CNB in 2001, Mr. Miller was Investment Officer with Fiduciary Trust International of California and, from 1995 to 1998, was an Associate with Pacific Investment Management Company. Mr. Miller, a Chartered Financial Analyst, holds a Bachelor's degree with a concentration in Finance from California State University, Fullerton. PAUL C. SINGLE is Vice President and Senior Fixed Income Portfolio Manager for CNAM. Mr. Single has over 23 years of institutional investment management experience and specializes in investment grade taxable fixed income securities. Prior to joining CNB in 2003, Mr. Single was Principal and Portfolio Manager of Wells Capital Management. ALAN REMEDIOS is Vice President and Senior Fixed Income Portfolio Manager for CNAM. Mr. Remedios has over 16 years of investment management experience and specializes in the research, analysis, and selection of fixed income securities for CNAM. Prior to joining CNB in 1999, Mr. Remedios was Vice President and Portfolio Manager at U.S. Trust Company. Mr. Remedios, a Chartered Financial Analyst, holds a degree in Finance from California State Polytechnic University. SUB-ADVISORS REED CONNER & BIRDWELL LLC ("RCB"), a wholly owned subsidiary of City National Corporation, currently serves as the RCB Small Cap Value Fund's sub-advisor, providing investment advisory and portfolio management services pursuant to a sub-advisory agreement with CNAM. RCB's address is 11111 Santa Monica Blvd., Suite 1700, Los Angeles, California 90025. As of December 31, 2006, RCB managed assets of approximately $3.66 billion for individual and institutional investors. RCB and its predecessor have been engaged in the investment advisory business for over 45 years. Jeffrey Bronchick, Executive Vice President, Principal and Chief Investment Officer, and Thomas D. Kerr, Principal and Vice President, Portfolio Management and Research, are principally responsible for the management of the RCB Small Cap Value Fund. They have been associated with RCB or its predecessor since 1989 and 1994, respectively. A discussion regarding the basis of the Board of Trustees' approval of CNAM's sub-advisory agreement with RCB is available in the Funds' Semi-Annual Report for the most recent fiscal period ended March 31. HALBIS CAPITAL MANAGEMENT (USA), INC. ("Halbis Capital USA") currently serves as the High Yield Bond Fund's sub-advisor, providing investment advisory and portfolio management services pursuant to a sub-advisory agreement with CNAM. Halbis Capital USA's principal offices are located at 452 Fifth Avenue, New York, NY 10018. It was formed in June, 2005, and is a wholly-owned subsidiary of Halbis Capital Management (UK), Ltd., which in turn is ultimately a part of HSBC Group, plc, one of the world's largest banking and financial services organizations. Halbis Capital USA provides investment advisory services relating to U.S. fixed income, high yield fixed income, emerging markets fixed income and alternative investment products. Halbis Capital USA is one of a number of HSBC Group subsidiaries (collectively referred to as "HSBC Group Investment Businesses") engaged in investment advisory and fund CNI CHARTER FUNDS | PAGE 20 management activities in many countries throughout the world. As of December 31, 2006, HSBC Group Investment Businesses managed assets of approximately $328.5 billion worldwide, and Halbis Capital USA managed assets of approximately $7.6 billion. The High Yield Bond Fund is managed by Richard J. Lindquist, CFA, a Managing Director and the head of the high yield management team at Halbis Capital USA. The high yield management team, including Mr. Lindquist, joined HSBC Investments May 1, 2005. Mr. Lindquist was previously a Managing Director and the head of the high yield management team at Credit Suisse Asset Management, LLC ("CSAM"). He joined CSAM in 1995 as a result of the acquisition of CS First Boston Investment Management, where he had been since 1989. Previously, he managed high yield portfolios at Prudential Insurance Company of America and a high yield mutual fund at T. Rowe Price Associates. Mr. Lindquist holds a BS in Finance from Boston College and an MBA in Finance from the University of Chicago Graduate School of Business. A discussion regarding the basis of the Board of Trustees' approval of CNAM's sub-advisory agreement with Halbis Capital USA is available in the Funds' Annual Report for the fiscal year ended September 30, 2005. OTHER SUB-ADVISORS. Under current law, the appointment of a new sub-advisor generally would require the approval of a Fund's shareholders. Although CNAM does not currently intend to replace any of the current sub-advisors, the Funds have received an exemptive order from the Securities and Exchange Commission (the "SEC"). This order would permit CNAM, subject to certain conditions required by the SEC, to replace any sub-advisor, other than RCB, with a new unaffiliated, third-party sub-advisor with the approval of the Board of Trustees but without obtaining shareholder approval. Shareholders, however, will be notified of any change in any of the sub-advisors and be provided with information regarding any new sub-advisor. An order from the SEC granting this exemption benefits shareholders by enabling the Funds to operate in a less costly and more efficient manner. CNAM has the ultimate responsibility to monitor any sub-advisors and recommend their hiring, termination and replacement. CNAM may also terminate any sub-advisor and assume direct responsibility for the portfolio management of that Fund with the approval of the Board of Trustees but without obtaining shareholder approval. ADMINISTRATOR SEI Investments Global Funds Services (the "Administrator") serves as administrator and fund accountant to the Funds. The Administrator is located at One Freedom Valley Drive, Oaks, Pennsylvania 19456. DISTRIBUTOR SEI Investments Distribution Co. (the "Distributor") serves as the Funds' distributor pursuant to a distribution agreement with the Funds. The Distributor is located at One Freedom Valley Drive, Oaks, Pennsylvania 19456 and can be reached at 1-888-889-0799. DISTRIBUTION OF FUND SHARES The Funds have adopted a plan (the "Plan") for their Class A shares under Rule 12b-1 of the Investment Company Act of 1940, as amended. The Plan allows the Funds to pay to the Distributor distribution fees of 0.25% of average daily net assets for the sale and distribution of their Class A shares (0.30% for the High Yield Bond Fund). The Distributor may pay some or all of such distribution fees to broker-dealers and other financial intermediaries (including CNB and its affiliates) as compensation for providing distribution-related services. Although the Funds do not have a front-end load, because the distribution fees are paid out of the Funds' assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. CNI CHARTER FUNDS | PAGE 21 The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs for dealers, which will be paid for by the Distributor from any distribution fees it receives or from any other source available to it. Under any such program, the Distributor may provide cash or non-cash compensation as recognition for past sales or encouragement for future sales that may include the following: merchandise, travel expenses, prizes, meals, and lodgings, and gifts that do not exceed $100 per year, per individual. SHAREHOLDER SERVICING FEES The Funds have adopted a shareholder service plan that allows the Funds to pay fees to broker-dealers and other financial intermediaries (including CNB) for services provided to Class A shareholders. Because these fees are paid out of the Funds' assets, over time these fees will also increase the cost of your investment. Shareholder servicing fees under that plan, as a percentage of average daily net assets, are 0.25% for Class A shares of the Funds, a portion or all of which may be received by CNB or its affiliates. CNI CHARTER FUNDS | PAGE 22 additional investment strategies and related risks The following risks of the Funds referred to below are related to investment strategies that are material but not fundamental strategies of the Funds. These risks are in addition to the principal risks of the Funds discussed above. See risks described with respect to each Fund under the section entitled "The Funds." FOREIGN SECURITIES - The Large Cap Growth Fund, the Large Cap Value Fund, the RCB Small Cap Value Fund and the High Yield Bond Fund may invest in foreign securities. Foreign investments may be subject to risks that are not typically associated with investing in domestic companies. For example, such investments may be adversely affected by changes in currency rates and exchange control regulations, future political and economic developments and the possibility of seizure or nationalization of companies, or the imposition of withholding taxes on income. Foreign stock markets tend to be more volatile than the U.S. market due to economic and political instability and regulatory conditions in some countries. These foreign securities may be denominated in foreign currencies, whose value may decline against the U.S. dollar. DEFENSIVE INVESTMENTS - The strategies described in this prospectus are those the Funds use under normal circumstances. At the discretion of each Fund's portfolio managers, we may invest up to 100% of the Fund's assets in cash or cash equivalents for temporary defensive purposes. No Fund is required or expected to take such a defensive posture. But if used, such a stance may help a Fund minimize or avoid losses during adverse market, economic or political conditions. During such a period, a Fund may not achieve its investment objective. For example, should the market advance during this period, a Fund may not participate as much as it would have if it had been more fully invested. PORTFOLIO TURNOVER - Each Fund will sell a security when its portfolio manager believes it is appropriate to do so, regardless of how long a Fund has owned that security. Buying and selling securities generally involves some expense to a Fund, such as commissions paid to brokers and other transaction costs. By selling a security, a Fund may realize taxable capital gains that it will subsequently distribute to shareholders. Generally speaking, the higher a Fund's annual portfolio turnover, the greater its brokerage costs and the greater the likelihood that it will realize taxable capital gains. On the other hand, a Fund may from time to time realize commission costs in order to engage in tax minimization strategies if the result is a greater enhancement to the value of a Fund share than the transaction cost to achieve it. Increased brokerage costs may adversely affect a Fund's performance. Also, unless you are a tax-exempt investor or you purchase shares through a tax-deferred account, the distribution of capital gains may affect your after-tax return. Annual portfolio turnover of 100% or more is considered high. SECTOR CONCENTRATION - From time to time a Fund may invest a significant portion of its total assets in various industries in one or more sectors of the economy. To the extent a Fund's assets are invested in a sector of the economy, the Fund will be subject to market and economic factors impacting companies in that sector. SMALLER CAPITALIZED COMPANIES - The RCB Small Cap Value Fund will invest in smaller capitalized companies. CNAM believes that smaller capitalized companies generally have greater earnings and sales growth potential than larger capitalized companies. The level of risk will be increased to the extent that a Fund has significant exposure to smaller capitalized or unseasoned companies (those with less than a three-year operating history). Investments in smaller capitalized companies may involve greater risks, such as limited product lines, markets and financial or managerial resources. In addition, the securities of smaller capitalized companies may have few market makers, wider spreads between their quoted bid and asked prices, and lower trading volume, resulting in greater price volatility and less liquidity than the securities of larger capitalized companies. CNI CHARTER FUNDS | PAGE 23 how to buy, sell and exchange shares Here are the details you should know about how to purchase, sell (sometimes called "redeem") and exchange shares: Shares of the Funds are offered only through approved broker-dealers or other financial institutions (each an "Authorized Institution"). Your Authorized Institution is responsible for maintaining your individual account records, processing your order correctly and promptly, keeping you advised regarding the status of your individual account, confirming your transactions and ensuring that you receive copies of the Funds' prospectuses. You will also generally have to address your correspondence or questions regarding the Funds to your Authorized Institution. HOW TO BUY SHARES To purchase shares of a Fund, you should contact your Authorized Institution and follow its procedures, including acceptable methods of payment and deadlines for receipt by the Authorized Institution of your share purchase instructions. Your Authorized Institution may charge a fee for its services, in addition to the fees charged by the Funds. A Fund may reject any purchase order if it is determined that accepting the order would not be in the best interest of the Fund or its shareholders. FOREIGN INVESTORS The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. CUSTOMER IDENTIFICATION AND VERIFICATION To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. What this means to you: when you open an account, your Authorized Institution will ask you for certain information, which includes your name, address, date of birth, and other information that will allow us to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account. Please contact your Authorized Institution for more information. The Funds are required by law to reject your investment if the required identifying information is not provided. In certain instances, the Authorized Institution is required to collect documents on behalf of the Funds to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity. Attempts to collect missing information required on the application will be performed by contacting you. If this information is unable to be obtained within a timeframe established in the sole discretion of the Funds, your application will be rejected. Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the net asset value per share next-determined after receipt of your application in proper form. However, the Funds reserve the right to close your account if it is unable to verify your identity. Attempts to verify your identity will be performed within a timeframe established in the sole discretion of the Funds. If the Funds are unable to verify your identity, the Funds reserve the right to liquidate your account at the then-current day's price and remit CNI CHARTER FUNDS | PAGE 24 proceeds to you via check. The Funds reserve the further right to hold your proceeds until clearance of your original check. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications. ANTI-MONEY LAUNDERING PROGRAM Customer identification and verification is part of the Funds' overall obligation to deter money laundering under Federal law. The Funds have adopted an Anti-Money Laundering Compliance Program designed to prevent the Funds from being used for money laundering or the financing of terrorist activities. In this regard, the Funds reserve the right to (i) refuse, cancel or rescind any purchase or exchange order, (ii) freeze any account and/or suspend account services or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Funds or in cases when the Funds are requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds. HOW TO SELL SHARES You may sell your shares only through your Authorized Institution. To sell shares of a Fund, you should contact your Authorized Institution and follow its procedures, including deadlines for receipt by the Authorized Institution of your share redemption instructions. Your Authorized Institution may charge a fee for its services, in addition to the fees charged by the Funds. Normally, the Funds will make payment on your redemption request as promptly as possible after receiving your request, but it may take up to seven business days. We generally pay sale (redemption) proceeds in cash. However, under conditions where cash redemptions are detrimental to a Fund and its shareholders, we reserve the right to make redemptions in readily marketable securities rather than cash (a "redemption in kind"). It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would probably have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. The Funds may suspend your right to redeem your shares if the New York Stock Exchange (the "NYSE") or the Federal Reserve restricts trading, the SEC declares an emergency or for other reasons, as permitted by federal securities laws. Please see the SAI for a more detailed discussion. HOW TO EXCHANGE SHARES You may exchange Class A shares of a Fund for Class A shares of any other CNI Charter Fund in which you are eligible to invest on any business day. When you exchange shares, you are really selling your shares and buying other shares, so your sale price and purchase price will be based on the price or net asset value ("NAV") of the relevant Funds next calculated after we receive your exchange request. To exchange shares of a Fund, you should contact your Authorized Institution. FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES The Funds' Board of Trustees has adopted policies and procedures with respect to frequent purchases and redemptions of Fund shares. The Funds discourage short-term or other excessive trading (such as market timing) into and out of the Funds because such trading may harm performance by disrupting portfolio management strategies and by increasing expenses. The Funds do not accommodate frequent purchases and redemptions of Fund shares and reserve the right to restrict, reject or cancel, without any prior notice, any purchase or exchange CNI CHARTER FUNDS | PAGE 25 order, including transactions representing excessive trading and transactions accepted by any shareholder's Authorized Institution. SEI Investments Management Corporation (d.b.a. SEI Institutional Transfer Agency), transfer agent to the Funds (the "Transfer Agent"), has procedures in place designed to detect and prevent market timing activity. CNAM also participates in the enforcement of the Funds' market timing prevention policy by monitoring transaction activity in the Funds. CNAM and the Transfer Agent currently monitor for various patterns in trading activity in client accounts, including omnibus accounts, such as a purchase and sale of shares of a Fund (a "round trip") within 30 days, multiple round trips within several months, and four exchanges per quarter. These parameters are subject to change. Shareholders seeking to engage in excessive trading practices may use a variety of strategies to avoid detection and, despite the efforts of the Funds to prevent excessive trading, there is no guarantee that the Funds or their transfer agents will be able to identify such shareholders or curtail their trading practices. The ability of the Funds and their agents to detect and curtail excessive trading practices may also be limited by operational systems and technological limitations. In addition, the Funds receive purchase, exchange and redemption orders through financial intermediaries and cannot always know or reasonably detect excessive trading which may be facilitated by these intermediaries or by their use of omnibus account arrangements. However, the Funds' distributor has received assurances from each financial intermediary which sells shares of the Funds that it has procedures in place to monitor for excessive trading. GENERAL INFORMATION How and when we calculate each Fund's NAV determines the price at which you will buy or sell shares. We calculate the NAV of each Fund as of the close of trading on the NYSE every day the NYSE is open. Shares may be purchased or sold on any day that the NYSE is open for business. The Funds reserve the right to open for business on days the NYSE is closed but the Federal Reserve Bank of New York is open. Shares, however, cannot be purchased or sold by Federal Reserve wire on days when either the NYSE or Federal Reserve is closed. The NYSE usually closes at 4:00 p.m. Eastern time on weekdays, except for holidays. On any business day when the Bond Market Association (the "BMA") recommends that the securities markets close early, each of the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund and the High Yield Bond Fund (each, a "Bond Fund") reserves the right to close at or prior to the BMA recommended closing time. If a Bond Fund does so, it will not grant same business day credit for purchase and redemption orders received after the Bond Fund's closing time and credit will be given on the next business day. If we receive your purchase, redemption or exchange order from your Authorized Institution before close of trading on the NYSE, we will price your order at that day's NAV. If we receive your order after close of trading on the NYSE, we will price your order at the next day's NAV. In some cases, however, you may have to transmit your request to your Authorized Institution by an earlier time in order for your request to be effective that day. This allows your Authorized Institution time to process your request and transmit it to the Funds before close of trading on the NYSE. HOW WE CALCULATE NAV NAV for one share of a Fund is the value of that share's portion of the net assets (I.E., assets less liabilities) of that Fund. We calculate each Fund's NAV by dividing the total net value of its assets by the number of outstanding shares. We base the value of each Fund's investments on its market value, usually the last price reported for each security before the close of the market that day. A market price may not be available for securities that trade infrequently. If market prices are not readily available or considered to be unreliable, fair value prices may be determined by the Funds' Fair Value Committee in good faith using methods approved by the Board CNI CHARTER FUNDS | PAGE 26 of Trustees. For instance, if trading in a security has been halted or suspended or a security has been delisted from a national exchange, a security has not been traded for an extended period of time, or a significant event with respect to a security occurs after the close of the market or exchange on which the security principally trades and before the time the Funds calculate NAV, the Fair Value Committee will determine the security's fair value. In determining the fair value of a security, the Fair Value Committee will consider CNAM's (or the relevant sub-advisor's) valuation recommendation and information supporting the recommendation, including factors such as the type of security, last trade price, fundamental analytical data relating to the security, forces affecting the market in which the security is purchased and sold, the price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant factors. Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value to price securities may value those securities higher or lower than another fund using market quotations or fair value to price the same securities. There can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. The NAV may vary for different share classes of the same Fund. More details about how we calculate the NAV for each Fund are in the SAI. PURCHASE AND ACCOUNT BALANCE MINIMUMS There are no minimum purchase or minimum shareholder account balance requirements; however, you will have to comply with the purchase and account balance minimums of your Authorized Institution. The Funds may require each Authorized Institution to meet certain aggregate investment levels before it may open an account with the Funds on behalf of its customers. Contact your Authorized Institution for more information. dividends For the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund and the High Yield Bond Fund, we will declare investment income daily and distribute it monthly as a dividend to shareholders. For the Large Cap Growth Fund and the Large Cap Value Fund, we will declare and distribute investment income, if any, quarterly as a dividend to shareholders. For the RCB Small Cap Value Fund, we will declare and distribute investment income, if any, annually as a dividend to shareholders. The Funds make distributions of capital gains, if any, at least annually. If you own Fund shares on a Fund's record date, you will be entitled to receive the distribution. Following their fiscal year end (September 30), the Funds may make additional distributions to avoid the imposition of a tax. We will automatically reinvest your dividends and capital gains distributions in additional full or fractional shares, unless you instruct your Authorized Institution in writing prior to the date of the dividend or distribution of your election to receive payment in cash. Your election will be effective for all dividends and distributions paid after your Authorized Institution receives your written notice. To cancel your election, please send your Authorized Institution written notice. Proceeds from dividends or distributions will normally be wired to your Authorized Institution on the business day after dividends or distributions are credited to your account. CNI CHARTER FUNDS | PAGE 27 taxes PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below, we have summarized some important tax issues that affect the Funds and their shareholders. This summary is based on current tax laws, which may change. Each Fund will distribute substantially all of its net investment income and capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, unless you invest solely through a tax-advantaged account such as an IRA or a 401(k) plan. Distributions you receive from a Fund may be taxable whether or not you reinvest them in the Funds. Income distributions are generally taxable at ordinary income tax rates. Capital gains distributions are generally taxable at the rates applicable to capital gains. EACH SALE OR EXCHANGE OF FUND SHARES IS A TAXABLE EVENT. Capital gains may be taxable at different rates depending upon the length of time a Fund holds its assets. We will inform you about the character of any dividends and capital gains upon payment. After the close of each calendar year, we will advise you of the tax status of distributions. Any redemption of a Fund's shares or any exchange of a Fund's shares for another Fund will be treated as a sale, and any gain on the transaction may be taxable. You must provide your Authorized 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 28%. If you plan to purchase shares of a Fund, check if it is planning to make a distribution in the near future. If you do not check, and you buy shares of the Fund just before a distribution, you will pay full price for the shares but receive a portion of your purchase price back as a taxable distribution. This is called "buying a dividend." Unless you hold the Fund in a tax-deferred account, you will have to include the distribution in your gross income for tax purposes, even though you may have not participated in the Fund's appreciation. The California Tax Exempt Bond Fund intends to continue paying what the Internal Revenue Code of 1986, as amended (the "Code"), calls "exempt-interest dividends" to shareholders by maintaining, as of the close of each quarter of its taxable year, at least 50% of the value of its assets in California municipal bonds. If that Fund satisfies this requirement, any distributions paid to shareholders from its net investment income will be exempt from federal income tax, to the extent that that Fund derives its net investment income from interest on municipal bonds. Any distributions paid from other sources of net investment income, such as market discounts on certain municipal bonds, will be treated as ordinary income by the Code. More information about taxes is contained in the SAI. CNI CHARTER FUNDS | PAGE 28 financial highlights The following financial highlights tables are intended to help you understand the Funds' financial performance. For each of the Funds, information for the years or periods indicated below has been audited by KPMG LLP, whose report, along with the Funds' financial statements, are included in the Funds' 2006 Annual Report (available upon request; see the back cover of this Prospectus). Information presented in the financial highlights tables is for a Class A share outstanding throughout each period. The total return figures in the tables represent the rate an investor would have earned (or lost) on a Class A investment in each Fund (assuming reinvestment of all dividends and distributions). LARGE CAP GROWTH FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003(1) Sept. 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 7.35 $ 6.69 $ 6.32 $ 5.21 $ 6.33 - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) -- 0.02 (0.01) (0.01) (0.02) Net Realized and Unrealized Gains (Losses) on Securities 0.33 0.67 0.38 1.12 (1.10) - ---------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.33 0.69 0.37 1.11 (1.12) - ---------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.00)(2) (0.03) (0.00)(2) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Dividends (0.00)(2) (0.03) (0.00)(2) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 7.68 $ 7.35 $ 6.69 $ 6.32 $ 5.21 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 4.55% 10.28% 5.87% 21.31% (17.69%) Net Assets End of Period (000's) $ 10,363 $ 8,278 $ 5,223 $ 1,965 $ 798 Ratio of Expenses to Average Net Assets(3) 1.24% 1.23% 1.26% 1.30% 1.30% Ratio of Net Investment Income (Loss) to Average Net Assets 0.03% 0.33% (0.14%) (0.09%) (0.29%) Ratio of Expenses to Average Net Assets (Excluding Waivers & Recaptured Fees) 1.25% 1.25% 1.26% 1.29% 1.34% Portfolio Turnover Rate 34% 27% 50% 43% 31% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Amount represents less than $0.01 per share. (3) Ratio includes waivers and previously waived investment fees. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 29 LARGE CAP VALUE FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 9.53 $ 8.76 $ 7.41 $ 6.04 $ 7.62 - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.11 0.09 0.05 0.06 0.05 Net Realized and Unrealized Gains (Losses) on Securities 1.20 1.12 1.36 1.37 (1.46) - ---------------------------------------------------------------------------------------------------------------------------------- Total from Operations 1.31 1.21 1.41 1.43 (1.41) - ---------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.10) (0.08) (0.06) (0.06) (0.05) Distributions from Realized Capital Gains (0.39) (0.36) -- -- (0.12) - ---------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.49) (0.44) (0.06) (0.06) (0.17) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.35 $ 9.53 $ 8.76 $ 7.41 $ 6.04 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 14.24% 14.14% 19.01% 23.75% (18.97%) Net Assets End of Period (000's) $ 13,104 $ 10,664 $ 6,281 $ 1,792 $ 769 Ratio of Expenses to Average Net Assets(2) 1.21% 1.21% 1.22% 1.25% 1.25% Ratio of Net Investment Income to Average Net Assets 1.13% 0.87% 0.64% 0.84% 0.65% Ratio of Expenses to Average Net Assets (Excluding Waivers & Recaptured Fees) 1.22% 1.22% 1.22% 1.25% 1.30% Portfolio Turnover Rate 31% 34% 36% 39% 42% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment fees. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 30 RCB SMALL CAP VALUE FUND Year ended Year ended Year ended Year ended Period ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003(1) Sept. 30, 2002(2) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE BEGINNING OF PERIOD $ 28.31 $ 27.13 $ 21.84 $ 15.04 $ 17.11 - ------------------------------------------------------------------------------------------------------------------------------------ Net Investment Income (Loss) (0.01) 0.00 (0.02) (0.08) (0.05) Net Realized and Unrealized Gains (Losses) on Securities 0.05 2.55 5.39 6.88 (2.02) - ------------------------------------------------------------------------------------------------------------------------------------ Total from Operations 0.04 2.55 5.37 6.80 (2.07) - ------------------------------------------------------------------------------------------------------------------------------------ Dividends from Net Investment Income 0.00(3) -- -- -- -- Distributions from Realized Capital Gains (0.37) (1.37) (0.08) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Dividends & Distributions (0.37) (1.37) (0.08) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE END OF PERIOD $ 27.98 $ 28.31 $ 27.13 $ 21.84 $ 15.04 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN* 0.17% 9.55% 24.64% 45.21% (12.10%) Net Assets End of Period (000's) $ 10,470 $ 12,754 $ 7,551 $ 2,384 $ 410 Ratio of Expenses to Average Net Assets(4)(5) 1.45% 1.43% 1.49% 1.49% 1.49% Ratio of Net Investment Income (Loss) to Average Net Assets(4) (0.04%) 0.01% (0.07%) (0.45%) (0.74%) Ratio of Expenses to Average Net Assets (Excluding Waivers & Recaptured Fees)(4) 1.46% 1.45% 1.48% 1.49% 1.53% Portfolio Turnover Rate 66% 41% 40% 65% 39% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) RCB Small Cap Value Fund Class A shares commenced operations on October 3, 2001. (3) Amount represents less than $0.01 per share. (4) Annualized for periods less than one year. (5) Ratio includes waivers and previously waived investment fees. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 31 CORPORATE BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 10.27 $ 10.61 $ 10.89 $ 10.65 $ 10.73 - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.39 0.37 0.37 0.44 0.50 Net Realized and Unrealized Gains (Losses) on Securities (0.10) (0.28) (0.16) 0.23 0.08 - ---------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.29 0.09 0.21 0.67 0.58 - ---------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.39) (0.37) (0.38) (0.43) (0.50) Distributions from Realized Capital Gains -- (0.06) (0.11) -- (0.16) - ---------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.39) (0.43) (0.49) (0.43) (0.66) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.17 $ 10.27 $ 10.61 $ 10.89 $ 10.65 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 2.93% 0.91% 1.99% 6.47% 5.69% Net Assets End of Period (000's) $ 1,332 $ 1,530 $ 1,522 $ 830 $ 544 Ratio of Expenses to Average Net Assets(2) 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets 3.88% 3.55% 3.51% 4.00% 4.71% Ratio of Expenses to Average Net Assets (Excluding Waivers) 1.00% 1.01% 1.04% 1.03% 1.07% Portfolio Turnover Rate 25% 25% 57% 66% 55% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment fees. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 32 GOVERNMENT BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003(1) Sept. 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 10.42 $ 10.64 $ 10.95 $ 11.01 $ 10.77 - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.39 0.29 0.23 0.33 0.43 Net Realized and Unrealized Gains (Losses) on Securities (0.12) (0.17) (0.17) (0.04) 0.34 - ---------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.27 0.12 0.06 0.29 0.77 - ---------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.39) (0.28) (0.23) (0.34) (0.41) Distributions from Realized Capital Gains -- (0.06) (0.14) (0.01) (0.12) - ---------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.39) (0.34) (0.37) (0.35) (0.53) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.30 $ 10.42 $ 10.64 $ 10.95 $ 11.01 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 2.63% 1.16% 0.55% 2.71% 7.47% Net Assets End of Period (000's) $ 1,782 $ 554 $ 436 $ 18 $ 525 Ratio of Expenses to Average Net Assets(2) 0.95% 0.95% 0.95% 0.95% 0.95% Ratio of Net Investment Income to Average Net Assets 3.81% 2.70% 2.14% 3.00% 3.70% Ratio of Expenses to Average Net Assets (Excluding Waivers) 1.03% 1.04% 1.06% 1.06% 1.11% Portfolio Turnover Rate 62% 58% 169% 54% 70% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment fees. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 33 CALIFORNIA TAX EXEMPT BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 10.29 $ 10.44 $ 10.62 $ 10.85 $ 10.51 - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.26 0.25 0.24 0.27 0.33 Net Realized and Unrealized Gains (Losses) on Securities 0.02 (0.11) (0.05) (0.02) 0.43 - ---------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.28 0.14 0.19 0.25 0.76 - ---------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.26) (0.25) (0.24) (0.29) (0.33) Distributions for Realized Capital Gains (0.04) (0.04) (0.13) (0.19) (0.09) - ---------------------------------------------------------------------------------------------------------------------------------- Total Dividends & Distributions (0.30) (0.29) (0.37) (0.48) (0.42) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 10.27 $ 10.29 $ 10.44 $ 10.62 $ 10.85 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 2.81% 1.39% 1.84% 2.37% 7.40% Net Assets End of Period (000's) $ 1,134 $ 1,487 $ 2,439 $ 732 $ 13 Ratio of Expenses to Average Net Assets(2) 0.75% 0.75% 0.75% 0.75% 0.75% Ratio of Net Investment Income to Average Net Assets 2.59% 2.43% 2.29% 2.62% 3.05% Ratio of Expenses to Average Net Assets (Excluding Waivers) 0.87% 0.88% 0.90% 0.90% 0.95% Portfolio Turnover Rate 43% 54% 51% 68% 90% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment fees. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 34 HIGH YIELD BOND FUND Year ended Year ended Year ended Year ended Year ended Sept. 30, 2006(1) Sept. 30, 2005(1) Sept. 30, 2004(1) Sept. 30, 2003 Sept. 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $ 9.04 $ 9.31 $ 8.95 $ 8.16 $ 8.57 - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.65 0.69 0.70 0.74 0.81 Net Realized and Unrealized Gains (Losses) on Securities (0.08) (0.27) 0.35 0.78 (0.40) - ---------------------------------------------------------------------------------------------------------------------------------- Total from Operations 0.57 0.42 1.05 1.52 0.41 - ---------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (0.65) (0.69) (0.69) (0.73) (0.82) - ---------------------------------------------------------------------------------------------------------------------------------- Total Dividends (0.65) (0.69) (0.69) (0.73) (0.82) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $ 8.96 $ 9.04 $ 9.31 $ 8.95 $ 8.16 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN* 6.58% 4.54% 12.14% 19.39% 4.49% Net Assets End of Period (000's) $ 20,045 $ 21,028 $ 20,655 $ 16,878 $ 9,397 Ratio of Expenses to Average Net Assets(2) 1.30% 1.30% 1.30% 1.30% 1.30% Ratio of Net Investment Income to Average Net Assets 7.28% 7.41% 7.56% 8.44% 9.03% Ratio of Expenses to Average Net Assets (Excluding Waivers) 1.40% 1.41% 1.44% 1.43% 1.48% Portfolio Turnover Rate 23% 46% 35% 36% 30% _____________________ * Returns are for the period indicated and have not been annualized. Fee waivers were in effect; if they had not been in effect, performance would have been lower. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) Per share calculations are based on Average Shares outstanding throughout the period. (2) Ratio includes waivers and previously waived investment fees. The impact of the recovered fees may cause a higher net expense ratio. CNI CHARTER FUNDS | PAGE 35 important terms to know QUALITY -- the credit rating given to a security by a nationally recognized statistical rating organization. YIELD -- the interest rate you would receive if you kept your investment in a Fund for a year. It is based on the current interest rate for a trailing seven-day period. EFFECTIVE YIELD -- the interest rate, compounded weekly, you would receive if you kept your investment in a Fund for a year. DURATION -- the sensitivity of a debt security to changes in interest rates. It takes into account both interest payments and payment at maturity. S&P 500/CITIGROUP GROWTH INDEX -- measures the performance of all of the stocks in the Standard & Poor's 500 that are classified as growth stocks. A proprietary methodology is used to score constituents, which are weighted according to their market capitalization. S&P 500/CITIGROUP VALUE INDEX -- measures the performance of all of the stocks in the Standard & Poor's 500 that are classified as value stocks. A proprietary methodology is used to score constituents, which are weighted according to their market capitalization. RUSSELL 2000 INDEX -- measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which measures the performance of the 3,000 largest U.S. companies based on total market capitalization. RUSSELL 2000 VALUE INDEX -- measures the performance of those Russell 2000 companies that have low price-to-book ratios and low forecasted growth values. The Index is reconstituted annually effective the last Friday of June each year. The Index is designed so that approximately 50% of the Russell 2000 market capitalization is in the Value Index. RUSSELL 2500 VALUE INDEX -- measures the performance of those Russell 2500 companies (the 2,500 smallest companies in the Russell 3000 Index) that have low price-to-book ratios and low forecasted growth values. The Index is rebalanced annually effective the last Friday of June each year. The Index is designed so that approximately 50% of the Russell 2500 market capitalization is in the Value Index. LEHMAN INTERMEDIATE U.S. CORPORATE INDEX -- comprised of fixed income securities issued by corporations which have a fixed rate coupon, have between 1 and 10 years to maturity, at least $150 million par outstanding, an investment grade rating from Moody's Investors Service (Baa3 or better), and are publicly registered. The composition of the Index is rebalanced monthly to include the universe of securities meeting the above criteria. LEHMAN INTERMEDIATE U.S. GOVERNMENT BOND INDEX -- comprised of securities issued by the U.S. Government and U.S. Government agencies which have a fixed rate coupon, between 1 and 10 years to maturity, and at least $150 million par outstanding. The composition of the Index is rebalanced monthly to include the universe of securities meeting the above criteria. LEHMAN CA INTERMEDIATE-SHORT MUNICIPAL INDEX -- comprised of California state-specific municipal issues which have a fixed rate coupon, have between 1 and 10 years to maturity, an investment grade rating from Moody's Investors Service (Baa3 or better), and are publicly registered. The individual issues must also have at least $5 million par outstanding and be part of a deal of $50 million or more. The composition of the Index is rebalanced monthly to include the universe of securities meeting the above criteria. CITIGROUP HIGH YIELD MARKET INDEX -- comprised of cash-pay deferred-interest and Rule 144A bonds with remaining maturities of at least one year and a minimum amount outstanding of US $100 million. The issuers are domiciled in either the United States or Canada. CNI CHARTER FUNDS | PAGE 36 privacy principles CNI Charter Funds and its affiliates know our shareholders expect and rely upon us to maintain the confidentiality and privacy of all of the information about them in our possession and control. Maintaining the trust and confidence of our shareholders is our highest priority. We have adopted and published the CNI Charter Funds Statement of Privacy Principles to guide our conduct when we collect, use, maintain or release shareholder information and to assist our shareholders and others to better understand our privacy practices in general and as they apply to nonpublic personal information in particular. Certain information regarding the Funds' Privacy Principles is summarized below. We will obey all applicable laws respecting the privacy of nonpublic personal information and will comply with the obligations of the law respecting nonpublic personal information provided to us. We collect, use and retain the information, including nonpublic personal information, about our shareholders and prospective shareholders that we believe is necessary for us to understand and better meet their financial needs and requests, to administer and maintain their accounts, to provide them with our products and services, to anticipate their future needs, to protect them and us from fraud or unauthorized transactions, and to meet legal requirements. We may share information regarding our shareholders with our affiliates as permitted by law because some of our products and services are delivered through or in conjunction with our affiliates. We instruct our colleagues to limit the availability of all shareholder information within our organization to those colleagues responsible for servicing the needs of the shareholder and those colleagues who reasonably need such information to perform their duties and as required or permitted by law. We do provide shareholder information, including nonpublic personal information, to our vendors and other outside service providers whom we use when appropriate or necessary to perform and enhance our shareholder services. When we provide shareholder information to anyone outside our organization, we only do so as required or permitted by law. We require all of our vendors and service providers who receive shareholder information from us to agree to maintain the information in confidence, to limit the use and dissemination of the information to the purpose for which it is provided and to abide by the law. To the extent permitted by law, we undertake to advise a shareholder of any government or other legal process served on us requiring disclosure of information about that shareholder. Except as stated above, we limit our disclosure of nonpublic personal information to third parties to the following circumstances: (i) when requested to do so by the shareholder; (ii) when necessary, in our opinion, to effect, administer, or enforce a shareholder initiated transaction; and (iii) when required or permitted to do so by law or regulation, including authorized requests from government agencies and if we are the victim of fraud or otherwise suffer loss caused by the unlawful act of the shareholder. A full copy of CNI Charter Funds' Statement of Privacy Principles is available at WWW.CNICHARTERFUNDS.COM. Should you have any questions regarding the Funds' Privacy Principles, please contact your investment professional or the Funds at 1-888-889-0799. CNI CHARTER FUNDS | PAGE 37 For More Information CNI CHARTER FUNDS 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). In the Funds' Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Additional information about the Funds' investments is available in the Funds' 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 Funds may be reviewed and copied: o at the SEC's Public Reference Room in Washington, D.C. at 1-202-942-8090; o on the EDGAR database on the SEC's Internet site at www.sec.gov; or o by written request (including duplication fee) to the Public Reference Section of the SEC, Washington, D.C. 20549-6009 or by electronic request at publicinfo@sec.gov. For the current seven-day yield, or if you have questions about the Funds, please call 1-888-889-0799. The Funds' Investment Company Act File Number: 811-07923. CNI-PS-005-0600 Exhibit G STATEMENT OF ADDITIONAL INFORMATION CNI CHARTER FUNDS 400 North Roxbury Drive, Beverly Hills, California 90210 LARGE CAP GROWTH EQUITY FUND LARGE CAP VALUE EQUITY FUND TECHNOLOGY GROWTH FUND RCB SMALL CAP VALUE FUND CORPORATE BOND FUND GOVERNMENT BOND FUND CALIFORNIA TAX EXEMPT BOND FUND HIGH YIELD BOND FUND PRIME MONEY MARKET FUND GOVERNMENT MONEY MARKET FUND CALIFORNIA TAX EXEMPT MONEY MARKET FUND Institutional Class, Class A, Class S and Class R Shares January 31, 2007 Mutual fund shares are not insured or guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation or any other governmental agency. Mutual fund shares are not bank deposits, nor are they obligations of, or issued, endorsed or guaranteed by City National Bank ("CNB"). Investing in mutual funds and other securities involves risks, including possible loss of principal. This Statement of Additional Information ("SAI") is not a prospectus. It should be read in conjunction with the Prospectuses dated January 31, 2007, which may be amended from time to time, for the Large Cap Growth Equity Fund (the "Large Cap Growth Fund"), the Large Cap Value Equity Fund (the "Large Cap Value Fund"), the Technology Growth Fund, the RCB Small Cap Value Fund (the "Small Cap Value Fund"), the Corporate Bond Fund, the Government Bond Fund, the California Tax Exempt Bond Fund (the "California Bond Fund"), the High Yield Bond Fund, the Prime Money Market Fund (the "Prime Money Fund"), the Government Money Market Fund (the "Government Money Fund") and the California Tax Exempt Money Market Fund (the "California Money Fund"). The Large Cap Growth Fund, the Large Cap Value Fund, the Technology Growth Fund and the Small Cap Value Fund are referred to herein as the "Equity Funds." The Corporate Bond Fund, the Government Bond Fund, the California Bond Fund and the High Yield Bond Fund are referred to herein as the "Bond Funds." The Prime Money Fund, the Government Money Fund and the California Money Fund are referred to herein as the "Money Funds." The Equity Funds, the Bond Funds and the Money Funds are referred to herein as the "Funds." Each Fund is a series of CNI Charter Funds (the "Trust"), an open-end, management investment company. Each Fund other than the California Bond Fund is a diversified portfolio; the California Bond Fund is a non-diversified portfolio. Audited financial statements for each of the Funds contained in the Annual Report to Shareholders of the Funds for the fiscal year ended September 30, 2006, are incorporated herein by reference. Audited financial statements for the predecessor to the Small Cap Value Fund, the RCB Small Cap Fund (a series of Professionally Managed Portfolios) contained in the Annual Reports to Shareholders of the RCB Small Cap Fund for the fiscal periods ending September 30, 2001 and June 30, 2001, are also incorporated herein by reference. The AHA Limited Maturity Fixed Income Fund, AHA Full Maturity Fixed Income Fund, AHA Balanced Fund, AHA Diversified Equity Fund and AHA Socially Responsible Equity Fund series of the Trust (collectively, the "AHA Funds") are offered through separate prospectuses and a separate CNI-SX-003-0300 statement of additional information. Audit financial statements for each of the AHA Funds are contained in a separate Annual Report to Shareholders for the fiscal year ended September 30, 2006. To obtain a free copy of the above-referenced Prospectuses or Annual Report for the Funds, please call 1-888-889-0799 or visit www.cnicharterfunds.com. To obtain a free copy of the above-referenced Prospectuses, Statement of Additional Information or Annual Reports for the AHA Funds, please call 1-800-445-1341 or visit www.ahafunds.org. -2- TABLE OF CONTENTS Page GENERAL INFORMATION...........................................................4 INVESTMENT TECHNIQUES AND RISK CONSIDERATIONS.................................4 INVESTMENT RESTRICTIONS......................................................31 MANAGEMENT OF THE TRUST......................................................36 PORTFOLIO TRANSACTIONS.......................................................53 DISTRIBUTIONS AND TAXES......................................................58 SHARE PRICE CALCULATION......................................................64 DISTRIBUTION PLAN............................................................67 SHAREHOLDER SERVICES AGREEMENT...............................................69 DEALER COMMISSIONS...........................................................70 EXPENSES.....................................................................71 CODE OF ETHICS...............................................................71 DISCLOSURE OF PORTFOLIO HOLDINGS.............................................71 PROXY VOTING.................................................................72 GENERAL INFORMATION..........................................................74 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..........................75 PERFORMANCE INFORMATION......................................................82 PURCHASE AND REDEMPTION OF SHARES............................................85 OTHER INFORMATION............................................................87 FINANCIAL STATEMENTS.........................................................87 APPENDIX A - RATINGS OF INVESTMENT SECURITIES...............................A-1 -3- GENERAL INFORMATION The various classes of shares of each Fund commenced operations on the following dates: - ------------------------------------------------------------------------------------------ Fund Institutional Class A Class S Class R Class - ------------------------------------------------------------------------------------------ Large Cap Growth Fund 1/14/00 3/28/00 N/A N/A - ------------------------------------------------------------------------------------------ Large Cap Value Fund 1/14/00 4/13/00 N/A N/A - ------------------------------------------------------------------------------------------ Small Cap Value Fund 10/3/01 10/3/01 N/A 10/1/01(*) - ------------------------------------------------------------------------------------------ Technology Growth Fund 10/3/00 10/23/00 N/A N/A - ------------------------------------------------------------------------------------------ Corporate Bond Fund 1/14/00 4/13/00 N/A N/A - ------------------------------------------------------------------------------------------ Government Bond Fund 1/14/00 4/13/00 N/A N/A - ------------------------------------------------------------------------------------------ California Bond Fund 1/14/00 4/13/00 N/A N/A - ------------------------------------------------------------------------------------------ High Yield Bond Fund 1/14/00 1/14/00 N/A N/A - ------------------------------------------------------------------------------------------ Prime Money Fund 3/23/98 10/18/99 10/26/99 N/A - ------------------------------------------------------------------------------------------ Government Money Fund 4/3/00 6/21/99 10/6/99 N/A - ------------------------------------------------------------------------------------------ California Money Fund 4/3/00 6/21/99 11/12/99 N/A - ------------------------------------------------------------------------------------------ In 2000, the fiscal year-end for the Trust was changed from October 31 to September 30. (*)The Small Cap Value Fund commenced operations on October 1, 2001, the date of its acquisition of the assets and liabilities of a series of Professionally Managed Portfolios, a registered investment company (the "RCB Predecessor Fund"), for which Reed Conner & Birdwell LLC ("RCB") served as investment adviser, and which had the same investment objective, policies and strategies as the Small Cap Value Fund. As compared with the Small Cap Value Fund, the RCB Predecessor Fund had different service providers, a different board of trustees and a different fee structure. In addition, the fiscal year end of the RCB Predecessor Fund was June 30 while the Small Cap Value Fund's fiscal year ends September 30. As of the date of the acquisition, all of the issued and outstanding shares of the RCB Predecessor Fund were converted into Class R shares of the Small Cap Value Fund. The RCB Predecessor Fund commenced operations on September 30, 1998. City National Asset Management, Inc. ("CNAM, Inc." or the "Investment Manager") serves as investment manager to the Funds. Each of Halbis Capital Management (USA), Inc. ("Halbis") and Reed Conner & Birdwell LLC ("RCB" and together with Halbis, the "Sub-Advisers") serves as a sub-adviser to one of the Funds, as described more fully below. INVESTMENT TECHNIQUES AND RISK CONSIDERATIONS The Prospectuses show the principal strategies and risks of investing in each Fund. This SAI shows additional strategies and risks of the Funds that an investor should also consider. PRIME MONEY FUND The Prime Money Fund invests generally in the following types of U.S. dollar-denominated money market instruments, which are deemed to mature in 397 days or less in accordance with federal securities regulations and which CNAM, Inc. has determined present minimal credit risk: - Commercial paper, including asset-backed commercial paper, rated in one of the two highest rating categories by Moody's Investors Services ("Moody's"), Standard and Poor's Corporation ("S&P"), Fitch IBCA, Duff and Phelps Inc. ("Fitch"), or any other nationally recognized statistical rating organization -4- ("NRSRO"); or commercial paper or notes of issuers with an unsecured debt issue outstanding currently rated in one of the two highest rating categories by any NRSRO where the obligation is on the same or a higher level of priority and collateralized to the same extent as the rated issue. - Other corporate obligations such as publicly traded bonds, debentures, and notes rated in one of the two highest rating categories by any NRSRO and other similar securities which, if unrated by any NRSRO, are determined by the Investment Manager, using guidelines approved by the Board of Trustees of the Trust (the "Board of Trustees" or the "Board"), to be at least equal in quality to one or more of the above referenced securities. - Obligations of, or guaranteed by, the U.S. or Canadian governments, their agencies or instrumentalities. - Repurchase agreements involving obligations that are suitable for investment under the categories listed above. - Certificates of deposit, time deposits, notes and bankers' acceptances of U.S. domestic banks (including their foreign branches), Canadian chartered banks, U.S. branches of foreign banks and foreign branches of foreign banks having total assets of $5 billion or greater. GOVERNMENT MONEY FUND It is a fundamental policy of the Government Money 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. CALIFORNIA MONEY FUND It is a fundamental policy of the California Money Fund to invest, under normal conditions, at least 80% of its net assets in municipal securities that pay interest that, in the opinion of bond counsel, is exempt from federal and California state personal income tax and that is not a preference item for purposes of the federal alternative minimum tax (the "AMT"). 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 Money 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 Money Fund has no present intention of investing in such securities), and (2) taxable investments. The California Money Fund will not invest 25% or more of its total 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. MONEY FUND RISKS The Money Funds will invest in securities which the Investment Manager has determined, according to procedures approved by the Board and factors set forth under Rule 2a-7 under the Investment -5- Company Act of 1940, as amended (the "1940 Act"), to present minimal credit risk. The ratings assigned to commercial paper and other corporate obligations, as well as the guidelines approved by the Board, are intended to enable the Investment Manager to minimize the credit risk with respect to the securities in the Money Funds' portfolios, but there can be no absolute assurance that the Investment Manager will be successful in this regard. If issuer defaults nevertheless occur representing a sufficiently large portion of a Money Fund's portfolios, the Money Fund may be unable to maintain stable net asset values of $1.00 per share. CALIFORNIA BOND FUND The California Bond Fund invests in obligations either issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies, authorities and instrumentalities, including industrial development bonds, as well as obligations of certain agencies and instrumentalities of the U.S. Government - in each case that pay interest that, in the opinion of bond counsel to the issuer, is exempt from federal income tax ("Municipal Securities") or exempt from federal and California personal income tax ("California Municipal Securities"). Thus, this Fund generally will have a lower return than if it primarily purchases higher yielding taxable securities. Generally, the value of the Municipal Securities and California Municipal Securities held by this Fund will fluctuate inversely with interest rates. The California Bond Fund is a "non-diversified" investment company under the 1940 Act. This means that, with respect to 50% of its total assets, it may not invest more than 5% of its total assets in the securities of any one issuer (other than the U.S. Government). The balance of its total assets may be invested in as few as two issuers. Thus, up to 25% of the Fund's total assets may be invested in the securities of any one issuer. For purposes of this limitation, a security is considered to be issued by the governmental entity (or entities) the assets and revenues of which back the security, or, with respect to an industrial development bond, that is backed only by the assets and revenues of a non-governmental user, by such non-governmental user. In certain circumstances, the guarantor of a guaranteed security also may be considered to be an issuer in connection with such guarantee. By investing in a portfolio of municipal securities, a shareholder in the California Bond Fund enjoys greater diversification than an investor holding a single municipal security. The investment return on a non-diversified portfolio, however, typically is dependent upon the performance of a smaller number of issuers relative to the number of issuers held in a diversified portfolio. If the financial condition or market assessment of certain issuers changes, this Fund's policy of acquiring large positions in the obligations of a relatively small number of issuers may affect the value of its portfolio to a greater extent than if its portfolio were fully diversified. PERMITTED INVESTMENTS Equity Securities. The Equity Funds will, and the Bond Funds may, invest in equity securities. Equity securities represent ownership interests in a company or corporation, and include common stock, preferred stock, warrants and other rights to acquire such instruments. Investments in equity securities in general are subject to market risks and fluctuation in value due to earnings, economic conditions and other factors that may cause their prices to fluctuate over time. The value of convertible equity securities is also affected by prevailing interest rates, the credit quality of the issuer and any call provisions. Fluctuations in the values of equity securities in which a Fund invests will cause the net asset value of the Fund to fluctuate. Investments in small or middle capitalization companies involve greater risk than is customarily associated with larger, more established companies due to the greater business risks of small size, -6- limited markets and financial resources, narrow product lines and the frequent lack of depth of management. The securities of small or medium-sized companies are often traded over-the-counter, and may not be traded in volumes typical of securities traded on a national securities exchange. Consequently, the securities of smaller companies may have limited market stability and may be subject to more abrupt or erratic market movements than securities of larger, more established companies or the market averages in general. Preferred stock is a blend of the characteristics of a bond and common stock. It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and, unlike common stock, its participation in the issuer's growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any residual assets after payment to creditors should the issuer be dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. Fixed Income Securities. The Money Funds and the Bond Funds will, and the Equity Funds may, invest in fixed income securities. Fixed income securities are debt obligations issued by the U.S. Government and its agencies, corporations, municipalities and other borrowers. The market values 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. Investors should recognize that, in periods of declining interest rates, the returns of the Funds which invest in debt securities will tend to be somewhat higher than prevailing market rates, and in periods of rising interest rates, the returns of the Funds which invest in debt securities will tend to be somewhat lower. Also, when interest rates are falling, the inflow of net new money to these 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 these Funds' current returns. In periods of rising interest rates, the opposite can be expected to occur. Changes in the ability of an issuer to make payments of interest and principal, in the market's perception of the issuer's creditworthiness, and in the rating of any fixed income security by recognized rating agencies also affect the market value of that issuer's debt securities. Changes in the value of portfolio securities will not necessarily affect cash income derived from these securities, but will affect the Funds' net asset values. See attached Appendix A for a discussion of fixed income ratings. These 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. Corporate Bonds. The Corporate Bond Fund and the Prime Money Fund may invest in corporate bonds. Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by shareholders, the corporation promises to pay bondholders interest and to repay the principal amount of the bond or note. Low Grade, High Yield Debt. There is no bottom limit on the ratings of high-yield securities that may be purchased or held by the High Yield Bond Fund. In addition, the High Yield Bond Fund may invest in unrated securities. Lower rated securities are defined as securities below the fourth highest -7- rating category by an NRSRO, as discussed in the appendix attached hereto. Such obligations are speculative and may be in default. Credit ratings evaluate the safety of principal and interest payments of securities, not their market values. The rating of an issuer is also heavily weighted by past developments and does not necessarily reflect probable future conditions. There is frequently a lag between the time a rating is assigned and the time it is updated. As credit rating agencies may fail to timely change credit ratings of securities to reflect subsequent events, the Investment Manager or Sub-Adviser will also monitor issuers of such securities. Fixed income securities are subject to the risk of an issuer's ability to meet principal and interest payments on the obligation (credit risk), and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Lower rated or unrated (i.e., high yield) securities are more likely to react to developments affecting market and credit risk than are more highly rated securities, which primarily react to movements in the general level of interest rates. The market values of fixed-income securities tend to vary inversely with the level of interest rates. Yields and market values of high yield securities will fluctuate over time, reflecting not only changing highest rates but the market's perception of credit quality and the outlook for economic growth. When economic conditions appear to be deteriorating, medium to lower rated securities may decline in value due to heightened concern over credit quality, regardless of prevailing interest rates. Investors should carefully consider the relative risks of investing in high yield securities and understand that such securities are not generally meant for short-term investing. Adverse economic developments can disrupt the market for high yield securities, and severely affect the ability of issuers, especially highly leveraged issuers, to service their debt obligations or to repay their obligations upon maturity which may lead to a higher incidence of default on such securities. In addition, the secondary market for high yield securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. As a result, the High Yield Bond Fund's advisers could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Furthermore, the Trust may experience difficulty in valuing certain securities at certain times. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating the High Yield Bond Fund's net asset value. Prices for high yield securities may be affected by legislative and regulatory developments. These laws could adversely affect the High Yield Bond Fund's net asset value and investment practices, the secondary market value for high yield securities, the financial condition of issuers of these securities and the value of outstanding high yield securities. Lower rated or unrated debt obligations also present risks based on payment expectations. If an issuer calls the obligations for redemption, the High Yield Bond Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. If the High Yield Bond Fund experiences unexpected net redemptions, it may be forced to sell its higher rated securities, resulting in a decline in the overall credit quality of the High Yield Bond Fund's investment portfolio and increasing the exposure of the High Yield Bond Fund to the risks of high yield securities. Variable and Floating Rate Instruments. The Money Funds and the Bond Funds may invest in variable and floating rate instruments. Certain of the obligations purchased by these 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 -8- 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. Convertible Securities and Warrants. The Equity Funds and the High Yield Bond Fund may invest in convertible securities and warrants. A convertible security is a fixed-income security (a debt instrument or a preferred stock) which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stocks in an issuer's capital structure, but are usually subordinated to similar non-convertible securities. While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar nonconvertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay fixed dividends. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of the Fund's entire investment therein). Section 4(2) Commercial Paper. The Funds may invest in Section 4(2) commercial paper. Section 4(2) commercial paper is issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"). Any resale of such commercial paper must be in an exempt transaction, usually to an institutional investor through the issuer or investment dealers who make a market on such commercial paper. 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 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 a Fund's inability to dispose of such securities promptly or at favorable prices. Commercial paper and short-term notes will consist of issues rated at the time of purchase "A-2" or higher by Standard & Poor's Ratings Group, "Prime-1" or "Prime-2" by Moody's Investors Service, Inc., or similarly rated by another NRSRO if unrated, will be determined by the Investment Manager (or the relevant Sub-adviser) to be of comparable quality. These rating symbols are described in the Appendix. To the extent that the Investment Manager (or Sub-Adviser), pursuant 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. Illiquid Securities. The Funds may invest in illiquid securities. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been -9- registered under the 1933 Act, securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Restricted securities are securities that may not be sold freely to the public absent registration under the 1933 Act, or an exemption from registration. The Board has delegated the function of making day-to-day determinations of liquidity to the Investment Manager (or Sub-Adviser, if any) 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 willing and ready to purchase and sell the security, (3) whether any dealers have agreed to make a market in the security, (4) the number of other potential purchasers for the security, and (5) the nature of the securities and the nature of the marketplace trades. No Money Fund will purchase illiquid securities, including time deposits and repurchase agreements maturing in more than seven days, if, as a result of the purchase, more than 10% of the Fund's net assets valued at the time of the transaction are invested in such securities. No Equity Fund or Bond Fund will purchase illiquid securities, including time deposits and repurchase agreements maturing in more than seven days, if, as a result of the purchase, more than 15% of the Fund's net assets valued at the time of the transaction are invested in such securities. Each Fund will monitor the level of liquidity and take appropriate action, if necessary, to attempt to maintain adequate liquidity. The investment policy on the purchase of illiquid securities is non-fundamental. Mortgage-Related Securities and Derivative Securities. The Corporate Bond Fund, the Government Bond Fund and the High Yield Bond Fund may invest in mortgage-related securities. A mortgage-related security is an interest in a pool of mortgage loans and is considered a derivative security. Most mortgage-related securities are pass-through securities, which means that investors receive payments consisting of a pro rata share of both principal and interest (less servicing and other fees), as well as unscheduled prepayments, as mortgages in the underlying mortgage pool are paid off by the borrowers. Certain mortgage-related securities are subject to high volatility. These Funds use these derivative securities in an effort to enhance return and as a means to make certain investments not otherwise available to these Funds. Agency Mortgage-Related Securities. The dominant issuers or guarantors of mortgage-related securities today are Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA creates pass-through securities from pools of government-guaranteed or -insured (Federal Housing Authority or Veterans Administration) mortgages. FNMA and FHLMC issue pass-through securities from pools of conventional and federally insured and/or guaranteed residential mortgages. The principal and interest on GNMA pass-through securities are guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. FNMA guarantees full and timely payment of all interest and principal, and FHLMC guarantees timely payment of interest and ultimate collection of principal of its pass-through securities. Securities from FNMA and FHLMC are not backed by the full faith and credit of the U.S. Government but are generally considered to offer minimal credit risks. The yields provided by these mortgage-related securities have historically exceeded the yields on other types of Government Securities with comparable "lives" largely due to the risks associated with prepayment. Adjustable rate mortgage securities ("ARMs") are pass-through securities representing interests in pools of mortgage loans with adjustable interest rates determined in accordance with a predetermined interest rate index and which may be subject to certain limits. The adjustment feature of ARMs tends to lessen their interest rate sensitivity. -10- Mortgage-Related Securities - GNMA. GNMA is a wholly owned corporate instrumentality of the U.S. Government within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment of the principal of, and interest on, securities that are based on and backed by a pool of specified mortgage loans. For these types of securities to qualify for a GNMA guarantee, the underlying collateral must be mortgages insured by the FHA under the Housing Act, or Title V of the Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible mortgage loans. The Housing Act provides that the full faith and credit of the U.S. Government is pledged to the payment of all amounts that may be required to be paid under any guarantee. In order to meet its obligations under a guarantee, GNMA is authorized to borrow from the U.S. Treasury with no limitations as to amount. GNMA pass-through securities may represent a proportionate interest in one or more pools of the following types of mortgage loans: (1) fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on multifamily residential properties under construction; (6) mortgage loans on completed multifamily projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to reduce the borrower's monthly payments during the early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans that provide for adjustments on payments based on periodic changes in interest rates or in other payment terms of the mortgage loans; and (9) mortgage-backed serial notes. Mortgage-Related Securities - FNMA. FNMA is a federally chartered and privately owned corporation established under the Federal National Mortgage Association Charter Act. FNMA was originally organized in 1938 as a U.S. Government agency to add greater liquidity to the mortgage market. FNMA was transformed into a private sector corporation by legislation enacted in 1968. FNMA provides funds to the mortgage market primarily by purchasing home mortgage loans from local lenders, thereby providing them with funds for additional lending. FNMA acquires funds to purchase loans from investors that may not ordinarily invest in mortgage loans directly, thereby expanding the total amount of funds available for housing. Each FNMA pass-through security represents a proportionate interest in one or more pools of FHA Loans, VA Loans or conventional mortgage loans (that is, mortgage loans that are not insured or guaranteed by any U.S. Government agency). The loans contained in those pools consist of one or more of the following: (1) fixed-rate level payment mortgage loans; (2) fixed-rate growing equity mortgage loans; (3) fixed-rate graduated payment mortgage loans; (4) variable-rate mortgage loans; (5) other adjustable-rate mortgage loans; and (6) fixed-rate mortgage loans secured by multifamily projects. Mortgage-Related Securities - FHLMC. FHLMC is a corporate instrumentality of the United States established by the Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily for the purpose of increasing the availability of mortgage credit to finance needed housing. The operations of FHLMC currently consist primarily of the purchase of first lien, conventional, residential mortgage loans and participation interests in mortgage loans and the resale of the mortgage loans in the form of mortgage-backed securities. The mortgage loans underlying FHLMC securities typically consist of fixed-rate or adjustable-rate mortgage loans with original terms to maturity of between 10 and 30 years, substantially all of which are secured by first liens on one-to-four-family residential properties or multifamily projects. Each mortgage loan must include whole loans, participation interests in whole loans and undivided interests in whole loans and participation in another FHLMC security. -11- Privately Issued Mortgage-Related Securities. Mortgage-related securities offered by private issuers include pass-through securities comprised of pools of conventional residential mortgage loans; mortgage-backed bonds which are considered to be obligations of the institution issuing the bonds and are collateralized by mortgage loans; and bonds and "CMOs" collateralized by mortgage-related securities issued by GNMA, FNMA, FHLMC or by pools of conventional mortgages, multifamily or commercial mortgage loans. Each class of a CMO is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the collateral pool may cause the various classes of a CMO to be retired substantially earlier than their stated maturities or final distribution dates. The principal of and interest on the collateral pool may be allocated among the several classes of a CMO in a number of different ways. Generally, the purpose of the allocation of the cash flow of a CMO to the various classes is to obtain a more predictable cash flow to some of the individual tranches than exists with the underlying collateral of the CMO. As a general rule, the more predictable the cash flow is on a CMO tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on mortgage-related securities. Certain classes of CMOs may have priority over others with respect to the receipt of prepayments on the mortgages. Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class which, like the other CMO structures, must be retired by its stated maturity date or final distribution date, but may be retired earlier. Planned amortization class CMOs ("PAC Bonds") are parallel pay CMOs that generally require payments of a specified amount of principal on each payment date; the required principal payment on PAC Bonds have the highest priority after interest has been paid to all classes. Privately issued mortgage-related securities generally offer a higher rate of interest (but greater credit and interest rate risk) than U.S. Government and agency mortgage-related securities because they offer no direct or indirect governmental guarantees. Many issuers or servicers of mortgage-related securities guarantee or provide insurance for timely payment of interest and principal, however. Some mortgage-related securities are offered through private placements that are restricted as to further sale. The value of these securities may be very volatile. Adjustable-Rate Mortgage-Related Securities. Because the interest rates on the mortgages underlying ARMs reset periodically, yields of such portfolio securities will gradually align themselves to reflect changes in market rates. Unlike fixed-rate mortgages, which generally decline in value during periods of rising interest rates, ARMs allow a Fund to participate in increases in interest rates through periodic adjustments in the coupons of the underlying mortgages, resulting in both higher current yields and low price fluctuations. Furthermore, if prepayments of principal are made on the underlying mortgages during periods of rising interest rates, a Fund may be able to reinvest such amounts in securities with a higher current rate of return. During periods of declining interest rates, of course, the coupon rates may readjust downward, resulting in lower yields to a Fund. Further, because of this feature, the value of ARMs is unlikely to rise during periods of declining interest rates to the same extent as fixed rate instruments. Other Mortgage-Related Securities. Other mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, including mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS"). Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage -12- banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing. CMO residuals are mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only ("IO") class of stripped mortgage-backed securities. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities, in certain circumstances a Fund may fail to recoup fully its initial investment in a CMO residual. CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has only very recently developed and CMO residuals currently may not have the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may, or pursuant to an exemption therefrom, may not have been registered under the 1933 Act. CMO residuals, whether or not registered under the 1933 Act, may be subject to certain restrictions on transferability, and may be deemed "illiquid" and subject to a Fund's limitations on investment in illiquid securities. SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on an IOs, POs and other mortgage securities that are purchased at a substantial premium or discount generally are extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on such securities' yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to fully recoup its initial investment in these securities even if the securities have received the highest rating by an NRSRO. -13- Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, established trading markets have not developed and, accordingly, these securities may be deemed "illiquid" and subject to a Fund's limitations on investment in illiquid securities. The value of derivative securities known as "floaters" and "inverse floaters" vary in response to interest rates. These securities may be illiquid and their values may be very volatile. Asset-Backed Commercial Paper. The Prime Money Fund and the California Money Fund each can invest a portion of its assets in asset-backed commercial paper and other Eligible Securities (as that term is defined below). The credit quality of most asset-backed commercial paper depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator (or any other affiliated entities), and the amount and quality of any credit support provided to the securities. The Prime Money Fund and the California Money Fund each intends to obtain repayment of asset-backed commercial paper from an identified pool of assets including automobile receivables, credit-card receivables, and other types of assets. Asset-backed commercial paper is issued by a special purpose vehicle (usually a corporation) that has been established for the purpose of issuing the commercial paper and purchasing the underlying pool of assets. The issuer of commercial paper bears the direct risk of prepayment on the receivables constituting the underlying pool of assets. In an effort to lessen the effect of failures by obligors on these underlying assets to make payments, such securities may contain elements of credit support. Credit support for asset-backed securities may be based on the underlying assets or credit enhancements provided by a third party. Credit enhancement techniques include letters of credit, insurance bonds, limited guarantees and over-collateralization. Credit support falls into two classes: liquidity protection and protection against ultimate default on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that scheduled payments on the underlying pool are made in a timely fashion. Protection against ultimate default ensures payment on at least a portion of the assets in the pool. This protection may be provided through guarantees, insurance policies, letters of credit obtained from third parties, various means of structuring the transaction, or a combination of such approaches. The degree of credit support provided on each issue is based generally on historical information respecting the level of credit risk associated with such payments. Delinquency or loss in excess of that anticipated could adversely affect the return on an investment in an asset-backed security. Asset-Backed Securities. The Prime Money Fund, the California Money Fund, the Corporate Bond Fund and the High Yield Bond Fund may invest in asset-backed securities. These types of securities represent a direct or indirect participation in, or are secured by and payable from, pools of assets, such as motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, and receivables from revolving credit (e.g., credit card) agreements. Payments or distributions of principal and interest on asset-backed securities may be supported by credit enhancements, such as various forms of cash collateral accounts or letters of credit. These securities are subject to the risk of prepayment. Prepayments of principal of asset-backed securities affect the average life of the asset-backed securities in a Fund's portfolio. Prepayments are affected by the level of interest rates and other factors, including general economic conditions. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of asset-backed securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the -14- average life of a pool. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, affecting the Fund's yield. Thus, asset-backed securities may have less potential for capital appreciation in periods of falling interest rates than other fixed-income securities of comparable duration, although they may have a comparable risk of decline in market value in periods of rising interest rates. Payment of principal and interest may be largely dependent upon the cash flows generated by the assets backing the securities. Variable Rate Demand Notes. The Bond Funds and the Money Funds may invest in variable rate demand notes ("VRDNs"). VRDNs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest upon a short notice period prior to specified dates, generally at 30-, 60-, 90-, 180-, or 365-day intervals. The interest rates are generally adjustable at intervals ranging from daily to one year. Adjustment formulas are designed to maintain the market value of the VRDN at approximately the par value of the VRDN upon the adjustment date. The adjustments typically are based upon the prime rate of a bank or some other appropriate interest rate adjustment index. The Bond Funds also may invest in VRDNs in the form of participation interests ("Participating VRDNs") in variable rate tax-exempt obligations held by a financial institution, typically a commercial bank ("institution"). Participating VRDNs provide a Fund with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDNs from the institution upon a specified number of days' notice, not to exceed seven. In addition, the Participating VRDN is backed by an irrevocable letter of credit or guaranty of the institution. A Fund has an undivided interest in the underlying obligation and thus participates on the same basis as the institution in such obligation except that the institution typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. Participating VRDNs may be unrated or rated, and their creditworthiness may be a function of the creditworthiness of the issuer, the institution furnishing the irrevocable letter of credit, or both. Accordingly, these Funds may invest in such VRDNs, the issuers or underlying institutions of which the Investment Manager (or Sub-Adviser) believes are creditworthy and satisfy the quality requirements of these Funds. The Investment Manager (or Sub-Adviser) periodically monitors the creditworthiness of the issuer of such securities and the underlying institution. During periods of high inflation and periods of economic slowdown, together with the fiscal measures adopted by governmental authorities to attempt to deal with them, interest rates have varied widely. While the value of the underlying VRDN may change with changes in interest rates generally, the variable rate nature of the underlying VRDN should minimize changes in the value of the instruments. Accordingly, as interest rates decrease or increase, the potential for capital appreciation and the risk of potential capital depreciation is less than would be the case with a portfolio of fixed-income securities. Some VRDNs have minimum or maximum rates, or maximum rates set by state law, which limit the degree to which interest on such VRDNs may fluctuate; to the extent they do increases or decreases in value may be somewhat lesser than would be the case without such limits. Because the adjustment of interest rates on the VRDNs is made in relation to movements of various interest rate adjustment indices, the VRDNs are not comparable to long-term fixed-rate securities. Accordingly, interest rates on the VRDNs may be higher or lower than current market rates for fixed-rate obligations of comparable quality with similar maturities. Foreign Securities. The Equity Funds and the Bond Funds may invest in securities issued by companies and governments of foreign countries. The Small Cap Value Fund may invest up to 20% -15- of its total assets in foreign securities. These investments may take the form of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs"), and other similar global instruments available in emerging markets, or other securities convertible into securities of eligible issuers. These securities may not necessarily be denominated in the same currency as the securities for which they may be exchanged. Generally, ADRs in registered form are designed for use in U.S. securities markets, and EDRs and other similar global instruments in bearer form are designed for use in European securities markets. ADRs may be sponsored by the foreign issuer or may be unsponsored. Unsponsored ADRs are organized independently and without the cooperation of the foreign issuer of the underlying securities. As a result, available information regarding the issuer may not be as current as for sponsored ADRs, and the prices of unsponsored ADRs may be more volatile than if they were sponsored by the issuers of the underlying securities. For purposes of a Fund's investment policies, a Fund's investments in ADRs, EDRs and similar instruments will be deemed to be investments in the equity securities representing the securities of foreign issuers into which they may be converted. Shareholders should consider carefully the substantial additional risks involved in investing in foreign securities. Foreign investments involve the possibility of expropriation, nationalization or confiscatory taxation; taxation of income earned in foreign nations (including, for example, withholding taxes on interest and dividends) or other taxes imposed with respect to investments in foreign nations; foreign exchange controls (which may include suspension of the ability to transfer currency from a given country and repatriation of investments); default in foreign government securities and political or social instability or diplomatic developments that could adversely affect investments. In addition, there is often less publicly available information about foreign issuers than those in the United States. Foreign companies are often not subject to uniform accounting, auditing and financial reporting standards. Further, the Equity Funds and the Bond Funds may encounter difficulties in pursuing legal remedies or in obtaining judgments in foreign courts. Brokerage commissions, fees for custodial services and other costs relating to investments by the Equity Funds and the Bond Funds in other countries are generally greater than in the United States. Foreign markets have different clearance and settlement procedures from those in the United States, and certain markets have experienced times when settlements did not keep pace with the volume of securities transactions, which resulted in settlement difficulty. The inability of a Fund to make intended security purchases due to settlement difficulties could cause it to miss attractive investment opportunities. Any delay in selling a portfolio security due to settlement problems could result in loss to a Fund if the value of the portfolio security declined, or result in claims against a Fund if it had entered into a contract to sell the security. In certain countries there is less government supervision and regulation of business and industry practices, stock exchanges, brokers and listed companies than in the United States. The securities markets of many of the countries in which these Funds may invest may also be smaller, less liquid and subject to greater price volatility than those in the United States. Certain securities may be denominated in foreign currencies, the values of which will be affected by changes in currency exchange rates and exchange control regulations, and costs will be incurred in connection with conversions between currencies. A change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Fund's securities denominated in the currency. Such changes also affect a Fund's income and distributions to shareholders. A Fund may be affected either favorably or unfavorably by changes in the relative rates of exchange among the currencies of different nations, and a Fund may therefore engage in foreign currency hedging strategies. Such strategies, however, involve certain transaction costs and investment risks, including dependence upon the Investment Manager's (or Sub-Adviser's) ability to predict movements in exchange rates. -16- Some countries in which the Equity Funds and the Bond Funds may invest may also have fixed or managed currencies that are not freely convertible at market rates into the U.S. dollar. Certain currencies may not be internationally traded. A number of these currencies have experienced steady devaluation relative to the U.S. dollar, and such devaluations in the currencies may have a detrimental impact on a Fund. Many countries in which a Fund may invest have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuation in inflation rates may have negative effects on certain economies and securities markets. Moreover, the economies of some countries may differ favorably or unfavorably from the U.S. economy in such respects as the rate of growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments. Certain countries also limit the amount of foreign capital that can be invested in their markets and local companies, creating a "foreign premium" on capital investments available to foreign investors such as the Equity Funds and the Bond Funds. The Equity Funds and the Bond Funds may pay a "foreign premium" to establish an investment position which it cannot later recoup because of changes in that country's foreign investment laws. The Equity Funds and the Bond Funds may endeavor to buy and sell foreign currencies on favorable terms. Some price spreads on currency exchange (to cover service charges) may be incurred, particularly when these Funds change investments from one country to another or when proceeds from the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. These Funds may be affected either favorably or unfavorably by fluctuations in the relative rates of exchange between the currencies of different nations, and by exchange control regulations, as well as indigenous economic and political developments. The Investment Manager (and each Sub-Adviser, as relevant) considers at least annually the likelihood of the imposition by any foreign government of exchange control restrictions that would affect the liquidity of these Funds' assets maintained with custodians in foreign countries, as well as the degree of risk from political acts of foreign governments to which such assets may be exposed. The Investment Manager (and each Sub-Adviser, as relevant) also considers the degree of risk attendant to holding portfolio securities in domestic and foreign securities depositories. Emerging Market Securities. The Equity Funds and the Bond Funds may invest in securities of companies in emerging markets. Many of the risks with respect to foreign investments are more pronounced for investments in developing or emerging market countries, such as many of the countries of Asia, Latin America, Eastern Europe, Russia, Africa, and the Middle East. Although there is no universally accepted definition, a developing country is generally considered to be a country which is in the initial stages of its industrialization cycle with a per capita gross national product of less than $8,000. The economies of many of these countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and economic conditions of their trading partners. The enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. Many of these countries may also have government exchange controls, currencies with no recognizable market value relative to the established currencies of western market economies, little or no experience in trading in securities, no financial reporting standards, a lack of a banking and securities infrastructure to handle such trading, and a legal tradition which does not recognize rights in private property. In certain of these countries, severe and persistent levels of inflation, including, in some cases, hyperinflation, has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. The political history of -17- certain of these countries has also been characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of trade barriers, and result in significant disruption in securities markets. A number of these countries are highly dependent on foreign loans for their operation. There have been moratoria on, and reschedulings of, repayment with respect to many countries' debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in the imposition of onerous conditions on their economies. Futures and Options on Futures. The Equity Funds and the High Yield Bond Fund may invest in futures contracts and options on futures contracts. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security or currency at a specified future time 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. Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (contracts traded on the same exchange, on the same underlying security or index, and with the same delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain; if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, a Fund realizes a capital gain; if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations. These 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. These Funds will minimize the risk that they 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 their expiration date. In order to avoid leveraging and related risks, when one of these Funds invests in futures contracts, the Fund 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. 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 lack of correlation between the changes in market value of the securities held 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. These Funds may buy and sell futures contracts and related options to manage exposure to changing interest rates and securities prices. Some strategies reduce a Fund's 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 a Fund's return. No price is paid upon entering into futures contracts. Instead, a Fund would be required to deposit an amount of cash -18- 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. 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 SAI. 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. The Fund limits its investments in securities issued by other investment companies in accordance with the 1940 Act and SEC rules. Under the 1940 Act, a Fund may invest its assets in any investment company, as long as the Fund and its affiliated persons own no more than 3% of the outstanding voting stock of the acquired investment company. This restriction may not apply to the Fund's investments in money market mutual funds, if the Fund's investments fall within the exceptions set forth under SEC rules. Zero Coupon Bonds. The Bond Funds and the Money Funds may invest in zero coupon securities, which are debt securities issued or sold at a discount from their face value and do not entitle the holder to any periodic payment of interest prior to maturity, a specified redemption date or a cash payment date. The amount of the discount varies depending on the time remaining until maturity or cash payment date, prevailing interest rates, liquidity of the security and perceived credit quality of the issuer. Zero coupon securities also may take the form of debt securities that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. The market prices of zero coupon securities are generally more volatile than the market prices of interest-bearing securities and respond more to changes in interest rates than interest-bearing securities with similar maturities and credit qualities. The "original issue discount" on the zero coupon bonds must be included ratably in the income of the Fund as the income accrues even though payment has not been received. The Bond Funds nevertheless intend to distribute amounts of cash equal to the currently accrued original issue discount, and this may require liquidating securities at times they might not otherwise do so and may result in capital loss. Pay-In-Kind Bonds. Investments of the High Yield Bond Fund in fixed-income securities may include pay-in-kind bonds. These are securities which, at the issuer's option, pay interest in either cash or additional securities for a specified period. Pay-in-kind bonds, like zero coupon bonds, are designed to give an issuer flexibility in managing cash flow. Pay-in-kind bonds are usually less volatile than zero coupon bonds, but more volatile than cash pay securities. REITs. The High Yield Bond Fund and the Equity Funds may invest in real estate investment trusts ("REITs"). REITs are trusts that invest primarily in commercial real estate or real estate-related loans. A REIT is not taxed on income distributed to its shareholders or unitholders if it complies with regulatory requirements relating to its organization, ownership, assets and income, and with a regulatory requirement that it distribute to its shareholders or unitholders at least 95% of its taxable income for each taxable year. Generally, REITs can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rents and capital gains from appreciation realized through property sales. Mortgage REITs invest the majority of their assets in real estate mortgages and derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. By investing in REITs indirectly through a Fund, shareholders will bear not -19- only the proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of underlying REITs. A Fund may be subject to certain risks associated with the direct investments of the REITs. REITs may be affected by changes in their underlying properties and by defaults by borrowers or tenants. Mortgage REITs may be affected by the quality of the credit extended. Furthermore, REITs are dependent on specialized management skills. Some REITs may have limited diversification and may be subject to risks inherent in financing a limited number of properties. REITs depend generally on their ability to generate cash flow to make distributions to shareholders or unitholders, and may be subject to defaults by borrowers and to self-liquidations. In addition, a REIT may be affected by its failure to qualify for tax-free pass-through of income under the Code or its failure to maintain exemption from registration under the 1940 Act. Privatizations. The High Yield Bond Fund and the Equity Funds may invest in "privatizations" -foreign governmental programs of selling interests in government-owned or -controlled enterprises - which may represent opportunities for significant capital appreciation. The ability of U.S. entities, such as these Funds, to participate in privatizations may be limited by local law, or the terms for their participation may be less advantageous than for local investors. There can be no assurance that privatization programs will be successful. Special Situations. The High Yield Bond Fund and the Equity Funds may invest in "special situations" - joint ventures, cooperatives, partnerships, private placements, unlisted securities and similar vehicles. Such Funds believe that carefully selected special situations could enhance their capital appreciation potential. The Funds also may invest in certain types of vehicles or derivative securities that represent indirect investments in foreign markets or securities in which it is impracticable for these Funds to invest directly. Investments in special situations may be illiquid, as determined by the Investment Manager (or Sub-Adviser) based on criteria reviewed by the Board. Forward Foreign Currency Contracts. A forward contract involves an obligation to purchase or sell a specific currency amount at a future date, agreed upon by the parties, at a price set at the time of the contract. The Bond Funds and the Equity Funds may enter into contracts to sell, for a fixed amount of U.S. dollars or other appropriate currency, the amount of foreign currency approximately equal to the value of some or all of the securities of these Funds denominated in such foreign currency. By entering into forward foreign currency contracts, these Funds will seek to protect the value of their investment securities against a decline in the value of a currency. However, these forward foreign currency contracts will not eliminate fluctuations in the underlying prices of the securities. Rather, they simply establish a rate of exchange which one can obtain at some future point in time. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result should the value of such currency increase. At the maturity of a forward contract, a Fund may either sell a portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader, obligating it to purchase, on the same maturity date, the same amount of the foreign currency. These Funds may realize gains or losses from currency transactions. Each of these Funds will place assets in a segregated account to assure that its obligations under forward foreign currency contracts are covered. Municipal Securities. The California Money Fund, the California Bond Fund and the High Yield Bond Fund may invest in municipal securities. Municipal securities consist of (1) debt obligations issued by state and local governments or by public authorities to obtain funds to be used for various -20- 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 debt obligation bonds are backed by the taxing power of the issuing municipality. Revenue obligations are backed by the revenue of a project or facility, for example, tolls from a toll bridge. 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 obligations generally depends solely on the ability of the revenues generated by the use of the specified facilities. Municipal Leases. The California Money Fund, the California Bond Fund and the High Yield Bond Fund may invest in municipal lease obligations - instruments, or participations in instruments, issued in connection with lease obligations or installment purchase contract obligations of municipalities. 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 the lease obligation. Specifically, in the state of California there are often legal covenants to budget for, appropriate funds for, and make the payments due under 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 if the project is not available for use and occupancy. Municipal leases will be treated as liquid only if they satisfy criteria set forth in guidelines established by the Board, and there can be no assurance that a market will exist or continue to exist for any municipal lease obligation. 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 90 days to 397 days. Municipal Bonds. Municipal bonds are debt obligations issued to obtain funds for various public purposes. The California Money Fund, the California Bond Fund and the High Yield Bond Fund may purchase certain private activity or industrial development bonds, the interest paid on which 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 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 revenues generated by the use of the facility to meet its financial obligations and the pledge. Options on Securities, Securities Indices and Currencies. Each Equity Fund and the High Yield Bond Fund may purchase put and call options on securities in which it has invested, on foreign currencies represented in its portfolio and on any securities index based in whole or in part on securities in which that Fund may invest. These Funds also may enter into closing sales transactions in order to realize gains or minimize losses on options they have purchased. Each of these Funds normally will purchase call options in anticipation of an increase in the market value of securities of the type in which it may invest or a positive change in the currency in which such securities are denominated. The purchase of a call option would entitle a Fund, in return for the -21- premium paid, to purchase specified securities or a specified amount of a foreign currency at a specified price during the option period. Each of these Funds normally will purchase put options in anticipation of an decrease in the market value of securities of the type in which it may invest or a negative change in the currency in which such securities are denominated. The purchase of a put option would entitle a Fund, in return for the premium paid, to sell specified securities or a specified amount of a foreign currency at a specified price during the option period. Each of these Funds may purchase and sell options traded on U.S. and foreign exchanges. Although a Fund will generally purchase only those options for which there appears to be an active secondary market, there can be no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time. For some options, no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that a Fund would have to exercise its options in order to realize any profit and would incur transaction costs upon the purchase or sale of the underlying securities. Secondary markets on an exchange may not exist or may not be liquid for a variety of reasons including: (i) insufficient trading interest in certain options; (ii) restrictions on opening transactions or closing transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances which interrupt normal operations on an exchange; (v) inadequate facilities of an exchange or the Options Clearing Corporation to handle current trading volume at all times; or (vi) discontinuance in the future by one or more exchanges for economic or other reasons, of trading of options (or of a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. Although these Funds do not currently intend to do so, they may, in the future, write (i.e., sell) covered put and call options on securities, securities indices and currencies in which they may invest. A covered call option involves a Fund's giving another party, in return for a premium, the right to buy specified securities owned by that Fund at a specified future date and price set at the time of the contract. A covered call option serves as a partial hedge against a price decline of the underlying security. However, by writing a covered call option, a Fund gives up the opportunity, while the option is in effect, to realize gain from any price increase (above the option exercise price) in the underlying security. In addition, a Fund's ability to sell the underlying security is limited while the option is in effect unless that Fund effects a closing purchase transaction. Each of these Funds also may write covered put options that give the holder of the option the right to sell the underlying security to the Fund at the stated exercise price. A Fund will receive a premium for writing a put option but will be obligated for as long as the option is outstanding to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise. In order to "cover" put options it has written, a Fund will cause its custodian to segregate cash, cash equivalents, Government Securities or other liquid equity or debt securities with at least the value of the exercise price of the put options. A Fund will not write put options if the aggregate value of the obligations underlying the put options exceeds 25% of that Fund's total assets. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of the Options Clearing Corporation inadequate, and result in the institution by an exchange of special procedures that may interfere with the timely execution of the Funds' option orders. -22- 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 Investment Manager (or Sub-Adviser, if applicable) 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. These guidelines currently permit the Funds to enter into repurchase agreements with any bank the Investment Manager (or Sub-Adviser) may recommend if it determines such bank to be creditworthy. 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-Adviser) 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 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. Lending of Portfolio Securities. The Equity Funds and the Bond Funds may lend their portfolio securities in order to generate additional income. Such loans may be made to broker-dealers or other financial institutions whose creditworthiness is acceptable to the Investment Manager (or Sub-Adviser). These loans would be required to be secured continuously by collateral, including cash, cash equivalents, irrevocable letters of credit, Government Securities, or other high-grade liquid debt securities, maintained on a current basis (i.e., marked to market daily) at an amount at least equal to 100% of the market value of the securities loaned plus accrued interest. A Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the income earned on the cash to the borrower or placing broker. Loans are subject to termination at the option of a Fund or the borrower at any time. Upon such termination, that Fund is entitled to obtain the return of the securities loaned within five business days. For the duration of the loan, a Fund will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned, will receive proceeds from the investment of the collateral and will continue to retain any voting rights with respect to those securities. As with other extensions of credit, there are risks of delay in recovery or even losses of rights in the securities loaned should the borrower of the securities fail financially. However, the loans will be made only to borrowers deemed by the Investment Manager (or Sub-Adviser) to be creditworthy, and when, in the judgment of the Investment Manager (or Sub-Adviser), the income which can be earned currently from such loans justifies the attendant risk. Standby Commitments and Put Transactions. The Government Money Fund, the California Money Fund and the Bond Funds reserve the right to engage in standby commitments and put transactions. The Investment Manager and each Sub-Adviser has 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 these Funds 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." -23- The purpose of engaging in transactions involving puts is to maintain flexibility and liquidity to permit these Funds 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. These Funds would limit their 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 puts 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, these Funds 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 one of these Funds 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. These Funds could, however, at any time sell the underlying portfolio security in the open market or wait until the portfolio security matures, at which time they 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 these Funds. 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, these Funds could seek to negotiate terms for its extension. If such a renewal cannot be negotiated on terms satisfactory to these Funds, these Funds could, of course, sell the security. The maturity of the underlying security will generally be different from that of the put. Highly Liquid Investments. The Funds may invest in cash and cash equivalents. The Funds may invest in bank notes. Bank notes are unsecured promissory notes representing debt obligations that are issued by banks in large denominations. 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. The Funds may invest in certificates of deposit. A certificate of deposit is an interest-bearing instrument with a specific maturity. 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. The Funds also may make interest-bearing time or other interest-bearing deposits in commercial or savings banks. Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of time at a specified interest rate. Certificates of deposit and time deposits with penalties for early withdrawal will be considered illiquid. Eurodollar Certificates of Deposit and Foreign Securities. The Prime Money Fund may invest in Eurodollar certificates of deposit and foreign securities. Before investing in Eurodollar certificates of deposit, the Prime Money 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. -24- Investments in securities of foreign issuers or securities principally traded overseas may involve certain special risks due to foreign economic, political, and legal developments, as described above. All such securities will be U.S. dollar denominated. Tax Exempt Commercial Paper. The California Bond Fund, the California Money Fund and the Prime Money Fund may invest in tax-exempt commercial paper. Tax exempt commercial paper is an unsecured short-term obligation issued by a government or political sub-division. U.S. Government Agency Obligations. Each Fund may invest in U.S. agency obligations. Various agencies of the U.S. Government issue obligations, including but not limited to the Federal Home Loan Bank ("FHLB"), the Student Loan Marketing Association, 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, FHLB, FHLMC, Federal Intermediate Credit Banks, Federal Land Banks, FNMA 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. U.S. Treasury Obligations. Each Fund may invest in U.S. Treasury Obligations, which consist of bills, notes and bonds issued by the U.S. Treasury as well as separately traded interest and principal component parts of such obligations, known as Separately Traded Registered Interest and Principal Securities ("STRIPS"), that are transferable through the federal book-entry system. STRIPS are sold as zero coupon securities, which means that they are sold at a substantial discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. This discount is accreted over the life of the security, and such accretion will constitute the income earned on the security for both accounting and tax purposes. Because of these features, such securities may be subject to greater interest rate volatility than interest paying investments. 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; in that case there could be an unrealized loss at the time of delivery. 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 these Funds 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. Index-based Investments. The Equity Funds (other than the Small Cap Value Fund) may invest in index-based investments. Index-Based Investments, such as Standard & Poor's Depository Receipts ("SPDRs"), NASDAQ-100 Index Tracking Stock ("NASDAQ 100s") and Dow Jones DIAMONDS -25- ("Diamonds"), are interests in unit investment trusts ("UITs") that may be obtained from the UITs or purchased in the secondary market. SPDRs, NASDAQ 100s and DIAMONDS are listed on the American Stock Exchange. A UIT will generally issue index-based investments in aggregations of 50,000 known as "Creation Units" in exchange for a "Portfolio Deposit" consisting of (a) a portfolio of securities substantially similar to the component securities ("Index Securities") of the applicable index (the "Index"), (b) a cash payment equal to a pro rata portion of the dividends accrued on the UIT's portfolio securities since the last dividend payment by the UIT, net of expenses and liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to equalize the net asset value of the Index and the net asset value of a Portfolio Deposit. Index-based investments are not individually redeemable, except upon termination of the UIT. To redeem, the portfolio must accumulate enough index-based investments to reconstitute a Creation Unit (large aggregations of a particular index-based investment). The liquidity of small holdings of index-based investments, therefore, will depend upon the existence of a secondary market. Upon redemption of a Creation Unit, the portfolio will receive Index Securities and cash identical to the Portfolio Deposit required of an investor wishing to purchase a Creation Unit that day. The price of index-based investments is derived and based upon the securities held by the UIT. Accordingly, the level of risk involved in the purchase or sale of index-based investments is similar to the risk involved in the purchase or sale of traditional common stock, with the exception that the pricing mechanism for index-based investments is based on a basket of stocks. Disruptions in the markets for the securities underlying index-based investments purchased or sold by the portfolio could result in losses on index-based investments. Trading in index-based investments involves risks similar to those risks, described above under "Options and Futures on Options" involved in the writing of options on securities. Borrowing Policy. The Funds may not borrow money except as a temporary measure for extraordinary purposes or for ordinary needs for overdraft protection, and then only in an amount up to one-third of the value of each Fund's 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. California Municipal Securities. Because the California Bond Fund and the California Money Fund invest primarily in California Municipal Securities, the value of their portfolio investments will be highly sensitive to events affecting the fiscal stability of the State of California (sometimes referred to in this section as the "State") and its municipalities, authorities and other instrumentalities that issue such securities. The following information is based on information available as of the date of this Statement of Additional Information primarily from official statements and prospectuses relating to securities offerings of the State, the latest of which is dated November 28, 2006. General Economic Conditions - --------------------------- The economy of the State is the largest among the 50 states and one of the largest in the world. The diversified economy of the State has major components in high technology, trade, entertainment, agriculture, tourism, construction and services. Certain of the State's significant industries, such as high technology, are sensitive to economic disruptions in their export markets. -26- Since early 2001, the State has faced severe financial challenges, which may continue for several years. The State experienced an economic recession in 2001 and a sluggish recovery in 2002 and 2003 (with greatest impacts in the high technology, internet, and telecommunications sectors, especially in Northern California); weakened exports; and most particularly, large stock market declines (with attendant declines in stock option values and capital gains realizations). These adverse fiscal and economic factors resulted in a serious erosion of General Fund tax revenues. In recent years, the State has derived a significant portion of its revenue from personal income and sales taxes. Because the amount collected from these taxes is particularly sensitive to economic conditions, the State's revenues have been volatile. California's geographic location subjects it to earthquake risks. 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 and significantly affect State and local governmental budgets. State Budgets - ------------- 2006 Budget Act. The Governor signed the 2006 Budget Act on June 30, 2006, for the fiscal period July 1, 2006 through June 30, 2007. The 2006 Budget Act forecasts $93.9 billion in General Fund revenues and transfers and $101.3 billion in expenditures. It projects that by utilizing the prior year's $9.5 billion General Fund balance, the General Fund will end the fiscal year with a positive balance of approximately $2.1 billion. The 2006 Budget Act assumes that the State will not issue Economic Recovery Bonds or raise taxes. The spending plan includes $3.2 billion for the repayment or prepayment of prior obligations, including $1.5 billion to prepay Economic Recovery Bonds, and other one-time costs of $1.6 billion. The State's Legislative Analyst's Office ("LAO"), in its "California Fiscal Outlook" report released on November 15, 2006, projected that the 2006-07 fiscal year will end with a reserve of about $3.1 billion, approximately $1 billion more than the $2.1 billion estimate contained in the 2006 Budget Act. However, the LAO estimated that the State would conclude fiscal year 2007-08 with a $5.5 billion operating shortfall and a $2.4 billion deficit. It reiterated its earlier warnings about the State's structural deficit in outlying years. Therefore, the LAO suggested, other actions will be needed to keep the budget in balance. The Governor's Budget for 2007-08, released in January 2007, projects General Fund revenues and transfers of $94.5 billion, expenditures of $102.1 billion and a General Reserve fund balance of $3.2 billion for fiscal year 2006-07. 2007-08 Governor's Budget. The Governor's Budget for the 2007-08 fiscal year projects a $1.9 billion budget operating deficit, smaller than the LAO's November 2006 estimate of $5.5 billion. This budget projects General Fund revenues and transfers for the fiscal year ending June 30, 2008 of $101.3 billion, and expenditures of $103.1 billion, increases of $6.8 billion and $1 billion, respectively, compared with the latest estimates for fiscal year 2006-07. The Governor's Budget closes the operating deficit by applying a portion of the estimated $3.2 billion fund balance from the 2006 Budget, leaving fiscal year 2007-08 with a $2.1 billion reserve, significantly better than the LAO's November 2006 estimate of a deficit of $2.4 billion. In its January 12, 2007 Overview of the 2007-08 Governor's Budget, the LAO concluded that the 2007-08 budget "contains a significant number of downside risks and is based on a number of optimistic assumptions." Even if the budget were adopted as proposed, the LAO believes that the budgeted savings and new revenues will fall short of levels estimated by the Governor's budget. Further, the LAO projects that State will continue to face structural deficits in outlying years and recommended that the Legislature develop a more realistic budget. -27- Constraints on the Budget Process. Proposition 58, approved in March 2004 with the State's Economic Recovery Bonds, requires the State to enact a balanced budget and establish a special reserve in the General Fund and restricts future borrowing to cover budget deficits. As a result of the provisions requiring the enactment of a balanced budget and restricting borrowing, the State would, in some cases, have to take more immediate actions to correct budgetary shortfalls. Beginning with the budget for fiscal year 2004-05, Proposition 58 requires the Legislature to pass a balanced budget and provides for mid-year adjustments in the event that the budget falls out of balance. The balanced budget determination is made by subtracting expenditures from all available resources, including prior-year balances. If the Governor determines that the State is facing substantial revenue shortfalls or spending deficiencies, the Governor is authorized to declare a fiscal emergency. He or she would then be required to propose legislation to address the emergency and call the Legislature into special session to consider that legislation. If the Legislature fails to pass and send to the Governor legislation to address the budget fiscal emergency within 45 days, the Legislature would be prohibited from acting on any other bills or adjourning in joint recess until such legislation is passed. Proposition 58 also requires that a special reserve (the Budget Stabilization Account) be established in the State's General Fund. Beginning with fiscal year 2006-07, a specified portion of estimated annual General Fund revenues would be transferred by the Controller into the Budget Stabilization Account no later than September 30 of each fiscal year. These transfers would continue until the balance in the Budget Stabilization Account reaches $8 billion or 5 percent of the estimated General Fund revenues for that fiscal year, whichever is greater. The annual transfer requirement would be in effect whenever the balance falls below the $8 billion or 5 percent target. The annual transfers could be suspended or reduced for a fiscal year by an executive order issued by the Governor no later than June 1 of the preceding fiscal year. Proposition 58 also prohibits certain future borrowing to cover budget deficits. This restriction applies to general obligation bonds, revenue bonds, and certain other forms of long-term borrowing. The restriction does not apply to certain other types of borrowing, such as short-term borrowing to cover cash shortfalls in the General Fund (including revenue anticipation notes or revenue anticipation warrants currently used by the State), or inter-fund borrowings. Future Budgets. It cannot be predicted what actions will be taken in the future by the Legislature and the Governor to deal with changing State revenues and expenditures. The State budget will be affected by national and State economic conditions and other factors. State Indebtedness - ------------------ General Obligation Bonds and Revenue Bonds. As of November 1, 2006, the State had approximately $56.5 billion aggregate principal of outstanding long-term general obligation bonds and revenue bonds. Including estimated interest of approximately $33.7 billion, the State's debt service requirements for general obligation bonds and revenue bonds totaled nearly $90.2 billion. General obligation bond authorizations of approximately $30.2 billion remained unissued as of that date, not including bonds approved by the voters on November 7, 2006 (see below). Ratings. As of January 16, 2007, the State's general obligation bonds were rated A1 by Moody's, A+ by Standard & Poor's, and A+ by Fitch Ratings. It is not possible to determine whether, or the extent to which, Moody's, Standard & Poor's or Fitch Ratings will change such ratings in the future. Strategic Growth Plan. Coinciding with the release of the State's 2006-07 budget, the Governor announced a "Strategic Growth Plan" for the State in which he proposed that the State spend nearly $223 billion over 10 years on State infrastructure programs such as transportation, education, flood control, public safety and courts. The Strategic Growth Plan would be financed in part through the issuance of $68 billion in general obligation bonds. In response to the Governor's proposal, the -28- Legislature in May 2006 approved a $116 million Strategic Growth Plan package, which included $37.3 in new general obligation bonds (approved by the voters on November 7, 2006), $50.1 billion in existing funding, and $28.4 billion in new leveraged funding sources. Local Government - ---------------- The primary units of local government in California are the counties, ranging in population from 1,200 (Alpine) to approximately 10 million (Los Angeles). Counties are responsible for the provision of many basic services, including indigent healthcare, welfare, courts, jails and public safety in unincorporated areas. There are also 478 incorporated cities and thousands of other special districts formed for education, utility and other services. The fiscal condition of local governments has been constrained since the enactment of "Proposition 13" in 1978 and later constitutional amendments, which reduced and limited the future growth of property taxes and limited the ability of local governments to impose "special taxes" (those devoted to a specific purpose) without two-thirds voter approval. Proposition 218, another initiative constitutional amendment enacted in 1996, further limited the ability of local governments to impose or raise various taxes, fees, charges and assessments without voter approval. Counties, in particular, have had fewer options to raise revenues than many other local government entities, and have been required to maintain many services. Some local governments in California have experienced notable financial difficulties, including Los Angeles County, Orange County and San Diego County, and there is no assurance that any California issuer will make full or timely payments of principal or interest or remain solvent. 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. According to the State, the 2004 Budget Act, related legislation and the enactment of Senate Constitutional Amendment No. 4 (described below) will dramatically change the State-local fiscal relationship. These constitutional and statutory changes implement an agreement negotiated between the Governor and local government officials (the "State-local agreement") in connection with the 2004 Budget Act. One change relates to the reduction of the Vehicle License Fee ("VLF") rate from 2 percent to 0.65 percent of the market value of the vehicle. In order to protect local governments, the reduction in VLF revenue to cities and counties from this rate change will be replaced by an increase in the amount of property tax they receive. As part of the State-local agreement, Senate Constitutional Amendment No. 4 was enacted by the Legislature and subsequently approved by the voters at the November 2004 election. Senate Constitutional Amendment No. 4 amends the State Constitution to, among other things, reduce the Legislature's authority over local government revenue sources by placing restrictions on the State's access to local governments' property, sales, and VLF revenues as of November 3, 2004. Beginning with fiscal year 2008-09, the State will be able to borrow up to 8 percent of local property tax revenues, but only if the Governor proclaims such action is necessary due to a severe State fiscal hardship, two-thirds of both houses of the Legislature approves the borrowing and the amount borrowed is required to be paid back within three years. The State also will not be able to borrow from local property tax revenues for more than two fiscal years within a period of 10 fiscal years. In addition, the State cannot reduce the local sales tax rate or restrict the authority of the local governments to impose or change the distribution of the statewide local sales tax. Senate Constitutional Amendment No. 4 also prohibits the State from mandating activities on cities, counties or special districts without providing for the funding needed to comply with the mandates. If the State does not provide funding for an activity that has been determined to be mandated, the requirement on cities, counties or special districts to abide by the mandate will be suspended. In addition, Senate Constitutional Amendment No. 4 expands the definition of what constitutes a mandate to encompass State action that transfers to cities, counties and special districts financial -29- responsibility for a required program for which the State previously had partial or complete responsibility. The State mandate provisions of Senate Constitutional Amendment No. 4 do not apply to schools or community colleges or to mandates relating to employee rights. Constitutional, Legislative and Other Factors - --------------------------------------------- The State is subject to an annual appropriations limit imposed by Article XIII B of the State Constitution (the "Appropriations Limit"). The Appropriations Limit does not restrict appropriations to pay debt service on voter-authorized bonds. Article XIII B prohibits the State from spending "appropriations subject to limitation" in excess of the Appropriations Limit. "Appropriations subject to limitation" are authorizations to spend "proceeds of taxes," which consist of tax revenues and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed "the cost reasonably borne by that entity in providing the regulation, product or service," but "proceeds of taxes" exclude most State subventions to local governments, tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on appropriations of funds which are not "proceeds of taxes," such as reasonable user charges or fees and certain other non-tax funds. Various types of appropriations are excluded from the Appropriations Limit. The State's Appropriations Limit in each year is based on the Limit for the prior year, adjusted annually for changes in State per capita personal income and changes in population, and adjusted, when applicable, for any transfer of financial responsibility for providing services to or from another unit of government or any transfer of the financial source for the provisions of services from tax proceeds to non-tax proceeds. The Legislature has enacted legislation to implement Article XIII B which defines certain terms used in Article XIII B and sets forth the methods for determining the Appropriations Limit. California Government code Section 7912 requires an estimate of the Appropriations Limit to be included in the Governor's Budget, and thereafter to be subject to the budget process and established in the Budget Act. On November 8, 1988, voters of the State approved Proposition 98, a combined initiative constitutional amendment and statute called the "Classroom Instructional Improvement and Accountability Act." Proposition 98 changed State funding of public education below the university level and the operation of the State appropriations funding, primarily by guaranteeing K-14 schools a minimum share of General Fund revenues. Proposition 98 permits the Legislature by two-thirds vote of both houses, with the Governor's concurrence, to suspend the K-14 schools' minimum funding formula for a one-year period. Proposition 98 also contains provisions transferring certain State tax revenues in excess of the Article XIII B limit to K-14 schools. Because of the complexities of Article XIII B, the ambiguities and possible inconsistencies in its terms, the applicability of its exceptions and exemptions and the impossibility of predicting future appropriations, it is not possible to predict the impact of this or related legislation on the bonds in the portfolios of the California Bond Fund and the California Money Fund. Article XIII B and other Articles of the State Constitution were adopted as measures that qualified for the ballot pursuant to the State's initiative process. Other Constitutional amendments affecting State and local taxes and appropriations have been proposed from time to time. If any such initiatives were adopted, the State could be pressured to provide additional financial assistance to local Governments or appropriate revenues as mandated by such initiatives. Propositions such as Proposition 98 and others that may be adopted in the future may place increasing pressure on the State's budget over future years, potentially reducing resources available for other State programs, especially to the extent the Article XIII B spending limit would restrain the State's ability to fund such other programs by raising taxes. -30- Effect of other State Laws on Bond Obligations. Some of the California Municipal Securities that the California Bond Fund and the California Money Fund can invest in may be obligations payable solely from the revenues of a specific institution or secured by specific properties. These 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 adversely affected by State laws, and California law limits the remedies of a creditor secured by a mortgage or deed of trust on real property. Debt obligations payable solely from revenues of health care institutions may also be insured by the State but no guarantee exists that adequate reserve funds will be appropriated by the Legislature for such purpose. Litigation - ---------- The State is a party to numerous legal proceedings, many of which normally occur in governmental operations. In addition, the State is involved in certain other legal proceedings that, if decided against the State might require the State to make significant future expenditures or impair future revenue sources. Because of the prospective nature of these proceedings, it is not presently possible to predict the outcome of such litigation or estimate the potential impact on the ability of the State to pay debt service costs on its obligations. On August 8, 2005, a lawsuit titled California Teachers Association et al. v. Arnold Schwarzenegger et al. was filed. Plaintiffs - California Teachers Association, California Superintendent of Public Instruction Jack O'Connell, and various other individuals - allege that the California Constitution's minimum school funding guarantee was not followed for the 2004-2005 fiscal year and the 2005-06 fiscal year in the aggregate amount of approximately $3.1 billion. Plaintiffs seek a writ of mandate requiring the State to recalculate the minimum-funding guarantee in compliance with the California Constitution. On May 10, 2006, counsel for all parties executed a settlement agreement, and the action has been stayed pending implementation legislation. The settlement calls for payment of the outstanding balance of the minimum funding obligation to school districts and community college districts (approximately $3 billion in the aggregate) through the 2013-14 fiscal year. On November 15, 2005, a California Superior Court judge entered a decision in a case which sought judicial validation for the issuance by the State of pension obligation bonds. The judge ruled the bonds were not valid. The State appealed, but it will not be able to issue pension obligation bonds until the matter is finally resolved. For the 2005-2006 fiscal year, the State made payments of about $525 million for a portion of the fiscal year contribution to the California Public Employees' Retirement System which had been planned to be funded from the bonds. The 2007 Governor's Budget does not call for the issuance of any pension obligation bonds. INVESTMENT RESTRICTIONS FUNDAMENTAL POLICIES No Equity Fund or Bond Fund may: 1. Other than the California Bond Fund, with respect to 75% of its total assets, (i) purchase the securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer; or (ii) acquire more than 10% of the outstanding voting securities of any one issuer. -31- 2. Purchase any securities which would cause 25% or more of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the United States Government, its agencies or instrumentalities. 3. Borrow money in an amount exceeding 33 1/3% of the value of its total assets, provided that, for purposes of this limitation, investment strategies which either obligate a Fund to purchase securities or require a Fund to segregate assets are not considered to be borrowings. Other than with respect to the Small Cap Value Fund, to the extent that its borrowings exceed 5% of its total assets, (i) all borrowings will be repaid before making additional investments and any interest paid on such borrowing will reduce income; and (ii) asset coverage of at least 300% is required. 4. Other than the Small Cap Value Fund, make loans if, as a result, more than 33 1/3% of its total assets would be loaned to other parties, except that each Fund may (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) lend its securities. The Small Cap Value Fund may not make loans, except that the Fund may (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) lend its securities. 5. Other than with respect to the Small Cap Value Fund, purchase or sell real estate, physical commodities, or commodities contracts, except that each Fund may purchase (i) marketable securities issued by companies which own or invest in real estate (including real estate investment trusts), commodities, or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts. The Small Cap Value Fund may not purchase or sell real estate, physical commodities, or commodities contracts. As a matter of operating policy, the Board of Trustees may authorize the Small Cap Value Fund in the future to engage in certain activities regarding futures contracts for bona fide hedging purposes; any such authorization will be accompanied by appropriate notification to shareholders. 6. Issue senior securities (as defined in the 1940 Act) except as permitted by rule, regulation or order of the Securities and Exchange Commission (the "SEC"), except that this restriction shall not be deemed to prohibit the Small Cap Value Fund from (a) making any permitted borrowings, mortgages or pledges, or (b) entering into options, futures or repurchase transactions. 7. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling a portfolio security. 8. Other than with respect to the Small Cap Value Fund, invest in interests in oil, gas, or other mineral exploration or development programs and oil, gas or mineral leases. 9. The Small Cap Value Fund may not purchase securities on margin, participate on a joint or joint and several basis in any securities trading account, or underwrite securities. The foregoing shall not preclude the Small Cap Value Fund from obtaining such short-term credit as may be necessary for clearance of purchases and sales of its portfolio securities. The foregoing percentages (other than the limitation on borrowing) will apply at the time of the purchase of a security and shall not be considered violated unless an excess or deficiency occurs immediately after or as a result of a purchase of such security. Except as otherwise indicated, these investment limitations and the investment limitations in each prospectus are fundamental policies of the Trust and may not be changed without shareholder approval. -32- NON-FUNDAMENTAL POLICIES No Equity Fund or Bond Fund may: 1. Other than with respect to the Small Cap Value Fund, pledge, mortgage or hypothecate assets except to secure borrowings permitted by the Fund's fundamental limitation on borrowing. 2. Invest in companies for the purpose of exercising control. 3. Other than with respect to the Small Cap Value Fund, purchase securities on margin or effect short sales, except that each Fund may (i) obtain short-term credits as necessary for the clearance of security transactions; (ii) provide initial and variation margin payments in connection with transactions involving futures contracts and options on such contracts; and (iii) make short sales "against the box" or in compliance with the SEC's position regarding the asset segregation requirements imposed by Section 18 of the 1940 Act. 4. Invest its assets in securities of any investment company, except as permitted by the 1940 Act or an order of exemption therefrom. 5. Purchase or hold securities that are illiquid or are otherwise not readily marketable (i.e., securities that cannot be disposed of for their approximate carrying value in seven days or less, which term includes repurchase agreements and time deposits maturing in more than seven days) if, in the aggregate, more than 15% of its net assets would be invested in illiquid securities. 6. The Small Cap Value Fund will not purchase portfolio securities while outstanding borrowings exceed 5% of its assets. Each of the foregoing percentage limitations (except with respect to the limitation on investing in illiquid and not readily marketable securities) apply at the time of purchase. If, subsequent to a Fund's purchase of an illiquid security, more than 15% of the Fund's net assets are invested in illiquid securities because of changes in valuations, the Fund will, within a reasonable time, dispose of a portion of such holding so that the above set-forth limit will not be exceeded. These limitations are non-fundamental and may be changed by the Board without a vote of shareholders. MONEY FUNDS Except as otherwise noted with an (*), the restrictions below are nonfundamental and can be changed as to a Money Fund without approval of the holders of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Money Fund. The Money Funds may not: 1. (*)Subject to the provisions of Rule 2a-7 under the 1940 Act, 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 total 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. 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 -33- (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. As to the California Money Fund, this restriction does not apply to municipal securities in any of the following categories: public housing; general obligations of states and localities; state and local finance authorities or municipal utilities systems. 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 1933 Act). The Money Funds will invest no more than 10% of their net assets in illiquid securities. 5. (*)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. 6. Invest for the purpose of exercising control or management of another issuer. 7. 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 Fund's prospectus and the 1940 Act. 8. (*)Make loans to others (except through the purchase of debt obligations or repurchase agreements in accordance with its investment objectives and policies). 9. (*)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. 10. Write, purchase or sell puts, calls or combinations thereof except as otherwise noted in this Statement of Additional Information. 11. 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. 12. (*)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. 13. (*)Issue senior securities as defined in the 1940 Act. 14. Invest in interests or leases in oil, gas or other mineral exploration or development programs. -34- Except for restrictions (3), (4) and (9), 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 Money Funds will only purchase securities that the Investment Manager has determined, according to procedures approved by the Board and factors set forth in Rule 2a-7 under the 1940 Act, present minimal credit risk and 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 an NRSRO (currently Moody's, S&P, Fitch or, 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) 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; (3) 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 three highest rating categories from the requisite NRSROs for long-term debt obligations; or (4) a security not rated by an NRSRO but deemed by the Investment Manager, pursuant to guidelines adopted by the 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, as defined above, that (1) 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), (2) has been determined by the Investment Manager, pursuant to guidelines adopted by the Board, to be of comparable quality to such a security, (3) is a security issued by a registered investment company that is a money market fund, or (4) 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); provided, however, that (1) the California Money Fund may invest up to 25% of the value of its total assets without regard to this restriction as permitted by Rule 2a-7 under the 1940 Act, and (2) each of the Prime Money Fund and the Government Money Fund may invest up to 25% of the value of its total assets without regard to this restriction for a period of up to three business days as permitted by Rule 2a-7, provided that neither such Fund may invest in the securities of more than one issuer in accordance with the foregoing proviso at any time. Moreover, a 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 a Fund's total assets or $1 million. In addition, the underlying securities involved in repurchase -35- agreements collateralized by non-Government Securities will be First Tier Securities at the time the repurchase agreements are executed. MANAGEMENT OF THE TRUST The Trustees and officers of the Trust, their principal occupations during the past five years, and their affiliations, if any, with CNAM, Inc., the investment manager to the Funds or CCM Advisors, LLC ("CCM Advisors"), the investment manager to the AHA Funds, are set forth below. The persons listed below may have held other positions with their employers named below during the relevant period. Certain officers of the Trust also serve as officers to one or more other mutual funds for which SEI Investments or its affiliates act as investment manager, administrator or distributor. Each Trustee is a "disinterested person" of the Trust, as defined in the 1940 Act (each, an "Independent Trustee," and collectively, the "Independent Trustees"). INDEPENDENT TRUSTEES - ----------------------------------------------------------------------------------------------------------------------- Name Position Term of Principal Occupation Number of Other Directorships Address with the Office(*) for the Portfolios in Held by Trustee Age Trust and Length Past Five Years Fund Complex of Time Overseen by Served Trustee - ----------------------------------------------------------------------------------------------------------------------- Irwin G. Barnet, Esq.(**) Trustee Since 1999 Attorney and partner, Reed 16 None Reed Smith LLP Smith LLP, a law firm 1901 Avenue of the (2003-present). Attorney Stars, #700 and principal, Crosby, Los Angeles, Heafey, Roach & May P.C., California 90067 a law firm (2000-2002 ). Age: 68 Attorney and principal, Sanders, Barnet, Goldman, Simons & Mosk, a law firm (1980-2000). - --------------------------------------------------------------------------------------------------------------------- Victor Meschures Trustee Since 1999 Certified Public 16 None Meschures, Campeas, Accountant, Meschures, Thompson, Snyder and Campeas, Thompson, Pariser, LLP Snyder and Pariser, LLP, 8383 Wilshire an accounting firm Boulevard, Suite 500 (1964-present). Beverly Hills, CA 90211 Age: 68 - --------------------------------------------------------------------------------------------------------------------- William R. Sweet Trustee Since 1999 Retired. Executive Vice 16 None 81 Mt. Tiburon Road President, Union Bank of Tiburon, California California (1985-1996). 94920 Age: 69 - --------------------------------------------------------------------------------------------------------------------- -36- - ----------------------------------------------------------------------------------------------------------------------- Name Position Term of Principal Occupation Number of Other Directorships Address with the Office* for the Portfolios in Held by Trustee Age Trust and Length Past Five Years Fund Complex of Time Overseen by Served Trustee - ----------------------------------------------------------------------------------------------------------------------- James Wolford(***) Trustee Since 1999 Chief Financial Officer, 16 None CNI Charter Funds Bixby Land Company, a 400 North Roxbury Drive real estate company Beverly Hills, (2004-present). Regional California 90210 Financial Officer, Age: 51 AIMCO, a real estate investment trust (2004). Chief Financial Officer, DBM Group, a direct mail marketing company (2001-2004). Senior Vice President and Chief Operating Officer, Forecast Commercial Real Estate Service, Inc. (2000-2001). Senior Vice President and Chief Financial Officer, Bixby Ranch Company (1985-2000). - ----------------------------------------------------------------------------------------------------------------------- (*) 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 Trustees or the shares entitled to vote. (**) During 2004 and 2005, Mr. Barnet's law firm, Reed Smith LLP, provided legal services to CNB and City National Corporation (CNB's parent company). In 2004, the firm billed approximately $70,140 for these services. In 2005, the firm billed approximately $24,823 for these services. In 2006, no fees were billed to or collected from CNB or City National Corporation by the firm. In February 2006, the other Independent Trustees determined that Mr. Barnet should continue to be classified as a "disinterested person" of the Trust, as defined in the 1940 Act, because of his limited participation in such services, which do not involve the Trust, and because of his minimal interest in such fees. Mr. Barnet's interest in the fees collected each year was substantially less than $60,000. (***) Bixby Land Company, of which Mr. Wolford is the Chief Financial Officer, currently has a $40 million revolving line of credit with CNB at an interest rate of 0.75% less than the prime rate, which expires in June 2007. The Company's outstanding balance was $35.0 million as of December 31, 2006. In addition the Company has an $80 million unsecured and one-time revolving acquisition facility priced at 0.75% less than the prime rate, which has a maturity date of August 8, 2009. There was no outstanding balance on this line as of December 31, 2006. The Company also has a $10 million loan at an interest rate of 5.84% from CNB secured by an office building located in San Diego, which expires in 2012, and a $6.46 million construction loan at an interest rate of 0.50% less than the prime rate, with an outstanding balance of $6.0 million as of December 31, 2006. The loan is to finance the construction of an industrial building in Redlands, California, and is due September 2007. The Company also has a $17.3 million construction loan at an interest rate of 0.50% less than the prime rate to finance construction of another industrial building in Redlands, California. The loan matures in August 2009, and the balance on the loan at December 31, 2006 was $7.66 million. In May 2006, the other Independent Trustees determined that Mr. Wolford should continue to be classified as a "disinterested person" of the Trust, as defined in the 1940 Act, because CNB's existing loans to the Company had been made in the ordinary course of business and because of the minimal benefits of the loans to Mr. Wolford. -37- OFFICERS - ----------------------------------------------------------------------------------------------------------------------- Name Position with the Term of Principal Occupation for the Address Trust Office(*) and Past Five Years Age Length of Time Served - ----------------------------------------------------------------------------------------------------------------------- Timothy D. Barto Vice President Since 2000 Attorney, Vice President and Assistant Secretary SEI Investments and Assistant of SEI Investments (1999- Present). Vice One Freedom Valley Drive Secretary President and Assistant Secretary of Oaks, Pennsylvania 19456 Administrator (1999-Present). Officer of various Age: 38 investment companies administered by Administrator (1999-2004). Assistant Secretary of the Distributor (2003-2004). Vice President of the Distributor (1999-2004). - ----------------------------------------------------------------------------------------------------------------------- Eric Kleinschmidt Controller and Since 2005 Director of Funds Accounting, SEI Investments SEI Investments Chief Operating (2004-Present). Manager of Funds Accounting, SEI One Freedom Valley Drive Officer Investments (1999-2004). Oaks, Pennsylvania 19456 Age: 38 - ----------------------------------------------------------------------------------------------------------------------- Vernon C. Kozlen President and Since 2000 Executive Vice President and Director of Asset City National Bank Chief Executive Management Development, CNB (1996-present). 400 N. Roxbury Drive Officer Director, Reed, Conner & Birdwell LLC Beverly Hills, CA 90210 (2000-present), and Convergent Capital Age: 63 Management, LLC (2003-present). Chairman of the Board, CNAM, Inc. (2001-2005). Chairman of the Board, City National Securities, Inc. (1999-2005). Director, CNAM, Inc. (2001-2006), and City National Securities, Inc. (1999-2006). - ----------------------------------------------------------------------------------------------------------------------- Valerie Y. Lewis Vice President and Since 2005 Chief Compliance Officer, CNAM, Inc. (August, City National Bank Chief Compliance 2005- present). Fund Boards Specialist - 400 N. Roxbury Drive Officer Assistant Secretary, Capital Research and Beverly Hills, CA 90210 Management Company and Capital International, Age: 50 Inc. (1999-2005). - ----------------------------------------------------------------------------------------------------------------------- James Ndiaye Vice President Since 2005 Attorney, SEI Investments Company (2004-present). SEI Investments and Assistant Vice President, Deutsche Asset Management One Freedom Valley Drive Secretary (2003-2004). Associate, Morgan Lewis & Bockius Oaks, Pennsylvania 19456 LLP (2000-2003). Assistant Vice President, ING Age: 38 Variable Annuities Group (1999-2000). - ----------------------------------------------------------------------------------------------------------------------- Michael T. Pang Vice President & Since 2005 Attorney, SEI Investments Company (2005-present). SEI Investments Assistant Counsel, Caledonian Bank & Trust's Mutual Funds One Freedom Valley Drive Secretary Group (2004-2005). Counsel, Permal Asset Oaks, Pennsylvania 19456 Management (2001-2004). Associate, Schulte, Roth Age: 34 & Zabel's Investment Management Group (2000-2001). - ----------------------------------------------------------------------------------------------------------------------- Rodney J. Olea Vice President Since 2000 Senior Vice President, CNAM, Inc. (2001-present). City National Bank Senior Vice President and Director of Fixed 400 N. Roxbury Drive Income, CNB (1994-present). Beverly Hills, CA 90210 Age: 41 - ----------------------------------------------------------------------------------------------------------------------- Sofia A. Rosala Vice President Since 2004 Vice President and Assistant Secretary, SEI SEI Investments and Assistant Investments Fund Management (2005-present). One Freedom Valley Drive Secretary Compliance Officer of SEI Investments Oaks, Pennsylvania 19456 (2001-2004). Account and Product Consultant, SEI Age: 34 Private Trust Company (1998-2001). - ----------------------------------------------------------------------------------------------------------------------- Timothy G. Solberg Vice President Since 2005 Managing Director and Chief Investment Officer, CCM Advisors, LLC and Assistant CCM Advisors (2001-present); Director of 190 S. LaSalle Street Secretary Marketing and Client Services, Hewitt Investment Suite 2800 Group, a Division of Hewitt Associates LLC Chicago, IL 60603 (1989-2001). Age: 53 - ----------------------------------------------------------------------------------------------------------------------- -38- - ----------------------------------------------------------------------------------------------------------------------- Name Position with the Term of Principal Occupation for the Address Trust Office(*) and Past Five Years Age Length of Time Served - ----------------------------------------------------------------------------------------------------------------------- Richard A. Weiss Vice President Since 2000 President, CNAM, Inc. (2001-present). Executive City National Bank and Assistant Vice President and Chief Investment Officer, CNB 400 N. Roxbury Drive Secretary (1999-present). Director, City National Beverly Hills, CA 90210 Securities (April 2003-present). Executive Vice Age: 46 President and Chief Investment Officer. Sanwa Bank California (1994-1999). - ----------------------------------------------------------------------------------------------------------------------- (*) Each officer serves at the pleasure of the Board of Trustees and until removed by the Board or the principal executive officer of the Trust, or until such officer resigns. THE BOARD OF TRUSTEES The Board of Trustees has responsibility for the overall management and operations of the Trust. The Board establishes the Trust's policies and meets regularly to review the activities of the officers, who are responsible for day-to-day operations of the Trust. COMMITTEES The Board has an Audit Committee, comprised solely of the Independent Trustees. Irwin G. Barnet, Victor Meschures, William R. Sweet and James Wolford are the current members. The Committee makes recommendations to the Board of Trustees with respect to the engagement of the Trust's independent registered public accounting firm, approves all auditing and other services provided to the Trust by its independent registered public accounting firm, and reviews with the independent registered public accounting firm the plan and results of the audit engagement and matters having a material effect on the Trust's financial operations. During the fiscal year ended September 30, 2006, the Audit Committee held two meetings. The Board has designated William R. Sweet and James Wolford as the Trust's "audit committee financial experts," as defined in Form N-CSR under the 1940 Act, based on the Board's review of their qualifications. The Board has a Nominating Committee, comprised solely of the Independent Trustees. Irwin G. Barnet, Victor Meschures, William R. Sweet and James Wolford are the current members of the Committee. The Committee periodically reviews such issues as the Board's composition, responsibilities, committees, compensation and other relevant issues, and recommends any appropriate changes to the Board of Trustees. The Committee did not meet during the fiscal year ended September 30, 2006. The Board has adopted the following procedures by which shareholders may recommend nominees to the Board of Trustees. While the Nominating Committee normally is able to identify from its own resources an ample number of qualified candidates, it will consider shareholder suggestions of persons to be considered as nominees to fill future vacancies on the Board, so long as the shareholder or shareholder group submitting a proposed nominee: beneficially owns more than 5% of the Trust's voting shares and has held such shares continuously for two years, and is not an adverse holder (i.e., the shareholder or shareholder group has acquired such shares in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the Trust). No eligible shareholder or shareholder group may submit more than one independent Board member nominee each year. Such suggestions must be sent in writing to the Trust's Secretary, and must be accompanied by the shareholder's contact information, the nominee's contact information and number of Fund shares owned by the nominee, all information regarding the nominee that would be required to be disclosed in solicitations of proxies for elections of directors required under the Securities Exchange Act of 1934, as amended, and a notarized letter from the nominee stating his or her intention -39- to serve as a nominee and be named in the Trust's proxy statement, if so designated by the Nominating Committee and the Board of Trustees. EQUITY SECURITIES OWNED BY TRUSTEES The following table sets forth the dollar range of equity securities beneficially owned by each Trustee as of December 31, 2006. INDEPENDENT TRUSTEES - ------------------------------------------------------------------------------------------------------- Aggregate Dollar Range of Equity Securities in All Registered Investment Name of Trustee Dollar Range of Equity Companies Overseen by Securities in each Fund Trustee in Family of Investment Companies - ------------------------------------------------------------------------------------------------------- Irwin G. Barnet Government Money Fund Over $100,000 Over $100,000 - ------------------------------------------------------------------------------------------------------- Victor Meschures None None - ------------------------------------------------------------------------------------------------------- William R. Sweet Large Cap Growth Fund $10,001 - $50,000 $1 - $10,000 Large Cap Value Fund $1 - $10,000 Small Cap Value Fund $1 - $10,000 - ------------------------------------------------------------------------------------------------------- James Wolford None None - ------------------------------------- ----------------------------------------------------------------- Trustees, officers, directors and full time employees of the Trust, CNAM, Inc., RCB, the Distributor and affiliates of such companies are not subject to the front end sales charge for Class R shares of the Small Cap Value Fund, as sales to such persons do not involve any sales expense to the Fund or the Distributor. COMPENSATION The following tables set forth Trustee compensation for the fiscal year ending September 30, 2006. -40- INDEPENDENT TRUSTEES - -------------------------------------------------------------------------------------------------------------- Name of Trustee Aggregate Pension or Retirement Estimated Annual Total Compensation From Compensation from Benefits Accrued As Benefits Upon Registrant and Fund Registrant Part of Funds' Retirement Complex Paid to Trustees Expenses - -------------------------------------------------------------------------------------------------------------- Irwin G. Barnet $41,500 N/A N/A $41,500 - -------------------------------------------------------------------------------------------------------------- Victor Meschures $38,500 N/A N/A $38,500 - -------------------------------------------------------------------------------------------------------------- William R. Sweet $39,750 N/A N/A $39,750 - -------------------------------------------------------------------------------------------------------------- James Wolford $38,500 N/A N/A $38,500 - -------------------------------------------------------------------------------------------------------------- INVESTMENT MANAGER Prior to April 1, 1999, Berkeley Capital Management ("BCM") served as the investment manager for the Prime Money Fund. The Trust and CNB entered into an Investment Management Agreement (the "Management Agreement") dated as of April 1, 1999 regarding the Trust. The Management Agreement was effective as to certain of the Funds subsequent to that date. On May 10, 2001, CNAM, Inc., a wholly owned subsidiary of CNB, became the investment manager to the Trust, and the Management Agreement between CNB and the CNI Charter Funds, and the obligations of CNB contained in the Management Agreement, were assumed by CNAM, Inc. CNAM, Inc. employs the same investment personnel that managed the Funds under CNB. The Investment Manager provides a continuous investment program of general investment and economic advice regarding the Funds' investment strategies, manages the Funds' investment portfolios and provides other services necessary to the operation of the Funds and the Trust. As of December 31, 2006, the Investment Manager had approximately $5.2 billion in assets under management. CNB, founded in the early 1950s, is a federally chartered commercial bank with approximately $48.6 billion in assets under administration as of December 31, 2006. CNB is a wholly-owned subsidiary of City National Corporation ("CNC"), a New York Stock Exchange listed company. The fees payable under the Management Agreement, and any fee waiver or expense reimbursement arrangements, with respect to the Funds are described in the Funds' prospectuses. The Management Agreement provides that the Investment Manager shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Management Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Investment Manager in the performance of its duties or from reckless disregard of its duties and obligations thereunder. -41- The Management Agreement with respect to each Fund is in effect for a two-year term (the "Initial Term") from its effective date, and thereafter continues in effect for one-year terms subject to annual approval (1) by the vote of a majority of the Trustees or by the vote of a majority of the outstanding voting securities of the Fund and (2) by the vote of a majority of the Trustees who are not parties to the Management Agreement or "interested persons" (as that term is defined in the 1940 Act) of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Management Agreement with respect to each Fund may be terminated at any time upon 60 days' notice by either party or by a vote of a majority of the outstanding shares of that Fund, and will terminate automatically upon its "assignment" (as such term is defined in the 1940 Act). The Investment Manager provides the Funds with investment management services, including the selection, appointment, and supervision of any sub-adviser to any of the Funds. Other than with respect to the Small Cap Value Fund, in accordance with an exemptive order from the SEC, the Investment Manager may from time to time with the approval of the Board of Trustees change a sub-adviser according to certain procedures without soliciting shareholders' approval. The Investment Manager may also, with Board approval, manage the Funds which currently have a sub-adviser directly without a sub-adviser without shareholder consent. Any reductions made by the Investment Manager in its fees from a Fund are subject to reimbursement by the Fund within the following three years provided the Fund is able to effect such reimbursement and remain in compliance with the foregoing expense limitations. The Investment Manager generally seeks reimbursement for the oldest reductions and waivers before payment by the Fund for fees and expenses for the current year. The Investment Manager's ability to request reimbursement is subject to various conditions. First, any reimbursement is subject to a Fund's ability to effect such reimbursement and remain in compliance with applicable expense limitations in place at that time. Second, the Investment Manager must specifically request the reimbursement from the Board. Third, the Board must approve such reimbursement as appropriate and not inconsistent with the best interests of the Fund and the shareholders at the time such reimbursement is requested. Because of these substantial contingencies, the potential reimbursements will be accounted for as contingent liabilities that are not recordable on the balance sheet of a Fund until collection is probable, but the full amount of the potential liability will appear in a footnote to each Fund's financial statements. At such time as it appears probable that a Fund is able to effect such reimbursement, that the Investment Manager intends to seek such reimbursement and that the Board has or is likely to approve the payment of such reimbursement, the amount of the reimbursement will be accrued as an expense of that Fund for that current period. Under a similar arrangement with the RCB Predecessor Fund, RCB has paid certain excess operating expenses of the RCB Predecessor Fund. The right to seek reimbursement of such excess operating expenses was carried over to the Class R shares of the Small Cap Value Fund. The Investment Manager also may act as an investment adviser or administrator to other persons, entities, and corporations, including other investment companies. The use of the name "CNI Charter" by the Trust and by the Funds is pursuant to the consent of the Investment Manager, which may be withdrawn if the Investment Manager ceases to be the Investment Manager of the Funds. For the relevant fiscal periods ending September 30, 2006, September 30, 2005 and September 30, 2004, the Funds paid the Investment Manager the following investment management fees and the Investment Manager waived the indicated amounts. For each Fund, the Investment Manager's investment management fees are allocated among the classes of the Fund according to the relative net asset values of the classes. -42- - -------------------------------------------------------------------------------------------------------------------- Fund Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended 9/30/06 9/30/05 9/30/04 - -------------------------------------------------------------------------------------------------------------------- Fees Fees Fees Fees Paid Waived Fees Paid Waived Fees Paid Waived - -------------------------------------------------------------------------------------------------------------------- Large Cap Growth Fund $292,709 N/A $240,683 N/A $195,140 N/A - -------------------------------------------------------------------------------------------------------------------- Large Cap Value Fund $584,676 N/A $309,673 N/A $266,543 N/A - -------------------------------------------------------------------------------------------------------------------- Technology Growth Fund $22,085 N/A $20,433 N/A $18,316 $1,149 - -------------------------------------------------------------------------------------------------------------------- Small Cap Value Fund $668,726 N/A $618,947 N/A $324,640 N/A - -------------------------------------------------------------------------------------------------------------------- Corporate Bond Fund $215,503 N/A $205,192 N/A $174,933 $5,597 - -------------------------------------------------------------------------------------------------------------------- Government Bond Fund $118,244 $23,207 $88,941 $17,588 $65,670 $15,500 - -------------------------------------------------------------------------------------------------------------------- California Bond Fund $40,654 $28,120 $34,992 $24,819 $25,914 $23,121 - -------------------------------------------------------------------------------------------------------------------- High Yield Bond Fund $266,638 $38,055 $296,131 $42,299 $235,640 $42,321 - -------------------------------------------------------------------------------------------------------------------- Prime Money Fund $2,760,898 N/A $1,922,067 N/A $1,657,566 N/A - -------------------------------------------------------------------------------------------------------------------- Government Money Fund $5,904,108 N/A $5,794,749 N/A $5,969,991 N/A - -------------------------------------------------------------------------------------------------------------------- California Money Fund $1,688,038 $515,898 $1,495,183 $429,471 $1,397,210 $530,243 - -------------------------------------------------------------------------------------------------------------------- For the fiscal year ended September 30, 2006, the Investment Manager recaptured fees it had previously waived in the following amounts: Technology Growth Fund: $1,667; and Corporate Bond Fund: $4,821. A summary of the Board's considerations associated with its approval of the Management Agreement is included in the Trust's Semi-Annual Report for the fiscal period ended March 31, 2006. SUB-ADVISERS The High Yield Bond Fund Halbis has entered into a sub-advisory agreement effective August 31, 2005 (the "Halbis Sub-Advisory Agreement") with the Investment Manager pursuant to which Halbis serves as discretionary investment adviser to the High Yield Bond Fund. The Halbis Sub-Advisory Agreement provides that Halbis shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or negligence on its part in the performance of its duties or from the reckless disregard of its obligations or duties thereunder. After its initial two-year term, the continuance of the Halbis Sub-Advisory Agreement with respect to the High Yield Bond Fund must be specifically approved at least annually (1) by the vote of a majority of the outstanding shares of the High Yield Bond Fund or by the Trustees, and (2) by the vote of a majority of the Trustees who are not parties to the Halbis 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 Halbis Sub-Advisory Agreement will terminate automatically in the event of its assignment or in the event that the Trust terminates, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the High Yield Bond Fund, by a majority of the outstanding shares of the High Yield Bond Fund, on not less than 60 days' written notice to Halbis, or by Halbis on not less than 60 days' written notice to the Trust. Halbis is entitled to a fee for its investment advisory services, which is calculated at the following annual rates: 0.50% of the average daily net assets of the Fund up to $35 million and 0.40% of such net assets over $35 million and less than $70 million, and 0.35% of such net assets over $70 million. For the year ended September 30, 2006 and the fiscal period ended September 30, 2005, the Investment Manager paid Halbis approximately $197,502 and $17,338 in sub-advisory fees. -43- Until September 1, 2005, Credit Suisse Asset Management, LLC ("Credit Suisse") served as investment sub-adviser to the High Yield Bond Fund pursuant to a sub-advisory agreement between the Investment Manager and Credit Suisse (the "Credit Suisse Sub-Advisory Agreement"). As of August 31, 2005, the Credit Suisse Sub-Advisory Agreement was terminated. For the period October 1, 2004 through September 1, 2005, the Investment Manager paid Credit Suisse approximately $198,133 in sub-advisory fees. For the year ended September 30, 2004, the Investment Manager paid Credit Suisse approximately $182,619 in sub-advisory fees. A summary of the Board's considerations associated with its approval of the Halbis Sub-Advisory Agreement is included in the Trust's Semi-Annual Report for the fiscal period ended March 31, 2005. The Small Cap Value Fund RCB has entered into a sub-advisory agreement (the "RCB Sub-Advisory Agreement" and, together with the Halbis Sub-Advisory Agreement, the "Sub-Advisory Agreements") with the Investment Manager. Pursuant to the RCB Sub-Advisory Agreement, RCB serves as discretionary investment adviser to the Small Cap Value Fund. The RCB Sub-Advisory Agreement provides that RCB shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or 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 RCB Sub-Advisory Agreement with respect to the Small Cap Value Fund after its initial two year term must be specifically approved at least annually (1) by the vote of a majority of the outstanding shares of the Small Cap Value Fund or by the Trustees, and (2) by the vote of a majority of the Trustees who are not parties to the RCB 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 RCB Sub-Advisory Agreement will terminate automatically in the event of its assignment or in the event that the Trust or the Small Cap Value Fund terminates, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Small Cap Value Fund, by a majority of the outstanding shares of the Small Cap Value Fund, on not less than 60 days' written notice to RCB, or by RCB on not less than 60 days' written notice to the Trust. RCB is entitled to a fee for its investment advisory services to be paid by CNAM, Inc., which is accrued daily and paid monthly at the annual rate of 0.85% of the average daily net assets of the Small Cap Value Fund. For the fiscal years ended September 30, 2006, September 30, 2005 and September 30, 2004, the Investment Manager paid RCB approximately $668,726, $618,947 and $311,386 in sub-advisory fees, respectively. The use of the name "RCB" by the Trust is pursuant to the consent of RCB, which may be withdrawn if RCB ceases to be the investment adviser to the Small Cap Value Fund. A summary of the Board's considerations associated with its approval of the RCB Sub-Advisory Agreement is included in the Trust's Semi-Annual Report for the fiscal period ended March 31, 2006. PORTFOLIO MANAGERS Information regarding CNAM, Inc. and each of the Sub-Advisers is contained in the Funds' Prospectuses under "Management of the Funds." Following is information with respect to each person who is primarily responsible for the day-to-day management of each Fund's portfolio (a "portfolio manager"), as identified in the Funds' Prospectus: (i) other accounts managed by the portfolio -44- manager, (ii) a description of the portfolio manager's compensation structure and (iii) the dollar range of the portfolio manager's investments in each Fund. All information provided below is as of September 30, 2006. CNAM, Inc. CNAM, Inc. manages the investment portfolios of the Large Gap Growth Fund, Large Cap Value Fund, Technology Growth Fund, Corporate Bond Fund, Government Bond Fund and California Bond Fund. The compensation received from CNB by all CNAM, Inc. employees, including each of the portfolio managers listed below, consists of base cash salaries and annual cash bonuses based on the investment professional's assigned portfolios' investment performance, his/her contribution to investment strategy and research, client retention, teamwork, and overall participation in CNB's investment division's activities. Investment professionals are also eligible to participate in CNC's stock option program, which provides for an annual stock grant based on individual performance, and corporate profit sharing program, which is a qualified defined contribution plan available to all CNB employees who are entitled to receive paid vacation. An eligible employee may defer a portion of his or her pay into the plan, a portion of which is matched by CNB. In addition, CNB may make discretionary contributions ("employer contributions") each year equal to a portion of its consolidated net profits, subject to an overall maximum percentage of compensation. Employer contributions vest over a period of five years of service with CNB. Large Cap Growth Fund The individuals with responsibility for managing the Large Gap Growth Fund are Richard A. Weiss and Brian L. Garbe. Messrs. Weiss and Garbe managed the following accounts (including the Large Gap Growth Fund): Mr. Weiss: - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 2 $152.5 0 $0 Companies: - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment 0 $0 0 $0 Vehicles: - ----------------------------------------------------------------------------------------------------------------- Other Accounts: 14 $22.7 0 $0 - ----------------------------------------------------------------------------------------------------------------- -45- Mr. Garbe: - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 3 $155.2 0 $0 Companies: - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment Vehicles: 0 $0 0 $0 - ----------------------------------------------------------------------------------------------------------------- Other Accounts: 8 $18.5 0 $0 - ----------------------------------------------------------------------------------------------------------------- Neither Mr. Weiss nor Mr. Garbe own any shares of the Large Cap Growth Fund. Large Cap Value Fund - -------------------- The individuals with primary responsibility for managing the Large Gap Value Fund are Richard A. Weiss and Brian L. Garbe. Additional information about Messrs. Weiss and Garbe is set forth above under "Large Cap Growth Fund". Neither Mr. Weiss nor Mr. Garbe own any shares of the Large Cap Value Fund. Technology Growth Fund - ---------------------- The individuals with primary responsibility for managing the Technology Growth Fund are Brian L. Garbe and Max Sasso. Additional information about Mr. Garbe is set forth above under "Large Gap Growth Fund". Mr. Sasso managed the following accounts (including the Technology Growth Fund): - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 1 $2.7 0 $0 Companies: - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment 0 $0 0 $0 Vehicles: - ----------------------------------------------------------------------------------------------------------------- Other Accounts: 94 $89.4 0 $0 - ----------------------------------------------------------------------------------------------------------------- Neither Mr. Garbe nor Mr. Sasso own any shares of the Technology Growth Fund. Corporate Bond Fund - ------------------- The individuals with primary responsibility for managing the Corporate Bond Fund are Rodney J. Olea and William C. Miller. Messrs. Olea and Miller managed the following accounts (including the Corporate Bond Fund): -46- Mr. Olea: - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 7 $4,539.7 0 $0 Companies: - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment 0 $0 0 $0 Vehicles: - ----------------------------------------------------------------------------------------------------------------- Other Accounts: 40 $425.2 0 $0 - ----------------------------------------------------------------------------------------------------------------- Mr. Miller: - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 5 $4,475.8 0 $0 Companies: - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment 0 $0 0 $0 Vehicles: - ----------------------------------------------------------------------------------------------------------------- Other Accounts: 68 $496.5 0 $0 - ----------------------------------------------------------------------------------------------------------------- Neither Mr. Olea nor Mr. Miller own any shares of the Corporate Bond Fund. Government Bond Fund - -------------------- The individuals with primary responsibility for managing the Government Bond Fund are Rodney J. Olea and Paul C. Single. Additional information about Mr. Olea is set forth above under "Corporate Bond Fund". Mr. Single managed the following accounts (including the Government Bond Fund): -47- - ----------------------------------------------------------------------------------------------------------------- The individuals with primary responsibility for managing the Government Bond Fund are Rodney J. Olea and Paul C. Single. Additional information about Mr. Olea is set forth above under "Corporate Bond Fund". Mr. Single managed the following accounts (including the Government Bond Fund): Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 4 $4,451.0 0 $0 Companies: - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment 0 $0 0 $0 Vehicles: - ----------------------------------------------------------------------------------------------------------------- Other Accounts: 60 $275.5 0 $0 - ----------------------------------------------------------------------------------------------------------------- Neither Mr. Olea nor Mr. Single own any shares of the Government Bond Fund. California Tax Exempt Bond Fund - ------------------------------- The individuals with primary responsibility for managing the California Bond Fund are Rodney J. Olea and Alan Remedios. Additional information about Mr. Olea is set forth above under "Corporate Bond Fund". Mr. Remedios managed the following accounts (including the California Bond Fund): - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 4 $4,421.6 0 $0 Companies: - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment 0 $0 0 $0 Vehicles: - ----------------------------------------------------------------------------------------------------------------- Other Accounts: 77 $307.6 0 $0 - ----------------------------------------------------------------------------------------------------------------- Neither Mr. Olea nor Mr. Remedios own any shares of the California Bond Fund. RCB RCB manages the investment portfolio of the Small Cap Value Fund. The individuals with primary responsibility for managing the Fund are Jeffrey Bronchick and Thomas D. Kerr. Messrs. Bronchick and Kerr managed the following accounts (including the Small Cap Value Fund): -48- - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions) Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered Investment 1 $ 69.9 0 $0 Companies - ----------------------------------------------------------------------------------------------------------------- Other Pooled Investment 1 $6.1 1 $6.1 Vehicles - ----------------------------------------------------------------------------------------------------------------- Other Accounts 1,243 $ 896.2 0 $0 - ----------------------------------------------------------------------------------------------------------------- Compensation for each of Messrs. Bronchick and Kerr is based on a combination of a competitive salary; a share in a bonus pool based on the profitability of the company and distributed according to a combination of contribution, peer review and other factors; and a pro rata share of available corporate profits as each is a principal of the firm. The bonus is paid annually at year-end. Mr. Bronchick owns shares worth over $1,000,000 in value, and Mr. Kerr owns shares worth $10,001-$50,000 in value, of the Small Cap Value Fund. Halbis Halbis manages the investment portfolio of the High Yield Bond Fund. The individual with primary responsibility for managing the Fund is Richard A. Lindquist. Mr. Lindquist managed the following accounts (including the High Yield Bond Fund): - ----------------------------------------------------------------------------------------------------------------- Type of Accounts Total Total Assets # of Accounts Managed with Total Assets with ---------------- ----- ------------- --------------------------- ------------------ # of Accounts (millions)(*)Performance-Based Advisory Performance-Based -------------- ---------- --------------------------- ----------------- Managed(*) Fee Advisory Fee (millions) ------- --- ----------------------- - ----------------------------------------------------------------------------------------------------------------- Registered 2 $51.1 0 $0 Investment Companies - ----------------------------------------------------------------------------------------------------------------- Other Pooled 1 $5.3 0 $0 Investment Vehicles - ----------------------------------------------------------------------------------------------------------------- Other Accounts 5 $350.4 0 $0 - ----------------------------------------------------------------------------------------------------------------- (*) These figures represent accounts of both Halbis and HSBC Investments (USA) Inc., as Halbis portfolio managers manage accounts on behalf of each of these entities. Mr. Lindquist's compensation consists of a base salary and an incentive bonus. The total sum set aside for bonus payments each year is a function of HSBC Investments (USA) Inc.'s profitability as a whole. In determining the amount to allocate to each individual, three factors are assessed: (1) the performance of the company; (2) the performance of the investment team; and (3) the performance of the individual. During the annual appraisal process, each department manager reviews the team's performance and contribution to the company for the past year on an individual basis. Bonuses and salary increases are awarded based on the individual's contribution to the team. Promotions are awarded to individuals who have performed well beyond expectations for their respective levels. -49- Mr. Lindquist does not own any shares of the High Yield Bond Fund. Potential Conflicts of Interest in Portfolio Management Portfolio managers who have day-to-day management responsibilities with respect to more than one Fund or other account may be presented with several potential or actual conflicts of interest. First, the management of multiple Funds and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each Fund and/or other account. In approving the Management Agreement and each Sub-Advisory Agreement, the Board of Trustees was satisfied that each portfolio manager would be able to devote sufficient attention to the management of the applicable Fund, and that the Investment Manager and each Sub-Adviser seeks to manage such competing interests for the time and attention of portfolio managers. In addition, most other accounts managed by each identified portfolio manager are managed using the same investment models that are used in connection with the management of the applicable Fund. If a portfolio manager identifies a limited investment opportunity which may be suitable for more than one Fund or other account, a Fund may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible Funds and other accounts of the Investment Manager or Sub-Adviser. To deal with these situations, the Investment Manager and each Sub-Adviser have adopted procedures for allocating portfolio transactions across multiple accounts, which generally provide for pro rata allocation, except for RCB which generally provides for allocation in a random manner. With respect to securities transactions for the Funds, the Investment Manager and each Sub-Adviser determines which broker to use to execute each order, consistent with its duty to seek best execution of the transaction. However, with respect to certain other accounts, the Investment Manager and Sub-Adviser may be limited by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these cases, trades for a Fund in a particular security may be placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the transaction, or both, to the possible detriment of the Fund or other account(s) involved. The appearance of a conflict of interest may also arise where the Investment Manager or Sub-Adviser has an incentive, such as a performance-based management fee, which relates to the management of one or more, but not to all, accounts with respect to which a portfolio manager has day-to-day management responsibilities. For example, an investment professional may devote more time to developing and analyzing investment strategies and opportunities or allocating securities preferentially to the account for which the Investment Manager or Sub-Adviser could share in investment gains. The Trust, Investment Manager and Sub-Advisers have adopted certain compliance policies and procedures designed to address the conflicts described above, including policies and procedures designed to ensure that investment opportunities are allocated equitably among different customer accounts and that no one client is favored over another. In addition, management of the Investment Manager and the Sub-Advisers meet periodically to identify and evaluate potential conflicts of interest. However, there is no guarantee that such policies and procedures will detect each and every situation in which a conflict arises. -50- ADMINISTRATOR The Trust and SEI Investments Global Funds Services (the "Administrator") have entered into an administration agreement (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, fund accounting, regulatory reporting, necessary office space, equipment, personnel, compensation and facilities. The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. The Administration Agreement shall remain in effect for a period of three years after the effective date of the agreement and shall continue in effect for successive renewal terms of two (2) years each, unless terminated by mutual agreement, by either party on not less than 60 days' prior written notice to the other party, upon the liquidation of a Fund with respect to that Fund, upon the liquidation of the Administrator, or upon 45 days' written notice following an uncured material breach. From April 1, 2002 through December 31, 2004 the Administrator was entitled to fees which were calculated based upon the aggregate average daily net assets ("Assets") of the Trust as follows: 0.10% of Assets not exceeding $2.5 billion; 0.08% of Assets exceeding $2.5 billion but not exceeding $5 billion; and 0.06% of Assets exceeding $5 billion. As of January 1, 2005, the Administrator is entitled to fees calculated based on the following schedule: .065% of Assets not exceeding $2.5 billion; .045% of Assets exceeding $2.5 billion but not exceeding $5 billion; and 0.025% of Assets exceeding $5 billion. Each Fund is subject to a minimum fee of $90,000. The Administrator may waive its fee or reimburse various expenses to the extent necessary to limit the total operating expenses of a Fund's shares. Any such waiver is voluntary and may be terminated at any time in the Administrator's sole discretion. For the fiscal years ended September 30, 2006, September 30, 2005, and September 30, 2004, the Funds paid the following administrative fees: - -------------------------------------------------------------------------------------------------------------------- Fund Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended 9/30/06 9/30/05 9/30/04 - -------------------------------------------------------------------------------------------------------------------- Fees Paid Fees Fees Fees Waived Fees Paid Waived Fees Paid Waived - -------------------------------------------------------------------------------------------------------------------- Large Cap Growth Fund $24,981 N/A $22,535 $1,793 $24,298 $3,033 - -------------------------------------------------------------------------------------------------------------------- Large Cap Value Fund $52,286 N/A $30,302 $2,586 $33,721 $5,043 - -------------------------------------------------------------------------------------------------------------------- Technology Growth Fund $1,441 N/A $1,463 $130 $1,887 $272 - -------------------------------------------------------------------------------------------------------------------- Small Cap Value Fund $43,652 N/A $44,123 $3,331 $29,412 $5,187 - -------------------------------------------------------------------------------------------------------------------- Corporate Bond Fund $29,883 N/A $30,727 $2,680 $37,035 $5,524 - -------------------------------------------------------------------------------------------------------------------- Government Bond Fund $18,244 N/A $15,005 $1,203 $15,382 $2,427 - -------------------------------------------------------------------------------------------------------------------- California Bond Fund $14,128 N/A $13,450 $1,126 $14,840 $2,289 - -------------------------------------------------------------------------------------------------------------------- High Yield Bond Fund $22,538 N/A $27,523 $2,499 $30,290 $4,664 - -------------------------------------------------------------------------------------------------------------------- Prime Money Fund $612,100 N/A $457,411 $39,798 $491,131 $80,934(*) - -------------------------------------------------------------------------------------------------------------------- Government Money Fund $1,259,467 N/A $1,330,954 $123,883 $1,799,024 $260,288(*) - -------------------------------------------------------------------------------------------------------------------- California Money Fund $452,745 N/A $433,449 $37,636 $583,338 $92,467(*) - -------------------------------------------------------------------------------------------------------------------- (*)The Administrator waived additional amounts in 2004 in order to maintain the yields of the Money Funds. -51- The Administrator, a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. PRINCIPAL DISTRIBUTOR 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 Distribution Agreement is renewable annually by approval of the Board of Trustees and of the Independent Trustees. The Distribution Agreement may be terminated by the Distributor, by a majority vote of the Independent Trustees have no financial interest in the Distribution Agreement or by a majority vote of the outstanding securities of the Trust upon not more than 60 days' written notice by either party or upon assignment by the Distributor. The Distributor receives distribution fees pursuant to the Distribution Plan on behalf of Class A shares of each Fund, Class S shares of the Money Funds and Class R shares of the Small Cap Value Fund, and expects to reallow substantially all of the fees to broker-dealers and service providers, including affiliates of CNAM, Inc., that provide distribution-related services. The Distributor is located at One Freedom Valley Drive, Oaks, Pennsylvania 19456. TRANSFER AGENT Pursuant to a transfer agency agreement, SEI Investments Fund Management (the "Transfer Agent"), a wholly owned subsidiary of SEI Investments located at One Freedom Valley Drive, Oaks, Pennsylvania 19456, serves as transfer agent for the Funds. CUSTODIAN Pursuant to a custodian agreement, U.S. Bank, N.A. located at 50 South 16th Street, Philadelphia, Pennsylvania 19102, serves as the custodian (the "Custodian") of the Funds' assets. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND REPORTS TO SHAREHOLDERS The Trust's independent registered public accounting firm, KPMG LLP, audits and reports on the annual financial statements of the Funds and reviews 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 1601 Market Street, Philadelphia, Pennsylvania 19103. LEGAL COUNSEL The validity of the shares of beneficial interest offered hereby has been passed upon by Paul, Hastings, Janofsky & Walker LLP, 515 South Flower Street, Los Angeles, California 90071. -52- PORTFOLIO TRANSACTIONS Portfolio transactions are undertaken principally to: pursue the objective of the Funds; invest money obtained from the sale of the Funds' shares; reinvest proceeds from maturing, or the sale of, portfolio securities; and meet redemptions of the Funds' shares. Portfolio transactions may increase or decrease the returns of the Funds depending upon management's ability correctly to time and execute them. The Investment Manager and the Sub-Advisers, in effecting purchases and sales of portfolio securities for the accounts of the Funds, seek to obtain best execution under the circumstances then prevailing. Subject to the supervision of the Board, the Investment Manager and the Sub-Advisers generally select broker-dealers for the Funds primarily on the basis of the quality and reliability of services provided, including but not limited to execution capability and financial responsibility. Each of the Investment Manager and the Sub-Advisers annually performs a formal review of the broker-dealers used by it with respect to the Funds, and performs informal reviews of the broker-dealers on an on-going basis. While the Funds' general policy is to seek to obtain the most favorable execution available, in selecting a broker-dealer to execute portfolio transactions, weight may also be given to the ability of a broker-dealer to furnish research, brokerage and statistical services to the Funds or to the Investment Manager or Sub-Adviser(s), even if the specific services were not provided just to the Funds and may be lawfully and appropriately used by the Investment Manager or Sub-Adviser(s) in advising other clients. The Investment Manager and Sub-Adviser(s) consider such information, which is in addition to, and not in lieu of, the services required to be performed by them under the Management Agreement or Sub-Advisory Agreement, as appropriate, to be useful in varying degrees, but of indeterminable value. In negotiating any commissions with a broker, a Fund may therefore pay a higher commission or spread than would be the case if no weight were given to the furnishing of these supplemental services, provided that the amount of such commission has been determined in good faith by the Investment Manager or relevant Sub-Adviser to be reasonable in relation to the value of the brokerage and/or research services provided by such broker-dealer, which services either produce a direct benefit to that Fund or assist the Investment Manager or Sub-Adviser in carrying out its responsibilities to that Fund or to other discretionary advisory clients of the Investment Manager or relevant Sub-Adviser. Purchases from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as marketmakers 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 and the Sub-Advisers. 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 a Sub-Adviser determines the purchase or sale of a security to be in the best interest of a Fund as well as of other clients, the Investment Manager or the Sub-Advisers, 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 a 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. The Funds do not direct securities transactions to broker-dealers in recognition of the sale of Fund shares. However, broker-dealers who execute brokerage transactions for the Funds may effect -53- purchases of shares of the Funds for their customers. The Funds do not use the Distributor to execute its portfolio transactions. SMALL CAP VALUE FUND Pursuant to the RCB Advisory Agreement, RCB determines which securities are to be purchased and sold by the Small Cap Value Fund and selects the broker-dealers to execute the Small Cap Value Fund's portfolio transactions. Where possible, RCB effects purchase and sale transactions through dealers (including banks) which specialize in the types of securities held by the Small Cap Value Fund, unless better executions are available elsewhere. Purchases of portfolio securities for the Small Cap Value Fund also may be made directly from issuers or from underwriters. Dealers and underwriters usually act as principal for their own accounts. Purchases from underwriters will include a concession paid by the issuer to the underwriter and purchases from dealers will include the spread between the bid and the asked price. If the execution and price offered by more than one dealer or underwriter are comparable, the order may be allocated to a dealer or underwriter that has provided research or other services as discussed below. In placing portfolio transactions, RCB uses reasonable efforts to choose broker-dealers capable of providing the services necessary to obtain the most favorable price and execution available. RCB considers the full range and quality of services available in making these determinations, such as the size of the order, the difficulty of execution, the operational facilities of the firm involved, the firm's risk in positioning a block of securities, and other factors. In those instances where it is reasonably determined that more than one broker-dealer can offer the services needed to obtain the most favorable price and execution available, consideration may be given to those broker-dealers that furnish or supply research products, trading services and statistical information to RCB that RCB may lawfully and appropriately use in its investment advisory capacities, as well as provide other services in addition to execution services. RCB may select a broker-dealer that furnishes such services, products and information even if the specific services are not directly useful to the Small Cap Value Fund and may be useful to RCB in advising other clients. In negotiating commissions with a broker or evaluating the spread to be paid to a dealer, the Small Cap Value Fund may therefore pay a higher commission or spread than would be the case if no weight were given to the furnishing of these supplemental services, provided that the amount of such commission or spread has been determined in good faith by RCB to be reasonable in relation to the value of the brokerage and/or research services provided by such broker-dealer. The standard of reasonableness is to be measured in light of RCB's overall responsibilities to the Small Cap Value Fund. Products, services and informational items may be provided directly to RCB by the broker or may be provided by third parties but paid for directly or indirectly by the broker. Where a particular service or product that a broker is willing to provide for soft dollars has not only a "research" application, but is also useful to RCB for non-"research" purposes, RCB will allocate the cost of the product or service between its research and non-research uses and pay only the "research" portion with soft dollars. Since this allocation of cost between research and non-research functions is determined solely by RCB, a conflict of interest may exist in its calculation. Generally, RCB makes similar portfolio investment decisions for all of the client accounts and mutual funds it advises, including the Small Cap Value Fund. Therefore, it is possible that at times RCB will determine it is desirable to acquire or sell identical securities on behalf of the Small Cap Value Fund and such client accounts and other mutual funds. In those instances, trading decisions will be made in accordance with RCB's allocation policy. In such event, the position of the Small Cap Value Fund and -54- such client account(s) or mutual funds in the same issuer may vary and the length of time that each may choose to hold its investment in the same issuer may likewise vary. However, to the extent any of these client accounts or mutual funds seeks to acquire the same security as the Small Cap Value Fund at the same time, the Small Cap Value Fund may not be able to acquire as large a portion of such security as it desires, or it may have to pay a higher price or obtain a lower yield for such security. Similarly, the Small Cap Value Fund may not be able to obtain as high a price for, or as large an execution of, an order to sell any particular security at the same time. If one or more of such client accounts or mutual funds simultaneously purchases or sells the same security that the Small Cap Value Fund is purchasing or selling, each day's transactions in such security will be allocated in between the Small Cap Value Fund and all such client accounts or mutual funds in a random manner. It is recognized that in some cases this system could have a detrimental effect on the price or value of the security insofar as the Small Cap Value Fund is concerned. In other cases, however, it is believed that the ability of the Small Cap Value Fund to participate in volume transactions may produce better executions for the Small Cap Value Fund. REGULAR BROKERS OR DEALERS "Regular brokers or dealers" of the Trust are the ten brokers or dealers that, during the most recent fiscal year, (i) received the greatest dollar amounts of brokerage commissions from the Trust's portfolio transactions, (ii) engaged as principal in the largest dollar amounts of the portfolio transactions of the Trust, or (iii) sold the largest dollar amounts of the Trust's shares. On September 30, 2006, the Prime Money Market Fund, Government Money Market Fund, Corporate Bond Fund, Large Cap Value Fund, Large Cap Growth Fund, Government Bond Fund, High Yield Bond Fund, RCB Small Cap Fund and Technology Growth Fund held securities of the Trust's "regular brokers or dealers" as follows: - --------------------------------------------------------------------------------------------------------------- Fund Name of Broker/Dealer Total $ Amount of Securities of Each Regular Broker-Dealer Held (in 000s) - --------------------------------------------------------------------------------------------------------------- Prime Money Market Fund Barclays Capital, Inc. $160,000 Banc of America Investment Services $150,000 Bear, Steans, & Co., Inc. $149,920 Nomura Securities I International, Inc. $125,000 First Tennessee Bank $25,000 Deutsche Bank Securities $25,000 Limited Lehman Brothers, Inc. $25,000 UBS Warburg Painwebber, Inc. $24,960 Citigroup, Inc. $24,982 Merrill Lynch, Inc. $24,989 Societe Generale Cowen $24,989 Securities Corp. Fidelity Capital Markets $203 - --------------------------------------------------------------------------------------------------------------- Government Money Market Fund Barclays Capital, Inc. $193,000 Bear, Stearns, & Co., Inc. $175,000 Banc of America Investment Services $150,000 - --------------------------------------------------------------------------------------------------------------- -55- - --------------------------------------------------------------------------------------------------------------- Nomura Securities I International, Inc. $150,000 Deutsche Bank Securities Limited $100,000 UBS Warburg Painwebber, Inc. $50,000 Lehman Brothers Inc. $25,000 - --------------------------------------------------------------------------------------------------------------- Corporate Bond Fund Fidelity Capital Markets $1,838 J.P. Morgan Chase Bank $1,122 Lehman Brothers, Inc. $1,107 Citigroup Global Services $1,034 Credit Suisse Corp. $1,009 Merrill Lynch, Inc. $986 HSBC Securities, Inc. $985 Countrywide Securities $982 CIT Group $978 Goldman, Sachs & Co. $978 Morgan Stanley Dean Witter, Inc. $973 Jefferies & Co., Inc. $665 Deutsche Bank Securities Limited $526 US Bancorp Investments $354 Wachovia Securities, Inc. $100 - --------------------------------------------------------------------------------------------------------------- Large Cap Value Fund Banc of America Corp. $3,771 Citigroup, Inc. $3,367 Wells Fargo $2,658 Wachovia Securities, Inc. $1,992 Morgan Stanley Dean Witter, Inc. $1,968 Goldman, Sachs & Company Fidelity Capital Markets $1,895 US Bancorp Investments $1,715 Merrill Lynch, Inc. $1,594 Lehman Brothers, Inc. $1,205 CIT Group $1,108 PNC Financial Services $705 Suntrust Capital Markets, Inc. $493 Bank of New York SEI Investments Distribution $487 Company $409 $11 - --------------------------------------------------------------------------------------------------------------- Large Cap Growth Fund Fidelity Capital Markets $657 Goldman, Sachs & Company - --------------------------------------------------------------------------------------------------------------- -56- - --------------------------------------------------------------------------------------------------------------- Lehman Brothers Inc. $440 T. Rowe Price $355 Countrywide Securities $335 Merrill Lynch, Inc. $301 SEI Investments Distribution Company $203 $25 - --------------------------------------------------------------------------------------------------------------- Government Bond Fund Fidelity Capital Markets $50 - --------------------------------------------------------------------------------------------------------------- High Yield Bond Fidelity Capital Markets $373 - --------------------------------------------------------------------------------------------------------------- RCB Small Cap Value Morgan Stanley Dean $3,053 Witter, Inc. - --------------------------------------------------------------------------------------------------------------- Technology Growth Fund Fidelity Capital Markets $51 SEI Investments Distribution Company $8 - --------------------------------------------------------------------------------------------------------------- BROKERAGE For the indicated fiscal years, the indicated Funds paid the following brokerage commissions: - ---------------------------------------------------------------------------------------------------- Total $ Total $ Amount % of Total % of Total Amount of of Brokerage Brokerage Brokerage Year Ending Brokerage Commissions Commissions Paid Transactions September 30, 2006 Commissions Paid to to Affiliated Effected Through Paid Affiliated Brokers Brokers Affiliated Brokers - ---------------------------------------------------------------------------------------------------- Large Cap Growth Fund $39,100 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Large Cap Value Fund $128,051 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Technology Growth Fund $2,373 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Small Cap Value Fund $220,565 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- -57- - ---------------------------------------------------------------------------------------------------- Total $ Total $ Amount % of Total % of Total Amount of of Brokerage Brokerage Brokerage Year Ending Brokerage Commissions Commissions Paid Transactions September 30, 2005 Commissions Paid to to Affiliated Effected Through Paid Affiliated Brokers Brokers Affiliated Brokers - ---------------------------------------------------------------------------------------------------- Large Cap Growth Fund $36,906 N/A N/A N/A - -------------------------------------------------------------------------------------------------- Large Cap Value Fund $56,402 N/A N/A N/A - -------------------------------------------------------------------------------------------------- Technology Growth Fund $4,757 N/A N/A N/A - -------------------------------------------------------------------------------------------------- Small Cap Value Fund $149,247 N/A N/A N/A - -------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Total $ Total $ Amount % of Total % of Total Amount of of Brokerage Brokerage Brokerage Year Ending Brokerage Commissions Commissions Paid Transactions September 30, 2004 Commissions Paid to to Affiliated Effected Through Paid Affiliated Brokers Brokers Affiliated Brokers - ---------------------------------------------------------------------------------------------------- Large Cap Growth Fund $53,783 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Large Cap Value Fund $56,352 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Technology Growth Fund $6,315 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Small Cap Value Fund $88,340 N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Of the total brokerage commissions paid by the Large Cap Growth Fund, Large Cap Value Fund, and Technology Growth Fund during the fiscal year ended September 30, 2006, a total of $169,029 (99.7%) was paid to firms which provided research services to the Investment Manager as well as execution services. DISTRIBUTIONS AND TAXES DISTRIBUTIONS The Funds receive income in the form of dividends and interest earned on their investments in securities. This income, less the expenses incurred in their operations, is the Funds' net investment income, substantially all of which will be declared as dividends to the Funds' shareholders. The Funds may also derive capital gains or losses in connection with sales or other dispositions of their portfolio securities. Any net gain a Fund may realize from transactions involving investments held less than the period required for long-term capital gain or loss recognition or otherwise producing short-term capital gains and losses (taking into account any carryover of capital losses from the eight previous taxable years) will be distributed to shareholders with and as a part of dividends giving rise to ordinary income. If during any year a Fund realizes a net gain on transactions involving investments held for the period required for long-term capital gain or loss recognition or otherwise producing long- -58- term capital gains and losses, such Fund will have a net long-term capital gain. After deduction of the amount of any net short-term capital loss, the balance (to the extent not offset by any capital losses carried over from the eight previous taxable years) will be distributed and treated as long-term capital gains in the hands of the shareholders regardless of the length of time that Fund's shares may have been held by the shareholders. The amount of dividend payments by any Fund depends on the amount of net investment income and net capital gains received by such Fund from its portfolio holdings, is not guaranteed and is subject to the discretion of the Board. The Funds do not pay "interest" or guarantee any fixed rate of return or minimum rate of return on an investment in their shares. For federal income tax purposes, distributions are taxable as to shareholders to the extent of a Fund's earnings and profits. A distribution of an amount in excess of a Fund's current and accumulated earnings and profits is treated as a non-taxable return of capital that reduces a shareholder's tax basis in his or her shares; any such distributions in excess of his or her basis are treated as gain from the sale of such shares. Taxes on distributions of capital gains are determined by how long a Fund owned the investments that generated such capital gains, rather than how long a shareholder has owned his or her shares. Distributions of gains from the sale of investments that a Fund owned for more than one year and that are properly designated by the Fund as capital gain distributions will be taxable as long-term capital gains. Similarly, for calendar years 2003 through 2010, distributions of investment income designated by a Fund as derived from "qualified dividend income" will be taxed in the hands of individuals at the rates applicable to long-term capital gain, provided holding period and other requirements are met. Long-term capital gain rates for individuals have been temporarily reduced to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for (i) "qualified dividend income" distributions, (ii) capital gain distributions derived from sales of portfolio securities after May 5, 2003, and on or before December 31, 2008, and (iii) for sales of Fund shares during such period. Distributions of gains from the sale of investments that a Fund owned for one year or less will be taxable as ordinary income; such distributions will not qualify for any reduced tax rates otherwise available to corporate dividends. Distributions are taxable to shareholders even if they are paid from income or gains earned by the Fund before a shareholder's investment. Any dividend or distribution per share paid by a Fund reduces that Fund's net asset value per share on the ex-dividend date by the amount of the dividend or distribution per share. Accordingly, a dividend or distribution paid shortly after a purchase of shares by a shareholder would represent, in substance, a partial return of capital (to the extent it is paid on the shares so purchased), even though it would be subject to income taxes (except for distributions from the Government Bond Fund, the Government Money Fund, the California Bond Fund or the California Money Fund to the extent they are not subject to state or federal income taxes). Any gain resulting from the sale or exchange of Fund shares generally will be taxable as a capital gain, either short-term or long-term, depending on the length of time the shareholder has held the shares. Dividends and other distributions will be reinvested in additional shares of the applicable Fund unless the shareholder has otherwise indicated. If cash payment is requested, checks will normally be mailed on the Business Day following the dividend reinvestment date. Investors have the right to change their elections with respect to the reinvestment of dividends and distributions by notifying the Transfer Agent in writing, but any such change will be effective only as to dividends and other distributions for which the record date is seven or more business days after the Transfer Agent has received the written request. -59- Your dividends begin to accrue on the day of purchase for shares bought if purchased before 4:00 P.M. (Eastern time). Your dividends begin to accrue on the following day for shares purchased after this cut-off time. We will not credit you with dividends for shares on the day you sell them. On each day that the Money Funds' net asset values per share are determined (each a "Business Day"), the Money 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 4:30 p.m. Eastern time for the Prime Money Fund and the Government Money Fund, and before 2:00 p.m. Eastern time for the California Money Fund; and (2) payment in immediately available funds wired to the Transfer Agent by the close of business the same day. The Money Funds calculate dividends based on daily net investment income. For this purpose, the net investment income of each Fund consists of: (1) accrued interest income, plus or minus amortized discount or premium, less (2) accrued expenses allocated to that Fund. If the Fund realizes any capital gains, they will be distributed at least once during the year as determined by the Board of Trustees. Should the net asset values of a Money Fund 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 Fund's distributions. FEDERAL INCOME TAXES It is the policy of each Fund to qualify for taxation, and to elect to be taxed, as a "regulated investment company" by meeting the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In order to so qualify, each Fund will distribute each year substantially all of its investment company taxable income (if any) and its net exempt-interest income (if any), and will seek to distribute each year substantially all of its net capital gains (if any) and 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 a regulated investment company, each Fund must, among other things, annually (1) derive at least 90% of its 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 its taxable years (i) at least 50% of the market value of each Fund's total assets is represented by cash or cash items (including receivables) 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 such Fund's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of each Fund's total assets is invested in the securities of any one issuer (other than Government Securities or securities of other regulated investment companies) or of two or more issuers that such Fund controls, 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, that the Funds distribute to shareholders, provided that the Funds meet certain minimum distribution requirements. To comply with these requirements, each Fund must distribute annually at least (1) 90% of its "investment company taxable income" (as that term is defined in the Code), and (2) 90% of the excess of (i) its tax-exempt interest -60- income over (ii) certain deductions attributable to that income (with certain exceptions), for its taxable years. Each Fund intends to make sufficient distributions to shareholders to meet these requirements. If a Fund fails to distribute in a calendar year (regardless of whether it has a non-calendar taxable year) at least 98% 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. Any distributions by the Funds of long-term capital gain and "qualified dividend income," properly designated as such, will be taxable to the shareholders as long-term capital gain, regardless of how long a shareholder has held Fund shares. 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 VRDNs that have a feature entitling the purchaser to resell the securities at a specified amount (a "put option"). In 1982, the Internal Revenue Service (the "IRS") issued a revenue ruling to the effect that, under specified circumstances, a regulated investment company would be the owner of tax-exempt municipal obligations acquired with a put option. The IRS also has issued private letter rulings to certain taxpayers (which do not serve as precedent for other taxpayers) to the effect that tax-exempt interest received by a regulated investment company with respect to such obligations will be tax-exempt in the hands of the company and may be distributed to its shareholders as exempt-interest dividends. The last such ruling was issued in 1983. The IRS subsequently announced that it would not ordinarily issue advance ruling letters 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 securities, or the participation interest therein, to be purchased by either the seller or a third party. Each Fund intends to take the position that it is the owner of any municipal obligations acquired subject to a stand-by commitment or a similar put right and that tax-exempt interest earned with respect to such municipal obligations will be tax-exempt in its hands. The Funds will be required in certain cases to withhold and remit to the U.S. Treasury a percentage of taxable dividends (at the fourth lowest individual income tax rate, currently 28% for amounts paid through 2010 and 31% for amounts paid after December 31, 2010) 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. -61- Regulations affect the application to non-U.S. investors of the back-up withholding and withholding tax rules. In some circumstances, these rules increase the certification and filing requirements imposed on non-U.S. investors in order to qualify for exemption from the back-up withholding tax, and exemption from, or a reduced rate of U.S. withholding tax under tax treaties. Non-U.S. investors should consult their tax advisers with respect to the potential application of these regulations. Distributions of net investment income and net realized capital gains by a Fund will be taxable to shareholders whether made in cash or reinvested in shares. In determining amounts of net realized capital gains to be distributed, any capital loss carryovers from the eight prior taxable years will be applied against capital gains. Shareholders receiving distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the net asset value of a share of a Fund on the reinvestment date. Fund distributions also will be included in individual and corporate shareholders' income on which the alternative minimum tax may be imposed. A Fund may receive dividend distributions from U.S. corporations. To the extent that a Fund receives such dividends and distributes them to its shareholders, and meets certain other requirements of the Code, corporate shareholders of a Fund may be entitled to the "dividends received" deduction. Availability of the deduction is subject to certain holding period and debt-financing limitations. As stated above, individual shareholders may be entitled to the use of maximum long-term capital gains rates on distributions of "qualified dividend income." Each Fund may from time to time use "equalization accounting" in determining the portion of its net investment income and/or capital gains that has been distributed. If a Fund elects to use equalization accounting, it will allocate a portion of its net investment income and/or realized capital gains to redemptions of Fund shares, which will reduce the amount of such income and capital gains that the Fund is required to distribute under the distribution requirements of the Code. The IRS has not published clear guidance concerning the methods to be used in allocating investment income and capital gains to the redemption of shares. If the IRS determines that a Fund is using an improper method of allocation and that it has under-distributed its net investment income and/or capital gains for any taxable year, such Fund may be liable for additional federal income tax, interest and penalties. This additional tax, interest and penalties could be substantial. In addition, shareholders of such Fund at the time of such determination may receive an additional distribution of net investment income and/or capital gains. If a shareholder sells its shares of a Fund within 6 months after the shares have been purchased by such shareholder, and to the extent the shareholder realizes a loss on the sale of the shares, the shareholder will not be able to recognize such a loss to the extent that tax-exempt interest dividends have been paid with respect to their shares. If a shareholder sells shares of a Fund within 6 months after the shares have been purchased by such shareholder, any losses realized by the shareholder on such a sale will be treated as long-term capital losses to the extent that the shareholder has received a long-term capital gain dividend distribution with respect to its shares of a Fund. Under Treasury regulations, if a shareholder realizes a loss on disposition of a Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment companies. -62- If more than 50% in value of the total assets of a Fund at the end of its fiscal year is invested in stock or other securities of foreign corporations, such Fund may elect to pass through to its shareholders the pro rata share of all foreign income taxes paid by such Fund. If this election is made, shareholders will be (i) required to include in their gross income their pro rata share of any foreign income taxes paid by such Fund, and (ii) entitled either to deduct their share of such foreign taxes in computing their taxable income or to claim a credit for such taxes against their U.S. income tax, subject to certain limitations under the Code, including certain holding period requirements. In this case, shareholders will be informed in writing by such Fund at the end of each calendar year regarding the availability of any credits on and the amount of foreign source income (including or excluding foreign income taxes paid by such Fund) to be included in their income tax returns. If 50% or less in value of such Fund's total assets at the end of its fiscal year are invested in stock or other securities of foreign corporations, such Fund will not be entitled under the Code to pass through to its shareholders their pro rata share of the foreign income taxes paid by such Fund. In this case, these taxes will be taken as a deduction by such Fund. A Fund may be subject to foreign withholding taxes on dividends and interest earned with respect to securities of foreign corporations. A Fund may invest up to 10% of its total assets in the stock of foreign investment companies. Such companies are likely to be treated as "passive foreign investment companies" ("PFICs") under the Code. Certain other foreign corporations, not operated as investment companies, may nevertheless satisfy the PFIC definition. A portion of the income and gains that these Funds derive from PFIC stock may be subject to a non-deductible federal income tax at the Fund level. In some cases, a Fund may be able to avoid this tax by electing to be taxed currently on its share of the PFIC's income, whether or not such income is actually distributed by the PFIC. A Fund will endeavor to limit its exposure to the PFIC tax by investing in PFICs only where such Fund will either (i) elect to treat the PFIC as a "Qualified Electing Fund" under Code Section 1295 or (ii) elect to "mark-to-market" the stock of such PFIC under Code Section 1296. Because it is not always possible to identify a foreign issuer as a PFIC in advance of making the investment, a Fund may incur the PFIC tax in some instances. 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 a Fund generally are not subject to U.S. taxation, unless the recipient is an individual who meets the Code's definition of "resident alien." Among the recent changes in U.S. federal tax law is a new exemption under which U.S. source withholding taxes are no longer imposed on dividends paid by regulated investment companies to the extent the dividends are designated as "interest-related dividends" or "short-term capital gain dividends." Under this exemption, interest-related dividends and short-term capital gain dividends generally represent distributions of interest or short-term capital gains that would not have been subject to U.S. withholding tax at source if they had been received directly by a foreign person, and that satisfy certain other requirements. The exemption applies to dividends with respect to taxable years of regulated investment companies beginning after December 31, 2004, and before January 1, 2008. Again, this applies unless the recipient is a 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 a Fund 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. -63- 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 Funds and the applicability of any state, local, or foreign taxation. Paul, Hastings, Janofsky & Walker LLP has expressed no opinion in respect thereof. CALIFORNIA INCOME TAX The California Bond Fund and the California Money Fund intend to qualify to pay dividends to shareholders that are exempt from California personal income tax ("California exempt-interest dividends"). Each of these two Funds 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 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 a 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 a 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 and attributable to the production of tax-exempt income 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 EQUITY FUNDS AND THE BOND FUNDS The net asset value per share of each of the Equity Funds and the Bond Funds is calculated as follows: all Fund liabilities incurred or accrued are deducted from the valuation of the Fund's total assets, which includes accrued but undistributed income; the resulting net assets are divided by the number of shares of that Fund outstanding at the time of the valuation and the result (adjusted to the nearest cent) is the net asset value per share. -64- In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith in accordance with procedures adopted by the Board of Trustees. Securities listed on a securities exchange or an automated quotation system for which quotations are readily available, including securities traded over the counter, are valued at the last quoted sale price on the principal exchange on which they are traded on the valuation date. If there is no such reported sale on the valuation date, securities are valued at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. Prices for securities traded on a securities exchange are provided daily by recognized independent pricing agents. The reliability of the valuations provided by the independent, third-party pricing agents are reviewed daily by the Administrator. These third-party pricing agents may employ methodologies, primarily regarding debt securities, that utilize actual market transactions, broker-dealer supplied valuations or other electronic data processing techniques. These techniques generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Debt obligations with remaining maturities of sixty days or less may be valued at their amortized cost that approximates fair market value. If a security price cannot be obtained from an independent, third-party pricing agent, the Administrator obtains a bid price from an independent broker who makes a market in the security. The Investment Manager (or Sub-Adviser, as relevant) supplies the Administrator with the appropriate broker contact, and to ensure independence the Administrator obtains the quote directly from the broker each day. Foreign securities owned in the Trust are valued at the closing prices (as determined prior to the Equity Funds and the Bond Funds' determination of net asset value) on the principal exchange on which they trade. The prices for foreign securities are reported in local currency and converted to U.S. dollars using currency exchange rates. Exchange rates are provided daily by recognized independent pricing agents. Financial futures are valued at the settlement price established each day by the board of exchange on which they are traded. Foreign currency forward contracts are valued at the current day's interpolated foreign exchange rate, as calculated using the current day's exchange rate, and the thirty, sixty, ninety and one-hundred eighty day forward rates. Valuation corrections are required where variations in net asset value are the result of mathematical mistakes, the misapplication of accounting principles, misjudgments in the use of fact, and failure to reflect market information that was known or should have been known. Valuation corrections require prospective actions, and may require retroactive actions if the net asset value variation is material. Valuation corrections that require retroactive action will be reported to the Board of Trustees. The Administrator has primary operational responsibility for the operation of the valuation process. The Administrator uses several systems to monitor the pricing data supplied by various sources. These reports are reviewed daily. Any identified discrepancies are researched and resolved in accordance with these procedures. All discrepancies identified by the price flagging systems, and the resolution and verification steps taken by the Administrator, are documented and retained as part of the Trust's daily records. -65- To ensure that the independent broker continues to supply a reliable valuation, at least once per week the Administrator provides the broker supplied value to the Investment Manager (or Sub-Adviser, as relevant) for review and approval. In addition, the Investment Manager (or Sub-Adviser) will consult with the Administrator in the event of a pricing problem, participate on the Fair Value Committee, and shall notify the Administrator in the event it discovers a pricing discrepancy. Under no circumstances may the Investment Manager or Sub-Adviser determine the value of a portfolio security outside of the established pricing framework. If current market quotations are not readily available, the Trust's Fair Value Committee will determine the security's value using Fair Value Procedures established by the Board of Trustees. For instance, if trading in a security has been halted or suspended or a security has been delisted from a national exchange, a security has not been traded for an extended period of time, or a significant event with respect to a security occurs after the close of the market or exchange on which the security principally trades and before the time the Trust calculates net asset value, the Fair Value Committee will determine the security's fair value. In making a good faith determination of the value of the security, the Committee will consider the Investment Manager's (or the Sub-Adviser's) valuation recommendation and information supporting the recommendation, including factors such as the type of security, last trade price, fundamental analytical data relating to the security, forces affecting the market in which the security is purchased and sold, the price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant factors. THE MONEY FUNDS The Money Funds value their 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 Money 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 believes may result in a material dilution or other unfair results to investors or existing shareholders, the Board of Trustees is required to cause the Fund to take such action as it deems appropriate to eliminate or reduce to the extent reasonably practicable such dilution or unfair results. If a Money Fund's net asset values per share (computed using market values) declined, or were expected to decline, below $1.00 (computed using amortized cost), the Board of Trustees might temporarily reduce or suspend dividend payments for the Fund 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 a Fund's net asset value 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. -66- DISTRIBUTION PLAN The Trust has adopted a Distribution Plan (the "Plan") for the Class A shares of the Funds, the Class S shares of the Money Funds and the Class R shares of the Small Cap Value Fund, in accordance with Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. In this regard, the Board has determined that the Plan is in the best interests of the shareholders. Continuance of the Plan must be approved annually by a majority of the Trustees and by a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of the Plan or in any agreements related thereto ("Qualified Trustees"). The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of a Fund or class affected. All material amendments to the Plan will require approval by a majority of the Trustees and of the Qualified Trustees. The Plan adopted for the Class A, Class S and Class R shares provides that the Trust will pay the Distributor a fee of up to 0.50% of the average daily net assets of each Fund's Class A, Class S and Class R shares that the Distributor can use to compensate broker-dealers and service providers, including the Investment Manager and affiliates of the Distributor, that provide distribution-related services to the Class A, Class S and Class R shareholders or to their customers who beneficially own the Class A, Class S and Class R shares. During the fiscal period ending September 30, 2004, the annual distribution fee rate for the Equity Funds' and the Bond Funds' Class A shares (other than the Technology Growth Fund and the High Yield Bond Fund) was 0.25%. The annual distribution fee rate for the Class A shares of the Technology Growth Fund and the High Yield Bond Fund was 0.30%. The annual distribution fee rate for the Small Cap Value Fund's Class R shares was 0.25%. The annual distribution fee rate for the Money Funds' Class A and Class S shares was 0.50%. Payments may be made under the Plan for distribution services, including reviewing of purchase and redemption orders, assisting in processing purchase, exchange and redemption requests from customers, providing certain shareholder communications requested by the Distributor, forwarding sales literature and advertisements provided by the Distributor, and arranging for bank wires. Except to the extent that affiliates of the Investment Manager have received or receive distribution fees from the Distributor, or that the Investment Manager has benefited or benefits through increased fees from an increase in the net assets of the Trust which may have resulted or results in part from the expenditures, no interested person of the Trust nor any Trustee who is not an interested person of the Trust has or had a direct or indirect financial interest in the operation of any of the distribution plan or related agreements. Although banking laws and regulations prohibit banks from distributing shares of open-end investment companies such as the Trust, according to an opinion issued to the staff of the SEC by the Office of the Comptroller of the Currency, financial institutions are not prohibited from acting in other capacities for investment companies, such as providing shareholder services. Should future legislative, judicial or administrative action prohibit or restrict the activities of financial institutions in connection with providing shareholder services, the Trust may be required to alter materially or discontinue its arrangements with such financial institutions. The Plan provides that the distribution fees paid by a particular class of a Fund may only be used to pay for the distribution expenses of that class of the Fund. Distribution fees are accrued daily and paid monthly, and are charged as expenses as accrued. Shares are not obligated under the Plan to pay any distribution expense in excess of the distribution fee. -67- Thus, if the Plan is terminated or otherwise not continued, no amounts (other than current amounts accrued but not yet paid) would be owed by the class of the Fund to the Distributor. The Board, when approving the establishment of the Plan, determined that there are various anticipated benefits to the Funds from such establishment, including the likelihood that the Plan will stimulate sales of shares of the Trust and assist in increasing the asset base of the Trust in the face of competition from a variety of financial products and the potential advantage to the shareholders of the Trust of prompt and significant growth of the asset base of the Trust, including greater liquidity, more investment flexibility and achievement of greater economies of scale. The Board annually reviews the Plan and has determined each year that there is a reasonable likelihood that the plan will benefit the Trust and its shareholders. The Plan (and any distribution agreement among the Funds, the Distributor or the Investment Manager and a selling agent with respect to the shares) may be terminated without penalty upon at least 60 days' notice by the Distributor or the Investment Manager, or by the Trust by vote of a majority of the Independent Trustees, or by vote of a majority of the outstanding shares (as defined in the 1940 Act) of the class to which the Plan applies. All distribution fees paid by the Funds under the Plan will be paid in accordance with Rule 2830 of the NASD Regulation, Inc. Rules of Conduct, as such Rule may change from time to time. Pursuant to the Plan, the Trustees will review at least quarterly a written report of the distribution expenses incurred by the Investment Manager on behalf of the shares of the Fund. In addition, as long as the Plan remains in effect, the selection and nomination of Trustees who are not interested persons (as defined in the 1940 Act) of the Trust shall be made by the Independent Trustees. For the fiscal year ending September 30, 2006, the Funds paid the Distributor the following distribution fees under the Plan. - ------------------------------------------------------------------------------------------------------ Fiscal Year Ended September 30, 2006 Total Fees Paid Total Fees Paid Directly to Other To the Distributor Broker-Dealers and Financial Intermediaries - ------------------------------------------------------------------------------------------------------ Class A Shares - ------------------------------------------------------------------------------------------------------ Large Cap Growth Fund $24,363 - - ------------------------------------------------------------------------------------------------------ Large Cap Value Fund $30,428 - - ------------------------------------------------------------------------------------------------------ Technology Growth Fund $4,215 - - ------------------------------------------------------------------------------------------------------ Small Cap Value Fund $29,995 - - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund $3,466 - - ------------------------------------------------------------------------------------------------------ Government Bond Fund $2,093 - - ------------------------------------------------------------------------------------------------------ California Bond Fund $3,048 - - ------------------------------------------------------------------------------------------------------ High Yield Bond Fund $58,557 - - ------------------------------------------------------------------------------------------------------ Prime Money Fund $1,020,783 $416,964 - ------------------------------------------------------------------------------------------------------ Government Money Fund $1,855,761 $4,093,414 - ------------------------------------------------------------------------------------------------------ California Money Fund $372,911 $1,550,435 - ------------------------------------------------------------------------------------------------------ Class S Shares - ------------------------------------------------------------------------------------------------------ Prime Money Fund $1,339,192 - - ------------------------------------------------------------------------------------------------------ Government Money Fund $1,239,707 - - ------------------------------------------------------------------------------------------------------ California Money Fund $475,329 - - ------------------------------------------------------------------------------------------------------ Class R Shares - ------------------------------------------------------------------------------------------------------ Small Cap Value Fund - $131,889 - ------------------------------------------------------------------------------------------------------ Of these amounts, $12,039 in unreimbursed expenses with respect to Class R of the RCB Fund, representing 0.02% of the Fund's assets as of September 30, 2006, were incurred under the Plan and -68- carried over for future use by the Fund pursuant to the Plan. In addition, $30,846 in distribution fees with respect to Class R of the RCB Fund, representing 0.04% of the Fund's assets as of September 30, 2006, had been refunded to the Distributor by a broker-dealer to correct an overpayment, and have been carried over for future use by the Fund pursuant to the Plan. SHAREHOLDER SERVICES AGREEMENT CNB has entered into a Shareholder Services Agreement with the Trust. Pursuant to the Shareholder Services Agreement, CNB 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 CNB a fee of 0.25% of the Funds' average daily net assets on an annual basis, payable monthly. CNB may pay certain banks, trust companies, broker-dealers, and other institutions (each a "Participating Organization") out of the fees CNB receives 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, CNB 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, CNB 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 CNB, a Participating Organization, or their nominees; and providing such other information and assistance to shareholders as may be reasonably requested by such shareholders. CNB 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' Prospectus 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. For the fiscal years ending September 30, 2006, September 30, 2005, and September 30, 2004 pursuant to the Shareholder Services Agreement, the Class A, Class S, Class R and Institutional Class shares of the Funds paid CNB the following fees: - -------------------------------------------------------------------------------------------------------- Fees Paid, Fiscal Year Ended Class A Class S Class R Institutional 9/30/06 Class - -------------------------------------------------------------------------------------------------------- Large Cap Growth Fund $48,725 N/A N/A $88,217 - -------------------------------------------------------------------------------------------------------- Large Cap Value Fund $60,856 N/A N/A $205,328 - -------------------------------------------------------------------------------------------------------- Technology Growth Fund $7,728 N/A N/A $2,983 - -------------------------------------------------------------------------------------------------------- Small Cap Value Fund $59,990 N/A $263,779 $34,799 - -------------------------------------------------------------------------------------------------------- -69- - -------------------------------------------------------------------------------------------------------- Corporate Bond Fund $6,932 N/A N/A $131,223 - -------------------------------------------------------------------------------------------------------- Government Bond Fund $4,186 N/A N/A $80,146 - -------------------------------------------------------------------------------------------------------- California Bond Fund $6,096 N/A N/A $60,631 - -------------------------------------------------------------------------------------------------------- High Yield Bond Fund $107,355 N/A N/A $52,766 - -------------------------------------------------------------------------------------------------------- Prime Money Fund(*) $2,252,432 $1,794,511 N/A $893,203 - -------------------------------------------------------------------------------------------------------- Government Money Fund(*) $9,272,974 $1,658,574 N/A $125,709 - -------------------------------------------------------------------------------------------------------- California Money Fund(*) $3,077,261 $646,446 N/A $200,268 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Fees Paid, Fiscal Year Ended Class A Class S Class R Institutional 9/30/05 Class - -------------------------------------------------------------------------------------------------------- Large Cap Growth Fund $17,350 N/A N/A $75,203 - -------------------------------------------------------------------------------------------------------- Large Cap Value Fund $22,264 N/A N/A $101,968 - -------------------------------------------------------------------------------------------------------- Technology Growth Fund $3,373 N/A N/A $2,632 - -------------------------------------------------------------------------------------------------------- Small Cap Value Fund $28,023 N/A $124,007 $29,993 - -------------------------------------------------------------------------------------------------------- Corporate Bond Fund $3,833 N/A N/A $122,421 - -------------------------------------------------------------------------------------------------------- Government Bond Fund $1,064 N/A N/A $60,871 - -------------------------------------------------------------------------------------------------------- California Bond Fund $5,452 N/A N/A $49,928 - -------------------------------------------------------------------------------------------------------- High Yield Bond Fund $53,777 N/A N/A $59,033 - -------------------------------------------------------------------------------------------------------- Prime Money Fund $402,497 $270,729 N/A $890,508 - -------------------------------------------------------------------------------------------------------- Government Money Fund $3,205,052 $423,845 N/A $111,555 - -------------------------------------------------------------------------------------------------------- California Money Fund $1,043,837 $71,308 N/A $233,266 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Fees Paid, Fiscal Year Ended Class A Class S Class R Institutional 9/30/04 Class - -------------------------------------------------------------------------------------------------------- Large Cap Growth Fund $8,967 N/A N/A $63,487 - -------------------------------------------------------------------------------------------------------- Large Cap Value Fund $10,326 N/A N/A $92,460 - -------------------------------------------------------------------------------------------------------- Technology Growth Fund $3,093 N/A N/A $2,632 - -------------------------------------------------------------------------------------------------------- Small Cap Value Fund $13,719 N/A $59,352 $18,514 - -------------------------------------------------------------------------------------------------------- Corporate Bond Fund $2,765 N/A N/A $110,065 - -------------------------------------------------------------------------------------------------------- Government Bond Fund $490 N/A N/A $46,707 - -------------------------------------------------------------------------------------------------------- California Bond Fund $3,731 N/A N/A $41,672 - -------------------------------------------------------------------------------------------------------- High Yield Bond Fund $49,169 N/A N/A $43,484 - -------------------------------------------------------------------------------------------------------- Prime Money Fund(*) $307,314 $190,525 N/A $785,266 - -------------------------------------------------------------------------------------------------------- Government Money Fund(*) $3,285,172 $343,474 N/A $129,841 - -------------------------------------------------------------------------------------------------------- California Money Fund(*) $1,036,601 $61,946 N/A $266,529 - -------------------------------------------------------------------------------------------------------- (*) CNB waived additional fees for Class A and Class S in order to maintain the Money Funds' yields. DEALER COMMISSIONS The Distributor receives a sales charge on purchases of Class R shares of the Small Cap Value Fund, some or all of which is reallowed to retail dealers, as follows: ------------------------------------------------------------------- Your investment Dealer Commission as a % of offering price ------------------------------------------------------------------- Less than $50,000 3.50% ------------------------------------------------------------------- $50,000 but less than $100,000 3.00% ------------------------------------------------------------------- $100,000 but less than $200,000 2.50% ------------------------------------------------------------------- $200,000 but less than $300,000 2.00% ------------------------------------------------------------------- $300,000 but less than $500,000 1.00% ------------------------------------------------------------------- $500,000 or more None ------------------------------------------------------------------- -70- EXPENSES The Trust pays the expenses of its operations, including: the fees and expenses of independent auditors, 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. In its role as Investment Manager, CNAM, Inc. has agreed to limit its investment management fees or reimburse the expenses of the various classes of the Funds as described in the Prospectuses. CODE OF ETHICS Each of the Trust, the Investment Manager, the Sub-Advisers and the Distributor has adopted a code of ethics which contains policies on personal securities transactions by "access persons." These policies comply in all material respects with Rule 17j-1 under the 1940 Act. Each code of ethics, among other things, permits access persons to invest in certain securities, subject to various restrictions and requirements. DISCLOSURE OF PORTFOLIO HOLDINGS The Board of Trustees has adopted a Policy on Disclosure of Portfolio Holdings. No later than 65 days after the end of each first and third fiscal quarter of the Trust, lists of each Fund's complete portfolio holdings as of the end of such quarter will be made available on the Funds' website. The Trust also files the Funds' complete portfolio schedules as of the end of each first and third fiscal quarter with the SEC on Form N-Q within 60 days of the end of the quarter. With respect to the Trust's second and fourth fiscal quarters, lists of each Fund's complete portfolio holdings will be made available in the Funds' annual and semi-annual reports, which are mailed to shareholders within 60 days of the end of the quarter and are filed with the SEC on Form N-CSR within ten days of such mailing. The current shareholder reports are also available on the Funds' website. Certain other general information regarding the portfolio holdings of each Fund may also be made available to the general public, with the prior approval of management of the Trust, by posting to the Funds' website(s) ten calendar days after the end of each month, subject to a 31-day lag from the date of the information. Pursuant to the policies adopted by the Board of Trustees, other than the foregoing disclosure, no information concerning the Trust's portfolio holdings may be disclosed to any third party except for the following disclosures: (1) to persons providing services to the Trust who have a need to know such information in order to fulfill their obligations to the Trust, such as portfolio managers, administrators, custodians, and the Board of Trustees; (2) in connection with periodic reports that are available to shareholders and the public; (3) to mutual fund rating or statistical agencies or persons performing similar functions who have signed a confidentiality agreement with the Trust; (4) pursuant to a regulatory request or as otherwise required by law; or (5) to persons approved in writing by the Chief Compliance Officer (the "CCO") of the Trust. Procedures to monitor the use of any non-public information by entities under item (3) above will include (a) annual written certifications relating to the confidentiality of such information or (b) conditioning the receipt of such information upon the recipient's written agreement to maintain the confidentiality of the information and not to trade based on the information. Any disclosure made pursuant to item (5) above will be reported to the Board at its next regular meeting. -71- As of January 22, 2007, the Trust has ongoing business arrangements with the following entities which involve making portfolio holdings information available to such entities as an incidental part of the services they provide to the Trust: (i) the Administrator and the Custodian pursuant to fund accounting and custody agreements, respectively, under which the Trust's portfolio holdings information is provided daily on a real-time basis; (ii) Institutional Shareholder Services pursuant to a proxy voting agreement under which the Trust's portfolio holdings information is provided weekly, subject to a one-day lag; (iii) accountants, attorneys and other professionals engaged by the Trust to whom the Trust provides portfolio holdings information on a regular basis with varying lag times after the date of the information, and (iv) Morningstar, Inc., Lipper Inc., imoney.net, Thomson Financial, Standard and Poor's, and Bloomberg L.P. pursuant to agreements under which each Fund's portfolio holdings information is provided quarterly no later than 65 days after the end of the previous quarter, and no earlier than the date such information is posted to the Trust's website. The release of all non-public information by the Trust is subject to confidentiality requirements. With respect to persons providing services to the Trust, information related to the Trust is required to be kept confidential pursuant to the Trust's agreements with such service providers, including an obligation not to trade on such information. The Trust's independent registered public accounting firm and attorneys engaged by the Trust maintain the confidentiality of such information pursuant to their respective professional ethical obligations, which the Board of Trustees believes are sufficient to preserve the confidentiality of such information. The Trust provides portfolio holdings information to mutual fund rating agencies only after such information is made public by posting on the Trust's website. Neither the Trust nor any of its investment advisers, sub-advisers or any other person may receive compensation in connection with the disclosure of information about the Trust's portfolio securities. In the event of a conflict between the interests of Fund shareholders and those of any of the Trust's investment advisers, sub-advisers, distributor, or any affiliated person of the Trust or any of its investment advisers, sub-advisers or distributor, the CCO will make a determination in the best interests of the Funds' shareholders, and will report such determination to the Board of Trustees at the next regular Board meeting. The Board of Trustees oversees the disclosure of information about the Trust's portfolio holdings principally by receiving oral and written reports from the CCO and through interaction with the CCO at meetings of the Board of Trustees. PROXY VOTING The Board of Trustees has adopted policies and procedures with respect to voting proxies relating to portfolio securities held by the Funds (the "Policy"), pursuant to which the Board has delegated the responsibility for voting such proxies to the Investment Manager as a part of the Investment Manager's general management of the Funds, subject to the Board's continuing oversight. The Investment Manager, in accordance with the Policy, has further delegated the responsibility for voting proxies of the Small Cap Value Fund to RCB. A conflict of interest may be deemed to occur when CNAM, Inc. or RCB or one of their affiliated persons has a financial interest in a matter presented by a proxy to be voted on behalf of a Fund, which may compromise CNAM, Inc.'s or RCB's independence of judgment and action in judging the proxy. If such a conflict occurs, CNAM, Inc. or RCB is required to submit a report to the Board of Trustees indicating the nature of the conflict of interest and how it was resolved. Information on how the Funds voted proxies relating to portfolio securities during the 12-month period ended June 30 is available (1) without charge, upon request, by calling 1-888-889-0799, (2) on the -72- Funds' website at www.cnicharterfunds.com, and (3) on the Securities and Exchange Commission's website at http://www.sec.gov. Certain information regarding the proxy voting policies of CNAM, Inc. and RCB is summarized below. CNAM, Inc. CNAM, Inc. has hired Institutional Shareholder Services ("ISS"), a third-party proxy voting service, to vote proxies on its behalf, and has adopted ISS' proxy voting guidelines. CNAM, Inc. has instructed ISS to vote proxies on its behalf in accordance with these guidelines and to vote (a) any issue or proposal designated in the guidelines to be voted on a "case by case basis" and (b) any issue or proposal not listed in the guidelines according to ISS' recommendation. CNAM, Inc. reserves the right to withdraw any proxy item from ISS and to vote the proxy item, if CNAM, Inc. determines that no material conflict of interest exists. Such proxy item will be submitted to CNAM, Inc.'s Management Committee, which will determine the vote for each of the proposals in a manner consistent with the Funds' best interests. If CNAM, Inc. determines that a material conflict of interest exists, the Management Committee will not vote and the proxy item will be returned to ISS for voting in accordance with ISS' guidelines. ISS's general positions on various proposals are as follows: 1. ISS votes on director nominees on a case-by-case basis, examining factors including independence of the board and its committees, attendance at board meetings, corporate governance provisions and takeover activity, and long-term company performance. ISS votes against proposals to classify the board, for shareholder proposals that a majority or more of directors be independent unless the board composition already meets ISS' threshold for independence, and for shareholder proposals asking that audit, compensation and/or nominating committees be composed exclusively of independent directors. 2. ISS votes against proposals to restrict or prohibit shareholder ability to take action by written consent or to call special meetings, proposals to require supermajority shareholder votes and proposals to eliminate cumulative voting. ISS votes for shareholder proposals that ask a company to submit its poison pill for shareholder ratification. 3. ISS votes with respect to compensation plans on a case-by-case basis, using methodology based primarily on the transfer of shareholder wealth (the dollar cost of pay plans to shareholders instead of simply focusing on voting power dilution). ISS also votes with respect to the following issues on a case-by-case basis: management proposals seeking approval to reprice options, votes on employee stock purchase plans, and all other shareholder proposals regarding executive and director pay. 4. ISS generally votes for proposals to ratify auditors, unless an auditor is not independent, fees for non-audit services are excessive, or there is reason to believe that the auditor has rendered an opinion which is neither accurate nor indicative of the company's financial position. RCB RCB's Operations Department, in consultation with its Chief Investment Officer, is ultimately responsible for ensuring that all proxies received by RCB are voted in a timely manner. RCB considers each proxy issue individually and on a case-by-case basis. It is RCB's policy to vote in -73- favor of those proposals which advance the sustainable economic value of the companies, and thus of the shareholders whose securities it holds. If a proxy proposal raises a material conflict of interest, RCB will disclose the conflict to the Trust and obtain its consent to the proposed vote prior to voting the securities. RCB's general positions on various proposals are as follows: 1. RCB generally votes against issues that seek to entrench the board of directors and management of a company through anti-takeover measures, staggered board terms, super-majority requirements and poison pill provisions. 2. RCB is highly sensitive to any measures that potentially dilute shareholder interests through new security issuance or excessive management compensation through equity gifting. 3. RCB will not vote in favor of any "social" issues unless it deems that such issues directly advance shareholder value. 4. RCB generally votes in favor of measures that provide shareholders with greater abilities to nominate directors, hold directors and management accountable for performance, and allow shareholders to directly vote on takeover proposals by third parties. GENERAL INFORMATION The Trust was organized as a statutory 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. The Trust is an open-end management investment company registered under the 1940 Act. The Trust currently offers shares of beneficial interest, $0.01 par value per share, in various series. Each series offers two classes of shares (Class A and Institutional Class), other than (a) the Money Funds, which also offer Class S shares, and (b) the Small Cap Value Fund, which also offers Class R shares. Currently, the Trust offers shares of sixteen series, including the eleven series described in this SAI. Two additional series have been organized but have not commenced operations. The Board may authorize the issuance of shares of additional series or classes of shares of beneficial interest if it deems it desirable. The Trust is generally not required to hold shareholder meetings. However, as provided in its Agreement and Declaration of Trust of the Trust (the "Declaration") and the Bylaws of the Trust (the "Bylaws"), shareholder meetings may be called by the Trustees for the purpose as may be prescribed by law, the Declaration 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 -74- vacancy in the Board, 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 Declaration 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 Declaration, and except that where any provision of law, of the Declaration, 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 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 Prospectus 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. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of January 5, 2007, the following shareholders are deemed to control the indicated Funds by virtue of owning more than 25% of the outstanding shares of such Funds. These control relationships will continue to exist until such time as each of the above-described share ownership represents 25% or less of the outstanding shares of the indicated Fund. Through the exercise of voting rights with respect to shares of the Fund, the controlling persons set forth below may be able to determine the outcome of shareholder voting on matters to which approval of shareholders is required. - ------------------------------------------------------------------------------------------------------- Fund Shareholder % of Fund - ------------------------------------------------------------------------------------------------------- California Tax Exempt Money Market National Financial Services, LLC 64.50% Fund Attn: Frank Bertola 200 Liberty Street, 5th Floor New York, NY 10281-5500 - ------------------------------------------------------------------------------------------------------- Government Money Market Fund National Financial Services, LLC 58.00% Attn: Frank Bertola 200 Liberty Street, 5th Floor New York, NY 10281-5500 - ------------------------------------------------------------------------------------------------------- City National Bank 29.63% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- Government Bond Fund City National Bank 49.18% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds - ------------------------------------------------------------------------------------------------------- -75- - ------------------------------------------------------------------------------------------------------- PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- City National Bank 25.61% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- Corporate Bond Fund City National Bank 66.25% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- Large Cap Growth Equity Fund City National Bank 40.40% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- Large Cap Value Fund City National Bank 25.00% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- California Tax Exempt Bond Fund City National Bank 75.15% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- Prime Money Market Fund City National Bank 54.97% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- Technology Growth Fund City National Bank 31.41% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------- NFS LLC FEBO 28.64% Howard M. Brandes TTEE Howard M Brandes Family Tr U/A 6/26/84 10670 Wilkins Ave. #2 Los Angeles, CA 90024-5842 - ------------------------------------------------------------------------------------------------------- -76- As of January 5, 2007, the following shareholders held of record the following numbers of shares of the following classes of each of the Funds. - ------------------------------------------------------------------------------------------------------ Fund Shareholder % of Class - ------------------------------------------------------------------------------------------------------ Prime Money Market Fund, National Financial Services, LLC 17.43% Institutional Class Attn: Frank Bertola 200 Liberty Street, 5th Floor New York, NY 10281-5500 - ------------------------------------------------------------------------------------------------------ Prime Money Market Fund, City National Bank 82.54% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Government Money Market Fund, City National Bank 99.74% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Money Market City National Bank 99.99% Fund, Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ High Yield Bond Fund, Institutional City National Bank 14.03% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ High Yield Bond Fund, Institutional City National Bank 50.96% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ High Yield Bond Fund, Institutional City National Bank 23.14% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ High Yield Bond Fund, City National Bank 7.49% Institutional Class PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Bond Fund, City National Bank 42.27% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Bond Fund, City National Bank 21.86% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds -77- - ------------------------------------------------------------------------------------------------------ PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Bond Fund, City National Bank 35.76% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Bond Fund, City National Bank 21.86% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds P. O. Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Large Cap Value Equity Fund, City National Bank 28.58% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Large Cap Value Equity Fund, City National Bank 11.09% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Large Cap Value Equity Fund, City National Bank 6.06% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Large Cap Value Equity City National Bank 18.55% Fund, Institutional Class PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Large Cap Growth Equity Fund, City National Bank 52.17% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Large Cap Growth Equity Fund, City National Bank 28.96% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Large Cap Growth Equity Fund, City National Bank 14.15% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund, Institutional City National Bank 67.68% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund, Institutional City National Bank 17.46% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ -78- - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund, Institutional City National Bank 13.07% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Government Bond Fund, Institutional City National Bank 51.37% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Government Bond Fund, Institutional City National Bank 26.75% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Government Bond Fund, Institutional City National Bank 18.61% Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Technology Growth Fund, City National Bank 65.90% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Technology Growth Fund, City National Bank 32.10% Institutional Class PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ RCB Small Cap Value Fund, City National Bank 35.63% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ RCB Small Cap Value Fund, City National Bank 17.07% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ RCB Small Cap Value Fund, City National Bank 12.20% Institutional Class Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ RCB Small Cap Value Fund, City National Bank 30.47% Institutional Class PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ High Yield Bond Fund, Class A NFS LLC FEBO 24.70% The Angell Family Trust Perry Oretzky TTEE MM024 - ------------------------------------------------------------------------------------------------------ -79- - ------------------------------------------------------------------------------------------------------ 10880 W. Wilshire Blvd. #920 Los Angeles, CA 90024-4110 - ------------------------------------------------------------------------------------------------------ California Tax-Exempt Bond Fund, NFS LLC FEBO 8.35% Class A Sarah Jane Anderson 18111 Von Karman Ave., Ste 1000 Irvine, CA 92612 - ------------------------------------------------------------------------------------------------------ California Tax-Exempt Bond Fund, NFS LLC FEBO 44.39% Class A Sarah F. Manson 700 N Bonhill Rd Los Angeles, CA 90049-2304 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Bond Fund, NFS LLC FEBO 8.86% Class A Markovic Tr Nandor Markovic U/A 01/01/89 336 S La Peer Dr Beverly Hills, CA 90211-3502 - ------------------------------------------------------------------------------------------------------ California Tax Exempt NFS LLC FEBO 8.86% Bond Fund, Class A Paul Mandel Rhoda Mandel TTEE Mandel Family Tr 620 N Palm Dr Beverly Hills, CA 90210-3415 - ------------------------------------------------------------------------------------------------------ California Tax Exempt NFS LLC FEBO 12.69% Bond Fund, Class A Toni Howard MM012 8383 Wilshire Blvd. #500 Beverly Hills, CA 90211-2410 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Bond Fund, NFS LLC FEBO 5.14% Class A Debra L Barach 17726 Palora St Encino, CA 91316-3710 - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund, Class A NFS LLC FEBO 19.01% Susan L Parker 27221 Westridge Ln Laguna Hills, CA 92653-5889 - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund, Class A NFS LLC FEBO 16.80% Lucien J Meyers TTEE Meyers Family Tr U/A 3/24/93 524 Third St Fillmore, CA 93015-1304 - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund, Class A NFS LLC FEBO 9.21% Ms Lisa Sandy Brown TTEE Little Ziggy's Folly Inc. c/o Barkin Perrin & Schwager 5855 Topanga Canyon Blvd. #410 Woodland Hills, CA 91367 - ------------------------------------------------------------------------------------------------------ Corporate Bond Fund, Class A NFS LLC FEBO 5.61% Michael G Wood Revocable Trust Michael G Wood - ------------------------------------------------------------------------------------------------------ -80- - ------------------------------------------------------------------------------------------------------ U/A 10/09/1998 2395 Peacock Valley Rd Chula Vista, CA 91915-2183 - ------------------------------------------------------------------------------------------------------ Government Bond, NFS LLC FEBO 54.18% Class A West Branch Regional Medical C 2463 SO M-30 West Branch, MI 48661 - ------------------------------------------------------------------------------------------------------ Government Bond, NFS LLC FEBO 5.90% Class A Susan L. Parker 27221 Westridge Ln Laguna Hills, CA 92653-5889 - ------------------------------------------------------------------------------------------------------ Government Bond, NFS LLC FEBO 5.52% Class A NFS/FMTC SEP IRA FBO Lynne S Hague 5009 Timberlake Terrace Culver City, CA 90230-4333 - ------------------------------------------------------------------------------------------------------ Technology Growth Fund, Class A NFS LLC FEBO 54.00% Howard M. Brandes TTEE Howard M Brandes Family Tr U/A 6/26/84 10670 Wilkins Ave. #2 Los Angeles, CA 90024-5842 - ------------------------------------------------------------------------------------------------------ Technology Growth Fund, Class A NFS LLC FEBO 5.22% Art Linson TTEE The Art Linson Production Inc Ret Tr Psp 210 Palisades Ave Santa Monica, CA 90402-2734 - ------------------------------------------------------------------------------------------------------ Prime Money Market Fund, Class A National Financial Services, LLC 35.24% Attn: Frank Bertola 200 Liberty Street, 5th Floor New York, NY 10281-5500 - ------------------------------------------------------------------------------------------------------ Prime Money Market Fund, Class A City National Bank 64.76% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Government Money Market Fund, Class National Financial Services, LLC 66.19% A Attn: Frank Bertola 200 Liberty Street, 5th Floor New York, NY 10281-5500 - ------------------------------------------------------------------------------------------------------ Government Money Market Fund, Class City National Bank 35.24% A Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Money Market National Financial Services, LLC 81.46% Fund, Class A Attn: Frank Bertola 200 Liberty Street, 5th Floor New York, NY 10281-5500 - ------------------------------------------------------------------------------------------------------ -81- - ------------------------------------------------------------------------------------------------------ California Tax Exempt Money Market City National Bank 18.54% Fund, Class A Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Small Cap Value Fund, Class A NFS LLC FEBO 6.90% Robert D. Beyer TTEE Beyer Chdrns TR Partshp U/A 8/30/96 P.O. Box 49975 Los Angeles, CA 90049 - ------------------------------------------------------------------------------------------------------ Prime Money Market Fund, Class S City National Bank 100% Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ Government Money Market Fund, Class City National Bank 100% S Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ California Tax Exempt Money Market City National Bank 100% Fund, Class S Fiduciary for Various Accounts Attn: Trust Ops/Mutual Funds PO Box 60520 Los Angeles, CA 90060-0520 - ------------------------------------------------------------------------------------------------------ As of January 23, 2007, the Trustees and officers of the Trust owned of record , in aggregate, less than 1% of the outstanding shares of each Fund. PERFORMANCE INFORMATION As noted in the Prospectuses, the Funds may, from time to time, quote various performance figures in advertisements and other communications to illustrate their past performance. Performance figures will be calculated separately for different classes of shares. YIELD The Funds' 30-day yields are calculated according to a formula prescribed by the SEC, expressed as follows: YIELD = 2[(1+[a-b]/cd)(6) - 1] Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursement). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. -82- d = the maximum offering price per share on the last day of the period. For the purpose of determining the interest earned (variable "a" in the formula) on debt obligations that were purchased by these Funds at a discount or premium, the formula generally calls for amortization of the discount or premium; the amortization schedule will be adjusted monthly to reflect changes in the market values of the debt obligations. Current yield reflects the interest income per share earned by the Money Funds' investments. Current yield is computed by determining the net change, excluding capital changes, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of a seven-day period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then annualizing the result by multiplying the base period return by (365/7). Effective yield is computed in the same manner except that the annualization of the return for the seven-day period reflects the results of compounding by adding 1 to the base period return, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result. This figure is obtained using the Securities and Exchange Commission formula: Effective Yield = [(Base Period Return + 1)(365/7)] - 1 Investors 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, will tend to be somewhat lower. In addition, when interest rates are falling, monies received by the Funds from the continuous sale of their shares will likely be invested in instruments producing lower yields than the balance of their portfolio of securities, thereby reducing the current yield of the Funds. In periods of rising interest rates, the opposite result can be expected to occur. 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 Bond Fund and California Money Fund is computed by dividing that portion of the current yield (or effective yield) of the Fund (computed for the Funds as indicated above) 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 Fund that is not tax-exempt. Assuming a California tax rate of 9.3% and a federal tax rate of 35% the effective tax rate based on the combination of the state and federal rates is 41.05%. The effective rate used in determining such yield does not reflect the tax costs resulting from the loss of the benefit of personal exemptions and itemized deductions that may result from the receipt of additional taxable income by taxpayers with adjusted gross incomes exceeding certain levels. The tax equivalent yield may be higher than the rate stated for taxpayers subject to the loss of these benefits. Each Fund's performance will vary from time to time depending upon market conditions, the composition of its portfolio and its operating expenses. Consequently, any given performance quotation should not be considered representative of that Fund's performance for any specified period in the future. In addition, because performance will fluctuate, it may not provide a basis for comparing an investment in that Fund with certain bank deposits or other investments that pay a fixed yield for a stated period of time. Investors comparing that Fund's performance with that of other investment companies should give consideration to the quality and maturity of the respective investment companies' portfolio securities. -83- AVERAGE ANNUAL TOTAL RETURN Total return may be stated for any relevant period as specified in the advertisement or communication. Any statements of total return for a Fund will be accompanied by information on that Fund's average annual compounded rate of return over the most recent four calendar quarters and the period from that Fund's inception of operations. The Funds may also advertise aggregate and average total return information over different periods of time. A Fund's "average annual total return" figures are computed according to a formula prescribed by the SEC expressed as follows: P(1 + T)(n) = ERV Where: P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at the beginning of a l-, 5- or 10-year period at the end of a l-, 5- or 10-year period (or fractional portion thereof), assuming reinvestment of all dividends and distributions and complete redemption of the hypothetical investment at the end of the measuring period. AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS Quotations of average annual total return after taxes on distributions will be expressed in terms of the average annual total return (after taxes on distributions) by finding the average annual compounded rates of return of a hypothetical investment in a Fund over different periods of time and since that Fund's inception of operations. A Fund's "average annual total return after taxes on distributions" figures are computed according to a formula prescribed by the SEC expressed as follows: P(1 + T)(n) = ATV(D) Where: P = a hypothetical initial payment of $1,000. T = average annual total return (after taxes on distributions). n = number of years. ATV(D) = ending value of a hypothetical $1,000 investment made at the beginning of a l-, 5- or 10-year period at the end of a l-, 5- or 10-year period (or fractional portion thereof), after taxes on Fund distributions but not after taxes on redemption, assuming reinvestment of all dividends and distributions and complete redemption of the hypothetical investment at the end of the measuring period. -84- AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION Quotations of average annual total return after taxes on distributions and redemption will be expressed in terms of the average annual total return (after taxes on distributions and redemption) by finding the average annual compounded rates of return of a hypothetical investment in a Fund over different periods of time and since that Fund's inception of operations. A Fund's "average annual total return after taxes on distributions and redemption" figures are computed according to a formula prescribed by the SEC expressed as follows: P(1 + T)(n) = ATV(DR) Where: P = a hypothetical initial payment of $1,000. T = average annual total return (after taxes on distributions and redemption). n = number of years. ATVDR = ending value of a hypothetical $1,000 investment made at the beginning of a l-, 5- or 10-year period at the end of a l-, 5- or 10-year period (or fractional portion thereof), after taxes on Fund distributions and redemption, assuming reinvestment of all dividends and distributions and complete redemption of the hypothetical investment at the end of the measuring period. PURCHASE AND REDEMPTION OF SHARES Shares of the Equity and Bond Funds may be purchased and redeemed on days when the New York Stock Exchange (the "NYSE") is open for business. Currently, the weekdays that the NYSE recognizes as holidays and is closed are: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Shares of the Money Funds may be purchased and redeemed on days when the NYSE and the Federal Reserve Bank of New York (the "Federal Reserve") are open for business. The Funds reserve the right to open for business on days that the NYSE is closed but the Federal Reserve is open. Purchases and redemptions will be made in full and fractional shares. The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds (other than the Small Cap Value Fund) subject to the satisfaction of enhanced due diligence. The Small Cap Value Fund does not accept investments by non-U.S. persons. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, the broker-dealer or other financial institution responsible for maintaining your account (your "Authorized Institution") will ask you for certain information, which includes your name, address, date of birth, and other information that will allow us to identify you. This information -85- is subject to verification to ensure the identity of all persons opening a mutual fund account. Please contact your Authorized Institution for more information. The Funds are required by law to reject your investment if the required identifying information is not provided. In certain instances, the Authorized Institution is required to collect documents on behalf of the Funds to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity. Attempts to collect missing information required on the application will be performed by contacting you. If this information is unable to be obtained within a timeframe established in the sole discretion of the Funds, your application will be rejected. Customer identification and verification is part of the Funds' overall obligation to deter money laundering under Federal law. The Funds have adopted an Anti-Money Laundering Compliance Program designed to prevent the Funds from being used for money laundering or the financing of terrorist activities. In this regard, the Funds reserve the right to (i) refuse, cancel or rescind any purchase or exchange order, (ii) freeze any account and/or suspend account services or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Funds or in cases when the Funds are requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds. 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 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. The Funds may be required to withhold federal income tax at a rate of 30% (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. The Trust reserves the right in its sole discretion to (i) suspend the continued offering of the Funds' shares, and (ii) reject purchase orders in whole or in part when in the judgment of the Investment Manager or the Distributor such suspension or rejection is in the best interest of a Fund. Payments to shareholders for shares of a Fund redeemed directly from that Fund will be made as promptly as possible but no later than three days after receipt by the Transfer Agent of the written request in proper form, with the appropriate documentation as stated in the Prospectus, except that a Fund may suspend the right of redemption or postpone the date of payment during any period when (i) trading on the NYSE is restricted as determined by the SEC or the NYSE is closed for other than -86- weekends and holidays; (ii) an emergency exists as determined by the SEC (upon application by a Fund pursuant to Section 22(e) of the 1940 Act) making disposal of portfolio securities or valuation of net assets of a Fund not reasonably practicable; or (iii) for such other period as the SEC may permit for the protection of the Fund's shareholders. OTHER INFORMATION The Prospectuses of the Funds and this SAI do not contain all the information included in the Trust's registration statement filed with the SEC under the 1933 Act with respect to the securities offered by the Prospectus. Certain portions of the registration statement have been omitted from the Prospectuses and this SAI 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. Copies of the registration statements may be obtained from the SEC upon payment of the prescribed fee. Statements contained in the Prospectuses or in this SAI 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 SAI form a part, each such statement being qualified in all respects by such reference. FINANCIAL STATEMENTS In 2000, the Board of Trustees approved a change in the Trust's fiscal year-end from October 31, to September 30. Audited financial statements for the Funds contained in the Annual Reports to Shareholders of the Funds for the fiscal year ending September 30, 2006, are available on request and are incorporated herein by reference. Audited financial statements for the RCB Predecessor Fund contained in the Annual Report to Shareholders of the RCB Predecessor Fund for the fiscal periods ending September 30, 2001 and June 30, 2001, are available on request and are incorporated herein by reference. -87- APPENDIX A - RATINGS OF INVESTMENT SECURITIES Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's Investors Service, Inc., ("Moody's") and Fitch IBCA, Duff & Phelps Inc. ("Fitch"). Standard & Poor's Rating Group - ------------------------------ Bond Ratings AAA Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. BBB Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB Bonds rated BB have less near-term vulnerability to default than other speculative grade debt. However, they face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. B Bonds rated B have a greater vulnerability to default but presently have the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. CCC Bonds rated CCC have a current identifiable vulnerability to default and are dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayment of principal. In the event of adverse business, financial or economic conditions, they are not likely to have the capacity to pay interest and repay principal. CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. D Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears. A-1 S&P's letter ratings may be modified by the addition of a plus (+) or a minus (-) sign designation, which is used to show relative standing within the major rating categories, except in the AAA (Prime Grade) category. Commercial Paper Ratings An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 367 days. Issues assigned an A rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) designation. A-2 Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues carrying this designation are regarded as having only speculative capacity for timely payment. C This designation is assigned to short-term obligations with doubtful capacity for payment. D Issues carrying this designation are in default, and payment of interest and/or repayment of principal is in arrears. Moody's Investors Service, Inc. - ------------------------------- Bond Ratings Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally 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 such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what generally are known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal A-2 and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds which are rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and, therefore, not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack the characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca present obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies the numerical modifiers 1, 2 and 3 to show relative standing within the major rating categories, except in the Aaa category and in the categories below B. The modifier 1 indicates a ranking for the security in the higher end of a rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of a rating category. Commercial Paper Ratings The rating Prime-1 (P-1) is the highest commercial paper rating assigned by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of short-term promissory obligations, and ordinarily will be evidenced by leading market positions in well established industries, high rates of return on funds employed, conservative capitalization structures with moderate reliance on debt and ample asset protection, broad margins in earnings coverage of fixed financial charges and high internal cash generation, and well established access to a range of financial markets and assured sources of alternate liquidity. Issuers (or related supporting institutions) rated Prime-2 (P-2) have a strong capacity for repayment of short-term promissory obligations. This ordinarily will be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. A-3 Issuers (or related supporting institutions) rated Prime-3 (P-3) have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirements for relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers (or related supporting institutions) rated Not Prime do not fall within any of the Prime rating categories. Fitch IBCA, Duff and Phelps, Inc. - --------------------------------- Bond Ratings The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt. The ratings take into consideration special features of the issue, its relationship to other obligations of the issuer, the current financial condition and operative performance of the issuer and of any guarantor, as well as the political and economic environment that might affect the issuer's future financial strength and credit quality. AAA Bonds rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA Bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. A-4 CCC Bonds rated CCC have certain identifiable characteristics, which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC Bonds rated CC are minimally protected. Default in payment of interest and/or principal seems probable over time. C Bonds rated C are in imminent default in payment of interest or principal. DDD, DD and D Bonds rated DDD, DD and D are in actual default of interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds and D represents the lowest potential for recovery. Plus (+) and minus (-) signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the AAA category covering 12-36 months. Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. Although the credit analysis is similar to Fitch's bond rating analysis, the short-term rating places greater emphasis than bond ratings on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. F-1+ Exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 Very strong credit quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2 Good credit quality. Issues carrying this rating have a satisfactory degree of assurance for timely payments, but the margin of safety is not as great as the F-l+ and F-1 categories. F-3 Fair credit quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade. F-S Weak credit quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D Default. Issues assigned this rating are in actual or imminent payment default. A-5 Exhibit H CNI Charter Funds 2006 Annual Report September 30, 2006 This report and the financial statements contained herein are provided for the general information of the shareholders of the CNI Charter Funds. This report is not authorized for distribution to prospective investors in the CNI Charter Funds unless preceded or accompanied by an effective prospectus. Please remember that past performance is no guarantee of future results. Shares of CNI Charter Funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency and involve investment risks, including the possible loss of the principal amount invested. TABLE OF CONTENTS CNI Charter Funds Annual Report 2 Letter to Our Shareholders 4 Equity Funds Investment Adviser's Report 6 Equity Funds Overview 10 Fixed Income Funds Investment Adviser's Report 12 Fixed Income Funds Overview 16 Money Market Funds Investment Adviser's Report 17 Schedules of Investments 58 Statements of Assets & Liabilities 61 Statements of Operations 64 Statements of Changes in Net Assets 68 Financial Highlights 71 Notes to Financial Statements 78 Report of Independent Registered Public Accounting Firm 79 Board Members and Officers 82 Notice to Shareholders 83 Disclosure of Fund Expenses 85 Approval of Investment Advisory Agreements ================================================================================ The Funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q within sixty days after the end of the period. The Funds' Form N-Q is available on the Commission's website at http://www.sec.gov, and may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The most current Form N-Q is also available on the Fund's website at www.cnicharterfunds.com and without charge, upon request, by calling 1-888-889-0799. A description of the policies and procedures that the Funds use to determine how to vote proxies relating to the Funds' portfolio securities, and information on how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is available (1) without charge, upon request, by calling 1-888-889-0799, (2) on the Funds' website at www.cnicharterfunds.com, and (3) on the Securities and Exchange Commission's website at www.sec.gov. CNI CHARTER FUNDS | PAGE 1 letter to our shareholders SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- This annual report covers the CNI Charter Funds for the fiscal year ended September 30, 2006. On the following pages, you will find the specific details of each Fund's portfolio and investment performance. Our unique philosophy and disciplined approach to capital market investment continued to show well over the last twelve months. Relatively healthy economic growth and strong corporate earnings, combined with steady and rising inflation during most of this period produced strong returns to financial assets as well as many alternative asset classes, including real estate, commodities, and other real assets. Equity markets continued to surprise on the upside despite growing evidence of a maturing economic recovery and, more recently, an imminent slowdown in economic growth. Fixed income securities generally produced sub-par, single-digit returns as the Federal Reserve ended its monetary tightening program after 17 consecutive rate increases, leaving the Treasury yield curve inverted. By adhering strictly to our fundamental investment strategies we were able to produce highly competitive results in all asset categories within the CNI Charter Funds family. City National Asset Management, Inc.'s underlying investment philosophy is to pursue the long-term goals and objectives specified for each of the Funds. With an active yet disciplined style, all Funds are managed to achieve competitive rates of return consistent with their respective, prescribed risk parameters. CNI Charter Funds follow a disciplined investment process that begins with a thorough assessment of the macroeconomic environment and the financial markets. Our broad based research process takes advantage of the most advanced investment technology, fundamental valuation, and quantitative tools to determine the most attractive sectors and securities within each Fund's area of concentration. The final step is to construct and continuously monitor precise portfolios that meet the objectives of the specific Funds, without being swayed by short-term trends and fads. This approach continued to serve shareholders well during the maturing phase of this economic cycle encountered in the period ended September 30, 2006. TWELVE-MONTH MARKET WATCH: OCTOBER 2005 - SEPTEMBER 2006 Domestic economic growth remained above historical norms for the most part during the past twelve months, although clear, market-related signs of an imminent slowdown were beginning to emerge towards the end of this period. Stronger than expected corporate earnings growth combined with rising short-term interest rates were the primary factors driving the stock and bond markets over the last twelve months. International equities, in particular, showed very attractive returns in U.S. Dollar terms, given the relative weakness in the Dollar during this time. - -------------------------------------------------------------------------------- Twelve-Month October, 2005 - Index Watch: September, 2006 EQUITIES S&P 500 Stock Index: ............................................. +10.8% Russell 2000 Value Index: ........................................ +14.0% MSCI EAFE Index: ................................................. +19.2% BONDS Lehman Brothers Gov't/Credit Bond Index: ................................................... + 3.3% Lehman Brothers Aggregate Bond Index: ................................................... + 3.7% Lehman Brothers CA Intermediate Muni Index: ...................................... + 3.7% - -------------------------------------------------------------------------------- CNI CHARTER FUNDS | PAGE 2 - -------------------------------------------------------------------------------- CNI CHARTER FUND PERFORMANCE AND HIGHLIGHTS (ALL RETURNS LISTED REFER TO INSTITUTIONAL CLASS SHARES) By adhering to our basic investment discipline and maintaining the appropriate amount of risk control in the various portfolios, the Funds continued to provide returns that are competitive in their respective investment arenas. All four of our equity-oriented funds produced gains over the past twelve months, in keeping with the broader market trends. The LARGE CAP VALUE EQUITY FUND led the pack with a 14.5% return. The TECHNOLOGY GROWTH FUND rose 6.8%, followed closely by the LARGE CAP GROWTH EQUITY FUND, which gained 4.6%. The RCB SMALL CAP VALUE EQUITY FUND eked out a 0.4% return for the same period. All four CNI Charter Bond Funds also produced solid gains for the period. Once again, the HIGH YIELD BOND FUND led the way with a 6.9% total return. The CALIFORNIA TAX-EXEMPT BOND FUND rose 3.2%, while the CORPORATE BOND FUND returned 3.2% and the GOVERNMENT BOND FUND gained 2.9%. Lastly, all three of the CNI Charter Money Market Funds produced steady, consistent, and competitive returns. These returns were in line with their respective investment mandates. Please read the following pages carefully as they contain important information on the assets and financial condition of the Funds. If you have any questions about this report or the CNI Charter Funds, please call your investment professional or (888) 889-0799. Thank you for choosing the CNI Charter Funds. Sincerely, /s/ Richard A. Weiss Richard A. Weiss PRESIDENT CITY NATIONAL ASSET MANAGEMENT, INC. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. CERTAIN SHAREHOLDERS MAY BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX (AMT). FEDERAL INCOME TAX RULES APPLY TO ANY CAPITAL GAIN DISTRIBUTIONS. FUND EXPENSES HAVE BEEN WAIVED DURING THE PERIOD ON WHICH THE PERFORMANCE IS BASED. WITHOUT WAIVERS, PERFORMANCE WOULD BE LOWER. THIS INFORMATION MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTING IN MUTUAL FUNDS INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL. IN ADDITIONAL TO THE NORMAL RISKS ASSOCIATED WITH INVESTING, INVESTMENTS IN SMALLER COMPANIES TYPICALLY EXHIBIT HIGHER VOLATILITY, AND PRODUCTS OF COMPANIES IN WHICH TECHNOLOGY FUNDS INVEST MAY BE SUBJECT TO SEVERE COMPETITION AND RAPID OBSOLESCENCE. AN INVESTMENT IN THE FUNDS IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. - -------------------------------------------------------------------------------- *NOT FDIC INSURED *NO BANK GUARANTEE *MAY LOSE VALUE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AHA Investment Funds, a series of the CNI Charter Funds - -------------------------------------------------------------------------------- Endorsed by the American Hospital Association, the five AHA Investment Funds encourage healthy behavior by having guidelines that prohibit investment in any tobacco-related securities. The five AHA Funds in the CNI Charter Fund family are: o AHA Limited Maturity Fixed Income Fund o AHA Full Maturity Fixed Income Fund o AHA Balanced Fund o AHA Diversified Equity Fund o AHA Socially Responsible Equity Fund These Funds together with the other eleven CNI Charter Funds provide an unwavering commitment to client satisfaction and quality investments that help successful individuals, families and businesses achieve their financial goals. For more information about the CNI Charter Funds (including the AHA Investment Funds) visit www.cnicharterfunds.com. CNI CHARTER FUNDS | PAGE 3 investment adviser's report SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- EQUITY FUNDS For the fiscal year ending September 30, 2006, the U.S. equity market, as measured by the S&P 500, returned 10.8%. The majority of the asset appreciation came in the first eight months of the fiscal year, as returns pushed higher into early May 2006. Corporate earnings remained the catalyst as growth rates, although lower than the previous year, continued to come in above expectations. Inflation fears, though, took a toll on the market in the middle of May 2006, as commodity prices continued to rise. The market sold off about 5% from its May highs, reaching its lows in mid June. Federal Reserve Bank ("Fed") Chairman Bernanke's talk in mid July started the recent market upturn on comments regarding the possible end to rising short-term interest rates. After raising the short-term rate to 5.25% in June, the Fed has kept rates stable in the two most recent Fed meetings. In addition to the Fed possibly ending its tightening policy, declines in commodity prices also provided a positive effect to stock prices. By the end of September, stock prices had surpassed their 12 month highs, with the Dow Jones Industrial Average surpassing its all time high. EQUITY FUND PERFORMANCE (ALL RETURNS LISTED FOR CNI CHARTER FUNDS REFER TO INSTITUTIONAL CLASS SHARES o The LARGE CAP VALUE EQUITY FUND returned 14.5% during the twelve months ending September 30, 2006. The S&P 500/Citigroup Value Index returned 15.4% and the Lipper Large-Cap Value Funds Classification returned 12.0% over the same time period. The telecommunications sector produced the top returns with companies like BellSouth producing a 69.0% return. The announced merger with AT&T (still pending) is expected to bring about improved efficiencies, cost reductions, and higher earnings. In the financial sector, Goldman Sachs gained 40.3% as earnings beat analysts' expectations on higher investment-banking fees. Ryder System, a leader in transportation and supply chain management, returned a positive 53.3%, as growth in its leasing unit continued to push earnings above expectations. Stocks that hurt performance included Intel, down 29.3%, as semiconductor prices declined and the company lost market share to rivals. Qualcomm was also down 22.0% on fears that increased usage of a rival phone technology will hurt their future earnings. o The LARGE CAP GROWTH EQUITY FUND returned 4.6% during the twelve months ending September 30, 2006. The S&P 500/Citigroup Growth Index returned 6.4% and the Lipper Large-Cap Growth Funds Classification returned 3.5%, over the same time period. Stocks that helped performance included the T. Rowe Price Group, which was up 25.2%. The asset management company benefit from strong asset flows into their fund complex. Pepsi Bottling Group, the second largest soft-drink distributor, gained 25.9% on increased sales of its "non-soda" products. In the technology sector, Oracle was up 43.1% as software license revenue surged due to recent acquisitions. Detractors from fund performance included Dell, down 33.2%. Dell missed analysts' earnings expectations due to competitive pricing and lost market share within the personal-computer market. Boston Scientific, maker of medical supplies, lost 36.7% due to the market's concern over a recent acquisition and issues regarding product quality. o The RCB SMALL CAP VALUE FUND returned 0.4% for the 12 months ending September 30, 2006 as compared with the Russell 2000 Value Index at 14.0%, the Russell 2000 Index at 9.9%, the Russell 2500 Value Index at 11.1%, and the Lipper Small Cap Value Funds Classification at 8.1%. The following text regarding performance has been provided by Reed, Connor & Birdwell, LLC, sub-adviser to the Fund. CNI CHARTER FUNDS | PAGE 4 investment adviser's report SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- "Over the trailing 12-month period we have grossly erred on the conservative side as far as asset allocation and stock selection while the investing world continued to embrace "risky" assets in the face of what we consider to be the uninspiring valuation of the overall market and mounting external risks. We believe this set of circumstances peaked in the first quarter of 2006 just in time to produce the maximum amount of performance embarrassment. However during the most recent quarter-end, we witnessed a nice rebound in year-to-date performance on an absolute basis and some "modest" make-up in relative performance. After a truly dismal four quarter run of relative performance, we believe we are back on track. Part of it is us; the mathematics of two takeovers of the largest positions in a concentrated portfolio (Advo and Intrawest) combined with a determination to stop making a few hellacious mistakes seemed to have produced the desired results. The other part consists of the small cap market forces which act as a headwind for the Fund. These would include liquidity, the inflows and subsequent outflows generated by exchange traded funds and the sector composition of the indexes. Our 30-odd stock portfolio has historically been able to side-step an index based headwind and we look forward to clawing back performance one stock at a time." o The TECHNOLOGY GROWTH FUND returned 6.8% during the twelve months ending September 30, 2006. The Russell 3000 Technology Index returned 6.1% and the Lipper Science & Technology Funds Objective returned 5.1%, over the same time period. Stocks that produced positive returns included Akamai Technologies, up 156.6%. The company exhibited strong earnings growth on increased demand for their software that accelerates the delivery of internet content. Cognizant Technology Solutions gained 58.9% on surging demand for computer consulting services. Apple Computer was up 43.6% on improved sales of their Macintosh personal computers and iPod music players. Stocks that lost ground included Tekelec, down 51.7%. The developer of telecommunication products and services had to restate earnings and take a write-down on a previous acquisition. NAVTEQ, a leading provider of navigation systems, lost 47.7% on declining sales in the automotive industry and delays in new product launches. STRATEGIC OUTLOOK FOR EQUITY FUNDS As we look forward, the strength of the economy and its effect on inflation and interest rates is the question of the day. Market strategists are divided. Some see lower rates on slower economic growth. Others see higher rates based on higher inflation and stronger than expected economic growth. At City National Asset Management, Inc., we see growing evidence of a maturing economic recovery and a slowdown in economic growth. Still, most economists are not calling for a recession anytime in the near future. In this environment, as in all market environments, we will continue to apply our disciplined investment approach with the objective of providing superior investment results across the various strategies we manage. Sincerely, /s/ Brian L. Garbe Brian L. Garbe DIRECTOR OF RESEARCH CITY NATIONAL ASSET MANAGEMENT, INC. CNI CHARTER FUNDS | PAGE 5 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP VALUE EQUITY FUND The Fund seeks to provide capital appreciation and moderate income consistent with current returns available in the market place by investing in large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations which are undervalued and whose market valuations compare favorably relative to similar companies. - ------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI Large Cap Value Equity Fund, Institutional Class or Class A Shares, versus the S&P 500/ Citigroup Value Index, and the Lipper Large Cap Value Funds Classification(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: LARGE CAP VALUE EQUITY FUND CNI Large Cap Value Fund, CNI Large Cap Value Fund, S&P 500/Citigroup Lipper Large Cap Institutional Class Shares Class A Shares Value Index Value Funds Index 1/14/00 10,000 10,000 10,000 10,000 9/30/00 10,099 10,093 9,871 10,449 9/30/01 8,446 8,410 8,508 9,641 9/30/02 6,852 6,814 6,989 7,783 9/30/03 8,498 8,433 8,579 9,544 9/30/04 10,147 10,036 10,271 11,137 9/30/05 11,607 11,455 11,950 12,644 9/30/06 13,290 13,086 13,796 14,160 (*) Standard and Poor's has changed the name and the construction methodology of their style indices. The S&P 500/Barra Value Index became the S&P 500/Citigroup Value Index in mid-December 2005. The Large Cap Value Fund will use the new index as a comparative investment benchmark going forward. (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------- Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - ------------------------------------------------------------------------------- Institutional Class (1)^ CNLIX 14.50% 16.07% 9.49% 4.33% - ------------------------------------------------------------------------------- Class A (2) CVEAX 14.24% 15.78% 9.25% 4.09%+ - ------------------------------------------------------------------------------- (1) Commenced operations on January 14, 2000. (2) Commenced operations on April 13, 2000. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. + Class A Shares performance for the period prior to April 13, 2000 reflects the performance of the Fund's Institutional Shares. The performance of the Institutional Shares has not been adjusted to reflect the higher Rule 12b-1 Fees and expenses applicable to Class A Shares. If it had, performance would have been lower than that shown. Top Ten Holdings % OF PORTFOLIO Bank of America 3.6 Citigroup 3.2 Exxon Mobil 2.7 Wells Fargo 2.5 Verizon Communications 2.4 Hewlett-Packard 2.4 Wachovia 1.9 Morgan Stanley 1.9 BellSouth 1.9 American International Group 1.8 CNI CHARTER FUNDS | PAGE 6 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP GROWTH EQUITY FUND The Fund seeks to provide capital appreciation by investing in large U.S. corporations and U.S. dollar denominated American Depository Receipts of large foreign corporations with the potential for growth and that possess superior management, strong market position, consistent records of increased earnings and a strong operating and financial position. - ------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI Large Cap Growth Equity Fund, Institutional Class or Class A Shares, versus the S&P 500/Citigroup Growth Index, and the Lipper Large Cap Growth Funds Classification(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: LARGE CAP GROWTH EQUITY FUND CNI Large Cap Growth Equity Fund, CNI Large Cap Growth Equity Fund, S&P 500/Citigroup Lipper Large Cap Institutional Class Shares Class A Shares Growth Index* Growth Funds Classification 1/14/00 $10,000 $10,000 $10,000 $10,000 9/30/00 9,370 9,349 9,763 10,314 9/30/01 6,360 6,329 5,950 6,080 9/30/02 5,250 5,210 4,538 4,814 9/30/03 6,380 6,320 5,717 5,825 9/30/04 6,775 6,691 6,203 6,259 9/30/05 7,490 7,379 6,709 7,040 9/30/06 7,834 7,715 7,138 7,288 (*) Standard and Poor's has changed the name and the construction methodology of their style indices. The S&P 500/Barra Growth Index became the S&P 500/Citigroup Growth Index in mid-December 2005. The Large Cap Growth Fund will use the new index as a comparative investment benchmark going forward. (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - -------------------------------------------------------------------------------- Institutional Class (1)^ CNGIX 4.59% 7.08% 4.25% (3.57)% - -------------------------------------------------------------------------------- Class A (2) CLEAX 4.55% 6.87% 4.03% (3.79)%+ - -------------------------------------------------------------------------------- (1) Commenced operations on January 14, 2000. (2) Commenced operations on March 28, 2000. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. + Class A Shares performance for the period prior to March 28, 2000 reflects the performance of the Fund's Institutional Shares. The performance of the Institutional Shares has not been adjusted to reflect the higher Rule 12b-1 Fees and expenses applicable to Class A Shares. If it had, performance would have been lower than that shown. Top Ten Holdings % OF PORTFOLIO Exxon Mobil 4.7 Procter & Gamble 3.5 Microsoft 3.0 General Electric 2.4 Wal-Mart Stores 2.4 Johnson & Johnson 2.4 Amgen 2.2 PepsiCo 2.1 Gilead Sciences 1.9 UnitedHealth Group 1.7 CNI CHARTER FUNDS | PAGE 7 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- RCB SMALL CAP VALUE FUND The Fund seeks to provide capital appreciation by investing primarily in smaller U.S. corporations which are considered undervalued. - ------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI RCB Small Cap Value Fund, Institutional Class, Class A or Class R Shares, versus the Russell 2500 Value Index, the Russell 2000 Index, the Russell 2000 Value Index, the Lipper Small Cap Value Funds Classification(1), and the Lipper Small Cap Core Funds Classification(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: RCB SMALL CAP VALUE FUND CNI RCB Small Cap CNI RCB CNI RCB Value Fund, Small Cap Small Cap Lipper Small Lipper Small Institutional Value Fund, Value Fund, Russell 2000 Russell 2000 Russell 2500 Cap Value Funds Cap Core Funds Class Shares Class A Shares Class R Shares Index Value Index Value Index Classification Classification 9/30/98 $10,000 $10,000 $ 9,650 $10,000 $10,000 $10,000 $10,000 $10,000 9/30/99 15,120 15,120 14,591 11,907 10,583 10,840 11,193 12,044 9/30/00 16,859 16,859 16,269 14,692 12,209 12,547 13,113 15,646 9/30/01 18,395 18,395 17,751 11,576 12,893 12,863 13,741 14,011 9/30/02 16,353 16,331 15,740 10,499 12,705 12,784 13,694 13,228 9/30/03 23,802 23,714 22,856 14,332 16,728 16,779 17,812 17,376 9/30/04 29,745 29,557 28,485 17,022 21,020 20,899 22,133 20,968 9/30/05 32,681 32,380 31,208 20,077 24,751 25,355 26,216 24,969 9/30/06 32,811 32,435 31,252 22,069 28,219 28,177 28,350 26,854 (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------- Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - ------------------------------------------------------------------------------- Institutional Class (1)^ RCBIX 0.40% 11.29% 12.27%+ 16.01%+ - ------------------------------------------------------------------------------- Class A (1) RCBAX 0.17% 11.00% 12.01%+ 15.85%+ - ------------------------------------------------------------------------------- Class R (2) RCBSX 0.14% 11.00% 11.98% 15.82% - ------------------------------------------------------------------------------- Class R with load RCBSX (3.38)% 9.69% 11.19% 15.31% - ------------------------------------------------------------------------------- (1) Commenced operations on October 3, 2001. (2) Commenced operations on September 30, 1998. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. + The performance of the Institutional Class and Class A Shares for the period prior to October 3, 2001 reflect the performance of the Class R Shares of a predecessor mutual fund. The performance of the Class R Shares has not been adjusted to reflect the Rule 12b-1 Fees and expenses applicable to Institutional and Class A Shares. Fees for the Institutional Class Shares are lower than the fees for the Class R Shares; correspondingly, performance would have been higher than that shown. Top Ten Holdings* % OF PORTFOLIO Lodgenet Entertainment 7.3 Alleghany 5.1 Smart & Final 4.8 White Mountains Insurance Group 4.4 USI Holdings 4.4 Ralcorp Holdings 4.3 Annaly Mortgage Management 4.3 Montpelier Re Holdings 4.3 Conseco 4.2 Jacuzzi Brands 4.1 *Excludes Repurchase Agreement CNI CHARTER FUNDS | PAGE 8 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- TECHNOLOGY GROWTH FUND The Fund seeks to provide long-term capital appreciation by investing in U.S. corporations and U.S. dollar denominated American Depository Receipts of foreign corporations with the potential for growth and that are engaged in the production, distribution and development of products or services based on technology and should benefit significantly from advances or improvements in technology. - -------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI Technology Growth Fund, Institutional Class or Class A Shares, versus the Russell 3000 Technology Index, and the Lipper Science & Technology Funds Objective(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: TECHNOLOGY GROWTH FUND CNI Technology CNI Technology Lipper Science Growth Fund Growth Fund Russell 3000 & Technology Institutional Class Shares Class A Shares Technology Index Funds Objective 10/03/00 $10,000 $10,000 $10,000 $10,000 9/30/01 3,544 3,463 3,608 3,494 9/30/02 2,262 2,201 2,449 2,308 9/30/03 3,504 3,405 3,953 3,819 9/30/04 3,464 3,346 3,951 3,871 9/30/05 4,044 3,894 4,560 4,565 9/30/06 4,318 4,139 4,839 4,796 (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------- Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - ------------------------------------------------------------------------------- Institutional Class (1)^ CTEIX 6.77% 7.22% 4.03% (13.08)% - ------------------------------------------------------------------------------- Class A (2) CTGAX 6.30% 6.73% 3.63% (13.80)% - ------------------------------------------------------------------------------- (1) Commenced operations on October 3, 2000. (2) Commenced operations on October 23, 2000. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. Top Ten Holdings % OF PORTFOLIO Microsoft 8.0 Hewlett-Packard 5.2 IBM 4.3 Cisco Systems 4.0 Intel 3.8 Texas Instruments 3.6 Qualcomm 3.5 Oracle 3.1 Apple Computer 2.9 Symantec 2.6 CNI CHARTER FUNDS | PAGE 9 investment adviser's report SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- FIXED INCOME FUNDS The bond market is more focused on an economic slowdown at the end of the fiscal year ending September 30, 2006. The Federal Reserve Bank ("Fed") has been on hold for the last three Federal Open Market Committee (FOMC) meetings due to the weaker economic news and slightly tamer inflationary reports. During this fiscal period, the Fed raised rates six times and is now on hold at a 5.25% Fed Funds rate. During the fiscal year, City National Asset Management, Inc. altered its maturity posture to its investment grade bond funds from a slightly defensive position to a neutral stance versus our comparative benchmarks. This strategy shift comes after rates have been increasing for several quarters. The yield curve remains quite flat or inverted as investors debate how long the Fed will remain on hold. Looking ahead, we are focused more on "horizon return" than yield to maturity. If the Fed reverses course and starts lowering interest rates to counter a weak economy in the future, the biggest risk to the bond investors, in our opinion, would be re-investment risk. So even if there is little yield to be garnered by extending out maturities at this juncture, we are keeping an eye on our maturity posture and might move it from a neutral maturity stance to an aggressive maturity stance versus our comparative benchmarks in order to lock in these higher rates for an extended period of time. BOND FUND PERFORMANCE (ALL RETURNS LISTED FOR CNI CHARTER FUNDS REFER TO INSTITUTIONAL CLASS SHARES) o The CORPORATE BOND FUND produced a total return of 3.2% for the last 12 months. For the same period, the Lehman Intermediate U.S. Corporate Index 3.6%. The corporate bond universe is heavily weighted in lower quality (Baa) rated securities that did reasonably well during this recent period and yield spreads for corporate bonds versus Treasuries remained tight. This Fund continued to retain a higher quality profile than the Index and thus did not capture all of the performance garnered by the lower quality bonds. The Fund's performance compares favorably with its peer group where the Lipper Short/Intermediate Investment Grade Objective was up 3.1%. o The GOVERNMENT BOND FUND produced a total return of 2.9% for the last 12 months. For the same period, the Lehman Intermediate U.S. Government Bond Index returned 3.5%. Our defensive maturity posture for the Fund worked for most of the period but underperformed after rates peaked in June 2006. Since that time, we have extended our average maturity in the Fund to capture the higher yields and position the Fund for appreciation potential if rates decline. The Fund performance relative to the peer group is tracking closely as measured by the Lipper Short Intermediate U.S. Government Objective return of 3.0%. o The CALIFORNIA TAX EXEMPT BOND FUND produced a total return of 3.2% for the last 12 months. For the same period, the Lehman CA Intermediate-Short Municipal Bond Index returned 3.2%. The Fund's strategy tracked close to the benchmark but trailed slightly as we extended our average maturity to lock in the higher yields during the mid-summer. The Fund's performance compares favorably with its peer group where the Lipper California Short/Intermediate Municipal Debt Objective returned 3.0%. o The HIGH YIELD BOND FUND produced a total return of 6.9% for the last 12 months. For the same period, the Citigroup High Yield Market Index returned 7.4%. Absolute performance remained strong for this sector even though the economy showed signs of a slowdown. The Fund trailed the Index slightly due its underweight in the lowest quality of bonds within the Index. The Fund's relative performance vis-a-vis its peer group remained positively competitive where the Lipper High Current Yield Bond Funds Objective returned 6.7%. CNI CHARTER FUNDS | PAGE 10 investment adviser's report SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- STRATEGIC OUTLOOK FOR BOND FUNDS With economic news all focused on an economic slowdown, many observers expect the Fed to pause indefinitely in its rate hike campaign or even reverse course in the quarters leading into 2007 if a problem develops in the economy. If so, the biggest risk for the typical bond investor or Fund in the coming quarters is "reinvestment risk" -- the possibility that funds reinvested as bonds mature may be at lower rates. With that said, we are positioned for stable rates in the near-term as evidenced by our neutral maturity stance versus the benchmarks. We are poised to extend maturities on major market sell-offs or if we see significant economic weakness coupled with a decline in inflationary measures. We continue to monitor these and other factors in order to add value to our actively managed bond funds in all interest rate environments. Sincerely, /s/ Rodney J. Olea Rodney J. Olea DIRECTOR OF FIXED INCOME CITY NATIONAL ASSET MANAGEMENT, INC. CNI CHARTER FUNDS | PAGE 11 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CORPORATE BOND FUND The Fund seeks to provide current income (as the primary component of a total return, intermediate duration strategy) by investing in a diversified portfolio of investment grade fixed income securities, primarily corporate bonds issued by domestic and international companies denominated in U.S. dollars. - -------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI Corporate Bond Fund, Institutional Class or Class A Shares, versus the Lehman Intermediate Corporate Index, and Lipper Short/Intermediate Investment Grade Debt Objective(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: CORPORATE BOND FUND CNI Corporate CNI Corporate Lehman Lipper Short/ Bond Fund Bond Fund Intermediate Intermediate Investment Institutional Class Shares Class A Shares Corporate Index Grade Debt Objective 1/14/00 $10,000 $10,000 $10,000 $10,000 9/30/00 10,577 10,592 10,644 10,569 9/30/01 11,861 11,871 11,992 11,750 9/30/02 12,580 12,547 12,852 12,392 9/30/03 13,428 13,359 14,129 12,997 9/30/04 13,717 13,624 14,686 13,266 9/30/05 13,890 13,748 14,946 13,427 9/30/06 14,333 14,151 15,479 13,838 (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------- Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - ------------------------------------------------------------------------------- Institutional Class (1)^ CNCIX 3.19% 2.20% 3.86% 5.51% - ------------------------------------------------------------------------------- Class A (2) CCBAX 2.93% 1.94% 3.58% 5.31%+ - ------------------------------------------------------------------------------- (1) Commenced operations on January 14, 2000. (2) Commenced operations on April 13, 2000. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. + Class A Shares performance for the period prior to April 13, 2000 reflects the performance of the Fund's Institutional Shares. The performance of the Institutional Shares has not been adjusted to reflect the higher Rule 12b-1 Fees and expenses applicable to Class A Shares. If it had, performance would have been lower than that shown. Top Ten Holdings* % OF PORTFOLIO General Electric Capital, Ser A, MTN 6.000%, 6/15/12 2.7 Giro Balanced Funding 5.270%, 10/05/06 2.6 FNMA CMO, Ser 2002-56, Cl MC 5.500%, 09/25/07 2.3 FHLMC, Ser R004, Cl Al 5.125%, 12/15/13 2.2 Union Planters Bank 5.125%, 06/15/07 2.1 Lehman Brothers Holdings 8.250%, 06/15/07 2.0 Walt Disney 5.700%, 07/15/11 2.0 National Rural Utilities, Ser C, MTN 7.250%, 03/01/12 1.9 AXA Financial 7.750%, 08/01/10 1.9 U.S. Treasury Inflation Index Note 2.000%, 01/15/14 1.9 * Excludes Cash Equivalents CNI CHARTER FUNDS | PAGE 12 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- GOVERNMENT BOND FUND The Fund seeks to provide current income (as the primary component of a total return, intermediate duration strategy) by investing primarily in U.S. government securities either issued or guaranteed by the U.S. government or its agencies or instrumentalities. - -------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI Government Bond Fund, Institutional Class or Class A Shares, versus the Lehman Intermediate U.S. Government Bond Index, and the Lipper Short/Intermediate U.S. Government Objective(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: GOVERNMENT BOND FUND CNI Government CNI Government Lehman Intermediate Lipper Short/ Bond Fund Bond Fund U.S. Government Intermediate Institutional Class Shares Class A Shares Bond Index U.S. Government Objective 1/14/00 $10,000 $10,000 $10,000 $10,000 9/30/00 10,564 10,535 10,659 10,539 9/30/01 11,796 11,720 12,031 11,721 9/30/02 12,685 12,596 13,045 12,506 9/30/03 13,024 12,937 13,502 12,828 9/30/04 13,130 13,009 13,760 12,994 9/30/05 13,316 13,159 13,940 13,114 9/30/06 13,701 13,505 14,432 13,501 (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------- Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - ------------------------------------------------------------------------------- Institutional Class (1)^ CNBIX 2.89% 1.70% 3.04% 4.80% - ------------------------------------------------------------------------------- Class A (2) CGBAX 2.63% 1.44% 2.88% 4.58%+ - ------------------------------------------------------------------------------- (1) Commenced operations on January 14, 2000. (2) Commenced operations on April 13, 2000. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. + Class A Shares performance for the period prior to April 13, 2000 reflects the performance of the Fund's Institutional Shares. The performance of the Institutional Shares has not been adjusted to reflect the higher Rule 12b-1 Fees and expenses applicable to Class A Shares. If it had, performance would have been lower than that shown. Top Ten Holdings % OF PORTFOLIO FNMA 7.125%, 06/15/10 11.6 FNMA 5.500%, 03/15/11 7.1 FNMA 5.000%, 01/23/09 6.7 FNMA 5.010%, 11/10/10 6.7 FHLB 6.200%, 03/22/21 5.4 FNMA 5.000%, 07/25/08 5.4 FHLMC REMIC, Ser R009, Cl AK 5.750%, 12/15/18 5.3 FHLB 4.375%, 09/17/10 5.3 FHLMC, Ser R004, Cl Al 5.125%, 12/15/13 5.2 FHLMC, Ser R003, Cl AG 5.125%, 10/15/15 5.0 CNI CHARTER FUNDS | PAGE 13 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT BOND FUND The Fund seeks to provide current income exempt from Federal and California state income tax (as the primary component of a total return strategy) by investing primarily in investment grade California municipal bonds and notes. - -------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI California Tax Exempt Bond Fund, Institutional Class or Class A Shares, versus the Lehman CA Intermediate-Short Municipal Index, and the Lipper CA Short/Intermediate Municipal Debt Objective(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: CALIFORNIA TAX EXEMPT BOND FUND CNI California CNI California Lehman CA Lipper CA Short/ Tax-Exempt Bond Fund, Tax-Exempt Bond Fund, Intermediate-Short Intermediate Institutional Class Shares Class A Shares Municipal Index Municipal Debt Objective 1/14/00 $10,000 $10,000 $10,000 $10,000 9/30/00 10,545 10,532 10,545 10,460 9/30/01 11,305 11,278 11,403 11,165 9/30/02 12,162 12,112 12,272 11,850 9/30/03 12,482 12,399 12,633 12,104 9/30/04 12,731 12,627 12,999 12,287 9/30/05 12,941 12,803 13,250 12,632 9/30/06 13,353 13,163 13,677 13,011 (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------- Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - ------------------------------------------------------------------------------- Institutional Class (1)^ CNTIX 3.18% 2.28% 3.39% 4.40% - ------------------------------------------------------------------------------- Class A (2) CCTEX 2.81% 2.01% 3.14% 4.18%+ - ------------------------------------------------------------------------------- (1) Commenced operations on January 14, 2000. (2) Commenced operations on April 13, 2000. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. + Class A Shares performance for the period prior to April 13, 2000 reflects the performance of the Fund's Institutional Shares. The performance of the Institutional Shares has not been adjusted to reflect the higher Rule 12b-1 Fees and expenses applicable to Class A Shares. If it had, performance would have been lower than that shown. Top Ten Holdings % OF PORTFOLIO San Diego, Unified School District, Election 1998 Project, Ser B-1, GO, MBIA 5.000%, 07/01/17 4.1 Escondido, Union School District, Refunding & Financing Project, COP, MBIA 4.750%, 07/01/19 2.9 California State, Public Works Board Lease, Department of Corrections-State Prisons Project, Ser A, RB, AMBAC 5.250%, 12/01/13 2.4 New York State, Ser E, RB 6.000%, 04/01/14 2.1 San Bernardino, Community College District, Election 2002 Project, Ser B, GO, MBIA 5.250%, 08/01/14 2.1 Sanger, Unified School District, Election 2006 Project, Ser A, GO, FSA 5.000%, 08/01/18 2.1 Arizona State, Transportation Board, GAN, Ser A, RB 5.000%, 07/01/13 2.0 San Diego County, Edgemoor & Regional Systems Projects, COP, AMBAC 5.000%, 02/01/18 2.0 Los Angeles, Water & Power Authority, Power Systems Project, Ser A, RB 5.000%, 07/01/08 1.9 Oakland, Redevelopment Agency, Central District Redevelopment Project, TA, AMBAC 5.500%, 02/01/14 1.9 CNI CHARTER FUNDS | PAGE 14 fund overview SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND The Fund seeks to maximize total return by investing primarily in fixed income securities rated below investment grade including corporate bonds and debentures, convertible and preferred securities, and zero coupon obligations. The Fund may also invest in fixed income securities rated below investment grade issued by governments and agencies, both U.S. and foreign, and in equity securities. The Fund seeks to invest in securities that offer a high current yield as well as total return potential and diversifies across issuers, industries and sectors to control risks. - ------------------------------------------------------------------------------- Comparison of Change in the Value of a $10,000 Investment in the CNI High Yield Bond Fund, Institutional Class or Class A Shares, versus the Citigroup High Yield Market Index and the Lipper High Current Yield Bond Funds Objective(1) [LINE GRAPHIC OMITTED] PLOT POINTS ARE AS FOLLOWS: HIGH YIELD BOND FUND CNI High Yield CNI High Yield Citigroup Lipper High Current Bond Fund, Bond Fund, High Yield Yield Bond Institutional Class Shares Class A Shares Market Index Funds Objective 1/14/00 $10,000 $10,000 $10,000 $10,000 9/30/00 10,420 10,394 9,974 9,882 9/30/01 10,165 10,109 9,373 9,058 9/30/02 10,653 10,563 9,059 8,900 9/30/03 12,757 12,611 12,073 11,142 9/30/04 14,348 14,142 13,586 12,401 9/30/05 15,044 14,784 14,468 13,155 9/30/06 16,082 15,757 15,536 14,035 (1) The performance in the above graph does not reflect the deduction of taxes the shareholder will pay on Fund distributions or the redemptions of Fund shares. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Past performance is no indication of future performance. The Fund's comparative benchmarks do not include the annual operating expenses incurred by the Fund. Please note that one cannot invest directly in an unmanaged index. AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------ Ticker 1-Year 3-Year 5-Year Inception Shares Symbol Return Return Return to Date - ------------------------------------------------------------------------------ Institutional Class (1)^ CHYIX 6.90% 8.03% 9.61% 7.33% - ------------------------------------------------------------------------------ Class A (1) CHBAX 6.58% 7.70% 9.28% 7.01% - ------------------------------------------------------------------------------ (1) Commenced operations on January 14, 2000. ^ The Fund's Institutional Class Shares are currently offered only to accounts where City National Bank serves as trustee or in a fiduciary capacity. Top Ten Holdings* % OF PORTFOLIO GMAC 6.750%, 12/01/14 1.6 General Motors 7.125%, 07/15/13 1.6 Qwest 7.625%, 06/15/15 1.4 Charter Communications Holdings 10.250%, 09/15/10 1.0 Smithfield Foods, Ser B 8.000%, 10/15/09 0.9 Ford Motor Credit 7.375%, 02/01/11 0.8 AES 9.000%, 05/15/15 0.8 Whiting Petroleum 7.000%, 02/01/14 0.7 Pogo Producing 6.875%, 10/01/17 0.7 El Paso 7.000%, 05/15/11 0.7 * Excludes cash equivalents CNI CHARTER FUNDS | PAGE 15 investment adviser's report SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- MONEY MARKET FUNDS The money market environment continued to change for most of this fiscal year ending September 30, 2006. The Federal Reserve Bank ("Fed") raised rates six times this period and has since been in a holding pattern for three consecutive meetings. Fed Funds target rate has been at 5.25% for over a quarter now and it seems poised to stay there for the remainder of 2006. Fed policy makers have been on a holding pattern as they weigh the mixed data on the economy. Inflation or core inflation remains at high levels, but the Fed is counting on the drop in oil prices and a slowdown in housing to help on this front. This of course remains to be seen. Until then, market participants are "data dependent" as we try to predict how long the Fed remains on hold and if the next move is up (because of high inflation) or down (because of a dramatic slowdown in economic growth coupled with declining inflation.) The CNI Charter Money Market Funds are enjoying higher yields after the Fed has moved short-term rates upward 17 times these past few years. We will maintain a conservative maturity posture until such a time we fear the Fed will reverse course and start cutting rates. The PRIME MONEY MARKET FUND continued to emphasize quality and liquidity in these uncertain times. With interest rates peaking above the 5.25% level in recent months -- higher than it's been in years, the average days to maturity have remained relatively short. This maturity allocation positions the Fund to perform competitively as 2007 approaches. The Fund has focused primarily on high-grade short-term commercial paper and corporate securities as well as government agency notes on the longer-end of the money market maturity spectrum. The GOVERNMENT MONEY MARKET FUND continued to be well-positioned from both a sector as well as maturity perspective. The maturity profile has incorporated a modified barbell strategy for most of the past fiscal year. This strategy has been beneficial over the past year as short rates have risen. This should also position the Fund to add value as short maturities continue to rise in 2006. The Fund's yield continued to be enhanced by the concentration of Government Agency securities over Treasury instruments. Our objective for the CALIFORNIA TAX EXEMPT MONEY MARKET FUND has always been safety and liquidity. Over the past fiscal year, prior historic budgetary challenges in California have given way to an improving credit profile for the state. Our stringent credit research effort remains the cornerstone to managing the Fund in the never-ending political/economic backdrop of Sacramento. The average days to maturity remains relatively short and our credit quality profile remains very high. STRATEGIC OUTLOOK Our outlook continues to be favorable for money market investments. Short-term rates will likely peak around these levels and move lower as we enter 2007. While a slowing economy is often synonymous with declining interest rates, many are uncertain of the Fed's next move due to the current high level of core inflation. Either way, we are near the peak of short-term rates and will extend out if the Fed changes its posture to one of easing. With the inverted yield curve in securities maturing under one year we maintain a shorter maturity stance for the CNI Charter Money Market Funds until the Fed changes its monetary policy. City National Asset Management, Inc. is monitoring the market very closely and will be proactive so as to take advantage of market opportunities. Sincerely, /s/ Rodney J. Olea Rodney J. Olea DIRECTOR OF FIXED INCOME CITY NATIONAL ASSET MANAGEMENT, INC. CNI CHARTER FUNDS | PAGE 16 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP VALUE EQUITY FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 32.6% Financials 14.2% Industrials 8.9% Consumer Discretionary 8.7% Information Technology 7.9% Energy 6.6% Telecommunications 5.9% Utilities 4.8% Consumer Staples 4.6% Materials 4.2% Healthcare 1.6% Short-Term Investments * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- COMMON STOCK [98.4%] AEROSPACE & DEFENSE [5.1%] Goodrich 16,400 $ 665 Honeywell International 21,200 867 Lockheed Martin 9,800 843 Northrop Grumman 17,000 1,157 Raytheon 15,200 730 United Technologies 17,500 1,109 ----------------------------------------------------------------------------- TOTAL AEROSPACE & DEFENSE 5,371 ============================================================================= AIR FREIGHT & LOGISTICS [0.7%] FedEx 6,800 739 ============================================================================= AUTO COMPONENTS [0.5%] Johnson Controls 6,800 488 ============================================================================= BEVERAGES [2.1%] Coca-Cola 27,100 1,211 Coca-Cola Enterprises 32,100 669 Molson Coors Brewing, Cl B 4,500 310 ----------------------------------------------------------------------------- TOTAL BEVERAGES 2,190 ============================================================================= CAPITAL MARKETS [6.5%] Bank of New York 11,600 409 Goldman Sachs Group 11,200 1,895 Lehman Brothers Holdings 15,000 1,108 Merrill Lynch 15,400 1,205 Morgan Stanley 27,000 1,968 State Street 5,200 324 ----------------------------------------------------------------------------- TOTAL CAPITAL MARKETS 6,909 ============================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- CHEMICAL [2.6%] Dow Chemical 36,000 $ 1,404 PPG Industries 14,000 939 Rohm & Haas 8,600 407 ----------------------------------------------------------------------------- TOTAL CHEMICAL 2,750 ============================================================================= COMMERCIAL BANKS [7.7%] Keycorp 10,400 389 National City 16,100 589 PNC Financial Services Group 6,800 493 SunTrust Banks 6,300 487 US Bancorp 48,000 1,594 Wachovia 35,700 1,992 Wells Fargo 73,460 2,658 ----------------------------------------------------------------------------- TOTAL COMMERCIAL BANKS 8,202 ============================================================================= COMMERCIAL SERVICES & SUPPLIES [0.4%] Waste Management 11,600 425 ============================================================================= COMMUNICATIONS EQUIPMENT [2.6%] Motorola 64,300 1,607 Nokia, ADR 27,000 532 Qualcomm 9,800 356 Tellabs* 23,800 261 ----------------------------------------------------------------------------- TOTAL COMMUNICATIONS EQUIPMENT 2,756 ============================================================================= COMPUTERS & PERIPHERALS [3.5%] Apple Computer* 7,300 562 Hewlett-Packard 68,700 2,521 IBM 7,900 647 ----------------------------------------------------------------------------- TOTAL COMPUTERS & PERIPHERALS 3,730 ============================================================================= CONSUMER FINANCE [0.6%] Capital One Financial 8,300 653 ============================================================================= DIVERSIFIED FINANCIAL SERVICES [7.4%] Bank of America 70,396 3,771 CIT Group 14,500 705 Citigroup 67,786 3,367 ----------------------------------------------------------------------------- TOTAL DIVERSIFIED FINANCIAL SERVICES 7,843 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 17 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP VALUE EQUITY FUND (CONTINUED) DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES [5.7%] AT&T 47,300 $ 1,540 BellSouth 45,900 1,962 Verizon Communications 68,009 2,525 ----------------------------------------------------------------------------- TOTAL DIVERSIFIED TELECOMMUNICATION SERVICES 6,027 ============================================================================= ELECTRIC UTILITIES [3.1%] Edison International 13,900 579 Entergy 3,500 274 FirstEnergy 15,700 877 FPL Group 17,300 778 PPL 22,700 747 ----------------------------------------------------------------------------- TOTAL ELECTRIC UTILITIES 3,255 ============================================================================= FOOD & STAPLES RETAILING [1.6%] Costco Wholesale 16,200 805 Kroger 19,300 447 Safeway 16,000 485 ----------------------------------------------------------------------------- TOTAL FOOD & STAPLES RETAILING 1,737 ============================================================================= FOOD PRODUCTS [0.6%] Archer-Daniels-Midland 8,400 318 Tyson Foods 22,000 350 ----------------------------------------------------------------------------- TOTAL FOOD PRODUCTS 668 ============================================================================= HEALTH CARE PROVIDERS & SERVICES [2.3%] Aetna 22,100 874 Cigna 4,500 524 Health Management Associates, Cl A 27,000 564 McKesson 9,200 485 ----------------------------------------------------------------------------- TOTAL HEALTH CARE PROVIDERS & SERVICES 2,447 ============================================================================= HOUSEHOLD DURABLES [0.7%] Newell Rubbermaid 11,800 334 Whirlpool 5,200 438 ----------------------------------------------------------------------------- TOTAL HOUSEHOLD DURABLES 772 ============================================================================= INDEPEDENT POWER PRODUCER/ ENERGY TRADER [0.8%] Constellation Energy Group 13,400 793 ============================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES [3.4%] General Electric 52,500 $ 1,853 Tyco International 61,600 1,724 ----------------------------------------------------------------------------- TOTAL INDUSTRIAL CONGLOMERATES 3,577 ============================================================================= INSURANCE [8.2%] ACE 17,800 974 Aflac 18,800 860 American International Group 29,100 1,928 Chubb 16,600 863 Hartford Financial Services Group 12,300 1,067 Metlife 17,100 969 Prudential Financial 9,700 740 St Paul Travelers 27,000 1,266 ----------------------------------------------------------------------------- TOTAL INSURANCE 8,667 ============================================================================= IT SERVICES [1.1%] Electronic Data Systems 39,900 978 First Data 5,500 231 ----------------------------------------------------------------------------- TOTAL IT SERVICES 1,209 ============================================================================= LEISURE EQUIPMENT & PRODUCTS [0.4%] Mattel 18,500 364 ============================================================================= LIFE SCIENCES TOOLS & SERVICES [0.4%] PerkinElmer 23,700 449 ============================================================================= MACHINERY [2.2%] Caterpillar 14,300 941 Danaher 7,000 481 Deere 7,400 621 Illinois Tool Works 7,000 314 ----------------------------------------------------------------------------- TOTAL MACHINERY 2,357 ============================================================================= MEDIA [4.9%] CBS, Cl B 25,750 725 Comcast, Cl A* 34,800 1,282 News Corp., Cl A 25,000 491 Time Warner 65,300 1,191 Walt Disney 47,900 1,481 ----------------------------------------------------------------------------- TOTAL MEDIA 5,170 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 18 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP VALUE EQUITY FUND (CONTINUED) DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- METALS & MINING [1.2%] Alcoa 31,300 $ 878 Phelps Dodge 5,200 440 ----------------------------------------------------------------------------- TOTAL METALS & MINING 1,318 ============================================================================= MULTI-UTILITIES & UNREGULATED POWER [2.0%] Dominion Resources 11,700 895 PG&E 19,600 816 Sempra Energy 8,600 432 ----------------------------------------------------------------------------- TOTAL MULTI-UTILITIES & UNREGULATED POWER 2,143 ============================================================================= MULTILINE RETAIL [1.5%] Federated Department Stores 23,400 1,011 JC Penney 8,000 547 ----------------------------------------------------------------------------- TOTAL MULTILINE RETAIL 1,558 ============================================================================= OFFICE ELECTRONICS [0.6%] Xerox* 43,500 677 ============================================================================= OIL & GAS [7.9%] Chevron 23,040 1,494 ConocoPhillips 28,380 1,690 Exxon Mobil 42,100 2,825 Hess 7,800 323 Marathon Oil 14,800 1,138 Occidental Petroleum 18,400 885 ----------------------------------------------------------------------------- TOTAL OIL & GAS 8,355 ============================================================================= PAPER & FOREST PRODUCTS [0.8%] International Paper 24,500 848 ============================================================================= PERSONAL PRODUCTS [0.5%] Alberto-Culver 10,500 531 ============================================================================= PHARMACEUTICALS [1.4%] Abbott Laboratories 16,000 777 Bristol-Myers Squibb 29,400 733 ----------------------------------------------------------------------------- TOTAL PHARMACEUTICALS 1,510 ============================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- ROAD & RAIL [2.4%] Avis Budget Group* 2,330 $ 43 CSX 31,400 1,031 Norfolk Southern 17,800 784 Ryder System 9,300 481 Union Pacific 2,800 246 ----------------------------------------------------------------------------- TOTAL ROAD & RAIL 2,585 ============================================================================= SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT [0.8%] Freescale Semiconductor* 13,000 494 Texas Instruments 11,000 366 ----------------------------------------------------------------------------- TOTAL SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 860 ============================================================================= SPECIALTY RETAIL [1.1%] Gap 41,000 777 Officemax 8,500 346 ----------------------------------------------------------------------------- TOTAL SPECIALTY RETAIL 1,123 ============================================================================= THRIFTS & MORTGAGE FINANCE [2.1%] Fannie Mae 19,900 1,113 Washington Mutual 26,200 1,139 ----------------------------------------------------------------------------- TOTAL THRIFTS & MORTGAGE FINANCE 2,252 ============================================================================= WIRELESS TELECOMMUNICATION SERVICES [1.0%] Alltel 10,600 588 Sprint-Nextel 24,300 417 ----------------------------------------------------------------------------- TOTAL WIRELESS TELECOMMUNICATION SERVICES 1,005 ============================================================================= TOTAL COMMON STOCK (Cost $87,095) 104,313 ========================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 19 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP VALUE EQUITY FUND (CONCLUDED) DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- CASH EQUIVALENTS [1.6%] Fidelity Institutional Domestic Money Market Portfolio, Cl I, 5.22%** 1,714,571 $ 1,715 SEI Daily Income Trust, Prime Obligation Fund, Cl A, 5.33%** 10,815 11 ----------------------------------------------------------------------------- TOTAL CASH EQUIVALENTS (Cost $1,726) 1,726 ========================================================================= TOTAL INVESTMENTS [100.0%] (Cost $88,821) 106,039 ========================================================================= OTHER ASSETS AND LIABILITIES [0.0%] 11 ========================================================================= NET ASSETS -- 100.0% $ 106,050 ============================================================================= * NON-INCOME PRODUCING SECURITY ** RATE SHOWN IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. ADR -- AMERICAN DEPOSITARY RECEIPT CL -- CLASS SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 20 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP GROWTH EQUITY FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 21.6% Information Technology 21.2% Healthcare 14.3% Consumer Staples 11.1% Consumer Discretionary 10.9% Financials 10.4% Energy 7.2% Industrials 1.5% Short-Term Investments 0.9% Materials 0.7% Utilities 0.2% Telecommunications * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- COMMON STOCK [98.1%] AEROSPACE & DEFENSE [0.4%] L-3 Communications Holdings 2,500 $ 196 ============================================================================= AIR FREIGHT & LOGISTICS [0.9%] United Parcel Service, Cl B 5,700 410 ============================================================================= BEVERAGES [3.4%] Coca-Cola 9,800 438 Pepsi Bottling Group 5,700 202 PepsiCo 14,500 946 ----------------------------------------------------------------------------- TOTAL BEVERAGES 1,586 ============================================================================= BIOTECHNOLOGY [5.1%] Amgen* 14,300 1,023 Genzyme-General Division* 6,500 439 Gilead Sciences* 12,700 872 ----------------------------------------------------------------------------- TOTAL BIOTECHNOLOGY 2,334 ============================================================================= CAPITAL MARKETS [4.1%] Franklin Resources 2,100 222 Goldman Sachs Group 2,600 440 Lehman Brothers Holdings 4,800 355 Merrill Lynch 2,600 203 State Street 5,400 337 T Rowe Price Group 7,000 335 ----------------------------------------------------------------------------- TOTAL CAPITAL MARKETS 1,892 ============================================================================= COMMERCIAL BANKS [0.5%] Synovus Financial 8,300 244 ============================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- COMMERCIAL SERVICES & SUPPLIES [1.4%] Equifax 7,000 $ 257 Robert Half International 5,200 176 RR Donnelley & Sons 6,300 208 ----------------------------------------------------------------------------- TOTAL COMMERCIAL SERVICES & SUPPLIES 641 ============================================================================= COMMUNICATIONS EQUIPMENT [3.3%] Cisco Systems* 29,250 673 Corning* 9,500 232 Qualcomm 17,000 618 ----------------------------------------------------------------------------- TOTAL COMMUNICATIONS EQUIPMENT 1,523 ============================================================================= COMPUTERS & PERIPHERALS [3.8%] Apple Computer* 8,100 624 Dell* 17,165 392 IBM 9,000 737 ----------------------------------------------------------------------------- TOTAL COMPUTERS & PERIPHERALS 1,753 ============================================================================= CONSUMER FINANCE [1.6%] Capital One Financial 5,200 409 SLM 6,400 333 ----------------------------------------------------------------------------- TOTAL CONSUMER FINANCE 742 ============================================================================= DIVERSIFIED FINANCIAL SERVICES [0.3%] Chicago Mercantile Exchange Holdings 250 120 ============================================================================= ENERGY EQUIPMENT & SERVICES [3.5%] BJ Services 14,100 425 Nabors Industries* 12,200 363 Schlumberger 7,800 484 Transocean* 4,900 358 ----------------------------------------------------------------------------- TOTAL ENERGY EQUIPMENT & SERVICES 1,630 ============================================================================= FOOD & STAPLES RETAILING [3.5%] Sysco 16,100 538 Wal-Mart Stores 21,975 1,084 ----------------------------------------------------------------------------- TOTAL FOOD & STAPLES RETAILING 1,622 ============================================================================= FOOD PRODUCTS [1.2%] General Mills 4,300 243 Kellogg 6,200 307 ----------------------------------------------------------------------------- TOTAL FOOD PRODUCTS 550 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 21 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP GROWTH EQUITY FUND (CONTINUED) DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- HEALTH CARE EQUIPMENT & SUPPLIES [3.8%] Bard (C.R.) 3,200 $ 240 Biomet 10,900 351 Boston Scientific* 8,400 124 Stryker 12,800 635 Zimmer Holdings* 6,200 419 ----------------------------------------------------------------------------- TOTAL HEALTH CARE EQUIPMENT & SUPPLIES 1,769 ============================================================================= HEALTH CARE PROVIDERS & SERVICES [4.5%] Caremark Rx 12,900 731 Coventry Health Care* 4,200 217 Quest Diagnostics 5,400 330 UnitedHealth Group 15,800 777 ----------------------------------------------------------------------------- TOTAL HEALTH CARE PROVIDERS & SERVICES 2,055 ============================================================================= HEALTH CARE TECHNOLOGY [0.4%] IMS Health 7,500 200 ============================================================================= HOTELS, RESTAURANTS & LEISURE [2.3%] Carnival 6,600 310 Starbucks* 9,500 324 Wyndham Worldwide* 1,660 46 Yum! Brands 7,400 385 ----------------------------------------------------------------------------- TOTAL HOTELS, RESTAURANTS & LEISURE 1,065 ============================================================================= HOUSEHOLD DURABLES [0.4%] Harman International Industries 2,200 184 ============================================================================= HOUSEHOLD PRODUCTS [5.5%] Colgate-Palmolive 10,100 628 Procter & Gamble 26,302 1,630 Clorox 4,400 277 ----------------------------------------------------------------------------- TOTAL HOUSEHOLD PRODUCTS 2,535 ============================================================================= INDEPENDENT POWER PRODUCER/ ENERGY TRADER [0.7%] TXU 5,200 325 ============================================================================= INDUSTRIAL CONGLOMERATES [3.3%] 3M 6,000 446 General Electric 31,075 1,097 ----------------------------------------------------------------------------- TOTAL INDUSTRIAL CONGLOMERATES 1,543 ============================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- INSURANCE [2.7%] Aflac 6,600 $ 302 American International Group 11,500 762 Progressive 8,000 196 ----------------------------------------------------------------------------- TOTAL INSURANCE 1,260 ============================================================================= INTERNET SOFTWARE & SERVICES [2.9%] eBay* 26,800 760 Yahoo!* 22,500 569 ----------------------------------------------------------------------------- TOTAL INTERNET SOFTWARE & SERVICES 1,329 ============================================================================= IT SERVICES [1.0%] First Data 7,100 298 Paychex 4,800 177 ----------------------------------------------------------------------------- TOTAL IT SERVICES 475 ============================================================================= LIFE SCIENCES TOOLS & SERVICES [0.6%] Thermo Electron* 7,100 279 ============================================================================= MACHINERY [1.1%] Danaher 7,600 522 ============================================================================= MEDIA [1.9%] Comcast* 8,100 299 McGraw-Hill 5,400 313 Time Warner 13,100 239 ----------------------------------------------------------------------------- TOTAL MEDIA 851 ============================================================================= METALS & MINING [0.9%] Goldcorp 9,000 212 Nucor 4,200 208 ----------------------------------------------------------------------------- TOTAL METALS & MINING 420 ============================================================================= MULTILINE RETAIL [1.8%] Sears Holdings* 2,700 427 Target 7,500 414 ----------------------------------------------------------------------------- TOTAL MULTILINE RETAIL 841 ============================================================================= OIL & GAS [6.8%] Chevron 3,800 247 Exxon Mobil 32,000 2,147 Sunoco 4,200 261 XTO Energy 11,300 476 ----------------------------------------------------------------------------- TOTAL OIL & GAS 3,131 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 22 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- LARGE CAP GROWTH EQUITY FUND (CONCLUDED) DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- PERSONAL PRODUCTS [0.6%] Avon Products 8,600 $ 264 ============================================================================= PHARMACEUTICALS [6.8%] Abbott Laboratories 4,795 233 Allergan 3,700 417 Forest Laboratories* 7,700 390 Johnson & Johnson 16,664 1,082 Schering-Plough 14,000 309 Wyeth 13,850 704 ----------------------------------------------------------------------------- TOTAL PHARMACEUTICALS 3,135 ============================================================================= REAL ESTATE INVESTMENT TRUST [0.9%] Simon Property Group 4,700 426 ============================================================================= REAL ESTATE MANAGEMENT & DEVELOPMENT [0.1%] Realogy* 2,075 47 ============================================================================= ROAD & RAIL [0.0%] Avis Budget Group* 830 15 ============================================================================= SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT [3.4%] Broadcom, Cl A* 11,850 360 Intel 12,350 254 Linear Technology 11,700 364 Texas Instruments 17,800 592 ----------------------------------------------------------------------------- TOTAL SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1,570 ============================================================================= SOFTWARE [7.1%] Autodesk* 9,800 341 Citrix Systems* 7,100 257 Electronic Arts* 3,600 200 Microsoft 49,830 1,362 Oracle* 22,500 399 Symantec* 34,400 732 ----------------------------------------------------------------------------- TOTAL SOFTWARE 3,291 ============================================================================= SPECIALTY RETAIL [3.4%] Best Buy 3,500 187 Home Depot 18,300 664 Lowe's 17,600 494 TJX 8,600 241 ----------------------------------------------------------------------------- TOTAL SPECIALTY RETAIL 1,586 ============================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- TEXTILES, APPAREL & LUXURY GOODS [1.3%] Coach* 17,300 $ 595 ============================================================================= THRIFTS & MORTGAGE FINANCE [0.7%] Countrywide Financial 8,600 301 ============================================================================= WIRELESS TELECOMMUNICATION SERVICES [0.2%] Sprint-Nextel 4,309 74 ============================================================================= TOTAL COMMON STOCK (Cost $41,212) 45,331 ========================================================================= CASH EQUIVALENTS [1.5%] Fidelity Institutional Domestic Money Market Portfolio, Cl I, 5.22%** 656,508 657 SEI Daily Income Trust, Prime Obligation Fund, Cl A, 5.33%** 25,272 25 ----------------------------------------------------------------------------- TOTAL CASH EQUIVALENTS (Cost $682) 682 ========================================================================= TOTAL INVESTMENTS [99.6%] (Cost $41,894) 46,013 ========================================================================= OTHER ASSETS AND LIABILITIES [ 0.4%] 192 ========================================================================= NET ASSETS -- 100.0% $ 46,205 ============================================================================= * NON-INCOME PRODUCING SECURITY ** RATE SHOWN IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. CL -- CLASS SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 23 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- RCB SMALL CAP VALUE FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 34.2% Financials 23.3% Consumer Discretionary 13.4% Industrials 12.2% Consumer Staples 4.9% Energy 4.4% Short-Term Investment 3.6% Utilities 2.4% Materials 1.6% Information Technology * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- COMMON STOCK+ [92.7%] BROADCASTING & CABLE [6.5%] Cox Radio* 161,250 $ 2,475 Cumulus Media* 218,600 2,090 ----------------------------------------------------------------------------- TOTAL BROADCASTING & CABLE 4,565 ============================================================================= COMMERCIAL SERVICES [7.1%] Adesa 58,000 1,340 Coinstar* 65,600 1,888 Watson Wyatt 42,000 1,719 ----------------------------------------------------------------------------- TOTAL COMMERCIAL SERVICES 4,947 ============================================================================= DIVERSIFIED MANUFACTURING [4.1%] Jacuzzi Brands* 283,300 2,830 ============================================================================= DIVERSIFIED METALS & MINING [2.4%] Compass Minerals International 59,000 1,670 ============================================================================= UTILITIES [3.6%] Sierra Pacific Resources* 174,000 2,495 ============================================================================= ENERGY EQUIPMENT & SERVICES [2.1%] Hanover Compressor* 79,200 1,443 ============================================================================= ENTERTAINMENT [7.3%] Lodgenet Entertainment* 270,000 5,098 ============================================================================= FOOD, BEVERAGE & TOBACCO [4.3%] Ralcorp Holdings* 62,400 3,010 ============================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS [3.1%] Central Garden & Pet* 45,100 $ 2,176 ============================================================================= INSURANCE [27.5%] Alleghany* 12,218 3,531 Conseco* 140,000 2,939 Hilb Rogal & Hobbs 38,900 1,659 Montpelier Re Holdings 152,450 2,956 Odyssey Re Holdings 58,000 1,959 USI Holdings* 226,200 3,065 White Mountains Insurance Group 6,200 3,081 ----------------------------------------------------------------------------- TOTAL INSURANCE 19,190 ============================================================================= MACHINERY [2.0%] IDEX 31,800 1,369 ============================================================================= OIL & GAS [2.8%] Rosetta Resources* 114,200 1,961 ============================================================================= PREPACKAGING SOFTWARE [1.6%] PLATO Learning* 175,300 1,117 ============================================================================= REAL ESTATE INVESTMENT TRUST [4.2%] Annaly Mortgage Management 225,100 2,958 ============================================================================= RETAIL [10.6%] IHOP 33,170 1,538 Smart & Final* 194,600 3,322 Triarc, Cl B 169,800 2,567 ----------------------------------------------------------------------------- TOTAL RETAIL 7,427 ============================================================================= SPECIALTY RETAIL [3.5%] Jo-Ann Stores* 144,100 2,409 ============================================================================= TOTAL COMMON STOCK (Cost $51,933) 64,665 ========================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 24 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- RCB SMALL CAP VALUE FUND (CONCLUDED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- CORPORATE BONDS [2.6%] FINANCIAL SERVICES [2.3%] Fairfax Financial Holding 7.750%, 04/26/12 $ 600 $ 558 Labranche (A) Callable 05/15/07 @ 104.75 9.500%, 05/15/09 1,000 1,043 ----------------------------------------------------------------------------- TOTAL FINANCIAL SERVICES 1,601 ============================================================================= LABORATORY EQUIPMENT [0.3%] Sea Containers, Ser B 10.750%, 10/15/06 250 200 ============================================================================= TOTAL CORPORATE BONDS (Cost $1,828) 1,801 ========================================================================= REPURCHASE AGREEMENT (B) [4.4%] Morgan Stanley, 5.000%, dated 09/29/06, repurchased on 10/02/06, repurchase price $3,054,731 (collateralized by a U.S. Treasury Note, par value $2,919,831, 6.500%, 2/15/10; with total market value $3,114,578) 3,053 3,053 ----------------------------------------------------------------------------- TOTAL REPURCHASE AGREEMENT (Cost $3,053) 3,053 ========================================================================= TOTAL INVESTMENTS [99.7%] (Cost $56,814) 69,519 ========================================================================= OTHER ASSETS AND LIABILITIES [0.3%] 222 ========================================================================= NET ASSETS -- 100.0% $ 69,741 ============================================================================= DESCRIPTION * NON-INCOME PRODUCING SECURITY + MORE NARROW INDUSTRIES ARE UTILIZED FOR COMPLIANCE PURPOSES, WHEREAS BROAD SECTORS ARE UTILIZED FOR REPORTING. (A) SECURITY EXEMPT FROM REGISTRATION UNDER RULE 144A OF THE SECURITIES ACT OF 1933. THESE SECURITIES MAY BE RESOLD IN TRANSACTIONS EXEMPT FROM REGISTRATION NORMALLY TO QUALIFIED INSTITUTIONS. ON SEPTEMBER 30, 2006, THE VALUE OF THESE SECURITIES AMOUNTED TO $1,043 (000), REPRESENTING 1.5% OF THE NET ASSETS OF THE FUND. (B) TRI-PARTY REPURCHASE AGREEMENT CL -- CLASS SER -- SERIES SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 25 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- TECHNOLOGY GROWTH FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 94.6% Information Technology 2.2% Short-Term Investments 1.5% Industrials 1.3% Healthcare 0.4% Consumer Discretionary * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- COMMON STOCK [97.8%] AUDIO & VIDEO EQUIPMENT MANUFACTURING [0.4%] Sony, ADR 300 $ 12 ============================================================================= COMMUNICATIONS EQUIPMENT MANUFACTURING [12.8%] Cisco Systems* 4,705 108 Harris 700 31 Motorola 2,725 68 Nokia, ADR 2,150 42 Qualcomm 2,600 95 ----------------------------------------------------------------------------- TOTAL COMMUNICATIONS EQUIPMENT MANUFACTURING 344 ============================================================================= COMPUTER & PERIPHERAL EQUIPMENT MANUFACTURING [19.3%] Apple Computer* 995 77 Dell* 1,525 35 EMC-Mass* 4,505 54 Hewlett-Packard 3,823 140 IBM 1,400 115 NAVTEQ* 400 10 Sandisk* 400 21 Symbol Technologies 2,250 33 Western Digital* 1,750 32 ----------------------------------------------------------------------------- TOTAL COMPUTER & PERIPHERAL EQUIPMENT MANUFACTURING 517 ============================================================================= COMPUTER SYSTEMS DESIGN & RELATED SERVICES [8.6%] Autodesk* 800 28 Cerner* 400 18 Cognizant Technology Solutions, Cl A* 800 59 Electronic Data Systems 1,725 42 Intergraph* 275 12 Jack Henry & Associates 1,100 24 DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- Micros Systems* 300 $ 15 Parametric Technology* 950 16 Quest Software* 1,100 16 ----------------------------------------------------------------------------- TOTAL COMPUTER SYSTEMS DESIGN & RELATED SERVICES 230 ============================================================================= DATA PROCESSING SERVICES [2.2%] Affiliated Computer Services, Cl A* 425 22 First Data 850 36 ----------------------------------------------------------------------------- TOTAL DATA PROCESSING SERVICES 58 ============================================================================= ELECTRONIC SHOPPING & MAIL-ORDER HOUSES [0.8%] eBay* 725 21 ============================================================================= FIBER OPTIC CABLE MANUFACTURING [1.8%] Corning* 2,000 49 ============================================================================= NAVIGATIONAL/MEASURING/MEDICAL/CONTROL INSTRUMENTS MANUFACTURING [2.5%] Flir Systems* 400 11 L-3 Communications Holdings 500 39 PerkinElmer 875 17 ----------------------------------------------------------------------------- TOTAL NAVIGATIONAL/MEASURING/MEDICAL/ CONTROL INSTRUMENTS MANUFACTURING 67 ============================================================================= ON-LINE INFORMATION SERVICES [5.4%] Google* 95 38 Juniper Networks* 1,092 19 WebEx Communications* 1,125 44 Websense* 700 15 Yahoo!* 1,200 30 ----------------------------------------------------------------------------- TOTAL ON-LINE INFORMATION SERVICES 146 ============================================================================= SEMICONDUCTOR & OTHER ELECTRONIC COMPONENT MANUFACTURING [18.9%] Amphenol, Cl A 500 31 Analog Devices 825 24 Applied Materials 800 14 Arrow Electronics* 500 14 Broadcom, Cl A* 1,200 37 Intel 4,950 102 Jabil Circuit 850 24 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 26 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- TECHNOLOGY GROWTH FUND (CONCLUDED) DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- Linear Technology 775 $ 24 Marvel Tech Group* 1,200 23 Maxim Integrated Products 900 25 Micron Technology* 750 13 National Semiconductor 475 11 Taiwan Semiconductor Manufacturing, ADR 3,394 33 Texas Instruments 2,900 97 TTM Technologies* 850 10 Xilinx 700 15 Zoran* 600 10 ----------------------------------------------------------------------------- TOTAL SEMICONDUCTOR & OTHER ELECTRONIC COMPONENT MANUFACTURING 507 ============================================================================= SOFTWARE PUBLISHERS [23.6%] Adobe Systems* 1,000 37 Akamai Technologies* 1,000 50 BEA Systems* 1,400 21 Citrix Systems* 1,175 43 Electronic Arts* 400 22 F5 Networks* 350 19 Intuit* 400 13 McAfee* 975 24 Microsoft 7,850 215 Oracle* 4,765 84 Red Hat* 500 11 SAP, ADR 250 12 Symantec* 3,300 70 VeriSign* 550 11 ----------------------------------------------------------------------------- TOTAL SOFTWARE PUBLISHERS 632 ============================================================================= TELECOMMUNICATIONS [1.5%] Amdocs* 1,000 40 ============================================================================= TOTAL COMMON STOCK (Cost $2,431) 2,623 ========================================================================= DESCRIPTION SHARES VALUE (000) - -------------------------------------------------------------------------------- CASH EQUIVALENTS [2.2%] Fidelity Institutional Domestic Money Market Portfolio, Cl I, 5.22%** 51,456 $ 51 SEI Daily Income Trust, Prime Obligation Fund, Cl A, 5.33%** 8,009 8 ============================================================================= TOTAL CASH EQUIVALENTS (Cost $59) 59 ========================================================================= TOTAL INVESTMENTS [100.0%] (Cost $2,490) 2,682 ========================================================================= OTHER ASSETS AND LIABILITIES [0.0%] -- ========================================================================= NET ASSETS -- 100.0% $ 2,682 ============================================================================= * NON-INCOME PRODUCING SECURITY ** RATE SHOWN IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. ADR -- AMERICAN DEPOSITARY RECEIPT CL -- CLASS AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 27 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CORPORATE BOND FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 38.9% Financial 25.6% Industrial 7.4% Telephone 7.3% Bank 5.4% U.S. Government Mortgage-Backed Obligations 3.2% Short-Term Investments 3.0% Utilities 2.6% Commercial Paper 1.9% U.S. Treasury Obligations 1.8% Municipal Bonds 1.1% Gas Transmission 0.8% Foreign Governments 0.7% Mortgage-Backed 0.3% Transportation * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- CORPORATE BONDS [85.0%] AIR TRANSPORTATION [0.3%] Federal Express, Ser A2 7.890%, 09/23/08 $ 165 $ 168 ============================================================================= AUTOMOTIVE [2.7%] DaimlerChrysler 5.875%, 03/15/11 570 571 Toyota Motor Credit 4.250%, 03/15/10 1,000 971 ----------------------------------------------------------------------------- TOTAL AUTOMOTIVE 1,542 ============================================================================= BANKS [8.4%] Bankers Trust 7.250%, 10/15/11 500 546 Crestar Finance 6.500%, 01/15/08 1,035 1,054 Deutsche Bank 7.500%, 04/25/09 500 526 Union Planters Bank 5.125%, 06/15/07 1,215 1,214 US Bancorp 6.875%, 09/15/07 350 354 Wachovia 7.125%, 10/15/06 100 100 Wells Fargo 4.625%, 08/09/10 1,000 984 ----------------------------------------------------------------------------- TOTAL BANKS 4,778 ============================================================================= BEAUTY PRODUCTS [1.5%] Avon Products 7.150%, 11/15/09 800 844 ============================================================================= DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- CHEMICALS [0.4%] Praxair 6.625%, 10/15/07 $ 200 $ 202 ============================================================================= COMMUNICATION & MEDIA [4.5%] AOL Time Warner 6.750%, 04/15/11 395 413 Comcast Cable Communications Holdings 8.375%, 03/15/13 440 502 News America Holdings 9.250%, 02/01/13 450 532 Walt Disney 5.700%, 07/15/11 1,100 1,121 ----------------------------------------------------------------------------- TOTAL COMMUNICATION & MEDIA 2,568 ============================================================================= COMPUTER SYSTEM DESIGN & SERVICES [3.3%] Cisco Systems 5.500%, 02/22/16 1,000 1,008 IBM 4.375%, 06/01/09 900 885 ----------------------------------------------------------------------------- TOTAL COMPUTERS SYSTEM DESIGN & SERVICES 1,893 ============================================================================= DRUGS [1.8%] Abbott Laboratories 5.375%, 05/15/09 1,000 1,009 ============================================================================= ELECTRICAL SERVICES [3.1%] American Electric Power 5.250%, 06/01/15 490 477 Iowa Electric Light & Power 6.000%, 10/01/08 200 202 WPS Resources 7.000%, 11/01/09 1,000 1,047 ----------------------------------------------------------------------------- TOTAL ELECTRICAL SERVICES 1,726 ============================================================================= FINANCIAL SERVICES [16.7%] American General Finance, Ser I, MTN 4.625%, 05/15/09 1,000 983 CIT Group, MTN 4.750%, 12/15/10 1,000 978 Citigroup 5.850%, 08/02/16 1,000 1,034 Countrywide Home Loans 5.625%, 07/15/09 155 156 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 28 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CORPORATE BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Countrywide Home Loans, Ser L, MTN 4.000%, 03/22/11 $ 875 $ 826 General Electric Capital, Ser A, MTN 6.875%, 11/15/10 250 266 6.000%, 06/15/12 1,500 1,559 HSBC Finance 5.250%, 04/15/15 1,000 985 John Deere Capital 4.625%, 04/15/09 750 740 MBNA 4.625%, 09/15/08 410 405 National Rural Utilities, Ser C, MTN 7.250%, 03/01/12 1,000 1,093 Washington Mutual 4.625%, 04/01/14 460 429 ----------------------------------------------------------------------------- TOTAL FINANCIAL SERVICES 9,454 ============================================================================= FOOD, BEVERAGE & TOBACCO [4.2%] Bottling Group 5.500%, 04/01/16 1,000 1,007 Diageo Capital 3.375%, 03/20/08 1,000 974 General Mills 2.625%, 10/24/06 410 409 ----------------------------------------------------------------------------- TOTAL FOOD, BEVERAGE & TOBACCO 2,390 ============================================================================= FOREIGN GOVERNMENTS [0.8%] United Mexican States 5.875%, 01/15/14 450 460 ============================================================================= INSURANCE [5.5%] Aflac 6.500%, 04/15/09 1,000 1,031 AXA Financial 7.750%, 08/01/10 1,000 1,084 Berkshire Hathaway Finance 4.125%, 01/15/10 1,000 972 ----------------------------------------------------------------------------- TOTAL INSURANCE 3,087 ============================================================================= INVESTMENT BANKER/BROKER DEALER [12.3%] Credit Suisse 5.500%, 08/15/13 1,000 1,009 Goldman Sachs Group 5.150%, 01/15/14 1,000 978 Jefferies Group 5.500%, 03/15/16 665 649 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- JPMorgan Chase 7.125%, 06/15/09 $ 675 $ 709 6.750%, 02/01/11 500 530 Lehman Brothers Holdings 8.250%, 06/15/07 1,100 1,122 Merrill Lynch 4.000%, 11/15/07 1,000 986 Morgan Stanley 3.875%, 01/15/09 1,000 973 ----------------------------------------------------------------------------- TOTAL INVESTMENT BANKER/BROKER DEALER 6,956 ============================================================================= PETROLEUM & FUEL PRODUCTS [2.0%] Chevron 8.625%, 06/30/10 200 225 ConocoPhillips 6.375%, 03/30/09 305 314 Duke Capital 5.500%, 03/01/14 625 614 ----------------------------------------------------------------------------- TOTAL PETROLEUM & FUEL PRODUCTS 1,153 ============================================================================= REAL ESTATE INVESTMENT TRUSTS [1.9%] Kimco Realty, MTN 6.960%, 07/16/07 1,000 1,011 Kimco Realty, Ser B, MTN 7.860%, 11/01/07 67 68 ----------------------------------------------------------------------------- TOTAL REAL ESTATE INVESTMENT TRUSTS 1,079 ============================================================================= RETAIL [7.0%] Kohl's 6.300%, 03/01/11 1,000 1,037 Kroger 5.500%, 02/01/13 450 444 McDonald's, Ser E, MTN 4.240%, 12/13/06 995 992 Target 5.875%, 07/15/16 500 518 Wal-Mart Stores 4.375%, 07/12/07 1,000 994 ----------------------------------------------------------------------------- TOTAL RETAIL 3,985 ============================================================================= TELEPHONES & TELECOMMUNICATIONS [7.5%] BellSouth 4.200%, 09/15/09 1,000 970 Deutsche Telekom International Finance 5.250%, 07/22/13 475 461 New Cingular Wireless Services 8.125%, 05/01/12 400 450 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 29 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CORPORATE BOND FUND (CONCLUDED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Southwestern Bell 6.625%, 07/15/07 $ 750 $ 757 Sprint Capital 8.375%, 03/15/12 550 616 Verizon Communications 5.550%, 02/15/16 1,000 987 ----------------------------------------------------------------------------- TOTAL TELEPHONES & TELECOMMUNICATIONS 4,241 ============================================================================= WASTE DISPOSAL [1.1%] Waste Management 6.875%, 05/15/09 575 597 ============================================================================= TOTAL CORPORATE BONDS (Cost $48,413) 48,132 ============================================================================= U.S. TREASURY OBLIGATION [1.9%] U.S. Treasury Inflation Index Note 2.000%, 01/15/14 1,101 1,080 ----------------------------------------------------------------------------- TOTAL U.S. TREASURY OBLIGATION (Cost $1,141) 1,080 ============================================================================= MUNICIPAL BONDS [1.8%] CALIFORNIA [1.8%] California Statewide, Community Development Authority, Ser A-2, RB, XLCA 4.000%, 11/15/06 75 75 City of Industry, Sales Tax Project, RB, MBIA 5.000%, 01/01/12 955 946 ----------------------------------------------------------------------------- TOTAL CALIFORNIA 1,021 ============================================================================= TOTAL MUNICIPAL BONDS (Cost $1,057) 1,021 ============================================================================= MORTGAGE-BACKED SECURITY [0.7%] Residential Asset Mortgage Products, Ser 2003-RS5, Cl AI4 3.700%, 09/25/31 393 387 ----------------------------------------------------------------------------- TOTAL MORTGAGE-BACKED SECURITY (Cost $388) 387 ========================================================================= DESCRIPTION FACE AMOUNT (000)/SHARES VALUE (000) - -------------------------------------------------------------------------------- U.S. GOVERNMENT MORTGAGE-BACKED OBLIGATIONS [5.5%] FHLMC, Ser 2982, Cl NB 5.500%, 02/15/29 $ 340 $ 341 FHLMC, Ser R004, Cl Al 5.125%, 12/15/13 1,238 1,228 FNMA CMO, Ser 2002-56, Cl MC 5.500%, 09/25/17 1,316 1,319 FNMA REMIC, Ser 2006, Cl AB 6.000%, 06/25/16 217 218 ----------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT MORTGAGE-BACKED OBLIGATIONS (Cost $3,102) 3,106 ============================================================================= COMMERCIAL PAPER (A) [2.7%] ASSET BACKED SECURITIES [2.7%] Giro Balanced Funding 5.270%, 10/05/06 1,489 1,488 ============================================================================= TOTAL COMMERCIAL PAPER (Cost $1,488) 1,488 ============================================================================= CASH EQUIVALENT [3.2%] Fidelity Institutional Domestic Money Market Portfolio, Cl I, 5.22%* 1,838,200 1,838 ----------------------------------------------------------------------------- TOTAL CASH EQUIVALENT (Cost $1,838) 1,838 ========================================================================= TOTAL INVESTMENTS [100.8%] (Cost $57,427) 57,052 ========================================================================= OTHER ASSETS AND LIABILITIES [-0.8%] (430) ========================================================================= NET ASSETS -- 100.0% $ 56,622 ============================================================================= * RATE SHOWN IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. (A) THE RATE REPORTED IS THE EFFECTIVE YIELD AT TIME OF PURCHASE. CL -- CLASS CMO -- COLLATERALIZED MORTGAGE OBLIGATION FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION MBIA -- MUNICIPAL BOND INSURANCE ASSOCIATION MTN -- MEDIUM TERM NOTE REMIC -- REAL ESTATE MORTGAGE INVESTMENT CONDUIT RB -- REVENUE BOND SER -- SERIES XLCA -- XL CAPITAL ASSURANCE SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 30 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- GOVERNMENT BOND FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 50.8% U.S. Government Agency Obligations 36.0% U.S. Government Mortgage-Backed Obligations 13.1% U.S. Treasury Obligations 0.1% Short-Term Investments * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY OBLIGATIONS [50.4%] FHLB 6.200%, 03/22/21 $ 2,000 $ 1,995 5.020%, 11/07/08 1,000 999 4.375%, 09/17/10 2,000 1,960 FHLMC 5.125%, 10/15/08 30 30 FNMA 7.125%, 06/15/10 4,000 4,298 5.500%, 03/15/11 2,570 2,630 5.010%, 11/10/10 2,500 2,476 5.000%, 07/25/08 2,000 1,995 5.000%, 01/23/09 2,500 2,493 ----------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (Cost $18,989) 18,876 ========================================================================= U.S. GOVERNMENT MORTGAGE-BACKED OBLIGATIONS [35.7%] FHLMC REMIC, Ser R005, Cl AB 5.500%, 12/15/18 1,398 1,396 FHLMC REMIC, Ser R009, Cl AK 5.750%, 12/15/18 1,966 1,972 FHLMC, Ser R003, Cl AG 5.125%, 10/15/15 1,888 1,872 FHLMC, Ser R004, Cl Al 5.125%, 12/15/13 1,944 1,928 FHLMC, Ser R007, Cl AC 5.875%, 05/15/16 1,853 1,859 FNMA, Pool 766620 4.574%, 03/01/34 1,110 1,088 GNMA, Pool 81318 4.500%, 04/20/35 1,170 1,155 GNMA, Pool 81447 5.000%, 08/20/35 131 129 GNMA, Pool 81510 4.250%, 10/20/35 1,415 1,378 GNMA, Pool 864622 4.500%, 06/20/35 600 592 ----------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT MORTGAGE-BACKED OBLIGATIONS (Cost $13,414) 13,369 ========================================================================= DESCRIPTION FACE AMOUNT (000)/SHARES VALUE (000) - -------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS [13.0%] U.S. Treasury Notes 5.500%, 02/15/08 $ 1,125 $ 1,135 4.250%, 11/15/13 1,050 1,027 4.250%, 08/15/15 1,150 1,119 3.875%, 01/15/09 1,445 1,487 3.750%, 05/15/08 75 74 ----------------------------------------------------------------------------- TOTAL U.S. TREASURY OBLIGATIONS (Cost $4,916) 4,842 ============================================================================= CASH EQUIVALENT [0.1%] Fidelity Institutional Domestic Money Market Portfolio, Cl I, 5.22%* 49,932 50 ----------------------------------------------------------------------------- TOTAL CASH EQUIVALENT (Cost $50) 50 ========================================================================= TOTAL INVESTMENTS [99.2%] (Cost $37,369) 37,137 ========================================================================= OTHER ASSETS AND LIABILITIES [ 0.8%] 316 ========================================================================= NET ASSETS -- 100.0% $ 37,453 ============================================================================= * RATE SHOWN IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. CL -- CLASS FHLB -- FEDERAL HOME LOAN BANK FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION GNMA -- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION REMIC -- REAL ESTATE MORTGAGE INVESTMENT CONDUIT SER -- SERIES SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 31 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT BOND FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 26.6% Education 13.7% General Revenue 11.4% Public Facilities 10.5% General Obligation 9.2% Water 8.6% Industrial Development 6.8% Power 4.8% Transportation 4.6% Utilities 1.6% Healthcare 1.2% Short-Term Investments 1.0% Airport * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- MUNICIPAL BOND [97.9%] ALABAMA [1.0%] Jefferson County, Sewer Authority, Ser B-8, RB, FSA Callable 02/01/10 @ 100 5.250%, 02/01/14 $ 250 $ 262 ============================================================================= ARIZONA [2.0%] Arizona State, Transportation Board, GAN, Ser A, RB 5.000%, 07/01/13 500 540 ============================================================================= CALIFORNIA [78.9%] Anaheim, Public Financing Authority, Distribution System Project, Second Lien, RB, MBIA 5.000%, 10/01/08 250 257 Berkeley, Ser C, GO, MBIA Callable 11/10/06 @ 102 5.000%, 09/01/10 95 96 Beverly Hills, Unified School District Authority, Ser B, GO Pre-Refunded @ 101 (A) 4.700%, 06/01/08 50 51 Big Bear Lake, Water Authority, RB, MBIA 6.000%, 04/01/11 200 216 Burbank, Public Financing Authority, Golden State Redevelopment Project, Ser A, RB, AMBAC Callable 12/01/13 @ 100 5.250%, 12/01/18 175 190 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- California State, Department of Water Resource & Power, Ser B-5, RB Callable 10/10/06 @ 100 (C) 3.650%, 05/01/22 $ 400 $ 400 California State, Department of Water Resources, Ser A, RB, AMBAC Callable 05/01/12 @ 101 5.500%, 05/01/14 300 331 California State, Department of Water Resources, Ser W, RB, FSA 5.500%, 12/01/13 400 448 California State, Educational Facilities Authority, Pooled College & University Projects, Ser A, RB 4.300%, 04/01/09 100 101 California State, Educational Facilities Authority, University of San Francisco, RB, MBIA 6.000%, 10/01/08 300 315 California State, GO 4.750%, 06/01/07 100 101 California State, GO Callable 02/01/12 @ 100 5.000%, 02/01/18 175 184 California State, GO Callable 08/01/13 @ 100 5.250%, 02/01/21 250 269 California State, GO Callable 10/01/10 @ 100 5.250%, 10/01/18 50 52 California State, GO Pre-Refunded @ 100 (A) 5.250%, 09/01/10 200 213 California State, GO Pre-Refunded @ 100 (A) 5.250%, 10/01/10 20 21 California State, Infrastructure & Economic Authority, Bay Area Toll Bridges Project, Ser A, RB, FSA Pre-Refunded @ 100 (A) 5.250%, 07/01/13 125 138 California State, Infrastructure & Economic Authority, Energy Efficiency Master Trust, Ser A, RB 5.000%, 03/01/11 315 334 California State, Infrastructure & Economic Authority, RB, MBIA Pre-Refunded @ 101 (A) 5.500%, 06/01/10 350 378 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 32 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- California State, Public Works Board Lease, California State University, Ser C, RB 5.000%, 10/01/07 $ 100 $ 101 California State, Public Works Board Lease, Department of Corrections Project, Ser B, RB, MBIA Callable 09/01/08 @ 101 5.000%, 09/01/21 100 103 California State, Public Works Board Lease, Department of Corrections, Ser A, RB Callable 09/01/08 @ 101 5.250%, 09/01/15 250 259 California State, Public Works Board Lease, Department of Corrections-State Prisons Project, Ser A, RB, AMBAC 5.250%, 12/01/13 600 657 California State, Public Works Board Lease, Department of Corrections-Ten Administration, Ser A, RB, AMBAC Callable 03/01/12 @ 100 5.250%, 03/01/18 155 166 California State, Public Works Board Lease, Trustees California State University, Ser A, RB Callable 10/01/08 @ 101 5.250%, 10/01/11 100 104 California State, Public Works Board Lease, Various University Projects, RB, MBIA Callable 06/01/11 @ 100 5.500%, 06/01/14 250 277 California State, Ser A-3, GO (C) 3.650%, 05/01/33 200 200 California State, University of California, Ser K, RB, MBIA Callable 09/01/08 @ 101 5.000%, 09/01/17 150 155 California Statewide, Communities Development Authority, Ser B-2, RB, XLCA 4.000%, 11/15/06 400 400 Central, Unified School District Authority, Ser A, GO, FGIC 5.500%, 07/01/22 400 444 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Coachella Valley, Water District Authority, Flood Control Project, COP, AMBAC Callable 10/01/07 @ 102 5.000%, 10/01/11 $ 250 $ 258 Corona, Public Financing Authority, City Hall Project, Ser B, RB Callable 09/01/12 @ 100 5.250%, 09/01/16 350 381 Culver City, Redevelopment Finance Authority, TA, AMBAC Sink Date 11/01/09 @ 100 5.500%, 11/01/14 75 82 Desert Sands, Unified School District, COP, MBIA Callable 03/01/13 @ 100 5.250%, 03/01/15 405 442 Escondido, Union School District, Refunding & Financing Project, COP, MBIA 4.750%, 07/01/19 735 792 Evergreen School District, Ser C, GO, FGIC Pre-Refunded @ 101 (A) 5.250%, 09/01/08 200 209 Fruitvale, School District, GO, FSA Callable 08/01/09 @ 102 5.000%, 08/01/19 200 211 Golden State, Tobacco Settlement, Ser A, RB Callable 06/01/09 @ 100 5.000%, 06/01/19 250 256 Golden State, Tobacco Settlement, Ser B, RB Pre-Refunded @ 100 (A) 5.750%, 06/01/08 250 259 Irvine, Improvement Board, Act 1915 Project, District #93-14, SAB (B) 3.650%, 09/02/25 100 100 Los Angeles County, Public Works Finance Authority, Master Refunding Project, Ser A, RB, MBIA 5.000%, 12/01/12 275 297 Los Angeles County, Public Works Finance Authority, Regional Park & Open Project, Ser A, RB Pre-Refunded @ 101 (A) 5.500%, 10/01/07 325 335 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 33 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Los Angeles County, Public Works Finance Authority, Ser B, RB, MBIA Callable 11/01/06 @ 102 5.250%, 09/01/14 $ 200 $ 204 Los Angeles, Harbor Development Project, Ser C, RB Callable 11/01/06 @ 101 5.125%, 11/01/11 180 182 Los Angeles, Municipal Improvement Authority, Central Library Project, Ser A, RB, MBIA 5.250%, 06/01/13 230 253 Los Angeles, Property Tax Project, Ser A, GO, MBIA 4.000%, 09/01/09 250 254 Los Angeles, Wastewater Systems Authority, RB, FSA 4.500%, 06/01/09 250 257 Los Angeles, Water & Power Authority, Power Systems Project, Ser A, RB 5.000%, 07/01/08 500 513 Los Angeles, Water & Power Authority, Power Systems Project, Ser AA1, RB, MBIA Callable 07/01/11 @ 100 5.250%, 07/01/13 200 215 M-S-R Public Power, Ser G, RB, MBIA Callable 07/01/07 @ 101 5.250%, 07/01/11 100 102 Modesto, Irrigation District, Capital Improvements Project, Ser A, COP, AMBAC Callable 10/01/16 @ 100 5.000%, 10/01/19 330 359 Northern California, Transmission Resource Authority, Ore Transmission Project, Ser A, RB, MBIA 7.000%, 05/01/13 250 292 Oakland, Joint Powers Financing Authority, Oakland Convention Center Project, RB, AMBAC 5.500%, 10/01/11 300 327 Oakland, Redevelopment Agency, Central Distric Redevelopment Project, TA, AMBAC 6.000%, 02/01/07 300 302 5.500%, 02/01/14 475 512 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Oakland, State Building Authority, Elihu M Harris Project, Ser A, RB, AMBAC Pre-Refunded @ 101 (A) 5.500%, 04/01/08 $ 100 $ 104 Pasadena, Electric Improvements Authority, RB, FSA 4.500%, 06/01/07 160 161 Pinole, Redevelopment Agency Project, TA, FSA Callable 08/01/09 @ 101 5.250%, 08/01/14 100 105 Riverside, RB Callable 10/01/08 @ 101 5.375%, 10/01/12 90 94 Riverside, RB Pre-Refunded @ 101 (A) 5.375%, 10/01/08 10 10 Sacramento County, Sanitation District Funding Authority, RB, ETM Callable 11/10/06 @ 102 5.000%, 12/01/07 100 102 Sacramento, City Unified School District, Ser A, GO, FSA 4.250%, 07/01/09 75 77 San Bernardino, Community College District, Election 2002 Project, Ser B, GO, MBIA Pre-Refunded @ 100 (A) 5.250%, 08/01/14 750 834 San Diego County, Edgemoor & Regional Systems Projects, COP, AMBAC Callable 02/01/15 @ 100 5.000%, 02/01/18 500 538 San Diego County, North County Regional Center for Expansion, COP, AMBAC Pre-Refunded @ 102 (A) 5.250%, 11/15/06 100 102 San Diego, Unified School District, Election 1998 Project, Ser B-1, GO, MBIA 5.000%, 07/01/17 1,000 1,107 San Diego, Unified School District, Election 1998 Project, Ser E, GO, FSA Callable 07/01/13 @ 100 5.000%, 07/01/28 400 431 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 34 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- San Diego, University School District, Capital Appreciation- Election 1998 Project, Ser D, GO, FGIC Callable 07/01/12 @ 101 5.250%, 07/01/24 $ 135 $ 148 San Diego, University School District, Election 1998 Project, Ser E, GO, FSA Callable 07/01/13 @ 101 5.250%, 07/01/16 100 110 San Francisco (City & County), Airports Commission Authority, Second Ser-27B, RB, FGIC 5.250%, 05/01/12 250 268 San Francisco (City & County), Public Utility Authority, Ser A, RB, MBIA Callable 11/01/06 @ 101.5 5.000%, 11/01/17 160 163 San Jose, University School District, Ser A, GO, FSA Callable 08/01/11 @ 101 5.375%, 08/01/19 150 162 San Ysidro, School District, Election 1997 Project, Ser C, GO, MBIA 6.000%, 08/01/11 205 228 Sanger, Unified School District, Election 2006 Project, Ser A, GO, FSA Callable 08/01/16 @ 102 5.000%, 08/01/18 500 555 Sanger, Unified School District, GO, MBIA 5.350%, 08/01/15 250 272 Santa Monica, Public Safety Facilities Project, RB Callable 07/01/09 @ 101 5.250%, 07/01/14 100 105 Semitropic, Improvement Water Storage Authority, RB, FSA, ACA Insured Pre-Refunded @ 103 (A) 4.000%, 06/01/11 250 262 Solano County, COP, MBIA Callable 11/01/12 @ 100 5.250%, 11/01/14 100 109 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Southern California, Metropolitan Water District Authority, Ser A, RB 5.750%, 07/01/21 $ 280 $ 331 Southern California, Publiic Power Authority, Southern Transmission Project, Sub-Ser A, RB, FSA Callable 07/01/12 @ 100 5.250%, 07/01/16 200 217 Sweetwater, Union High School District, Ser A, RB, FSA 5.000%, 09/01/13 355 385 Wiseburn, School District, Ser A, GO, FGIC 4.200%, 08/01/07 125 126 ----------------------------------------------------------------------------- TOTAL CALIFORNIA 21,461 ============================================================================= FLORIDA [1.4%] Florida State, Correctional Private Commission Authority, COP, MBIA Callable 08/01/11 @ 101 5.375%, 08/01/14 350 379 ============================================================================= GEORGIA [0.8%] Georgia State, Metropolitan Atlanta Rapid Transportation Authority, Second Indenture Project, Ser A, RB, MBIA 6.250%, 07/01/07 200 204 ============================================================================= ILLINOIS [2.2%] Illinois State, Civic Center Authority, RB, FSA Callable 12/15/10 @ 100 5.500%, 12/15/14 200 214 Illinois State, Development Finance Authority, Revolving Fund-Master Trust, RB Callable 09/01/12 @ 100 5.500%, 09/01/13 250 274 Illinois State, Ser A, GO Callable 10/01/13 @ 100 5.000%, 10/01/16 100 108 ----------------------------------------------------------------------------- TOTAL ILLINOIS 596 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 35 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- MICHIGAN [0.9%] Michigan State, Building Authority, Facilities Project, Ser II, RB Pre-Refunded @ 101 (A) 5.000%, 10/15/07 $ 250 $ 256 ============================================================================= NEW JERSEY [1.4%] New Jersey State, Turnpike Authority, RB, MBIA, ETM 6.500%, 01/01/16 315 369 ============================================================================= NEW YORK [2.1%] New York State, Ser E, RB 6.000%, 04/01/14 500 574 ============================================================================= OREGON [1.4%] Lane County, School District, GO Pre-Refunded @ 100 (A) 5.625%, 06/15/10 345 370 ============================================================================= TEXAS [2.0%] San Angelo, Waterworks & Sewer System Authority, Refunding & Improvements Projects, RB, FSA Callable 04/01/11 @ 100 5.250%, 04/01/19 100 106 Travis County, Health Facilities Development Authority, Ascension Health Credit Project, Ser A, RB, MBIA Pre-Refunded @ 101 (A) 6.250%, 11/15/09 400 435 ----------------------------------------------------------------------------- TOTAL TEXAS 541 ============================================================================= UTAH [0.5%] Central, Water Conservancy District, Ser D, GO Pre-Refunded @ 100 (A) 4.600%, 04/01/09 140 144 ============================================================================= WASHINGTON [1.3%] Washington State, Ser 02-A, GO, FSA Callable 07/01/11 @ 100 5.000%, 07/01/19 345 362 ============================================================================= DESCRIPTION FACE AMOUNT (000)/SHARES VALUE (000) - -------------------------------------------------------------------------------- PUERTO RICO [2.0%] Puerto Rico, Electric Power Authority, Power Project, Ser CC, RB, MBIA Callable 07/01/07 @ 101.5 5.250%, 07/01/09 $ 100 $ 103 Puerto Rico, Municipal Finance Agency, Ser A, RB, FSA Callable 07/01/07 @ 101.5 5.250%, 07/01/10 130 133 Puerto Rico, Public Buildings Authority, Government Facilities Project, Ser J, RB, AMBAC Callable 07/01/12 @ 100 5.000%, 07/01/36 300 320 ----------------------------------------------------------------------------- TOTAL PUERTO RICO 556 ============================================================================= TOTAL MUNICIPAL BOND (Cost $26,537) 26,614 ======================================================================= CASH EQUIVALENT [1.1%] Federated California Municipal Money Market Fund, Cl I, 3.42%* 309,680 310 ----------------------------------------------------------------------------- TOTAL CASH EQUIVALENT (Cost $310) 310 ========================================================================= TOTAL INVESTMENTS [99.0%] (Cost $26,847) 26,924 ========================================================================= OTHER ASSETS AND LIABILITIES [1.0%] 284 ========================================================================= NET ASSETS -- 100.0% $ 27,208 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 36 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT BOND FUND (CONCLUDED) DESCRIPTION - -------------------------------------------------------------------------------- (A) PRE-REFUNDED SECURITY - THE MATURITY DATE SHOWN IS THE PRE-REFUNDED DATE. (B) SECURITIES ARE HELD IN CONJUNCTION WITH A LETTER OF CREDIT FROM A MAJOR BANK OR FINANCIAL INSTITUTION. (C) FLOATING RATE SECURITY - THE RATE REFLECTED ON THE SCHEDULE OF INVESTMENTS IS THE RATE IN EFFECT ON SEPTEMBER 30, 2006. * RATE SHOWN IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. AMBAC -- AMERICAN MUNICIPAL BOND ASSURANCE COMPANY COP -- CERTIFICATE OF PARTICIPATION ETM -- ESCROWED TO MATURITY FGIC -- FINANCIAL GUARANTY INSURANCE COMPANY FSA -- FINANCIAL SECURITY ASSISTANCE GAN -- GRANT ANTICIPATION NOTE GO -- GENERAL OBLIGATION MBIA -- MUNICIPAL BOND INSURANCE ASSOCIATION RB -- REVENUE BOND SAB -- SPECIAL ASSESSMENT BOND SER -- SERIES TA -- TAX ALLOCATION XLCA -- XL CAPITAL ASSURANCE SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 37 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 72.2% Industrial 7.5% Financial 6.2% Telephone 5.8% Utilities 4.9% Gas Transmission 1.8% Short-Term Investments 1.5% Transportation 0.1% Common Stock 0.0% Healthcare * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- CORPORATE BONDS [97.0%] ADVERTISING [0.3%] Advanstar Communications 10.750%, 08/15/10 $ 100 $ 108 ============================================================================= AEROSPACE & DEFENSE [1.3%] DRS Techologies 6.625%, 02/01/16 100 98 Esterline Technologies 7.750%, 06/15/13 100 101 L-3 Communications 5.875%, 01/15/15 200 190 Sequa, Ser B 8.875%, 04/01/08 150 156 ----------------------------------------------------------------------------- TOTAL AEROSPACE & DEFENSE 545 ============================================================================= AGRICULTURE [0.4%] American Rock Salt 9.500%, 03/15/14 150 155 ============================================================================= AIRLINES [0.5%] American Airlines, Ser 2001-2 7.800%, 04/01/08 200 200 ============================================================================= ALUMINUM [0.3%] Novelis (A) 8.250%, 02/15/15 150 142 ============================================================================= APPAREL/TEXTILES [0.4%] Levi Strauss 9.750%, 01/15/15 100 103 Phillips-Van Heusen 7.250%, 02/15/11 75 76 ----------------------------------------------------------------------------- TOTAL APPAREL/TEXTILES 179 ============================================================================= DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- AUTO RENT & LEASE [1.4%] Avis Budget Car Rental (A) 7.750%, 05/15/16 $ 100 $ 97 Hertz (A) 10.500%, 01/01/16 150 165 Rent-Way 11.875%, 06/15/10 100 116 United Rentals 6.500%, 02/15/12 90 87 Williams Scotsman 8.500%, 10/01/15 100 102 ----------------------------------------------------------------------------- TOTAL AUTO RENT & LEASE 567 ============================================================================= AUTOMOTIVE [1.6%] General Motors 7.125%, 07/15/13 725 637 ============================================================================= AUTOPARTS [1.2%] Accuride 8.500%, 02/01/15 150 140 Dura Operating, Ser D 9.000%, 05/01/09 75 3 Metaldyne 10.000%, 11/01/13 100 101 Tenneco Automotive 8.625%, 11/15/14 150 148 TRW Automotive 11.000%, 02/15/13 98 107 ----------------------------------------------------------------------------- TOTAL AUTOPARTS 499 ============================================================================= BROADCASTING & CABLE [6.8%] Albritton Communications 7.750%, 12/15/12 150 151 Atlantic Broadband Finance (A) 9.375%, 01/15/14 100 98 Cablevision Systems, Ser B 8.000%, 04/15/12 225 228 CCO Holdings 8.750%, 11/15/13 250 252 Charter Communications Holdings 10.250%, 09/15/10 400 408 Coleman Cable 9.875%, 10/01/12 100 100 CSC Holdings 7.625%, 07/15/18 100 102 Echostar DBS 6.625%, 10/01/14 200 190 Fisher Communication 8.625%, 09/15/14 150 156 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 38 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- General Cable 9.500%, 11/15/10 $ 100 $ 107 Gray Television 9.250%, 12/15/11 100 104 Insight Commununications (B) 12.250%, 02/15/11 100 106 Kabel Deutschland (A) 10.625%, 07/01/14 200 214 Mediacom Capital 7.875%, 02/15/11 150 148 Nexstar Finance Holdings (B) 10.050%, 04/01/13 200 167 Olympus Communications, Ser B (D) 10.625%, 11/15/06 100 140 Videotron Ltee 6.875%, 01/15/14 100 99 ----------------------------------------------------------------------------- TOTAL BROADCASTING & CABLE 2,770 ============================================================================= BUILDING & CONSTRUCTION [4.1%] Ainsworth Lumber 7.250%, 10/01/12 100 74 6.750%, 03/15/14 100 70 Beazer Homes USA 8.375%, 04/15/12 100 100 Brand Services 12.000%, 10/15/12 150 168 DR Horton 5.625%, 01/15/16 125 116 Goodman Global Holdings 7.875%, 12/15/12 75 71 Interline Brands 8.125%, 06/15/14 50 51 International Utility Structures (D) 10.750%, 02/01/08 100 1 KB Home 8.625%, 12/15/08 50 51 6.250%, 06/15/15 200 184 Nortek 8.500%, 09/01/14 200 189 Panolam Industries (A) 10.750%, 10/01/13 250 252 Ply Gem Industries 9.000%, 02/15/12 150 120 RMCC Acquisition (A) 9.500%, 11/01/12 150 155 Tech Olympic USA 7.500%, 01/15/15 100 77 ----------------------------------------------------------------------------- TOTAL BUILDING & CONSTRUCTION 1,679 ============================================================================= DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- BUSINESS SERVICES [0.7%] Corrections 7.500%, 05/01/11 $ 100 $ 102 FTI Consulting 7.625%, 06/15/13 50 51 Geo Group 8.250%, 07/15/13 150 150 ----------------------------------------------------------------------------- TOTAL BUSINESS SERVICES 303 ============================================================================= CHEMICALS [4.7%] Basell Af SCA (A) 8.375%, 08/15/15 250 248 BCP Crystal US Holdings 9.625%, 06/15/14 45 49 Crystal Holdings, Ser B (B) 9.037%, 10/01/14 73 59 Equistar Chemicals 10.625%, 05/01/11 150 161 Georgia Gulf (A) 9.500%, 10/15/14 150 149 Lyondell Chemical 8.250%, 09/15/16 60 61 8.000%, 09/15/14 60 61 Mosaic Global Holdings 10.875%, 08/01/13 100 111 Mosaic Global Holdings, Ser B 11.250%, 06/01/11 100 106 Nalco 7.750%, 11/15/11 150 153 Nova Chemicals 6.500%, 01/15/12 250 235 Polymer Holdings (B) 11.043%, 07/15/14 250 203 PolyOne 10.625%, 05/15/10 100 107 Rhodia 10.250%, 06/01/10 65 73 Rockwood Specialties Group 10.625%, 05/15/11 73 78 Terra Capital 11.500%, 06/01/10 65 71 ----------------------------------------------------------------------------- TOTAL CHEMICALS 1,925 ============================================================================= CIRCUIT BOARDS [0.1%] Viasystems 10.500%, 01/15/11 50 49 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 39 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- COAL MINING [0.4%] Alpha Natural Resources 10.000%, 06/01/12 $ 150 $ 161 ============================================================================= COMMERCIAL SERVICES [0.9%] Iron Mountain 8.750%, 07/15/18 150 156 8.625%, 04/01/13 100 102 The Brickman Group, Ser B 11.750%, 12/15/09 100 107 ----------------------------------------------------------------------------- TOTAL COMMERCIAL SERVICES 365 ============================================================================= COMPUTER SYSTEM DESIGN & SERVICES [0.9%] Activant Solution (A) 9.500%, 05/01/16 100 93 Xerox 7.625%, 06/15/13 250 262 ----------------------------------------------------------------------------- TOTAL COMPUTERS SYSTEM DESIGN & SERVICES 355 ============================================================================= CONSUMER PRODUCTS & SERVICES [4.4%] Ames True Temper (C) 9.507%, 01/15/12 100 101 Exopac Holding (A) 11.250%, 02/01/14 100 102 Gregg Appliances 9.000%, 02/01/13 150 137 Johnsondiversey Holdings (B) 12.305%, 05/15/13 200 173 Johnsondiversey, Ser B 9.625%, 05/15/12 150 151 Libbey Glass (A) (C) 12.436%, 06/01/11 100 104 Prestige Brands 9.250%, 04/15/12 90 90 Sealy Mattress 8.250%, 06/15/14 200 204 Southern States Cooperative (A) 10.500%, 11/01/10 200 209 Spectrum Brands 7.375%, 02/01/15 300 240 Steinway Musical (A) 7.000%, 03/01/14 100 98 Visant Holding (A) 8.750%, 12/01/13 100 101 WMG Holdings (B) 9.563%, 12/15/14 130 97 ----------------------------------------------------------------------------- TOTAL CONSUMER PRODUCTS & SERVICES 1,807 ============================================================================= DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- CONTAINERS & PACKAGING [2.0%] Crown Americas 7.750%, 11/15/15 $ 150 $ 152 Graham Packaging 9.875%, 10/15/14 100 98 Intertape Polymer US 8.500%, 08/01/14 50 47 Owens-Brockway Glass Container 6.750%, 12/01/14 100 95 Owens-Illinois 8.100%, 05/15/07 100 101 Plastipak Holdings (A) 8.500%, 12/15/15 100 101 Solo Cup 8.500%, 02/15/14 150 130 Stone Container 7.375%, 07/15/14 100 91 ----------------------------------------------------------------------------- TOTAL CONTAINERS & PACKAGING 815 ============================================================================= DIVERSIFIED OPERATIONS [0.9%] Jacuzzi Brands 9.625%, 07/01/10 150 159 Trinity Industries 6.500%, 03/15/14 200 195 ----------------------------------------------------------------------------- TOTAL DIVERSIFIED OPERATIONS 354 ============================================================================= EDUCATIONAL SERVICES [0.3%] Education Management (A) 10.250%, 06/01/16 60 61 8.750%, 06/01/14 60 61 ----------------------------------------------------------------------------- TOTAL EDUCATIONAL SERVICES 122 ============================================================================= ELECTRICAL PRODUCTS [0.5%] ESI Tractebel Acquisitions, Ser B 7.990%, 12/30/11 60 62 Kinetek, Ser D 10.750%, 11/15/06 150 149 ----------------------------------------------------------------------------- TOTAL ELECTRICAL PRODUCTS 211 ============================================================================= ELECTRIC UTILITIES [5.1%] AES (A) 9.000%, 05/15/15 300 323 7.750%, 03/01/14 100 104 Allegheny Energy Supply 7.800%, 03/15/11 200 213 Aquila 7.625%, 11/15/09 100 104 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 40 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Calpine Generating (D) 11.080%, 04/01/10 $ 200 $ 210 CMS Energy 7.500%, 01/15/09 100 103 6.875%, 12/15/15 150 152 Edison Mission Energy 7.730%, 06/15/09 200 206 Mirant North America 7.375%, 12/31/13 150 150 Reliant Resources 9.500%, 07/15/13 200 208 Sierra Pacific Resources 8.625%, 03/15/14 200 216 TECO Energy 7.200%, 05/01/11 100 104 ----------------------------------------------------------------------------- TOTAL ELECTRIC UTILITIES 2,093 ============================================================================= ENTERTAINMENT & GAMING [7.8%] AMC Entertainment 11.000%, 02/01/16 100 109 9.875%, 02/01/12 100 103 9.500%, 02/01/11 72 72 Aztar 9.000%, 08/15/11 100 104 Choctaw Resort Development Entity (A) 7.250%, 11/15/19 200 199 Chukchansi Economic Development Authority (A) 8.000%, 11/15/13 150 154 Cinemark USA 9.000%, 02/01/13 100 104 Circus & Eldorado Joint Venture/ Silver Legacy Capital 10.125%, 03/01/12 150 158 Herbst Gaming 8.125%, 06/01/12 150 153 Inn of the Mountain Gods 12.000%, 11/15/10 150 157 Isle of Capri Casinos 7.000%, 03/01/14 200 190 Jacobs Entertainment (A) 9.750%, 06/15/14 75 74 MGM Mirage 8.500%, 09/15/10 200 213 6.750%, 09/01/12 100 99 6.000%, 10/01/09 100 99 Mohegan Tribal Gaming Authority 7.125%, 08/15/14 150 149 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- MTR Gaming Group, Ser B 9.750%, 04/01/10 $ 200 $ 210 OED/Diamond Jo 8.750%, 04/15/12 100 100 Penn National Gaming 6.875%, 12/01/11 100 100 Speedway Motorsports 6.750%, 06/01/13 100 99 Station Casinos 6.875%, 03/01/16 100 94 Tunica-Biloxi Gaming Authority (A) 9.000%, 11/15/15 125 130 Waterford Gaming (A) 8.625%, 09/15/12 109 115 Wynn Las Vegas Capital 6.625%, 12/01/14 200 194 ----------------------------------------------------------------------------- TOTAL ENTERTAINMENT & GAMING 3,179 ============================================================================= FINANCIAL SERVICES [2.9%] Ford Motor Credit 7.375%, 10/28/09 200 194 7.375%, 02/01/11 350 336 GMAC 6.750%, 12/01/14 675 659 ----------------------------------------------------------------------------- TOTAL FINANCIAL SERVICES 1,189 ============================================================================= FOOD, BEVERAGE & TOBACCO [4.2%] Chiquita Brands International 7.500%, 11/01/14 100 87 Del Monte 8.625%, 12/15/12 50 52 Dominos 8.250%, 07/01/11 75 79 Friendly Ice Cream 8.375%, 06/15/12 200 181 General Nutrition Center 8.500%, 12/01/10 150 146 Land O' Lakes 8.750%, 11/15/11 6 6 Le-Natures (A) 10.000%, 06/15/13 150 155 Leiner Health Products 11.000%, 06/01/12 100 97 National Beef Packaging 10.500%, 08/01/11 100 104 National Wine & Spirits 10.125%, 01/15/09 100 101 Pinnacle Foods 8.250%, 12/01/13 150 150 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 41 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Smithfield Foods, Ser B 8.000%, 10/15/09 $ 350 $ 366 Swift 12.500%, 01/01/10 200 203 ----------------------------------------------------------------------------- TOTAL FOOD, BEVERAGE & TOBACCO 1,727 ============================================================================= FORESTRY [0.1%] Tembec Industries 7.750%, 03/15/12 100 51 ============================================================================= GAS/NATURAL GAS [3.9%] Colorado Interstate Gas 6.800%, 11/15/15 150 151 El Paso 7.000%, 05/15/11 275 277 El Paso Natural Gas 7.625%, 08/01/10 150 155 MarkWest Energy Partners (A) 8.500%, 07/15/16 150 151 Semco Energy 7.125%, 05/15/08 250 249 Targa Resources (A) 8.500%, 11/01/13 200 200 Williams 8.125%, 03/15/12 200 213 7.625%, 07/15/19 50 52 6.375%, 10/01/10 (A) 150 149 ----------------------------------------------------------------------------- TOTAL GAS/NATURAL GAS 1,597 ============================================================================= MACHINERY [1.5%] Case New Holland 9.250%, 08/01/11 100 106 7.125%, 03/01/14 100 100 Cummins 9.500%, 12/01/10 150 158 Terex 7.375%, 01/15/14 100 100 Trimas 9.875%, 06/15/12 150 139 ----------------------------------------------------------------------------- TOTAL MACHINERY 603 ============================================================================= MEDICAL [3.2%] Angiotech Pharmaceuticals (A) 7.750%, 04/01/14 100 95 Bio-Rad Laboratories 7.500%, 08/15/13 100 102 Biovail 7.875%, 04/01/10 100 100 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- CDRV Investors (B) 9.558%, 01/01/15 $ 200 $ 148 Extendicare Health 6.875%, 05/01/14 100 107 Genesis HealthCare 8.000%, 10/15/13 100 104 MQ Associates (B) 13.869%, 08/15/12 150 53 Mylan Laboratories 5.750%, 08/15/10 150 148 Omnicare 6.750%, 12/15/13 250 243 Tenet Healthcare 9.250%, 02/01/15 200 193 ----------------------------------------------------------------------------- TOTAL MEDICAL 1,293 ============================================================================= MEDICAL PRODUCTS & SERVICES [0.2%] Vanguard Health Holding 9.000%, 10/01/14 100 97 ============================================================================= MISCELLANEOUS BUSINESS SERVICES [2.5%] Affinion Group 11.500%, 10/15/15 150 154 Allied Security Escrow 11.375%, 07/15/11 150 150 Carriage Services 7.875%, 01/15/15 200 194 CCM Merger (A) 8.000%, 08/01/13 225 216 Compagnie Generale de Geophysique 7.500%, 05/15/15 50 50 Integrated Alarm Services Group (A) 12.000%, 11/15/11 100 99 Mobile Services Group 9.750%, 08/01/14 150 154 ----------------------------------------------------------------------------- TOTAL MISCELLANEOUS BUSINESS SERVICES 1,017 ============================================================================= MISCELLANEOUS MANUFACTURING [0.9%] Dresser-Rand Group 7.375%, 11/01/14 133 130 KI Holdings (B) 9.972%, 11/15/14 250 184 Maax Holdings (B) 26.373%, 12/15/12 200 74 ----------------------------------------------------------------------------- TOTAL MISCELLANEOUS MANUFACTURING 388 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 42 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- PAPER & RELATED PRODUCTS [3.4%] Abitibi-Consolidated 7.750%, 06/15/11 $ 100 $ 92 Appleton Papers, Ser B 9.750%, 06/15/14 100 99 Domtar 7.125%, 08/15/15 150 139 Georgia-Pacific 7.700%, 06/15/15 100 100 JSG Funding 9.625%, 10/01/12 100 105 Neenah Paper 7.375%, 11/15/14 150 141 Newark Group 9.750%, 03/15/14 200 194 Norampac 6.750%, 06/01/13 100 95 Norske Skog Canada 7.375%, 03/01/14 250 230 Smurfit Kappa Funding 7.750%, 04/01/15 150 142 Verso Paper Holdings (A) 9.125%, 08/01/14 65 65 ----------------------------------------------------------------------------- TOTAL PAPER & RELATED PRODUCTS 1,402 ============================================================================= PETROLEUM & FUEL PRODUCTS [7.2%] Atlas Pipeline Partners 8.125%, 12/15/15 200 204 Chesapeake Energy 6.250%, 01/15/18 100 93 Clayton William Energy 7.750%, 08/01/13 150 135 Comstock Resources 6.875%, 03/01/12 150 143 Dynegy Holdings 6.875%, 04/01/11 100 97 El Paso Production Holding 7.750%, 06/01/13 200 204 Forest Oil 8.000%, 06/15/08 150 154 8.000%, 12/15/11 100 104 Frontier Oil 6.625%, 10/01/11 150 150 Giant Industries 8.000%, 05/15/14 200 216 Pacific Energy 7.125%, 06/15/14 100 102 6.250%, 09/15/15 250 246 Parker Drilling 9.625%, 10/01/13 150 164 Plains Exploration & Production 8.750%, 07/01/12 150 159 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Pogo Producing 6.875%, 10/01/17 $ 300 $ 286 Pride International 7.375%, 07/15/14 100 103 Swift Energy 7.625%, 07/15/11 100 100 Whiting Petroleum 7.000%, 02/01/14 300 292 ----------------------------------------------------------------------------- TOTAL PETROLEUM & FUEL PRODUCTS 2,952 ============================================================================= PRINTING & PUBLISHING [3.3%] Dex Media (B) 8.738%, 11/15/13 200 168 Dex Media East 9.875%, 11/15/09 100 105 Dex Media West, Ser B 8.500%, 08/15/10 100 103 Emmis Operating 6.875%, 05/15/12 150 150 Haights Cross Operating 11.750%, 08/15/11 200 205 JII Holdings 13.000%, 04/01/07 70 60 Primedia 8.000%, 05/15/13 100 91 RH Donnelley 6.875%, 01/15/13 200 182 RH Donnelley, Ser A-2 6.875%, 01/15/13 50 46 Sheridan Group 10.250%, 08/15/11 150 152 Warner Music Group 7.375%, 04/15/14 100 98 ----------------------------------------------------------------------------- TOTAL PRINTING & PUBLISHING 1,360 ============================================================================= REAL ESTATE INVESTMENT TRUST [0.4%] Host Marriott, Ser O 6.375%, 03/15/15 150 145 ============================================================================= RETAIL [2.7%] Asbury Automotive Group 9.000%, 06/15/12 150 154 Denny's Holdings 10.000%, 10/01/12 150 155 Group 1 Automotive 8.250%, 08/15/13 100 102 Jean County Group 8.500%, 08/01/14 150 144 Landry's Restaurants, Ser B 7.500%, 12/15/14 100 96 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 43 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Leslie's Poolmart 7.750%, 02/01/13 $ 100 $ 99 NPC International (A) 9.500%, 05/01/14 100 99 Rite Aid 8.125%, 05/01/10 100 100 True Temper Sports 8.375%, 09/15/11 150 134 ----------------------------------------------------------------------------- TOTAL RETAIL 1,083 ============================================================================= RUBBER & PLASTIC [0.4%] Goodyear Tire & Rubber 9.000%, 07/01/15 150 152 ============================================================================= SEMI-CONDUCTORS [1.2%] Amkor Technology 9.250%, 06/01/16 100 94 Flextronics International 6.250%, 11/15/14 100 97 Freescale Semiconductors 7.125%, 07/15/14 200 214 Sensata Technologies (A) 8.000%, 05/01/14 100 97 ----------------------------------------------------------------------------- TOTAL SEMI-CONDUCTORS 502 ============================================================================= STEEL & STEEL WORKS [1.4%] AK Steel 7.875%, 02/15/09 115 114 7.750%, 06/15/12 200 195 Gerdau Ameristeel 10.375%, 07/15/11 100 108 International Steel Group 6.500%, 04/15/14 150 148 ----------------------------------------------------------------------------- TOTAL STEEL & STEEL WORKS 565 ============================================================================= TELEPHONES & TELECOMMUNICATIONS [8.5%] American Cellular, Ser B 10.000%, 08/01/11 150 157 American Tower 7.125%, 10/15/12 150 154 Centennial Communications 10.125%, 06/15/13 100 106 8.125%, 02/01/14 50 49 Cincinnati Bell 8.375%, 01/15/14 185 187 Dobson Cellular Systems 9.875%, 11/01/12 230 247 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Dobson Communications (C) 9.757%, 10/15/12 $ 250 $ 255 Insight Midwest 9.750%, 10/01/09 200 204 IPCS 11.500%, 05/01/12 150 168 Nextel Partners 8.125%, 07/01/11 150 158 Nordic Telephone (A) 8.875%, 05/01/16 50 53 NTL Cable 9.125%, 08/15/16 150 155 PanAmSat 9.000%, 08/15/14 96 99 Qwest 7.625%, 06/15/15 564 585 5.625%, 11/15/08 100 99 Rogers Wireless 9.625%, 05/01/11 100 113 7.250%, 12/15/12 50 52 Rural Cellular 9.750%, 01/15/10 200 201 Telenet Group Holding (A) (B) 9.651%, 06/15/14 22 19 Time Warner Telecom Holdings 9.250%, 02/15/14 100 105 Triton PCS 8.500%, 06/01/13 150 139 UbiquiTel Operating 9.875%, 03/01/11 150 163 ----------------------------------------------------------------------------- TOTAL TELEPHONES & TELECOMMUNICATIONS 3,468 ============================================================================= TRANSPORTATION SERVICES [1.7%] American Commercial Lines 9.500%, 02/15/15 97 105 Kansas City Southern 9.500%, 10/01/08 100 104 NCL 10.625%, 07/15/14 100 97 Ship Finance 8.500%, 12/15/13 200 193 Stena 7.000%, 12/01/16 200 189 ----------------------------------------------------------------------------- TOTAL TRANSPORTATION SERVICES 688 ============================================================================= WASTE DISPOSAL [0.2%] Allied Waste North America, Ser B 7.125%, 05/15/16 100 99 ============================================================================= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 44 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- HIGH YIELD BOND FUND (CONCLUDED) DESCRIPTION FACE AMOUNT (000)/SHARES VALUE (000) - -------------------------------------------------------------------------------- WHOLESALE [0.2%] Collins & Aikman Floor Cover, Ser B 9.750%, 02/15/10 $ 100 $ 100 ============================================================================= TOTAL CORPORATE BONDS (Cost $39,734) 39,698 ========================================================================= COMMON STOCK [0.2%] COMMERCIAL SERVICES [0.0%] Magellan Health Services* 69 3 ============================================================================= RETAIL [0.2%] Crunch Equity Holding* 56 57 ============================================================================= TOTAL COMMON STOCK (Cost $61) 60 ========================================================================= CASH EQUIVALENTS [1.8%] Evergreen Select Money Market, Institutional Class, 5.20%** 373,441 373 Fidelity Institutional Domestic Money Market Portfolio, Cl I, 5.22%** 373,441 373 ----------------------------------------------------------------------------- TOTAL CASH EQUIVALENTS (Cost $746) 746 ========================================================================= WARRANTS [0.0%] Dayton Superior, Expires 06/15/09* (A) 100 -- Diva Systems, Expires 03/01/08* (A) 600 -- Pliant, Expires 06/01/10* (A) 100 -- ----------------------------------------------------------------------------- TOTAL WARRANTS (Cost $0) -- ========================================================================= TOTAL INVESTMENTS [99.0%] (Cost $40,541) 40,504 ========================================================================= OTHER ASSETS AND LIABILITIES [1.0%] 428 ========================================================================= NET ASSETS -- 100.0% $ 40,932 ============================================================================= DESCRIPTION - -------------------------------------------------------------------------------- * NON-INCOME PRODUCING SECURITY ** RATE SHOWN IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. (A) SECURITY SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, EXEMPT FROM REGISTRATION UNDER SECTION 144A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER "ACCREDITED INVESTORS." THE TOTAL VALUE OF THESE SECURITIES AS OF SEPTEMBER 30, 2006 WAS $4,568 (000) AND REPRESENTS 11.2% OF NET ASSETS. (B) STEP BOND -- THE RATE REFLECTED ON THE SCHEDULE OF INVESTMENTS IS THE RATE IN EFFECT ON SEPTEMBER 30, 2006. THE COUPON ON A STEP BOND CHANGES ON A SPECIFIC DATE. (C) FLOATING RATE SECURITY -- THE RATE REFLECTED ON THE SCHEDULE OF INVESTMENTS IS THE RATE IN EFFECT ON SEPTEMBER 30, 2006. (D) IN DEFAULT ON INTEREST PAYMENTS CL -- CLASS SER -- SERIES AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 45 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- PRIME MONEY MARKET FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 44.7% Commercial Paper 39.4% Repurchase Agreements 5.5% Certificate of Deposit 5.5% U.S. Government Agency Obligations 3.7% Corporate Bond 1.2% Mortgage-Backed 0.0% Cash Equivalent * Percentages are based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- COMMERCIAL PAPER (A) [45.0%] ASSET BACKED SECURITIES [15.5%] Amsterdam Funding 5.260%, 10/05/06 $ 25,000 $ 24,986 Barton Capital 5.260%, 11/03/06 25,000 24,880 Duke Funding High Grade 5.285%, 10/23/06 25,000 24,919 Kitty Hawk Funding 5.255%, 10/20/06 25,000 24,931 Laguna (C) 5.300%, 12/18/06 25,000 24,713 Premier Asset 5.260%, 10/20/06 10,000 9,972 Ranger Funding 5.260%, 10/05/06 25,000 24,985 Windmill Funding 5.260%, 10/05/06 25,000 24,985 Yorktown Capital (C) 5.260%, 10/30/06 25,000 24,894 -------------------------------------------------------------------------- TOTAL ASSET BACKED SECURITIES 209,265 ========================================================================== BANKS [7.4%] BNP Paribas Finance 5.245%, 10/11/06 25,000 24,964 Dexia Delaware 5.225%, 10/06/06 25,000 24,982 Lloyds TSB Bank 5.250%, 10/02/06 25,000 24,996 Societe Generale 5.250%, 10/04/06 25,000 24,989 -------------------------------------------------------------------------- TOTAL BANKS 99,931 ========================================================================== FINANCE AUTO LOANS [5.5%] American Honda Finance 5.220%, 10/11/06 25,000 24,964 5.450%, 01/26/07 (C) 25,000 25,000 Toyota Motor Credit 5.240%, 10/31/06 25,000 24,891 -------------------------------------------------------------------------- TOTAL FINANCE AUTO LOANS 74,855 ========================================================================== DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- FINANCIAL SERVICES [3.7%] Citigroup Funding 5.240%, 10/06/06 $ 25,000 $ 24,982 General Electric Capital 5.240%, 10/17/06 25,000 24,942 -------------------------------------------------------------------------- TOTAL FINANCIAL SERVICES 49,924 ========================================================================== INSURANCE [3.7%] Prudential Funding 5.230%, 10/02/06 25,000 24,996 5.220%, 10/12/06 25,000 24,960 -------------------------------------------------------------------------- TOTAL INSURANCE 49,956 ========================================================================== PERSONAL CREDIT INSTITUTIONS [1.8%] ING Funding 5.230%, 10/26/06 25,000 24,909 ========================================================================== RETAIL [1.9%] Wal-Mart Stores 5.200%, 10/04/06 25,000 24,989 ========================================================================== SECURITY BROKERS & DEALERS [5.5%] Bearn Stearns 5.250%, 10/23/06 25,000 24,920 Merrill Lynch 5.230%, 10/04/06 25,000 24,989 Morgan Stanley 5.260%, 10/05/06 25,000 24,985 -------------------------------------------------------------------------- TOTAL SECURITY BROKERS & DEALERS 74,894 ========================================================================== TOTAL COMMERCIAL PAPER (Cost $608,723) 608,723 ===================================================================== CERTIFICATES OF DEPOSIT [5.5%] Barclays Bank 5.450%, 10/25/06 25,000 25,000 Deutsche Bank New York 5.310%, 12/07/06 25,000 25,000 First Tennessee Bank 5.440%, 10/23/06 25,000 25,000 -------------------------------------------------------------------------- TOTAL CERTIFICATES OF DEPOSIT (Cost $75,000) 75,000 ===================================================================== SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 46 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- PRIME MONEY MARKET FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000)/SHARES VALUE (000) - -------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY OBLIGATIONS [5.5%] FHLB 4.550%, 12/29/06 $ 5,000 $ 5,000 4.600%, 01/08/07 5,000 5,000 4.580%, 02/07/07 5,000 5,000 5.490%, 02/22/07 5,000 5,000 5.200%, 02/22/07 5,000 5,000 5.080%, 02/22/07 10,000 9,979 4.870%, 03/12/07 5,000 5,000 4.250%, 04/16/07 5,000 4,977 5.500%, 07/27/07 (B) 5,000 5,000 5.550%, 08/08/07 5,000 5,000 5.250%, 10/26/07 5,000 5,000 FNMA 4.750%, 01/02/07 5,000 4,991 4.000%, 02/28/07 10,000 9,947 -------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (Cost $74,894) 74,894 ===================================================================== CORPORATE BONDS [3.7%] BANKS [1.8%] Bank of America 5.310%, 11/07/06 25,000 25,000 ========================================================================== FINANCIAL SERVICES [1.9%] SLM, Ser A, MTN 5.625%, 04/10/07 25,000 25,022 ========================================================================== TOTAL CORPORATE BONDS (Cost $50,022) 50,022 ===================================================================== MORTGAGE-BACKED SECURITY [1.2%] Capital Auto Receivable Asset Trust, Ser 06, Cl SN-1, 5.440%, 09/20/07 16,194 16,194 -------------------------------------------------------------------------- TOTAL MORTGAGE-BACKED SECURITY (Cost $16,194) 16,194 ===================================================================== CASH EQUIVALENT [0.0%] Fidelity Institutional Domestic Money Market Portfolio, Cl I, 5.22%* 202,758 203 -------------------------------------------------------------------------- TOTAL CASH EQUIVALENT (Cost $203) 203 ===================================================================== DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS (D) [39.6%] Banc of America 5.330%, dated 09/29/06, repurchased on 10/02/06, repurchase price $125,055,521 (collateralized by a U.S. Goverment obligation; par value $155,544,026, 5.000%, 03/01/35; with total market value $127,500,000) $ 125,000 $ 125,000 Barclay Bank 5.350%, dated 09/29/06, repurchased on 10/02/06, repurchase price, $135,260,277 (collateralized by U.S. Government obligations, ranging in par value $3,026,075-$150,000,000, 4.929%-6.444%, 02/01/23- 09/01/36; with total market value $137,904,001) 135,200 135,200 Bear Stearns 5.370%, dated 09/29/06, repurchased on 10/02/06, repurchase price $125,055,937 (collateralized by various U.S. Government obligations, ranging in par value $4,825,844-$12,325,000, 5.000%-7.000%, 12/01/18- 10/01/36; with total market value $127,502,530) 125,000 125,000 Lehman Brothers 5.380%, dated 09/29/06, repurchased on 10/02/06, repurchase price $25,011,208 (collateralized by a U.S. Government obligation, par value $25,235,000, 6.000%, 09/01/36; with total market value $25,502,325) 25,000 25,000 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 47 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- PRIME MONEY MARKET FUND (CONCLUDED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Nomura 5.400%, dated 09/29/06, repurchased on 10/02/06, repurchase price $125,056,250 (collateralized by various U.S. Government obligations, ranging in par value $1,896,666-$150,000,000, 3.969%-6.971%, 03/01/18- 09/01/36; with total market value $127,500,000) $ 125,000 $ 125,000 -------------------------------------------------------------------------- TOTAL REPURCHASE AGREEMENTS (Cost $535,200) 535,200 ===================================================================== TOTAL INVESTMENTS [100.5%] (Cost $1,360,236) 1,360,236 ===================================================================== OTHER ASSETS AND LIABILITIES [-0.5%] (7,346) ===================================================================== NET ASSETS -- 100.0% $ 1,352,890 ================================================================================ (A) THE RATE REPORTED IS THE EFFECTIVE YIELD AT TIME OF PURCHASE. (B) STEP BOND -- THE RATE REFLECTED ON THE SCHEDULE OF INVESTMENTS IS THE RATE IN EFFECT ON SEPTEMBER 30, 2006. THE COUPON ON A STEP BOND CHANGES ON A SPECIFIC DATE. (C) SECURITY EXEMPT FROM REGISTRATION UNDER RULE 144A OF THE SECURITIES ACT OF 1933. THESE SECURITIES MAY BE RESOLD IN TRANSACTIONS EXEMPT FROM REGISTRATION NORMALLY TO QUALIFIED INSTITUTIONS. ON SEPTEMBER 30, 2006, THE VALUE OF THESE SECURITIES AMOUNTED TO $74,607, REPRESENTING 5.5% OF THE NET ASSETS OF THE FUND. (D) TRI-PARTY REPURCHASE AGREEMENT * RATE REPORTED IS THE 7-DAY EFFECTIVE YIELD AS OF SEPTEMBER 30, 2006. CL -- CLASS FHLB -- FEDERAL HOME LOAN BANK FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION MTN -- MEDIUM TERM NOTE SER -- SERIES SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 48 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- GOVERNMENT MONEY MARKET FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTING (UNAUDITED)*: 63.1% U.S. Government Agency Obligations 36.9% Repurchase Agreements * Percentages are based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY OBLIGATIONS [64.9%] FFCB (A) 5.100%, 10/02/06 $ 50,000 $ 49,993 5.100%, 10/03/06 155,000 154,956 5.070%, 10/04/06 50,000 49,979 5.120%, 10/06/06 32,660 32,637 FHLB 5.130%, 10/02/06 (A) 81,250 81,238 5.090%, 10/03/06 (A) 300,000 299,915 5.080%, 10/04/06 (A) 100,000 99,958 5.000%, 10/13/06 25,000 25,000 5.170%, 10/18/06 (A) 100,000 99,757 5.130%, 10/20/06 (A) 50,000 49,865 4.550%, 12/29/06 25,000 25,000 4.600%, 01/08/07 25,000 25,000 5.250%, 01/16/07 25,000 25,000 4.580%, 02/07/07 25,000 25,000 5.490%, 02/22/07 25,000 25,000 5.200%, 02/22/07 25,000 25,000 5.080%, 02/22/07 25,000 24,947 4.870%, 03/12/07 25,000 25,000 4.250%, 04/16/07 20,000 19,909 4.625%, 05/18/07 36,010 35,883 5.500%, 07/27/07 (B) 25,000 25,000 5.550%, 08/08/07 25,000 25,000 5.375%, 08/28/07 10,000 10,000 5.320%, 09/14/07 25,000 25,000 5.500%, 10/02/07 25,000 25,000 5.260%, 10/23/07 25,000 25,000 5.250%, 10/26/07 37,060 37,060 FNMA 4.750%, 01/02/07 42,997 42,920 2.500%, 01/30/07 5,300 5,251 4.000%, 02/28/07 25,000 24,866 -------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (Cost $1,444,134) 1,444,134 ===================================================================== DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS (C) [37.9%] Bank of America 5.330%, dated 09/29/06, repurchased on 10/02/06, repurchase price $150,066,625 (collaterized by U.S. Government obligations, ranging in par value $32,250,307-$153,855,805, 5.000%, 03/01/35-07/01/35; with total market value $153,000,000) $ 150,000 $ 150,000 Barclay Bank 5.350%, dated 09/29/06, repurchased on 10/02/06, repurchase price $193,286,135 (collateralized by U.S. Government obligations, ranging in par value $40,826,933-$61,183, 315, 5.000%-6.592%, 07/01/20- 06/01/36; with total market value $197,064,001) 193,200 193,200 Bear Stearns Inc. & Co. 5.370%, dated 09/29/06, repurchased on 10/02/06, repurchase price $175,078,312 (collateralized by U.S. Treasury obligations, ranging in par value $1,465,000-$11,897,393, 4.500%-7.500%, 04/01/13- 09/01/36, with total market value $178,502,511) 175,000 175,000 Deutsche Bank 5.330%, dated 09/29/06, repurchased on 10/02/06, repurchase price $100,044,417 (collateralized by U.S. Government obligations, ranging in par value $20,764,040-$43,000,000, 5.000%-6.500%, 08/25/15- 08/25/32; with total market value $102,000,001) 100,000 100,000 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 49 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- GOVERNMENT MONEY MARKET FUND (CONCLUDED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Lehman Brothers 5.380%, dated 09/29/06, repurchased on 10/02/06, repurchase price $25,011,208 (collateralized by U.S. Government obligation, par value $25,235,000, 6.000%, 09/01/36; with total market value $25,502,325) $ 25,000 $ 25,000 Nomura 5.400%, dated 09/29/06, repurchased on 10/02/06, repurchase price $150,067,500 (collaterized by U.S. Government obligations, ranging in par value $455,000-$100,000,000, 4.002%-7.661%, 06/01/16- 05/01/36; with total market value $153,000,001) 150,000 150,000 UBS Warburg 5.300%, dated 09/29/06, repurchased on 10/02/06, repurchase price $50,022,083 (collateralized by U.S. Government obligations, ranging in par value $7,490,000-$33,010,867, 5.500%-6.500%, 11/01/34- 08/01/36; with total market value $51,002,935) 50,000 50,000 -------------------------------------------------------------------------- TOTAL REPURCHASE AGREEMENTS (Cost $843,200) 843,200 ===================================================================== TOTAL INVESTMENTS [102.8%] (Cost $2,287,334) 2,287,334 ===================================================================== OTHER ASSETS AND LIABILITIES [-2.8%] (61,867) ===================================================================== NET ASSETS -- 100.0% $ 2,225,467 ========================================================================== DESCRIPTION - -------------------------------------------------------------------------------- (A) THE RATE REPORTED IS THE EFFECTIVE YIELD AT TIME OF PURCHASE. (B) STEP BOND -- THE RATE REFLECTED ON THE SCHEDULE OF INVESTMENTS IS THE RATE IN EFFECT ON SEPTEMBER 30, 2006. THE COUPON ON A STEP BOND CHANGES ON A SPECIFIC DATE. (C) TRI-PARTY REPURCHASE AGREEMENT FFCB -- FEDERAL FARM CREDIT BANK FHLB -- FEDERAL HOME LOAN BANK FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 50 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT MONEY MARKET FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] SECTOR WEIGHTINGS (UNAUDITED)*: 13.9% General Revenue 12.9% General Obligation 11.3% Water 10.6% Housing 10.2% Power 8.9% Industrial Development 7.4% Utilities 7.1% Education 7.0% Transportation 4.7% Public Facilities 4.4% Healthcare 1.1% Commercial Paper 0.5% Equipment * Percentages based on total investments. - -------------------------------------------------------------------------------- DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- MUNICIPAL BOND [97.5%] CALIFORNIA [96.4%] ABAG, Finance Authority for Non-Profit Corporations, Hamlin School Project, Ser A, GO (A) (B) (C) 3.610%, 08/01/32 $ 1,500 $ 1,500 ABAG, Finance Authority for Non-Profit Corporations, Public Policy Institute, Ser A, RB (A) (B) (C) 3.610%, 11/01/31 2,955 2,955 ABAG, Finance Authority for Non-Profit Corporations, School of the Sacred Heart, Ser B, RB (A) (B) (C) 3.750%, 06/01/30 8,100 8,100 ABAG, Finance Authority for Non-Profit Corporations, Ser C, COP (A) (B) (C) 3.700%, 10/01/27 9,710 9,710 ABAG, Finance Authority for Non-Profit Corporations, Ser D, COP (A) (B) (C) 3.700%, 10/01/27 2,500 2,500 ABAG, Financial Authority for Non-Profit Corporations, Jewish Community Center Project, RB (A) (B) (C) 3.790%, 11/15/31 13,270 13,270 Anaheim, Multi-Family Housing Authority, Heritage Village Apartments Project, Ser A, RB (A) (B) (D) 3.610%, 07/15/33 4,685 4,685 Berkeley, Unified School District, TRAN 4.500%, 11/01/06 6,000 6,008 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Berkeley, YMCA Project, RB (A) (B) (C) 3.610%, 06/01/23 $ 1,850 $ 1,850 Califonia State, Community College Financing Authority, Ser A, TRAN, FSA 4.500%, 06/29/07 4,500 4,528 California State, Bay Area Toll Authority, San Francisco Bay Area Project, Ser A, RB, AMBAC (A) (B) 3.580%, 04/01/39 12,800 12,800 California State, Daily Kindergarten University, Ser A-5, GO (A) (B) (C) 3.600%, 05/01/34 8,000 8,000 California State, Daily Kindergarten University, Ser B-1, GO (A) (B) (C) 3.650%, 05/01/34 3,400 3,400 California State, Department of Water Resource & Power, Ser A, RB, MBIA (A) (B) 5.250%, 05/01/07 2,590 2,614 California State, Department of Water Resource & Power, Ser B-1, RB (A) (B) (C) 3.800%, 05/01/22 6,000 6,000 California State, Department of Water Resource & Power, Ser B-2, RB (A) (B) (C) 3.660%, 05/01/22 5,870 5,870 California State, Department of Water Resource & Power, Ser C-15, RB (A) (B) (C) 3.650%, 05/01/22 5,000 5,000 California State, Department of Water Resource & Power, Sub-Ser F-2, RB (A) (B) (C) 3.700%, 05/01/20 2,000 2,000 California State, Department of Water Resource & Power, Sub-Ser G-3, RB, FSA (A) (B) 3.590%, 05/01/16 1,050 1,050 California State, Department of Water Resource & Power, Sub-Ser G-4, RB, FSA (A) (B) 3.600%, 05/01/16 10,000 10,000 California State, Department of Water Resourse & Power, Ser B-6, RB (A) (B) (C) 3.650%, 05/01/22 1,200 1,200 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 51 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT MONEY MARKET FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- California State, Economic Development Financing Authority, KQED Project, RB (A) (B) (C) 3.570%, 04/01/20 $ 1,300 $ 1,300 California State, Economic Recovery Authority, Ser C-1, RB (A) (B) 3.650%, 07/01/23 3,250 3,250 California State, Economic Recovery Authority, Ser C-10, RB (A) (B) (C) 3.600%, 07/01/23 7,810 7,810 California State, Economic Recovery Authority, Ser C-12, RB (A) (B) 3.580%, 07/01/23 1,100 1,100 California State, Economic Recovery Authority, Ser C-13, RB, XLCA (A) (B) 3.680%, 07/01/23 5,000 5,000 California State, Economic Recovery Authority, Ser C-3, RB (A) (B) 3.650%, 07/01/23 2,485 2,485 California State, Economic Recovery Authority, Ser C-7, RB (A) (B) (C) 3.600%, 07/01/23 5,350 5,350 California State, Economic Recovery Authority, Ser C-8, RB (A) (B) (C) 3.650%, 07/01/23 3,000 3,000 California State, Educational Facilities Authority, Chapman University Project, RB (A) (B) (C) 3.570%, 12/01/30 1,000 1,000 California State, Educational Facilities Authority, University San Francisco, RB (A) (B) (C) 3.500%, 05/01/30 5,200 5,200 California State, Health Facilities Finance Authority, Adventist Health Systems Project, Ser B, RB (A) (B) (C) 3.800%, 09/01/25 4,400 4,400 California State, Health Facilities Finance Authority, Adventist Hospital Project, Ser B, RB, MBIA (A) (B) 3.790%, 09/01/28 1,200 1,200 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- California State, Infrastructure & Economic Authority, Asian Art Museum Foundation Project, RB, MBIA (A) (B) 3.790%, 06/01/34 $ 14,000 $ 14,000 California State, Infrastructure & Economic Authority, Colburn School Project, Ser B, RB (A) (B) (C) 3.600%, 08/01/37 3,655 3,655 California State, Infrastructure & Economic Authority, J Paul Getty Trust Project, Ser D, RB (A) 3.250%, 04/01/33 10,000 10,000 California State, Ser A-3, GO 3.650%, 05/01/33 14,000 14,000 California State, Ser B, Sub-Ser B-1, GO (A) (B) (C) 3.590%, 05/01/40 15,000 15,000 California State, Ser B, Sub-Ser B-6, GO (A) (B) (C) 3.650%, 05/01/40 8,700 8,700 California State, Ser B-1, GO (A) (B) (C) 3.580%, 05/01/33 7,000 7,000 California State, Weekly Kindgarten University, Ser B-5, GO (A) (B) (C) 3.590%, 05/01/34 11,525 11,525 California Statewide, Communities Development Authority, Childrens Hospital Project, Ser A, RB, AMBAC (A) (B) 3.580%, 08/15/32 1,300 1,300 California Statewide, Communities Development Authority, Childrens Hospital Project, Ser B, RB, AMBAC (A) (B) 3.580%, 08/15/32 1,800 1,800 California Statewide, Communities Development Authority, North Peninsula Jewish Project, RB (A) (B) (C) 3.790%, 07/01/34 6,300 6,300 California Statewide, Communities Development Authority, Monterey County Project, Ser A-3, TRAN 4.500%, 06/29/07 5,000 5,033 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 52 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT MONEY MARKET FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Corona, Multi-Family Housing Authority, Country Hills Project, Ser A, RB (A) (B) (D) 3.600%, 02/01/25 $ 6,475 $ 6,475 East Bay, Municipal Utilities District Authority, Ser A, RB, FSA (A) (B) 3.570%, 06/01/25 5,220 5,220 East Bay, Municipal Utilities District Authority, Sub-Ser 1, RB, XLCA (A) (B) 3.580%, 06/01/38 6,700 6,700 East Bay, Municipal Utilities District Authority, Sub-Ser B-1, RB, XLCA (A) (B) 3.580%, 06/01/38 14,965 14,965 East Bay, Municipal Utilities District Authority, Sub-Ser B-3, RB, XLCA (A) (B) 3.600%, 06/01/38 4,985 4,985 Eastern California, Municipal Water District, COP, Ser B, TA, FGIC (A) (B) 3.600%, 07/01/20 5,000 5,000 Fremont, Family Center Finance Project, COP (A) (B) (C) 3.600%, 08/01/28 4,300 4,300 Fremont, Office Building Improvement & Fire Equipment Project, COP (A) (B) (C) 3.600%, 08/01/30 3,345 3,345 Fresno, Multi-Family Housing Authority, Stonepine Apartment Project, Ser A, RB (A) (B) (D) 3.600%, 02/15/31 2,095 2,095 Fresno, Palm Lakes Apartment Project, RB (A) (B) (C) 3.700%, 05/01/15 3,615 3,615 Glendale, Police Building Project, COP (A) (B) 3.680%, 06/01/30 19,600 19,600 Grant, Joint Union High School District, School Facility Bridge Funding Project, COP, FSA (A) (B) 3.600%, 09/01/34 1,000 1,000 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Huntington Beach, Union High School District, School Facility Bridge Funding Project, COP, FSA (A) (B) 3.600%, 09/01/28 $ 1,890 $ 1,890 Irvine Ranch, Water District #140-240-105-250, GO (A) (B) (C) 3.650%, 04/01/33 4,525 4,525 Irvine Ranch, Water District, GO (A) (B) (C) 3.650%, 01/01/21 9,000 9,000 Irvine, Improvement Board, Act 1915 Project, District #03-19, Ser B, SAB (A) (B) 3.650%, 09/02/29 2,000 2,000 Irvine, Improvement Board, Act 1915 Project, District #05-21, Ser A, RB (A) (B) (C) 3.650%, 09/02/31 12,000 12,000 Irvine, Improvement Board, Act 1915 Project, District #87-8, SAB (A) (B) (C) 3.650%, 09/02/24 1,100 1,100 Irvine, Improvement Board, Act 1915 Project, District #93-14, SAB (A) (B) (C) 3.650%, 09/02/25 16,670 16,670 Kern County, TRAN 4.500%, 06/29/07 5,000 5,036 Kings County, Multi-Family Housing Authority, Edgewater Isle Apartments Project, Ser A, RB (A) (B) (D) 3.600%, 02/15/31 13,410 13,410 Lemon Grove, Multifamily Housing, Hillside Terrace Project, RB (A) (B) (D) 3.600%, 02/15/31 4,955 4,955 Lodi, Electric System Authority, Ser A, COP, MBIA (A) (B) 3.580%, 07/01/32 9,360 9,360 Los Angeles County, Multi- Family Housing Authority, Malibu Canyon Apartments Project, Ser B, RB (A) (B) (C) 3.620%, 06/01/10 8,000 8,000 Los Angeles County, Sanitation Districts Financing Authority, Capital Project, Ser A, RB, FSA 5.000%, 10/01/06 1,210 1,210 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 53 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT MONEY MARKET FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Los Angeles County, Ser A, TRAN 4.500%, 06/29/07 $ 13,000 $ 13,093 Los Angeles, Department of Water & Power, Sub-Ser B-1, RB (A) (B) 3.680%, 07/01/35 11,000 11,000 Los Angeles, Department of Water & Power, Sub-Ser B-3, RB (A) (B) 3.640%, 07/01/35 3,600 3,600 Los Angeles, Department of Water, Sub-Ser -2, RB (A) (B) 3.650%, 07/01/35 2,000 2,000 Los Angeles, Metropolitan Transit Commission, Ser A, RB, FGIC (A) (B) 3.570%, 07/01/12 5,330 5,330 Los Angeles, Metropolitan Transportation Authority, Proposition C, Ser A, RB, MBIA (A) (B) 3.600%, 07/01/20 11,015 11,015 Los Angeles, Samuel A Fryer Vavney, Ser A, COP (A) (B) (C) 3.570%, 08/01/21 7,000 7,000 Los Angeles, Unified School District, Administration Building Project, Ser A, COP, AMBAC (A) (B) 3.600%, 10/01/24 8,365 8,365 Los Angeles, Wastewater Systems, Sub-Ser B-1, RB, XLCA (A) (B) 3.520%, 06/01/28 4,480 4,480 Los Angeles, Water & Power Resource Authority, Power System Project, Sub-Ser A-7, RB (A) (B) 3.590%, 07/01/35 15,000 15,000 Los Angeles, Water & Power Resource Authority, Sub-Ser B-2, RB (A) (B) 3.650%, 07/01/34 2,000 2,000 Los Angeles, Water & Power Resource Authority, Sub-Ser B-6, RB (A) (B) 3.790%, 07/01/34 9,675 9,675 Los Angeles, Water & Power Resource Authority, Subser B-3, RB (A) (B) 3.700%, 07/01/34 10,700 10,700 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Moorpark, Unified School District, Ser A, COP, FSA (A) (B) 3.600%, 11/01/28 $ 1,000 $ 1,000 Newport Beach, Hoag Memorial Hospital, Ser A, RB (A) (B) 3.670%, 10/01/26 5,700 5,700 Newport Beach, Hoag Memorial Hospital, Ser B, RB (A) (B) 3.670%, 10/01/26 1,045 1,045 Newport Beach, Hoag Memorial Hospital, Ser C, RB (A) (B) 3.670%, 10/01/26 7,870 7,870 Oakland, Capital Equipment Project, COP (A) (B) (C) 3.680%, 12/01/15 3,890 3,890 Oakland-Alameda County, Coliseum Project, Ser C-1, RB (A) (B) (C) 3.630%, 02/01/25 15,000 15,000 Orange County, Apartment Development Authority, Bear Brand Apartments Project, RB (A) (B) (D) 3.580%, 11/01/07 1,900 1,900 Orange County, Apartment Development Authority, Hidden Hills Project, Ser C, RB (A) (B) 3.620%, 11/01/09 3,200 3,200 Orange County, Apartment Development Authority, Larkspur Canyon Apartments, Ser A, RB (A) (B) (D) 3.590%, 06/15/37 1,200 1,200 Orange County, Apartment Development Authority, Riverbend Apartments Project, Ser B, RB (A) (B) (D) 3.590%, 12/01/29 5,000 5,000 Orange County, Apartment Development Authority, Seaside Meadow Project, Ser C, RB (A) (B) (D) 3.580%, 08/01/08 8,000 8,000 Orange County, Sanitation District Authority, Ser A, COP (A) (B) 3.650%, 08/01/29 11,755 11,755 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 54 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT MONEY MARKET FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Orange County, Sanitation District Authority, Ser B, COP (A) (B) 3.650%, 08/01/30 $ 1,300 $ 1,300 Orange County, Water District Authority, Ser A, COP (A) (B) 3.570%, 08/01/42 2,800 2,800 Pasadena, Public Financing Authority, Rose Bowl Refinancing & Improvement Project, RB (A) (B) (C) 3.550%, 12/01/23 5,000 5,000 Riverside County, Ser C, COP (A) (B) (C) 3.650%, 12/01/15 15,700 15,700 Riverside, Unified School District, Ser C, School Facility Bridge Funding Project, COP, FSA (A) (B) 3.600%, 09/01/27 1,610 1,610 Sacramento County, Housing Authority, Bent Tree Apartments Project, Ser A, RB (A) (B) (D) 3.600%, 02/15/31 2,500 2,500 Sacramento County, TRAN 4.500%, 07/17/07 7,000 7,048 San Bernardino County, Housing Authority, Alta Loma Heritage Project, Ser A, RB (A) (B) (C) 3.620%, 02/01/23 1,354 1,354 San Diego County, School District, Ser A, TRAN 4.500%, 07/27/07 6,000 6,038 San Diego, Museum of Art Project, COP (A) (B) (C) 3.750%, 09/01/30 1,400 1,400 San Diego, Unified School District, Ser A, TRAN 4.500%, 07/24/07 4,000 4,025 San Francisco (City & County), Housing Authority, Bayside Village Project D, Ser A, RB (A) (B) (C) 3.620%, 12/01/16 6,000 6,000 San Francisco City & County, Moscone Center Expansion Project, Ser 2, RB, AMBAC (A) (B) 3.580%, 04/01/30 1,150 1,150 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- San Francisco, Bay Area Toll Authority, Ser A, RB, AMBAC (A) (B) 3.580%, 04/01/36 $ 15,850 $ 15,850 San Francisco, Bay Area Toll Authority, Ser C, RB, AMBAC (A) (B) 3.570%, 04/01/25 5,650 5,650 San Francisco, Building Authority, Civic Center Complex Project, Ser A, RB, AMBAC Pre-Refunded @ 102 (F) 5.250%, 12/01/16 1,000 1,023 San Jose, Redevelopment Agency, Merged Area Redevelopment Project, Ser A, RB (A) (B) (C) 3.570%, 07/01/26 3,100 3,100 Santa Barbara County, Schools Financing Authority, TRAN 4.500%, 06/29/07 2,000 2,012 Santa Clara County, Financing Authority, VMC Facility Replacement Project, Ser B, RB (A) (B) 3.600%, 11/15/25 12,375 12,375 Santa Clara Valley, Transportation Authority, Ser A, RB, AMBAC (A) (B) 3.600%, 06/01/26 6,300 6,300 Santa Cruz County, TRAN 4.500%, 06/29/07 5,000 5,031 South Coast, Local Education Agencies, Ser A, TRAN 4.500%, 06/29/07 2,000 2,015 Southern California, Metro Water District Authority, Waterworks Authorization, Ser B-4 (A) (B) 3.570%, 07/01/35 5,000 5,000 Southern California, Metropolitan Water District Authority, Ser B, RB (A) (B) 3.580%, 07/01/27 2,100 2,100 Southern California, Metropolitan Water District Authority, Ser B-3, RB (A) (B) 3.650%, 07/01/35 8,600 8,600 Southern California, Metropolitan Water District Authority, Ser C-2, RB (A) (B) 3.600%, 07/01/36 4,650 4,650 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 55 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT MONEY MARKET FUND (CONTINUED) DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Southern California, Metropolitan Water District Authority, Water Works Authorization, Ser B, RB (A) (B) 3.580%, 07/01/28 $ 4,000 $ 4,000 Southern California, Metropolitan Water District, Ser A, RB (A) (B) 3.640%, 07/01/25 3,800 3,800 Southern California, Metropolitan Water District, Ser C-1, RB (A) (B) 3.570%, 07/01/30 5,000 5,000 Southern California, Metropolitan Water District, Ser C-3, RB (A) (B) 3.570%, 07/01/30 6,200 6,200 Southern California, Public Power Authority, Southern Transmission Project, RB, AMBAC (A) (B) (C) 3.580%, 07/01/19 8,000 8,000 State of California, Economic Recovery Authority, Ser C-2, RB (A) (B) (D) 3.650%, 07/01/23 2,250 2,250 State of California, Ser B-3, GO (A) (B) (C) 3.600%, 05/01/33 6,100 6,100 Sunnyvale, Government Center Site Acquisition Project, Ser A, COP, AMBAC (A) (B) 3.610%, 04/01/31 4,300 4,300 Three Valleys, Municipal Water District Authority, Miramar Water Treatment Project, COP (A) (B) (C) 3.710%, 11/01/14 4,700 4,700 Turlock, Irrigation District, Capital Improvement & Refunding Project, COP (A) (B) (C) 3.790%, 01/01/31 9,350 9,350 Upland, Community Redevelopment Authority, Sunset Ridge & Village Apartments Project, RB (A) (B) (C) 3.590%, 12/01/29 6,700 6,700 Ventura County, TRAN 4.500%, 07/02/07 2,500 2,515 DESCRIPTION FACE AMOUNT (000) VALUE (000) - -------------------------------------------------------------------------------- Westminster, Civic Center Refinancing Program, Ser A, COP, AMBAC (A) (B) 3.610%, 06/01/22 $ 2,900 $ 2,900 Yolo County, Multi-Family Housing Authority, Primero Grove Project, Ser A, RB (A) (B) (C) 3.570%, 11/01/27 10,485 10,485 -------------------------------------------------------------------------- TOTAL CALIFORNIA 793,653 ========================================================================== MASSACHUSETTS [0.6%] Massachusetts State, Development & Finance Agency, Harvard University Project, Ser B-1, RB (A) (B) 3.750%, 07/15/36 5,000 5,000 ========================================================================== WASHINGTON [0.5%] Seattle, Municipal Light & Power Authority, RB (A) (B) (C) 3.700%, 06/01/21 4,300 4,300 ========================================================================== TOTAL MUNICIPAL BOND (Cost $802,953) 802,953 ===================================================================== COMMERCIAL PAPER (E) [1.1%] California State 3.470%, 10/03/06 9,000 9,000 ========================================================================== TOTAL INVESTMENTS [98.6%] (Cost $811,953) 811,953 ===================================================================== OTHER ASSETS AND LIABILITIES [1.4%] 11,670 ===================================================================== NET ASSETS -- 100.0% $ 823,623 ========================================================================== SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 56 schedule of investments SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- CALIFORNIA TAX EXEMPT MONEY MARKET FUND (CONCLUDED) DESCRIPTION - -------------------------------------------------------------------------------- (A) FLOATING RATE SECURITY -- THE RATE REFLECTED ON THE SCHEDULE OF INVESTMENTS IS THE RATE IN EFFECT ON SEPTEMBER 30, 2006. (B) PUT AND DEMAND FEATURE -- THE DATE REPORTED ON THE SCHEDULE OF INVESTMENTS IS THE FINAL MATURITY, NOT THE NEXT RESET OR PUT DATE. (C) SECURITIES ARE HELD IN CONJUNCTION WITH A LETTER OF CREDIT FROM A MAJOR BANK OR FINANCIAL INSTITUTION. (D) SECURITIES ARE COLLATERALIZED UNDER AN AGREEMENT FROM FHLMC/FNMA. (E) THE RATE REPORTED IS THE EFFECTIVE YIELD AT TIME OF PURCHASE. (F) PRE-REFUNDED SECURITY - THE MATURITY DATE SHOWN IS THE PRE-REFUNDED DATE. ABAG -- ASSOCIATION OF BAY AREA GOVERNMENTS AMBAC -- AMERICAN MUNICIPAL BOND ASSURANCE COMPANY COP -- CERTIFICATE OF PARTICIPATION FGIC -- FINANCIAL GUARANTY INSURANCE COMPANY FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION FSA -- FINANCIAL SECURITY ASSISTANCE GO -- GENERAL OBLIGATION MBIA -- MUNICIPAL BOND INSURANCE ASSOCIATION RB -- REVENUE BOND SAB -- SPECIAL ASSESSMENT BOND SER -- SERIES TA -- TAX ALLOCATION TRAN -- TAX & REVENUE ANTICIPATION NOTE XLCA -- XL CAPITAL ASSURANCE SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 57 statements of assets and liabilities (000) SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- Large Cap Value Large Cap Growth RCB Small Cap Technology Equity Fund Equity Fund Value Fund Growth Fund ------------------------------------------------------------------ ASSETS: Cost of securities (including repurchase agreements) $ 88,821 $ 41,894 $ 56,814 $ 2,490 - --------------------------------------------------------------------------------------------------------------------------------- Investments in securities at value $ 106,039 $ 46,013 $ 66,466 $ 2,682 Repurchase agreements at value -- -- 3,053 -- Receivable for investment securities sold 2,830 1,330 274 -- Income receivable 136 28 114 1 Receivable for capital shares sold 102 31 1 2 Prepaid Expenses 1 1 1 -- - --------------------------------------------------------------------------------------------------------------------------------- Total Assets 109,108 47,403 69,909 2,685 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for investment securities purchased 2,851 1,140 -- -- Payable for income distributions 110 16 -- -- Payable for capital shares redeemed 6 -- 55 -- Investment adviser fees payable 53 25 49 2 Shareholder servicing fees payable 24 12 56 1 Administrative fees payable 5 2 3 -- Accrued expenses 9 3 5 -- - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 3,058 1,198 168 3 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 106,050 $ 46,205 $ 69,741 $ 2,682 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Paid-in-Capital (unlimited authorization -- $0.01 par value) $ 83,636 $ 45,086 $ 55,935 $ 3,995 Undistributed (distributions in excess of) net investment income (2) (1) 3 -- Accumulated net realized gain (loss) on investments 5,198 (2,999) 1,098 (1,505) Net unrealized appreciation on investments 17,218 4,119 12,705 192 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 106,050 $ 46,205 $ 69,741 $ 2,682 - --------------------------------------------------------------------------------------------------------------------------------- Institutional Shares ($Dollars): Net Assets $92,945,293 $35,842,162 $13,435,095 $1,244,724 Total shares outstanding at end of year 8,971,363 4,622,315 475,646 289,773 Net asset value, offering and redemption price per share (net assets / shares outstanding) $ 10.36 $ 7.75 $ 28.25 $ 4.30 Class A Shares ($Dollars): Net Assets $13,104,250 $10,363,242 $10,470,133 $1,437,152 Total shares outstanding at end of year 1,266,627 1,350,243 374,234 339,378 Net asset value, offering and redemption price per share (net assets / shares outstanding) $ 10.35 $ 7.68 $ 27.98 $ 4.23 Class R Shares ($Dollars): Net Assets $ -- $ -- $45,835,513 $ -- Total shares outstanding at end of year -- -- 1,640,798 -- Net asset value and redemption price per share (net assets / shares outstanding) $ -- $ -- $ 27.93 $ -- Maximum offering price per share (net asset value / 96.50%) $ -- $ -- $ 28.94 $ -- AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 58 statements of assets and liabilities (000) SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- California Corporate Government Tax Exempt High Yield Bond Fund Bond Fund Bond Fund Bond Fund ------------------------------------------------------------------ ASSETS: Cost of securities $ 57,427 $ 37,369 $ 26,847 $ 40,541 - ---------------------------------------------------------------------------------------------------------------------------------- Investments in securities at value $ 57,052 $ 37,137 $ 26,924 $ 40,504 Cash 12 -- 1 -- Receivable for investment securities sold -- -- -- 152 Income receivable 704 313 349 903 Receivable for capital shares sold 17 121 -- 3 Prepaid Expenses 1 1 -- 1 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets 57,786 37,572 27,274 41,563 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for investment securities purchased 962 -- -- 475 Payable for income distributions 159 96 43 101 Payable for capital shares redeemed 5 -- 11 5 Investment adviser fees payable 19 10 3 22 Shareholder servicing fees payable 12 8 6 13 Administrative fees payable 3 2 1 2 Accrued expenses 4 3 2 3 Payable to custodian -- -- -- 10 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,164 119 66 631 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 56,622 $ 37,453 $ 27,208 $ 40,932 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Paid-in-Capital (unlimited authorization -- $0.01 par value) $ 57,332 $ 38,099 $ 27,174 $ 42,224 Undistributed net investment income 1 1 -- -- Accumulated net realized loss on investments (336) (415) (43) (1,255) Net unrealized appreciation (depreciation) on investments (375) (232) 77 (37) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 56,622 $ 37,453 $ 27,208 $ 40,932 - ---------------------------------------------------------------------------------------------------------------------------------- Institutional Shares ($Dollars): Net Assets $55,290,256 $35,670,498 $26,073,962 $20,887,459 Total shares outstanding at end of year 5,438,882 3,470,224 2,544,904 2,332,240 Net asset value, offering and redemption price per share (net assets / shares outstanding) $ 10.17 $ 10.28 $ 10.25 $ 8.96 Class A Shares ($Dollars): Net Assets $ 1,332,049 $ 1,782,407 $ 1,134,367 $20,044,571 Total shares outstanding at end of year 130,949 173,035 110,426 2,238,216 Net asset value, offering and redemption price per share (net assets / shares outstanding) $ 10.17 $ 10.30 $ 10.27 $ 8.96 AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 59 statements of assets and liabilities (000) SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- California Prime Government Tax Exempt Money Money Money Market Fund Market Fund Market Fund ----------------------------------------------------- ASSETS: Cost of securities (including repurchase agreements) $ 1,360,236 $ 2,287,334 $ 811,953 - ------------------------------------------------------------------------------------------------------------------ Investments in securities at value $ 825,036 $ 1,444,134 $ 811,953 Repurchase agreements at value 535,200 843,200 -- Cash 4 58 11,101 Income receivable 2,647 5,196 3,841 Prepaid Expenses 16 35 12 - ------------------------------------------------------------------------------------------------------------------ Total Assets 1,362,903 2,292,623 826,907 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES: Payable for investment securities purchased 5,000 62,060 2,016 Payable for income distributions 4,055 3,400 693 Investment adviser fees payable 280 493 131 Shareholder servicing fees payable 511 922 337 Administrative fees payable 62 105 39 Trustees' fees payable 1 2 1 Accrued expenses 104 174 67 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities 10,013 67,156 3,284 - ------------------------------------------------------------------------------------------------------------------ NET ASSETS $ 1,352,890 $ 2,225,467 $ 823,623 - ------------------------------------------------------------------------------------------------------------------ NET ASSETS Paid-in-Capital (unlimited authorization -- $0.01 par value) $ 1,353,291 $ 2,225,465 $ 823,622 Undistributed net investment income 1 2 -- Accumulated net realized gain (loss) on investments (402) -- 1 - ------------------------------------------------------------------------------------------------------------------ NET ASSETS $ 1,352,890 $ 2,225,467 $ 823,623 - ------------------------------------------------------------------------------------------------------------------ Institutional Shares ($Dollars): Net Assets $388,170,906 $ 52,781,932 $ 85,014,525 Total shares outstanding at end of year 388,306,196 52,783,258 85,015,819 Net asset value, offering and redemption price per share (net assets / shares outstanding) $ 1.00 $ 1.00 $ 1.00 Class A Shares ($Dollars): Net Assets $640,366,315 $1,940,602,170 $631,477,612 Total shares outstanding at end of year 640,635,133 1,940,597,943 631,479,986 Net asset value, offering and redemption price per share (net assets / shares outstanding) $ 1.00 $ 1.00 $ 1.00 Class S Shares ($Dollars): Net Assets $324,352,628 $ 232,082,832 $107,130,690 Total shares outstanding at end of year 324,442,719 232,083,278 107,127,093 Net asset value and redemption price per share (net assets / shares outstanding) $ 1.00 $ 1.00 $ 1.00 AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 60 statements of operations FOR THE YEAR ENDED SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- Large Cap Value Large Cap Growth RCB Small Cap Technology Equity Fund Equity Fund Value Fund Growth Fund (000) (000) (000) (000) ------------------------------------------------------------------- INVESTMENT INCOME: Dividend $ 2,173 $ 568 $ 572 $ 17 Interest 16 -- 541 -- Less: Foreign tax withheld (2) -- (6) -- - ------------------------------------------------------------------------------------------------------------------------------- Total Investment Income 2,187 568 1,107 17 - ------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees 585 293 669 22 Shareholder Servicing Fees--Institutional Class 205 88 35 3 Shareholder Servicing Fees--Class A(1) 61 49 60 8 Shareholder Servicing Fees--Class R(1) -- -- 264 -- Administrative Fees 52 25 43 1 Trustee Fees 3 2 3 -- Professional Fees 12 3 10 (2) Transfer Agent Fees 10 5 9 -- Custodian Fees 5 2 9 -- Printing Fees 4 1 3 -- Registration Fees 3 1 1 -- Insurance and Other Fees 7 5 9 -- - ------------------------------------------------------------------------------------------------------------------------------- Total Expenses 947 474 1,115 32 - ------------------------------------------------------------------------------------------------------------------------------- Recovery of Investment Advisory Fees Previously Waived(2) -- -- -- 2 Less Waiver of: Transfer Agent Fees (10) (5) (9) -- - ------------------------------------------------------------------------------------------------------------------------------- Net Expenses 937 469 1,106 34 - ------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 1,250 99 1 (17) - ------------------------------------------------------------------------------------------------------------------------------- Net Realized Gain From Securities Transactions 5,205 1,412 1,110 103 Net Change in Unrealized Appreciation (Depreciation) on Investments 6,087 547 (908) 81 - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,542 $2,058 $ 203 $167 =============================================================================================================================== (1) INCLUDES CLASS SPECIFIC DISTRIBUTION EXPENSES. (2) SEE NOTE 4 FOR ADVISORY FEES RECOVERED. AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 61 statements of operations FOR THE YEAR ENDED SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- California Corporate Government Tax Exempt High Yield Bond Fund Bond Fund Bond Fund Bond Fund (000) (000) (000) (000) ---------------------------------------------------------------- INVESTMENT INCOME: Interest $2,584 $1,533 $841 $3,467 Dividend 50 26 13 18 - -------------------------------------------------------------------------------------------------------------------------------- Total Investment Income 2,634 1,559 854 3,485 - -------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees 216 141 69 305 Shareholder Servicing Fees--Institutional Class 131 80 61 53 Shareholder Servicing Fees--Class A(1) 7 4 6 107 Administrative Fees 30 18 14 23 Trustee Fees 2 1 1 2 Professional Fees 5 4 2 4 Transfer Agent Fees 6 4 3 4 Custodian Fees 3 2 1 2 Printing Fees 1 1 1 1 Registration Fees 1 1 1 1 Insurance and Other Fees 6 4 3 5 - -------------------------------------------------------------------------------------------------------------------------------- Total Expenses 408 260 162 507 - -------------------------------------------------------------------------------------------------------------------------------- Recovery of Investment Advisory Fees Previously Waived(2) 5 -- -- -- Less Waiver of: Investment Advisory Fees -- (23) (28) (38) Transfer Agent Fees (6) (4) (3) (4) - -------------------------------------------------------------------------------------------------------------------------------- Net Expenses 407 233 131 465 - -------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 2,227 1,326 723 3,020 - -------------------------------------------------------------------------------------------------------------------------------- Net Realized Loss From Securities Transactions (276) (360) (35) (18) Net Change in Unrealized Appreciation (Depreciation) on Investments (191) 48 122 (392) - -------------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,760 $1,014 $810 $2,610 ================================================================================================================================== (1) INCLUDES CLASS SPECIFIC DISTRIBUTION EXPENSES. (2) SEE NOTE 4 FOR ADVISORY FEES RECOVERY. AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 62 statements of operations FOR THE YEAR ENDED SEPTEMBER 30, 2006 - -------------------------------------------------------------------------------- California Prime Government Tax Exempt Money Money Money Market Fund Market Fund Market Fund (000) (000) (000) ---------------------------------------------- INVESTMENT INCOME: Interest $52,333 $104,689 $25,657 Dividend 24 -- -- - --------------------------------------------------------------------------------------------------------------- Total Investment Income 52,357 104,689 25,657 - --------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees 2,761 5,904 2,204 Shareholder Servicing Fees--Institutional Class 893 126 200 Shareholder Servicing Fees--Class A(1) 3,592 14,797 4,808 Shareholder Servicing Fees--Class S(1) 2,009 1,857 713 Administrative Fees 612 1,259 453 Trustee Fees 37 85 30 Professional Fees 127 242 95 Transfer Agent Fees 120 248 89 Custodian Fees 58 108 44 Printing Fees 43 68 30 Registration and Filing Fees 33 50 17 Insurance and Other Fees 102 269 91 - --------------------------------------------------------------------------------------------------------------- Total Expenses 10,387 25,013 8,774 - --------------------------------------------------------------------------------------------------------------- Less Waiver of: Investment Advisory Fees -- -- (516) Shareholder Servicing Fees -- Class A(1) (1,340) (5,524) (1,731) Shareholder Servicing Fees -- Class S(1) (214) (198) (67) Transfer Agent Fees (120) (248) (89) - --------------------------------------------------------------------------------------------------------------- Net Expenses 8,713 19,043 6,371 - --------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 43,644 85,646 19,286 - --------------------------------------------------------------------------------------------------------------- Net Realized Gain From Securities Transactions -- 1 -- - --------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $43,644 $ 85,647 $19,286 =============================================================================================================== (1) INCLUDES CLASS SPECIFIC DISTRIBUTION EXPENSES. AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 63 statements of changes in net assets FOR THE YEAR ENDED SEPTEMBER 30, - -------------------------------------------------------------------------------- Large Cap Value Large Cap Growth Equity Fund (000) Equity Fund (000) -------------------- ---------------------- 2006 2005 2006 2005 - ----------------------------------------------------------------------------- ---------------------- OPERATIONS: Net Investment Income (Loss) $ 1,250 $ 536 $ 99 $ 194 Net Realized Gain (Loss) from Security Transactions 5,205 4,127 1,412 376 Net Change in Unrealized Appreciation (Depreciation) on Investments 6,087 1,915 547 2,999 - ----------------------------------------------------------------------------- ---------------------- Net Increase in Net Assets Resulting from Operations 12,542 6,578 2,058 3,569 - ----------------------------------------------------------------------------- ---------------------- DIVIDENDS AND DISTRIBUTIONS FROM: Net Investment Income: INSTITUTIONAL CLASS (1,124) (453) (96) (172) CLASS A (128) (82) (5) (26) CLASS R -- -- -- -- Realized Capital Gains: INSTITUTIONAL CLASS (3,330) (1,585) -- -- CLASS A (459) (323) -- -- CLASS R -- -- -- -- - ----------------------------------------------------------------------------- ---------------------- Total Dividends and Distributions (5,041) (2,443) (101) (198) - ----------------------------------------------------------------------------- ---------------------- CAPITAL SHARE TRANSACTIONS:(1) INSTITUTIONAL CLASS: Shares Issued 55,314 8,083 7,916 10,719 Shares Issued in Lieu of Dividends and Distributions 2,902 673 30 56 Shares Redeemed (14,689) (7,549) (7,829) (4,944) - ----------------------------------------------------------------------------- ---------------------- Increase (Decrease) in Net Assets from Institutional Class Share Transactions 43,527 1,207 117 5,831 - ----------------------------------------------------------------------------- ---------------------- CLASS A: Shares Issued 2,656 4,714 3,182 3,209 Shares Issued in Lieu of Dividends and Distributions 471 323 4 18 Shares Redeemed (1,743) (1,366) (1,497) (785) - ----------------------------------------------------------------------------- ---------------------- Increase (Decrease) in Net Assets from Class A Share Transactions 1,384 3,671 1,689 2,442 - ----------------------------------------------------------------------------- ---------------------- CLASS R: Shares Issued -- -- -- -- Shares Issued in Lieu of Dividends and Distributions -- -- -- -- Shares Redeemed -- -- -- -- - ----------------------------------------------------------------------------- ---------------------- Increase (Decrease) in Net Assets from Class R Share Transactions -- -- -- -- - ----------------------------------------------------------------------------- ---------------------- Net Increase (Decrease) in Net Assets from Share Transactions 44,911 4,878 1,806 8,273 - ----------------------------------------------------------------------------- ---------------------- Total Increase (Decrease) in Net Assets 52,412 9,013 3,763 11,644 - ----------------------------------------------------------------------------- ---------------------- NET ASSETS: Beginning of year 53,638 44,625 42,442 30,798 - ----------------------------------------------------------------------------- ---------------------- End of year $106,050 $ 53,638 $ 46,205 $ 42,442 ============================================================================= ====================== Undistributed (Distributions in Excess of) Net Investment Income $ (2) $ -- $ (1) $ (1) - ----------------------------------------------------------------------------- ---------------------- (1) SEE NOTE 8 FOR SHARES ISSUED AND REDEEMED. AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 64 RCB Small Cap Technology Growth Corporate Bond Value Fund (000) Fund (000) Fund (000) -------------------- -------------------- -------------------- 2006 2005 2006 2005 2006 2005 - ----------------------------------------------------------------------------- -------------------- -------------------- OPERATIONS: Net Investment Income (Loss) $ 1 $ 44 $ (17) $ 4 $ 2,227 $ 1,920 Net Realized Gain (Loss) from Security Transactions 1,110 2,115 103 40 (276) (65) Net Change in Unrealized Appreciation (Depreciation) on Investments (908) 3,809 81 320 (191) (1,281) - ----------------------------------------------------------------------------- -------------------- -------------------- Net Increase in Net Assets Resulting from Operations 203 5,968 167 364 1,760 574 - ----------------------------------------------------------------------------- -------------------- -------------------- DIVIDENDS AND DISTRIBUTIONS FROM: Net Investment Income: INSTITUTIONAL CLASS (35) -- (4) -- (2,167) (1,865) CLASS A (1) -- -- -- (54) (54) CLASS R (10) -- -- -- -- -- Realized Capital Gains: INSTITUTIONAL CLASS (186) (462) -- -- -- (293) CLASS A (170) (480) -- -- -- (10) CLASS R (785) (2,072) -- -- -- -- - ----------------------------------------------------------------------------- -------------------- -------------------- Total Dividends and Distributions (1,187) (3,014) (4) -- (2,221) (2,222) - ----------------------------------------------------------------------------- -------------------- -------------------- CAPITAL SHARE TRANSACTIONS:(1) INSTITUTIONAL CLASS: Shares Issued 5,422 7,853 333 428 15,662 15,341 Shares Issued in Lieu of Dividends and Distributions 159 325 4 -- 406 396 Shares Redeemed (5,973) (3,616) (357) (379) (11,526) (10,031) - ----------------------------------------------------------------------------- -------------------- -------------------- Increase (Decrease) in Net Assets from Institutional Class Share Transactions (392) 4,562 (20) 49 4,542 5,706 - ----------------------------------------------------------------------------- -------------------- -------------------- CLASS A: Shares Issued 1,155 7,216 144 37 146 604 Shares Issued in Lieu of Dividends and Distributions 129 391 -- -- 25 30 Shares Redeemed (3,396) (2,825) (215) (56) (353) (571) - ----------------------------------------------------------------------------- -------------------- -------------------- Increase (Decrease) in Net Assets from Class A Share Transactions (2,112) 4,782 (71) (19) (182) 63 - ----------------------------------------------------------------------------- -------------------- -------------------- CLASS R: Shares Issued 12,077 28,095 -- -- -- -- Shares Issued in Lieu of Dividends and Distributions 742 1,991 -- -- -- -- Shares Redeemed (24,106) (10,847) -- -- -- -- - ----------------------------------------------------------------------------- -------------------- -------------------- Increase (Decrease) in Net Assets from Class R Share Transactions (11,287) 19,239 -- -- -- -- - ----------------------------------------------------------------------------- -------------------- -------------------- Net Increase (Decrease) in Net Assets from Share Transactions (13,791) 28,583 (91) 30 4,360 5,769 - ----------------------------------------------------------------------------- -------------------- -------------------- Total Increase (Decrease) in Net Assets (14,775) 31,537 72 394 3,899 4,121 - ----------------------------------------------------------------------------- -------------------- -------------------- NET ASSETS: Beginning of year 84,516 52,979 2,610 2,216 52,723 48,602 - ----------------------------------------------------------------------------- -------------------- -------------------- End of year $ 69,741 $ 84,516 $ 2,682 $ 2,610 $ 56,622 $ 52,723 ============================================================================= ==================== ==================== Undistributed (Distributions in Excess of) Net Investment Income $ 3 $ 43 $ -- $ 4 $ 1 $ -- - ----------------------------------------------------------------------------- -------------------- -------------------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 65 statements of changes in net assets FOR THE YEAR ENDED SEPTEMBER 30, - -------------------------------------------------------------------------------- Government California Tax Exempt Bond Fund (000) Bond Fund (000) ------------------------ ------------------------ 2006 2005 2006 2005 - --------------------------------------------------------------------------------- ------------------------ OPERATIONS: Net Investment Income $ 1,326 $ 738 $ 723 $ 593 Net Realized Gain (Loss) from Security Transactions (360) (55) (35) 135 Net Change in Unrealized Appreciation (Depreciation) on Investments 48 (342) 122 (391) - --------------------------------------------------------------------------------- ------------------------ Net Increase in Net Assets Resulting from Operations 1,014 341 810 337 - --------------------------------------------------------------------------------- ------------------------ DIVIDENDS AND DISTRIBUTIONS FROM: Net Investment Income: INSTITUTIONAL CLASS (1,292) (728) (692) (540) CLASS A (32) (11) (31) (53) CLASS S -- -- -- -- Realized Capital Gains: INSTITUTIONAL CLASS -- (118) (90) (71) CLASS A -- (2) (5) (11) CLASS S -- -- -- -- - --------------------------------------------------------------------------------- ------------------------ Total Dividends and Distributions (1,324) (859) (818) (675) - --------------------------------------------------------------------------------- ------------------------ CAPITAL SHARE TRANSACTIONS:(1) INSTITUTIONAL CLASS: Shares Issued 13,593 12,985 8,793 8,952 Shares Issued in Lieu of Dividends and Distributions 338 209 255 139 Shares Redeemed (6,079) (5,454) (5,739) (3,813) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Institutional Class Share Transactions 7,852 7,740 3,309 5,278 - --------------------------------------------------------------------------------- ------------------------ CLASS A: Shares Issued 1,378 275 31 302 Shares Issued in Lieu of Dividends and Distributions 9 5 6 25 Shares Redeemed (162) (153) (385) (1,240) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Class A Share Transactions 1,225 127 (348) (913) - --------------------------------------------------------------------------------- ------------------------ CLASS S: Shares Issued -- -- -- -- Shares Issued in Lieu of Dividends and Distributions -- -- -- -- Shares Redeemed -- -- -- -- - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Class S Share Transactions -- -- -- -- - --------------------------------------------------------------------------------- ------------------------ Net Increase (Decrease) in Net Assets from Share Transactions 9,077 7,867 2,961 4,365 - --------------------------------------------------------------------------------- ------------------------ Total Increase (Decrease) in Net Assets 8,767 7,349 2,953 4,027 - --------------------------------------------------------------------------------- ------------------------ NET ASSETS: Beginning of year 28,686 21,337 24,255 20,228 - --------------------------------------------------------------------------------- ------------------------ End of year $ 37,453 $ 28,686 $ 27,208 $ 24,255 ================================================================================= ======================== Undistributed (Distributions in excess of) Net Investment Income $ 1 $ 3 $ -- $ -- - --------------------------------------------------------------------------------- ------------------------ (1) SEE NOTE 8 FOR SHARES ISSUED AND REDEEMED. AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 66 High Yield Prime Money Bond Fund (000) Market Fund (000) ------------------------ ------------------------ 2006 2005 2006 2005 - --------------------------------------------------------------------------------- ------------------------ OPERATIONS: Net Investment Income $ 3,020 $ 3,416 $ 43,644 $ 14,619 Net Realized Gain (Loss) from Security Transactions (18) (157) -- 1 Net Change in Unrealized Appreciation (Depreciation) on Investments (392) (1,200) -- -- - --------------------------------------------------------------------------------- ------------------------ Net Increase in Net Assets Resulting from Operations 2,610 2,059 43,644 14,620 - --------------------------------------------------------------------------------- ------------------------ DIVIDENDS AND DISTRIBUTIONS FROM: Net Investment Income: INSTITUTIONAL CLASS (1,599) (1,815) (14,704) (7,317) CLASS A (1,421) (1,589) (18,919) (4,601) CLASS S -- -- (10,020) (2,701) Realized Capital Gains: INSTITUTIONAL CLASS -- -- -- -- CLASS A -- -- -- -- CLASS S -- -- -- -- - --------------------------------------------------------------------------------- ------------------------ Total Dividends and Distributions (3,020) (3,404) (43,643) (14,619) - --------------------------------------------------------------------------------- ------------------------ CAPITAL SHARE TRANSACTIONS:(1) INSTITUTIONAL CLASS: Shares Issued 4,120 6,056 1,690,942 1,215,600 Shares Issued in Lieu of Dividends and Distributions 895 945 2,507 1,411 Shares Redeemed (6,503) (6,600) (1,637,671) (1,251,828) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Institutional Class Share Transactions (1,488) 401 55,778 (34,817) - --------------------------------------------------------------------------------- ------------------------ CLASS A: Shares Issued 1,822 4,528 2,204,941 958,549 Shares Issued in Lieu of Dividends and Distributions 817 920 5,522 982 Shares Redeemed (3,425) (4,403) (1,882,549) (848,138) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Class A Share Transactions (786) 1,045 327,914 111,393 - --------------------------------------------------------------------------------- ------------------------ CLASS S: Shares Issued -- -- 1,261,525 499,380 Shares Issued in Lieu of Dividends and Distributions -- -- -- -- Shares Redeemed -- -- (1,140,675) (411,638) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Class S Share Transactions -- -- 120,850 87,742 - --------------------------------------------------------------------------------- ------------------------ Net Increase (Decrease) in Net Assets from Share Transactions (2,274) 1,446 504,542 164,318 - --------------------------------------------------------------------------------- ------------------------ Total Increase (Decrease) in Net Assets (2,684) 101 504,543 164,319 - --------------------------------------------------------------------------------- ------------------------ NET ASSETS: Beginning of year 43,616 43,515 848,347 684,028 - --------------------------------------------------------------------------------- ------------------------ End of year $ 40,932 $ 43,616 $1,352,890 $ 848,347 ================================================================================= ======================== Undistributed (Distributions in excess of) Net Investment Income $ -- $ -- $ 1 $ -- - --------------------------------------------------------------------------------- ------------------------ Government Money California Tax Exempt Market Fund (000) Money Market Fund (000) ------------------------ ------------------------ 2006 2005 2006 2005 - --------------------------------------------------------------------------------- ------------------------ OPERATIONS: Net Investment Income $ 85,646 $ 38,831 $ 19,286 $ 9,079 Net Realized Gain (Loss) from Security Transactions 1 -- -- -- Net Change in Unrealized Appreciation (Depreciation) on Investments -- -- -- -- - --------------------------------------------------------------------------------- ------------------------ Net Increase in Net Assets Resulting from Operations 85,647 38,831 19,286 9,079 - --------------------------------------------------------------------------------- ------------------------ DIVIDENDS AND DISTRIBUTIONS FROM: Net Investment Income: INSTITUTIONAL CLASS (2,064) (880) (2,080) (1,365) CLASS A (74,663) (33,943) (15,136) (7,285) CLASS S (8,922) (4,006) (2,065) (433) Realized Capital Gains: INSTITUTIONAL CLASS -- -- -- (27) CLASS A -- -- -- (144) CLASS S -- -- -- (7) - --------------------------------------------------------------------------------- ------------------------ Total Dividends and Distributions (85,649) (38,829) (19,281) (9,261) - --------------------------------------------------------------------------------- ------------------------ CAPITAL SHARE TRANSACTIONS:(1) INSTITUTIONAL CLASS: Shares Issued 635,895 376,258 1,444,514 1,139,802 Shares Issued in Lieu of Dividends and Distributions 2 7 -- 8 Shares Redeemed (615,154) (387,834) (1,432,711) (1,145,985) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Institutional Class Share Transactions 20,743 (11,569) 11,803 (6,175) - --------------------------------------------------------------------------------- ------------------------ CLASS A: Shares Issued 5,761,555 4,965,371 2,014,013 1,822,478 Shares Issued in Lieu of Dividends and Distributions 51,511 23,227 12,188 6,066 Shares Redeemed (5,767,874) (4,950,864) (1,964,398) (1,763,753) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Class A Share Transactions 45,192 37,734 61,803 64,791 - --------------------------------------------------------------------------------- ------------------------ CLASS S: Shares Issued 1,013,412 689,747 348,788 271,376 Shares Issued in Lieu of Dividends and Distributions -- -- -- -- Shares Redeemed (1,009,234) (724,928) (329,840) (216,708) - --------------------------------------------------------------------------------- ------------------------ Increase (Decrease) in Net Assets from Class S Share Transactions 4,178 (35,181) 18,948 54,668 - --------------------------------------------------------------------------------- ------------------------ Net Increase (Decrease) in Net Assets from Share Transactions 70,113 (9,016) 92,554 113,284 - --------------------------------------------------------------------------------- ------------------------ Total Increase (Decrease) in Net Assets 70,111 (9,014) 92,559 113,102 - --------------------------------------------------------------------------------- ------------------------ NET ASSETS: Beginning of year 2,155,356 2,164,370 731,064 617,962 - --------------------------------------------------------------------------------- ------------------------ End of year $2,225,467 $2,155,356 $ 823,623 $ 731,064 ================================================================================= ======================== Undistributed (Distributions in excess of) Net Investment Income $ 2 $ 5 $ -- $ (5) - --------------------------------------------------------------------------------- ------------------------ SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CNI CHARTER FUNDS | PAGE 67