<PAGE> 1
As filed with the Securities and Exchange Commission on
January 30, 1997
Registration No. 33-12608 and 811-5059
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
____ PRE-EFFECTIVE AMENDMENT NO. __
____ POST-EFFECTIVE AMENDMENT NO. __
(Check appropriate box or boxes)
--------------------------
HIGHMARK FUNDS
(Exact Name of Registrant as Specified in Charter)
Oaks, PA 19456
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
1-800- 433-6884
(AREA CODE AND TELEPHONE NUMBER)
----------------
MARTIN E. LYBECKER, ESQUIRE
Ropes & Gray
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
Approximate Date of Proposed Public Offering: As soon as practicable
after this Registration Statement becomes effective.
It is proposed that this filing will become effective on February 26,
1997 pursuant to Rule 488.
An indefinite amount of the Registrant's securities has been
registered under the Securities Act of 1933 pursuant to Rule 24f-2 under The
Investment Company Act of 1940. In reliance upon such Rule, no filing fee is
being paid at this time. A Rule 24f-2 notice for the Registrant for the year
ended July 31, 1996 was filed on September 27, 1996.
<PAGE> 2
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-14 ITEM CAPTION IN COMBINED PROSPECTUS/PROXY STATEMENT
- -------------- ----------------------------------------------
<S> <C>
1 Cross-Reference Sheet; Front Cover
2 Table of Contents
3 Synopsis of Prospectuses and Risk Factors
4 Proposal (1) -- Approval of Agreement and Plan of Reorganization; Special Meeting of Shareholders;
Proposal Regarding Approval or Disapproval of Agreement and Plan of Reorganization;
Background and Reasons for the Proposed Reorganization; Information about the Reorganization
5 Front Cover -- Incorporated by reference to specified documents; HighMark Funds; Financial
Statements; Information filed with the Securities and Exchange Commission; Management Discussion
of Fund Performance
6 Front Cover -- Incorporated by Reference to Specified Documents; Stepstone Funds; Financial
Statements; Information filed with the Securities and Exchange Commission
7 Special Meeting of Shareholders; Proposal Regarding Approval or Disapproval of Agreement and Plan
of Reorganization; Information About the Reorganization; Voting Information
8 Interest of Certain Persons in the Transaction
9 Not Applicable
10, 11 Cover Page
12 Cover Page -- Incorporated by reference to specified documents
13 Cover Page -- Incorporated by reference to specified documents
14 Pro Forma Financial Statements
</TABLE>
Part C
The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
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<PAGE> 3
IMPORTANT SHAREHOLDER INFORMATION
STEPSTONE FUNDS
The document you hold in your hands contains your Combined Proxy
Statement/Prospectus and proxy card. A proxy card is, in essence, a ballot.
When you vote your proxy, it tells us how to vote on your behalf on important
issues relating to Stepstone. If you simply sign the proxy without specifying
a vote, your shares will be voted in accordance with the recommendations of the
Board of Trustees.
We urge you to spend a few minutes with the Combined Proxy Statement/
Prospectus, fill out your proxy card, and return it to us. Voting your proxy,
and doing so promptly, enables Stepstone to avoid conducting additional
mailings. When Shareholders do not return their proxies in sufficient numbers,
the Funds may bear the expense of follow-up solicitations.
Please take a few moments to exercise your right to vote. Thank you.
The Combined Proxy Statement/Prospectus constitutes the Proxy Statement of
Stepstone Funds for the meeting of its shareholders. It also constitutes the
Prospectus of HighMark Funds for 13 of its portfolios which are to issue shares
in connection with the proposed reorganization - HighMark Diversified Money
Market Fund, HighMark 100% U.S. Treasury Money Market Fund, HighMark California
Tax-Free Money Market Fund, HighMark Balanced Fund, HighMark Growth Fund,
HighMark Value Momentum Fund, HighMark Blue Chip Growth Fund, HighMark Emerging
Growth Fund, HighMark International Equity Fund, HighMark Intermediate-Term
Bond Fund, HighMark Convertible Securities Fund, HighMark Government Securities
Fund and HighMark California Intermediate Tax-Free Bond Fund.
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<PAGE> 4
STEPSTONE FUNDS
Oaks, PA 19456
March 7, 1997
To the Shareholders:
Enclosed you will find several documents being furnished to you in
connection with a special meeting of the shareholders of the Stepstone Funds to
be held on Wednesday, April 16, 1997 at SEI Fund Resources, Oaks, Pennsylvania.
We hope this material will receive your immediate attention and that, if you
cannot attend the meeting in person, you will vote your proxy promptly.
The Trustees of the Stepstone Funds ("Stepstone") are recommending
that shareholders of each Stepstone Fund approve a reorganization of such
Stepstone Fund in which it will transfer all of its assets to the corresponding
HighMark Fund, as listed in the chart below, in return for Fiduciary or Retail
shares (collectively, "Shares") of such HighMark Fund and the assumption by
such HighMark Fund of all of the liabilities of such Stepstone Fund. After the
transfer, Shares of each HighMark Fund will be distributed to the
corresponding Stepstone Fund's shareholders tax-free in liquidation of such
Stepstone Fund. As a result of these transactions, your shares of such
Stepstone Fund would, in effect, be exchanged at net asset value and on a
tax-free basis for Shares of such HighMark Fund. If the Stepstone Fund
shareholder of record has Institutional Class shares, that shareholder will
receive HighMark Fiduciary shares. All other Stepstone shareholders will
receive HighMark Retail Class Shares.
<TABLE>
<S> <C>
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Stepstone Money Market Fund HighMark Diversified Money Market Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Treasury Money Market Fund HighMark 100% U.S. Treasury Money Market Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone California Tax-Free Money Market Fund HighMark California Tax-Free Money Market Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Balanced Fund HighMark Balanced Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Growth Equity Fund HighMark Growth Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Value Momentum Fund HighMark Value Momentum Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Blue Chip Growth Fund HighMark Blue Chip Growth Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Emerging Growth Fund HighMark Emerging Growth Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone International Equity Fund HighMark International Equity Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Intermediate-Term Bond Fund HighMark Intermediate-Term Bond Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Convertible Securities Fund HighMark Convertible Securities Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Government Securities Fund HighMark Government Securities Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone California Intermediate Tax-Free Bond HighMark California Intermediate Tax-Free Bond Fund
Fund
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 5
Union Bank of California, N.A. has advised the Stepstone Trustees
that it believes that the above-described transactions regarding the Stepstone
Funds and the HighMark Funds offer the shareholders of the Stepstone Funds an
opportunity to pursue similar investment objectives more effectively and with
resulting economies of scale and potentially lower expense ratios over time.
THE STEPSTONE TRUSTEES BELIEVE THAT THE PROPOSED COMBINATIONS OF THE STEPSTONE
FUNDS WITH THE HIGHMARK FUNDS ARE IN THE BEST INTERESTS OF THE STEPSTONE FUNDS
AND THEIR SHAREHOLDERS AND RECOMMEND THAT YOU VOTE IN FAVOR OF SUCH PROPOSALS.
The Notice of Special Meeting of Shareholders, the accompanying
Combined Prospectus/Proxy Statement and proxy cards are enclosed. Please read
them carefully. If you are unable to attend the meeting in person, we urge you
to sign, date, and return the proxy card so that your shares may be voted in
accordance with your instructions.
SINCE THE MEETING IS LESS THAN FIVE WEEKS AWAY, WE URGE YOU TO GIVE
THE ENCLOSED MATERIAL YOUR PROMPT ATTENTION SO THAT STEPSTONE WILL NOT HAVE TO
INCUR THE EXPENSE OF ADDITIONAL MAILINGS.
Your vote is important to us. Thank you for taking the time to
consider this important proposal.
Sincerely yours,
[ ]
Stepstone Funds
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<PAGE> 6
THE STEPSTONE FUNDS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of :
Stepstone Money Market Fund
Stepstone Treasury Money Market Fund
Stepstone California Tax-Free Money Market Fund
Stepstone Balanced Fund
Stepstone Growth Equity Fund
Stepstone Value Momentum Fund
Stepstone Blue Chip Growth Fund
Stepstone Emerging Growth Fund
Stepstone International Equity Fund
Stepstone Intermediate-Term Bond Fund
Stepstone Convertible Securities Fund
Stepstone Government Securities Fund
Stepstone California Intermediate Tax-Free Bond Fund
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of the
above-referenced funds (collectively the "Stepstone Funds"), separate series of
the Stepstone Funds ("Stepstone"), will be held at SEI Fund Resources, Oaks,
Pennsylvania on Wednesday, April 16, 1997 at 3:00 p.m., Eastern time, for the
following purposes:
1. To consider and act upon an Agreement and Plan of
Reorganization ("Agreement") between Stepstone and HighMark
Funds ("HighMark") providing for the transfer of all of the
assets of each Stepstone Fund to the corresponding HighMark
Fund as listed below in exchange for Fiduciary and Retail
shares (collectively, "Shares") of such HighMark Fund and the
assumption by such HighMark Fund of all of the liabilities of
such Stepstone Fund, followed by the dissolution and
liquidation of such Stepstone Fund, and the distribution of
Shares of such HighMark Fund to the shareholders of such
Stepstone Fund:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------
Stepstone Money Market Fund HighMark Diversified Money Market Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Treasury Money Market Fund HighMark 100% U.S. Treasury Money Market Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone California Tax-Free Money Market Fund HighMark California Tax-Free Money Market Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Balanced Fund HighMark Balanced Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Growth Equity Fund HighMark Growth Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Value Momentum Fund HighMark Value Momentum Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Blue Chip Growth Fund HighMark Blue Chip Growth Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Emerging Growth Fund HighMark Emerging Growth Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone International Equity Fund HighMark International Equity Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Intermediate-Term Bond Fund HighMark Intermediate-Term Bond Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone Convertible Securities Fund HighMark Convertible Securities Fund
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------
Stepstone Government Securities Fund HighMark Government Securities Fund
- ------------------------------------------------------------------------------------------------------------
Stepstone California Intermediate Tax-Free Bond Fund HighMark California Intermediate Tax-Free Bond Fund
- ------------------------------------------------------------------------------------------------------------
</TABLE>
2. To transact such other business as may properly come before
the Meeting or any adjournment or adjournments thereof.
The proposed transaction is described in the attached Combined
Prospectus/Proxy Statement. A copy of the Agreement is attached as Appendix A
thereto.
Pursuant to instructions of the Board of Trustees of Stepstone, the
close of business on February 12, 1997, has been designated as the record date
for determination of shareholders entitled to notice of, and to vote at, the
Meeting.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY
STEPSTONE'S BOARD OF TRUSTEES. THIS IS IMPORTANT TO ENSURE A QUORUM AT THE
SPECIAL MEETING. PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED
BY SUBMITTING TO STEPSTONE A WRITTEN NOTICE OF REVOCATION OR A SUBSEQUENTLY
EXECUTED PROXY OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
By Order of the Trustees
[ ]
[ ]
STEPSTONE FUNDS
Oaks, Pennsylvania
March 7, 1997
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<PAGE> 8
PROSPECTUS/PROXY STATEMENT
[___________, 1997]
HighMark Funds Stepstone Funds
Oaks, PA 19456 Oaks, PA 19456
Tel. No. 1-800-433-6884 Tel. No. 1-800-433-6884
COMBINED PROSPECTUS/PROXY STATEMENT
This Combined Prospectus/Proxy Statement is furnished in connection
with the solicitation of proxies from the holders of units of beneficial
interest ("shares") of the Stepstone Funds for use at a Special Meeting of
Shareholders of the Stepstone Funds to approve an Agreement and Plan of
Reorganization ("Agreement") between the Stepstone Funds ("Stepstone") and the
HighMark Funds ("HighMark") dated as of [_________ , 1997], a copy of which is
attached hereto as Appendix A, and the consummation of the transactions
(collectively, the "Transaction") contemplated therein. The Agreement
contemplates the transfer of all of the assets and liabilities of each
Stepstone Fund to corresponding investment portfolios of HighMark in exchange
for Fiduciary and Retail shares of the corresponding HighMark Fund
(collectively "Shares"), followed by the dissolution and liquidation of the
respective Stepstone Fund and the distribution of Shares to the shareholders of
the Stepstone Fund. As a result of the proposed Transaction, each shareholder
of the above-referenced Stepstone Funds will receive on a tax-free basis, a
number of full and fractional Shares of the corresponding HighMark Fund equal
at the date of the exchange to the value of the net assets of each Stepstone
Fund transferred to the corresponding HighMark Fund attributable to the
shareholder (based on the proportion of the outstanding shares of the Stepstone
Fund owned at that time by the shareholder). If the Stepstone Fund shareholder
of record has Institutional Class shares, that shareholder will receive
HighMark Fiduciary shares. All other Stepstone shareholders will receive
HighMark Retail shares.
The respective Stepstone Funds correspond to the HighMark Funds as
follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
Stepstone Money Market Fund ("Stepstone Money HighMark Diversified Money Market Fund ("HighMark
Market") Diversified Money Market")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Treasury Money Market Fund ("Stepstone HighMark 100% U.S. Treasury Money Market Fund
Treasury Money Market") ("HighMark 100% U.S. Treasury Money Market")
- ---------------------------------------------------------------------------------------------------------------
Stepstone California Tax-Free Money Market Fund HighMark California Tax-Free Money Market Fund
("Stepstone California Tax-Free Money Market") ("HighMark California Tax-Free Money Market")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Balanced Fund ("Stepstone Balanced") HighMark Balanced Fund ("HighMark Balanced")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Growth Equity Fund ("Stepstone Growth HighMark Growth Fund ("HighMark Growth")
Equity")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Value Momentum Fund ("Stepstone Value HighMark Value Momentum Fund ("HighMark Value
Momentum") Momentum")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Blue Chip Growth Fund ("Stepstone Blue HighMark Blue Chip Growth Fund ("HighMark Blue Chip
Chip Growth") Growth")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Emerging Growth Fund ("Stepstone Emerging HighMark Emerging Growth Fund ("HighMark Emerging
Growth") Growth")
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE> 9
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
Stepstone International Equity Fund ("Stepstone HighMark International Equity Fund ("HighMark
International Equity") International Equity")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Intermediate-Term Bond Fund ("Stepstone HighMark Intermediate-Term Bond Fund ("HighMark
Intermediate-Term Bond") Intermediate-Term Bond")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Convertible Securities Fund ("Stepstone HighMark Convertible Securities Fund ("HighMark
Convertible Securities") Convertible Securities")
- ---------------------------------------------------------------------------------------------------------------
Stepstone Government Securities Fund ("Stepstone HighMark Government Securities Fund ("HighMark
Government Securities") Government Securities")
- ---------------------------------------------------------------------------------------------------------------
Stepstone California Intermediate Tax-Free Bond HighMark California Intermediate Tax-Free Bond Fund
Fund ("Stepstone California Intermediate Tax-Free ("HighMark California Intermediate Tax-Free Bond")
Bond")
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(such funds each are a "Stepstone Fund" or a "HighMark Fund" and are
collectively the "Stepstone Funds" or the "HighMark Funds").
This Combined Prospectus/Proxy Statement explains concisely what you
should know before investing in the HighMark Funds. Please read it and keep it
for future reference. This Combined Prospectus/Proxy Statement is accompanied
by the prospectuses relating to the HighMark Funds, each of which is dated
February 26, 1997 (the "HighMark Prospectuses"), which contain information
about the HighMark Funds, as well as the current prospectuses relating to the
Stepstone Funds dated May 28, 1996 (the "Stepstone Prospectuses"), which
contain information about the Stepstone Funds, all of which are incorporated
into this Combined Prospectus/Proxy Statement by reference. The current
Statement of Additional Information of the HighMark Funds, dated February 26,
1997, has been filed with the Securities and Exchange Commission and is
incorporated into this Combined Prospectus/Proxy Statement by reference. The
Statement of Additional Information of HighMark may be obtained, without
charge, by writing SEI Financial Services Company, Oaks, PA 19456 or by
calling 1-800- 433-6884. The Statement of Additional Information of the
Stepstone Funds, dated May 28, 1996, has been filed with the Securities and
Exchange Commission and is incorporated into this Combined Prospectus/Proxy
Statement by reference. The Statement of Additional Information of the
Stepstone Funds may be obtained, without charge, by writing SEI Financial
Services Company at the above-listed address or by calling 1-800- 433-6884. In
addition, a Statement of Additional Information dated [_________, 1997]
relating to the Transaction described in this Combined Prospectus/Proxy
Statement has been filed with the Securities and Exchange Commission and is
also incorporated into this Combined Prospectus/Proxy Statement by reference.
Such Statement of Additional Information may be obtained, without charge, by
writing SEI Financial Services Company at the above-listed address or by
calling 1-800- 433-6884.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------------------------------------------------------
THE SHARES OF HIGHMARK OFFERED HEREBY ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF
CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR
AFFILIATES OR CORRESPONDENTS. HIGHMARK'S SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN HIGHMARK INVOLVES RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
------------------------------------------------------------------------
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<PAGE> 10
[BACK COVER PAGE]
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS COMBINED PROSPECTUS/PROXY STATEMENT IN
CONNECTION WITH THE OFFERING MADE BY THIS COMBINED PROSPECTUS/PROXY STATEMENT
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY STEPSTONE OR BY HIGHMARK. THIS COMBINED
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-10-
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROPOSAL (1) APPROVAL OF AGREEMENT AND
PLAN OF REORGANIZATION . . . . . . . . . . . . . . . . .
FEE TABLES . . . . . . . . . . . . . . . . . . . . . . . .
SYNOPSIS OF PROSPECTUSES . . . . . . . . . . . . . . . . .
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . .
SPECIAL MEETING OF SHAREHOLDERS . . . . . . . . . . . . . .
PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF
AGREEMENT AND PLAN OF REORGANIZATION . . . . . . . . . .
BACKGROUND AND REASONS FOR THE PROPOSED
REORGANIZATION . . . . . . . . . . . . . . . . . . . . . .
INFORMATION ABOUT THE REORGANIZATION . . . . . . . . . .
HIGHMARK FUNDS . . . . . . . . . . . . . . . . . . . . . .
STEPSTONE FUNDS . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . .
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . .
INFORMATION FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION . . . . . . . . . . . . . . . . . . .
FORM OF AGREEMENT AND PLAN OF REORGANIZATION . . . . . .
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . .
FEE TABLES -- APPENDIX B . . . . . . . . . . . . . . . . .
HIGHMARK ANNUAL REPORT -- APPENDIX C . . . . . . . . . . .
</TABLE>
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<PAGE> 12
PROPOSAL (1) -- APPROVAL OF AGREEMENT
AND PLAN OF REORGANIZATION
At a meeting held on October 17, 1996, all of the Trustees of
Stepstone unanimously approved an Agreement and Plan of Reorganization by and
between Stepstone and HighMark providing for the transfer of all of the assets
of each Stepstone Fund to its corresponding HighMark Fund in exchange for
Shares of beneficial interest of such HighMark Fund and the assumption by such
HighMark Fund of all of the liabilities of such Stepstone Fund.
Following the transfer, each of the Stepstone Funds will be dissolved
and the Shares received by each Stepstone Fund will be distributed to the
respective shareholders of such Stepstone Funds in liquidation of the Stepstone
Funds. As a result of the proposed Transaction, shareholders of each Stepstone
Fund will receive, on a tax-free basis, a number of full and fractional Shares
equal in value at the date of the exchange to the value of the net assets of
the Stepstone Fund transferred to the corresponding HighMark Fund attributable
to the shareholder (based on the proportion of the outstanding shares of the
Stepstone Fund owned at the time by the shareholder). If the Stepstone Fund
shareholder of record has Institutional Class shares, that shareholder will
receive HighMark Fiduciary shares. All other Stepstone shareholders will
receive HighMark Retail Class shares.
For the reasons set forth below under "Background and Reasons for the
Proposed Reorganization," the Board of Trustees of Stepstone and HighMark,
including Trustees of Stepstone and HighMark who are not "interested persons"
of either Stepstone or HighMark as defined in the Investment Company Act of
1940 (the "1940 Act") (the "Independent Trustees"), unanimously concluded that
participation in the proposed Transaction is in the best interests of the
respective registered investment companies and their respective existing
shareholders and that the economic interests of their respective existing
shareholders will not be diluted as a result of effecting the proposed
Transaction.
In reaching this conclusion, the Trustees considered, among other
things, the qualifications and experience of Union Bank of California, N.A.
(the "Advisor"); the projected expense ratios of each HighMark Fund compared to
the corresponding Stepstone Fund, and the potential economies of scale which
could be realized over time by former Stepstone Fund shareholders as each
HighMark Fund increases in size; the services to be provided to HighMark
Shareholders, including the availability of portfolios with objectives,
policies and services similar to those of the Stepstone Funds; the
recommendation of the Advisor in favor of the Transaction; and the fact that
the Transaction will be free from Federal income taxes to the Stepstone Funds
and the HighMark Funds and their shareholders.
FEE TABLES
Fee tables showing the current fees for the Stepstone and HighMark
Funds can be found in Appendix B at the end of this Combined Prospectus/Proxy
Statement. Because the fees for the HighMark Funds following the Transaction
will be identical to the current fees for the HighMark Funds as set forth in
the fee tables, no pro forma fees are provided.
-12-
<PAGE> 13
SYNOPSIS OF PROSPECTUSES
Investment Objectives and Policies. Below is a brief comparison of
the investment objectives and policies of each Stepstone Fund and the
corresponding HighMark Fund. Following the Fund by Fund comparisons, there is
a brief comparison of investment policies and techniques that are common to all
of the Funds. The following discussion is qualified in its entirety by the
disclosure on such subjects contained in the HighMark Prospectuses and the
Stepstone Prospectuses accompanying this Combined Prospectus/Proxy Statement.
For a full and detailed description of permitted investments, see the
applicable HighMark and Stepstone Prospectuses.
The securities currently held by each Stepstone Fund are substantially
similar to those securities which the corresponding HighMark Fund may hold.
Consequently, the proposed reorganizations of the Stepstone Funds should not
result in higher than normal portfolio turnover due to the corresponding
HighMark Fund's disposal of investment securities.
STEPSTONE MONEY MARKET AND HIGHMARK DIVERSIFIED MONEY MARKET As its
investment objective, Stepstone Money Market seeks to preserve principal value
and maintain a high degree of liquidity while providing current income.
Similarly, HighMark Diversified Money Market seeks current income with
liquidity and stability of principal. Both Stepstone Money Market and HighMark
Diversified Money Market invest in U.S. dollar denominated obligations
determined by the Advisor to present minimal credit risks under guidelines
adopted by each of HighMark's and Stepstone's Board of Trustees.
For both Stepstone Money Market and HighMark Diversified Money Market,
such obligations include:
(i) obligations issued by the U.S. Government, and backed by its
full faith and credit, and obligations issued or guaranteed as
to principal and interest by the agencies or instrumentalities
of the U.S. Government;
(ii) obligations such as bankers' acceptances, bank notes,
certificates of deposit and time deposits of thrift
institutions, savings and loans, U.S. commercial banks
(including foreign branches of such banks), and U.S. and
foreign branches of foreign banks;
(iii) short-term promissory notes issued by corporations, including
Canadian Commercial Paper ("CCP") and Europaper;
(iv) U.S. dollar denominated securities issued or guaranteed by
foreign governments, their political subdivisions, agencies or
instrumentalities, and obligations of supranational entities
such as the World Bank and the Asian Development Bank;
(v) loan participations;
(vi) readily-marketable, short-term debt securities including, but
not limited to, those backed by company receivables, truck and
auto loans, leases, and credit card loans;
(vii) Treasury receipts, including TRs, TIGRs and CATs; and
(viii) repurchase agreements involving such obligations.
Subject to the provisions of Rule 2a-7 under the 1940 Act, investments
of both Stepstone Money Market and HighMark Diversified Money Market consist of
those obligations that, at the time of purchase, possess the highest short-term
rating from at least one nationally recognized statistical rating organization
("NRSRO") (for example, commercial paper rated "A-1" by Standard & Poor's
Corporation ("S&P") or "P-1" by Moody's
-13-
<PAGE> 14
Investors Service, Inc. ("Moody's"))(1). Although HighMark Diversified Money
Market does not presently expect to do so, it may also invest up to 5% of its
net assets in obligations that, at the time of purchase, possess one of the two
highest short-term ratings from at least one NRSRO, and in obligations that do
not possess an equivalent short-term rating (i.e., are unrated) but are
determined by the Advisor to be of comparable quality to the rated instruments
eligible for purchase by the Fund under guidelines adopted by the HighMark
Board of Trustees.
HighMark Diversified Money Market will not invest more than 5% of its
total assets in the securities of any one first tier issuer, except that
HighMark Diversified Money Market may invest up to 25% of its total assets in
the securities of a single first tier issuer for a period of up to three
business days. There is no limit on the percentage of HighMark Diversified
Money Market's assets that may be invested in obligations issued or guaranteed
by the U.S. Government, its agencies, or instrumentalities and repurchase
agreements fully collateralized by such obligations.
Both Stepstone Money Market and HighMark Diversified Money Market may
concentrate their investments in certain instruments issued by U.S. Banks, U.S.
branches of foreign banks, and foreign branches of U.S. banks, but only so long
as the investment risk associated with investing in foreign branches of U.S.
banks is the same as that associated with investing in instruments issued by
the U.S. parent.
STEPSTONE TREASURY MONEY MARKET AND HIGHMARK 100% U.S. TREASURY MONEY
MARKET. As its investment objective, Stepstone Treasury Money Market seeks to
preserve principal value and maintain a high degree of liquidity while
providing current income. Similarly, HighMark 100% U.S. Treasury Money Market
seeks current income with liquidity and stability of principal.
Both Stepstone Treasury Money Market and HighMark 100% U.S. Treasury
Money Market invest exclusively in direct U.S. Treasury obligations and
separately traded component parts of such obligations transferable through the
Federal Reserve book-entry system ("STRIPs"). Stepstone Treasury Money Market
additionally may invest in repurchase agreements involving such obligations;
HighMark 100% U.S. Treasury Money Market may not. Stepstone Treasury Money
Market is limited to making investments and engaging in investment transactions
that are permissible for federal credit unions; HighMark 100% U.S. Treasury
Money Market is not explicitly limited in this regard .
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET AND HIGHMARK CALIFORNIA
TAX-FREE MONEY MARKET. As its investment objective, Stepstone California
Tax-Free Money Market seeks to preserve principal and maintain a high degree of
liquidity while providing current income exempt from federal and California
state personal income taxes. Similarly, as its investment objective, HighMark
California Tax-Free Money Market seeks as high a level of current interest
income free from federal income tax and California personal income tax as is
consistent with the preservation of capital and relative stability of
principal.
Both Stepstone California Tax-Free Money Market and HighMark
California Tax-Free Money Market invest in obligations issued by the State of
California and its political subdivisions or municipal authorities and
obligations issued by territories or possessions of the United States
("Municipal Securities").
Under normal market conditions and, as a matter of fundamental policy,
at least 80% of the value of the total assets of both Stepstone California
Tax-Free Money Market and HighMark California Tax-Free Money Market will be
invested in Municipal Securities, the interest on which, in the opinion of bond
counsel, is excluded from gross income both for federal income tax purposes and
for California personal income tax purposes, and does not constitute a
preference item for individuals for purposes of the federal alternative minimum
tax.
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(1) For information on ratings, see the Appendix to the Statement of
Additional Information of HighMark or Stepstone.
-14-
<PAGE> 15
Under normal market conditions, up to 20% of the total assets of both
Stepstone California Tax-Free Money Market and HighMark California Tax-Free
Money Market may be invested in short-term obligations, the interest on which
is treated as a preference item for individuals for purposes of the federal
alternative minimum tax or subject to federal or California personal income tax
("Taxable Obligations"). These short-term obligations may include bonds from
other states and cash equivalents.
Investments of both Stepstone California Tax-Free Money Market and
HighMark California Tax-Free Money Market consist of those obligations that, at
the time of purchase, possess one of the two highest short-term ratings by a
NRSRO, and in obligations that do not possess a rating (i.e., are unrated) but
are determined by the Advisor to be of comparable quality to the rated
instruments eligible for purchase by the Fund under the guidelines adopted by
the Stepstone or HighMark Board of Trustees.
HighMark California Tax-Free Money Market may hold uninvested cash
reserves pending investment during temporary "defensive" periods or if, in the
opinion of the Advisor, desirable tax-exempt obligations are unavailable. In
accordance with the Fund's investment objective and subject to its fundamental
policies, investments may be made in Taxable Obligations if, for example,
suitable tax-exempt obligations are unavailable or if acquisition of U.S.
Government or other taxable securities is deemed appropriate for temporary
"defensive" purposes. For temporary defensive purposes, Stepstone California
Tax-Free Money Market may, when the Advisor determines that market conditions
warrant, invest up to 100% of its assets in municipal obligations of other
states or taxable money market instruments.
Both Stepstone California Tax-Free Money Market and HighMark
California Tax-Free Money Market may also acquire Municipal Securities that
have "put" features. Under a put feature, the Fund has the right to sell the
Municipal Security within a specified period of time at a specified price.
STEPSTONE BALANCED AND HIGHMARK BALANCED. As its investment
objective, Stepstone Balanced seeks to provide both capital appreciation and
income. HighMark Balanced seeks capital appreciation and income, with
conservation of capital a secondary consideration.
Both Stepstone Balanced and HighMark Balanced may invest in any type
or class of security. Under normal market conditions, both Stepstone Balanced
and HighMark Balanced will invest between 50% and 70% of their total assets in
equity securities. Senior fixed-income securities will normally constitute at
least 25% of the net assets of both Stepstone Balanced and HighMark Balanced.
Equity securities for both Stepstone Balanced and HighMark Balanced
include common stocks, warrants to purchase common stocks, American Depositary
Receipts ("ADRs"), preferred stocks and securities (including debt securities)
convertible into or exercisable for common stocks. HighMark Balanced may also
invest in Standard & Poor's Depositary Receipts ("SPDRs"). Fixed-income
investments for both Stepstone Balanced and HighMark Balanced consist of bonds,
debentures, notes, zero-coupon securities, all forms of mortgage-related
securities (including collateralized mortgage obligations), and obligations
issued or guaranteed by the U.S. or foreign Governments or their agencies or
instrumentalities. Privately issued mortgage-backed securities must be rated
in one of the top two categories by at least one NRSRO. In addition to
mortgage-backed securities, both Stepstone Balanced and HighMark Balanced may
invest in other asset-backed securities including, but not limited to, those
backed by company receivables, truck and auto loans, leases, and credit card or
other receivables.
Both Stepstone Balanced and HighMark Balanced may invest in bonds,
notes and debentures of any maturity issued by U.S. and foreign corporate and
governmental issuers. Both Stepstone Balanced and HighMark Balanced will invest
only in corporate fixed-income securities that are rated at the time of
purchase as investment grade by a NRSRO (e.g., at least Baa from Moody's or BBB
from S&P) or, if unrated, which the Advisor deems to be of comparable quality.
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<PAGE> 16
The portions of the assets of both Stepstone Balanced and HighMark
Balanced invested in equity securities and fixed-income securities vary from
time to time within the stated ranges, depending upon the Advisor's assessment
of business, economic and market conditions.
STEPSTONE GROWTH EQUITY AND HIGHMARK GROWTH. As its investment
objective, Stepstone Growth Equity seeks long-term capital growth. Similarly,
HighMark Growth seeks long-term capital appreciation through investments in
equity securities. The production of current income is an incidental
objective.
Under normal market conditions, both Stepstone Growth Equity and
HighMark Growth invest at least 65% of their total assets in equity securities,
including common stocks, warrants to purchase common stocks, ADRs, preferred
stocks and securities (including debt securities) convertible into or
exercisable for common stocks, of growth-oriented companies. HighMark Growth
emphasizes a well diversified portfolio of medium to large capitalization
growth companies (capitalization in excess of $500 million) with a record of
above average growth in earnings. HighMark Growth focuses on companies that
the Advisor believes to have enduring quality and above average earnings
growth.
STEPSTONE VALUE MOMENTUM AND HIGHMARK VALUE MOMENTUM. As their
investment objectives, both Stepstone Value Momentum and HighMark Value
Momentum seek long-term capital growth with a secondary objective of income.
Under normal market conditions, both Stepstone Value Momentum and
HighMark Value Momentum will invest at least 65% of their total assets in
equity securities, including common stocks, warrants to purchase common stocks,
ADRs, preferred stocks and securities (including debt securities) convertible
into or exercisable for common stocks. Both Stepstone Value Momentum and
HighMark Value Momentum will be invested primarily in securities which the
Advisor believes to be undervalued relative to the market and to the security's
historic valuation. Stocks are then screened for positive price or earnings
momentum. Securities purchased will generally have a medium to high market
capitalization. A majority of the securities in which both Stepstone Value
Momentum and HighMark Value Momentum invest will be dividend paying.
STEPSTONE BLUE CHIP GROWTH AND HIGHMARK BLUE CHIP GROWTH. As their
investment objectives, both Stepstone Blue Chip Growth and HighMark Blue Chip
Growth seek long-term capital growth by investing in a diversified portfolio of
common stocks and other equity securities of seasoned, large capitalization
companies.
Under normal market conditions, both Stepstone Blue Chip Growth and
HighMark Blue Chip Growth will invest at least 65% of their total assets in
equity securities, including common stocks, warrants to purchase common stocks,
ADRs, preferred stocks and securities (including debt securities) convertible
into or exercisable for common stocks. Both Stepstone Blue Chip Growth and
HighMark Blue Chip Growth primarily invest in equity securities of seasoned,
large capitalization companies. A seasoned company is generally a company with
an operating history of 3 years or more. A large capitalization company is
generally a company with capitalization in excess of $1.0 billion. A majority
of each Fund's equity investments ordinarily will consist of dividend-paying
securities. Stepstone Blue Chip Growth limits its investment in foreign
securities to 15% of its total assets; HighMark Blue Chip Growth does not.
STEPSTONE EMERGING GROWTH AND HIGHMARK EMERGING GROWTH. As their
investment objectives, both Stepstone Emerging Growth and HighMark Emerging
Growth seek long-term growth of capital by investing in a diversified portfolio
of equity securities of small capitalization, emerging growth companies.
Under normal market conditions, both Stepstone Emerging Growth and
HighMark Emerging Growth will invest at least 65% of their total assets in
equity securities, including common stocks, warrants to purchase common stocks,
ADRs, preferred stocks and securities (including debt securities) convertible
into or exercisable for common stocks of small and medium capitalization
companies. Small and medium capitalization companies
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<PAGE> 17
are those with capitalization between $50 million and $1 billion and the
potential for growth or those which, in the Advisor's opinion, have potential
for above-average long-term capital appreciation. An emerging growth company
is one which, in the Advisor's judgment, is in the developing stages of its
life cycle and has demonstrated or is expected to achieve rapid growth in
earnings and/or revenues.
Both Stepstone Emerging Growth and HighMark Emerging Growth may also
invest in equity securities of companies in "special equity situations,"
meaning companies experiencing unusual and possibly non-repetitive
developments, such as mergers; acquisitions; spin-offs; liquidations;
reorganizations; and new products, technology or management.
STEPSTONE INTERNATIONAL EQUITY AND HIGHMARK INTERNATIONAL EQUITY. As
their investment objectives, both Stepstone International Equity and HighMark
International Equity seek to provide long-term capital appreciation by
investing primarily in a diversified portfolio of equity securities of non-U.S.
issuers.
Under normal market conditions, at least 65% of the assets of both
Stepstone International Equity and HighMark International Equity will be
invested in the following equity securities of non-U.S. issuers: common
stocks, securities convertible into common stocks, preferred stocks, warrants
and rights to purchase common stock. Under normal market conditions, at least
65% of the total assets of both Stepstone International Equity and HighMark
International Equity will be invested in securities of issuers organized under
the laws of at least five countries other than the United States that are
included in the Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE Index").(2) The Advisor and Tokyo-Mitsubishi Asset
Management (U.K.), Ltd., the sub-advisor to both Stepstone International Equity
and HighMark International Equity, select individual securities for both
Stepstone International Equity and HighMark International Equity on the basis
of their growth opportunities or undervaluation in relation to other
securities. Both Stepstone International Equity and HighMark International
Equity expect their investments to emphasize companies with market
capitalizations in excess of $100,000,000.
Both Stepstone International Equity and HighMark International Equity
will typically invest in equity securities listed on recognized foreign
exchanges, but may also invest up to 15% of their total assets in securities
traded in over-the-counter markets. Equity securities of non-U.S. issuers may
also be purchased in the form of sponsored or unsponsored ADRs and sponsored or
unsponsored European Depositary Receipts ("EDRs").
Both Stepstone International Equity and HighMark International Equity
may invest in futures and options on futures for the purpose of achieving their
objectives. Both Stepstone International Equity and HighMark International
Equity may invest in futures and related options based on any type of security
or index traded on U.S. or foreign exchanges or over the counter, as long as
the underlying security or securities represented by an index, are permitted
investments of the Fund. Such futures contracts may include index contracts
and contracts for foreign currencies. Both Stepstone International Equity and
HighMark International Equity may enter into futures contracts and options on
futures only to the extent that their obligations under such contracts or
transactions, together with options on securities or indices represent not more
than 25% of either Fund's assets.
Both Stepstone International Equity and HighMark International Equity
may enter into forward foreign currency contracts as a hedge against possible
variations in foreign exchange rates, and may also invest in options on
currencies.
The remaining assets of both Stepstone International Equity and
HighMark International Equity may be invested in investment grade bonds and
debentures issued by non-U.S. or U.S. companies, obligations of
- --------------------
(2) "MSCI-EAFE Index" is a registered service mark of Morgan Stanley
Capital International which does not sponsor and is in no way affiliated with
the International Equity Fund.
-17-
<PAGE> 18
supranational entities, securities issued or guaranteed by foreign and U.S.
governments, and foreign and U.S. commercial paper. Certain of these
instruments may have floating or variable interest rate provisions. In
addition, both Stepstone International Equity and HighMark International Equity
may invest in securities of issuers whose principal activities are in countries
with emerging markets. Both Stepstone International Equity and HighMark
International Equity may also purchase shares of closed-end investment
companies that invest in the securities of issuers in a single country or
region and shares of open-end management investment companies.
STEPSTONE INTERMEDIATE-TERM BOND AND HIGHMARK INTERMEDIATE-TERM Bond.
As its investment objective, Stepstone Intermediate-Term Bond seeks to provide
total return. Similarly, HighMark Intermediate-Term Bond seeks total return
through investments in fixed-income securities.
Under normal market conditions, at least 65% of the assets of both
Stepstone Intermediate-Term Bond and HighMark Intermediate-Term Bond will be
invested in bonds. For purposes of this policy "bonds" include (i) corporate
bonds and debentures rated at the time of purchase as "investment grade" (one
of the four highest bond rating categories by a NRSRO) or determined by the
Advisor to be of comparable quality; (ii) Yankee Bonds and Eurodollar
instruments; (iii) notes or bonds issued by the U.S. Government and its
agencies and instrumentalities (such as Government National Mortgage
Association ("GNMA") securities); (iv) mortgage-backed securities, including
privately issued mortgage-backed securities and readily-marketable asset-backed
securities, which must be rated at the time of purchase as investment grade, or
be determined by the Advisor to be of comparable quality; (v) securities issued
or guaranteed by foreign governments, their political subdivisions, agencies or
instrumentalities; (vi) obligations of supranational entities such as the World
Bank and the Asian Development Bank; and (vii) zero coupon obligations.
The dollar-weighted average portfolio maturity of both Stepstone
Intermediate-Term Bond and HighMark Intermediate-Term Bond will be from three
to ten years.
STEPSTONE CONVERTIBLE SECURITIES AND HIGHMARK CONVERTIBLE SECURITIES.
As their investment objectives, both Stepstone Convertible Securities and
HighMark Convertible Securities seek a high level of current income and capital
appreciation by investing in convertible securities.
Under normal market conditions, at least 65% of the assets of both
Stepstone Convertible Securities and HighMark Convertible Securities will be
invested in convertible securities consisting of bonds, debentures, notes and
preferred stocks each of which are convertible into common stock. In general,
a convertible security is a fixed-income security such as a bond (which
typically pays a fixed annual rate of interest) or preferred stock (which
typically pays a fixed dividend), that may be converted at a stated price
within a specified period of time into a specified number of shares of common
stock of the issuing company, or of a different company.
Both Stepstone Convertible Securities and HighMark Convertible
Securities may invest up to 35% of their assets in convertible bonds rated
lower than Baa by Moody's or BBB by S&P and as low as Caa by Moody's or CCC by
S&P, which are lower-quality, higher-yielding, high-risk debt securities
(commonly known as "junk bonds"). Both Stepstone Convertible Securities and
HighMark Convertible Securities may also invest in unrated convertible
securities which, in the opinion of Bank of Tokyo-Mitsubishi Trust Company, the
sub-advisor to both Stepstone Convertible Securities and HighMark Convertible
Securities, are of comparable quality to such rated securities.
Both Stepstone Convertible Securities and HighMark Convertible
Securities may invest any remaining assets in common stocks; securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities;
corporate bonds rated Baa or better by Moody's or BBB or better by S&P
(investment grade bonds); shares of other investment companies with similar
investment objectives; high grade commercial paper; money market funds; money
market instruments and cash; floating and variable rate notes; repurchase
agreements; dollar-denominated securities of foreign issuers; and SPDRs.
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<PAGE> 19
STEPSTONE GOVERNMENT SECURITIES AND HIGHMARK GOVERNMENT SECURITIES.
As their investment objectives, both Stepstone Government Securities and
HighMark Government Securities seek to achieve total return consistent with the
preservation of capital by investing in a diversified portfolio of obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
Under normal market conditions, both Stepstone Government Securities
and HighMark Government Securities will invest at least 80% of their assets in
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities, including mortgage-backed securities issued or guaranteed by
U.S. government agencies such as GNMA, the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
and repurchase agreements backed by such securities. Both Stepstone Government
Securities and HighMark Government Securities may invest any remaining assets
in corporate bonds that are rated at the time of purchase as investment grade
or determined by Bank of Tokyo-Mitsubishi Trust Company, the sub-advisor to
both Stepstone Government Securities and HighMark Government Securities, to be
of comparable quality; Yankee Bonds, including sovereign, supranational and
Canadian bonds; shares of other investment companies with similar investment
objectives; commercial paper; money market funds; privately issued
mortgage-backed and other readily-marketable asset-backed securities; and money
market instruments and cash.
The sub-advisor will seek to enhance the yield of both Stepstone
Government Securities and HighMark Government Securities by taking advantage of
yield disparities or other factors that occur in the government securities and
money markets. Both Stepstone Government Securities and HighMark Government
Securities may dispose of any security prior to its maturity if such
disposition and reinvestment of the proceeds are expected to enhance its yield
consistent with the sub-advisor's judgment as to a desirable maturity structure
or if such disposition is believed to be advisable due to other circumstances
or considerations. Both Stepstone Government Securities and HighMark
Government Securities will seek to achieve capital gains by taking advantage of
price appreciation caused by interest rate changes.
Under normal market conditions, both Stepstone Government Securities
and HighMark Government Securities may invest up to 20% of their total assets
in money market instruments. When market conditions indicate a temporary
"defensive" investment strategy as determined by the Advisor , HighMark
Government Securities may invest more than 20% of its total assets in money
market instruments. For temporary defensive purposes during periods when the
Advisor determines that market conditions warrant, Stepstone Government
Securities may invest up to 100% of its assets in money market instruments.
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND AND HIGHMARK
CALIFORNIA INTERMEDIATE TAX-FREE BOND. As their investment objectives, both
Stepstone California Intermediate Tax-Free Bond and HighMark California
Intermediate Tax-Free Bond seek to provide high current income that is exempt
from federal and State of California income taxes.
Under normal market conditions, both Stepstone California Intermediate
Tax-Free Bond and HighMark California Intermediate Tax-Free Bond will invest
primarily in bonds and notes issued by the State of California, its agencies,
instrumentalities, and political sub-divisions, the income on which is exempt
from regular federal and State of California personal income taxes ("California
Municipal Securities"). Both Stepstone California Intermediate Tax-Free Bond
and HighMark California Intermediate Tax-Free Bond may also invest in bonds and
notes of other states, territories, and possessions of the U.S. and their
agencies, authorities, instrumentalities and political sub-divisions which are
exempt from federal income taxes, and in shares of other investment companies,
specifically money market funds, which have similar investment objectives.
Under normal market conditions, at least 80% of the assets of both
Stepstone California Intermediate Tax-Free Bond and HighMark California
Intermediate Tax-Free Bond will be invested in bonds and notes rated as
investment grade by S&P, Moody's, Fitch Investors Service ("Fitch") or other
NRSROs and which pay interest
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<PAGE> 20
that is not treated as a preference item for purposes of the federal
alternative maximum tax. Both Stepstone California Intermediate Tax-Free Bond
and HighMark California Intermediate Tax-Free Bond may purchase unrated
securities that are determined by the Advisor to be of comparable quality at
the time of purchase .
Both Stepstone California Intermediate Tax-Free Bond and HighMark
California Intermediate Tax-Free Bond intend to maintain at least 65% of their
assets in California Municipal Securities and may invest up to 100% of their
assets in such securities.
Neither Stepstone California Intermediate Tax-Free Bond nor HighMark
California Intermediate Tax-Free Bond has restrictions on the maturity of
municipal securities in which they may invest. The dollar-weighted average
portfolio maturity of each Fund will be from three to ten years.
When market conditions indicate a temporary "defensive" investment
strategy as determined by the Advisor, HighMark California Intermediate
Tax-Free Bond may invest more than 20% of its total assets in municipal
obligations of other states or taxable money market instruments including
repurchase agreements. For temporary defensive purposes during periods when
the Advisor determines that market conditions warrant, Stepstone California
Intermediate Tax-Free Bond may invest up to 25% of its assets in money market
instruments.
OTHER INVESTMENTS
Each Stepstone Fund and each HighMark Fund limits investments in
illiquid securities to 15% or less of their net assets (10% or less of net
assets for money market funds), and may additionally purchase restricted
securities which have not been registered under the Securities Act of 1933
(e.g., Rule 144A Securities and Section 4(2) commercial paper), subject to
policies approved by the HighMark and Stepstone Boards of Trustees.
Each Stepstone Fund and each HighMark Fund may lend portfolio
securities in an amount representing up to 33 1/3% of the value of its total
assets, with the exception of HighMark California Tax-Free Money Market and
Stepstone California Intermediate Tax-Free Bond, which may not engage in
securities lending.
Each Stepstone Fund and each HighMark Fund, with the exception of
HighMark 100% U.S. Treasury Money Market, may enter into repurchase agreements.
Each HighMark Fund, with the exception of HighMark 100% U.S. Treasury Money
Market, may also enter into reverse repurchase agreements. HighMark
Diversified Money Market and HighMark California Tax-Free Money Market intend
to limit their activity in reverse repurchase agreements to no more than 10% of
their respective total assets.
Each HighMark Fund may enter into forward commitments or purchase
securities on a "when-issued" basis. Each HighMark Fund expects that
commitments by it to enter into forward commitments or purchase when-issued
securities will not exceed 25% of the value of its total assets under normal
market conditions. Only the following Stepstone Funds may enter into forward
commitments or purchase securities on a when-issued basis: Stepstone Money
Market, Stepstone Treasury Money Market, Stepstone California Tax-Free Money
Market, Stepstone Balanced, Stepstone Intermediate-Term Bond, Stepstone
Convertible Securities, Stepstone Government Securities, and Stepstone
California Intermediate Tax-Free Bond. Such Stepstone Funds may not exceed 20%
of the value of their respective total assets subject to such commitments.
Stepstone Money Market, Stepstone Treasury Money Market, Stepstone
California Tax-Free Money Market, HighMark Diversified Money Market, HighMark
100% U.S. Treasury Money Market, and HighMark California Tax-Free Money Market
each intend to comply with Rule 2a-7 under the 1940 Act. Shares of each Fund
are priced pursuant to the amortized cost method whereby Stepstone or HighMark
seeks to maintain each Fund's net asset value per Share at $1.00. Securities
or instruments in which each Fund invests have remaining maturities of 397 days
or less, although instruments subject to repurchase agreements and certain
adjustable rate
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<PAGE> 21
instruments may bear longer maturities. The dollar-weighted average portfolio
maturity of each Fund will not exceed 90 days.
Under normal market conditions, the following Funds may invest up to
35% of their total assets in money market instruments: Stepstone and HighMark
Balanced, Stepstone Growth Equity and HighMark Growth, Stepstone and HighMark
Value Momentum, Stepstone and HighMark Blue Chip Growth, Stepstone and HighMark
Emerging Growth, Stepstone and HighMark International Equity, Stepstone and
HighMark Intermediate-Term Bond, and Stepstone and HighMark Convertible
Securities. When market conditions indicate a temporary "defensive" investment
strategy as determined by the Advisor, each such HighMark Fund may invest more
than 35% of its total assets in money market instruments. For temporary
defensive purposes during periods when the Advisor determines that market
conditions warrant, each such Stepstone Fund may invest up to 100% of its
assets in money market instruments.
Each of the Stepstone and HighMark Funds, except the money market
funds, may purchase securities of money market funds of other investment
companies, and the HighMark Funds, except the money market funds, may purchase
securities of variable funds of other investment companies, subject to the
terms of the 1940 Act, and in the case of the HighMark Funds, to the terms of
the HighMark exemptive order.
HighMark California Tax-Free Money Market may invest up to 10% of its
total assets in shares of other investment companies with like objectives.
Stepstone California Tax-Free Money Market may also invest in shares of other
investment companies with like investment objectives. Although Stepstone
California Tax-Free Money Market is not subject to a stated percentage
limitation in the Stepstone Prospectus, both Stepstone and HighMark California
Tax-Free Money Market are subject to the terms of the 1940 Act.
Stepstone and HighMark Balanced, Stepstone Growth Equity and HighMark
Growth, Stepstone and HighMark Value Momentum, HighMark Blue Chip Growth,
HighMark Emerging Growth, and HighMark International Equity may write covered
calls on their equity securities and enter into closing transactions with
respect to covered call options.
The assets of Stepstone and HighMark Balanced, HighMark Growth,
HighMark Value Momentum, Stepstone and HighMark Blue Chip Growth, and Stepstone
and HighMark Emerging Growth may be invested in options, futures contracts and
options on futures, SPDRs, and investment grade bonds. The aggregate value of
options on securities (long puts and calls) will not exceed 10% of a Fund's net
assets at the time such options are purchased by the Fund. Each such Fund may
enter into futures and options on futures only to the extent that obligations
under such contracts or transactions, together with options on securities,
represent not more than 25% of its assets.
Stepstone and HighMark Balanced, Stepstone Growth Equity and HighMark
Growth, Stepstone and HighMark Value Momentum, Stepstone and HighMark Blue Chip
Growth, Stepstone and HighMark Emerging Growth, and Stepstone and HighMark
International Equity may purchase options in stock indices to invest cash on an
interim basis. The aggregate premium paid on all options on stock indices
cannot exceed 20% of any such Fund's total assets.
HighMark Intermediate-Term Bond, Stepstone and HighMark Government
Securities, and HighMark California Intermediate Tax-Free Bond may invest in
futures and options on futures for the purpose of achieving their objectives
and for adjusting portfolio duration. Such Funds may invest in futures and
related options based on any type of security or index traded on U.S. or
foreign exchanges or over the counter, as long as the underlying security or
securities represented by an index, are permitted investments of such Fund.
Each such Fund may enter into futures contracts and related options only to the
extent that obligations under such contracts or transactions represent not more
than 10% of its assets.
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<PAGE> 22
INVESTMENT RESTRICTIONS. As noted above, each Stepstone Fund's
investment objective and policies are similar, although not always identical,
to those of the corresponding HighMark Fund. In addition, for the most part,
the types of instruments and securities in which they may invest are similar.
Likewise, the fundamental investment restrictions adopted by each Stepstone
Fund and the corresponding HighMark Fund, which may be changed only with
shareholder approval, are also similar. However, as summarized below, there
are some differences between these investment restrictions. The following
discussion is qualified by the disclosure on such subjects contained in the
HighMark Prospectuses and the Stepstone Prospectuses accompanying and
incorporated by reference into this Combined Prospectus/Proxy Statement, as
well as by the disclosure on such subjects contained in the Statements of
Additional Information of HighMark and Stepstone which are incorporated by
reference into this Combined Prospectus/Proxy Statement.
The following three investment restrictions are contained in the
Stepstone Prospectuses and the HighMark Prospectuses, and although worded
slightly differently, provide in substance that none of the Funds may:
1) Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities, if, immediately after the purchase, more than 5% of the
value of such Fund's total assets would be invested in the issuer or the Fund
would hold more than 10% of any class of securities of the issuer or more than
10% of the issuer's outstanding voting securities (except that up to 25% of the
value of the Fund's total assets may be invested without regard to these
limitations).
2) Purchase any securities that would cause more than 25% of such
Fund's total assets at the time of purchase to be invested in securities of one
or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities (and, in the case of the money
market funds, domestic bank certificates of deposit or bankers' acceptances,
and repurchase agreements secured by bank instruments); (b) wholly owned
finance companies will be considered to be in the industries of their parents
if their activities are primarily related to financing the activities of their
parents; and (c) utilities will be divided according to their services (for
example, gas, gas transmission, electric and gas, electric, and telephone will
each be considered a separate industry);
3) Make loans, except that a Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements in
accordance with its investment objective and policies.
The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the respective Fund.
In restriction (1) above, each Stepstone Fund, HighMark California
Intermediate Tax-Free Bond, HighMark Convertible Securities, and HighMark
International Equity specifically note that repurchase agreements involving
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are excluded from the restriction. The remaining HighMark
Funds do not refer to repurchase agreements in the restriction itself, but
achieve the same result by noting in the description of repurchase agreements
contained in the HighMark Prospectuses under the heading "Description of
Permitted Investments" that repurchase agreements involving government
securities are not subject to a Fund's fundamental investment limitation on
purchasing securities of any one issuer.
Additional fundamental investment restrictions are contained in the
Stepstone and HighMark Statements of Additional Information. HighMark has
revised and simplified its fundamental investment restrictions for the
following Funds: HighMark Value Momentum, HighMark Blue Chip Growth, HighMark
Emerging Growth, HighMark International Equity, HighMark Intermediate-Term
Bond, HighMark Government Securities, HighMark Convertible Securities, and
HighMark California Intermediate Tax-Free Bond (hereinafter the "New
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<PAGE> 23
Model Funds"). It is HighMark's intent to conform the fundamental investment
restrictions of the remaining HighMark Funds to the simplified format of the
New Model Funds by means of a proxy vote within the next two years. The
fundamental investment restrictions for the New Model Funds provide that each
such Fund:
1. May purchase securities of any issuer only when consistent
with the maintenance of its status as a diversified company
under the 1940 Act, or the rules or regulations thereunder, as
such statute, rules or regulations may be amended from time to
time.
2. May not concentrate investments in a particular industry or
group of industries, or within any one state (except that the
limitation as to investments in any one state or its political
subdivision shall not apply to HighMark California Tax-Free
Money Market ), as concentration is defined under the 1940
Act, or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
3. May issue senior securities to the extent permitted by the
1940 Act, or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to
time.
4. May lend or borrow money to the extent permitted by the 1940
Act, or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
5. May purchase or sell commodities, commodities contracts,
futures contracts, or real estate to the extent permitted by
the 1940 Act, or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to
time.
6. May underwrite securities to the extent permitted by the 1940
Act, or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
7. May pledge, mortgage or hypothecate any of its assets to the
extent permitted by the 1940 Act, or the rules or regulations
thereunder, as such statute, rules or regulations may be
amended from time to time.
The fundamental limitations of the New Model Funds have been adopted
to avoid wherever possible the necessity of shareholder meetings otherwise
required by the 1940 Act. This recognizes the need to react quickly to changes
in the law or new investment opportunities in the securities markets and the
cost and time involved in obtaining shareholder approvals for diversely held
investment companies. However, the New Model Funds also have adopted
nonfundamental limitations are set forth below, which in some instances may be
more restrictive than their fundamental limitations. Any changes in a HighMark
Fund's nonfundamental limitations are communicated to the HighMark Fund's
shareholders prior to effectiveness.
1940 ACT RESTRICTIONS. Under the 1940 Act, and the rules, regulations
and interpretations thereunder, a "diversified company," as to 75% of its total
assets, may not purchase securities of any issuer (other than obligations of,
or guaranteed by, the U.S. Government, its agencies or its instrumentalities)
if, as a result, more than 5% of the value of its total assets would be
invested in the securities of such issuer or more than 10% of the issuer's
voting securities would be held by the fund. "Concentration" is generally
interpreted under the 1940 Act to be investing more than 25% of net assets in
an industry or group of industries. The 1940 Act limits the ability of
investment companies to borrow and lend money and to underwrite securities.
The 1940 Act currently prohibits an open-end fund from issuing senior
securities, as defined in the 1940 Act, except under very limited
circumstances.
The following investment limitations of the New Model Funds are nonfundamental
policies. Each such HighMark Fund may not:
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1. Acquire more than 10% of the voting securities of any one issuer.
This limitation applies to only 75% of a Fund's assets.
2. Invest in companies for the purpose of exercising control.
3. Borrow money, except for temporary or emergency purposes and then
only in an amount not exceeding one-third of the value of total assets and
except that a Fund may borrow from banks or enter into reverse repurchase
agreements for temporary emergency purposes in amounts up to 10% of the value
of its total assets at the time of such borrowing. To the extent that such
borrowing exceeds 5% of the value of the Fund's assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any
time fall below 300%, the Fund shall, within three days thereafter or such
longer period as the Securities and Exchange Commission may prescribe by rules
and regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowing shall be at least 300%. This borrowing
provision is included solely to facilitate the orderly sale of portfolio
securities to accommodate heavy redemption requests if they should occur and is
not for investment purposes. All borrowings will be repaid before making
additional investments and any interest paid on such borrowings will reduce
income.
4. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed 10% of
total assets taken at current value at the time of the incurrence of such loan,
except as permitted with respect to securities lending.
5. Purchase or sell real estate, real estate limited partnership
interest, commodities or commodities contracts (except that HighMark Government
Securities, HighMark Blue Chip Growth, HighMark Emerging Growth, HighMark
International Equity, HighMark Value Momentum, HighMark Intermediate-Term Bond
and HighMark California Intermediate Tax-Free Bond may invest in futures
contracts and options on futures contracts, as disclosed in the prospectuses)
and interest in a pool of securities that are secured by interests in real
estate. However, subject to their permitted investments, any Fund may invest
in companies which invest in real estate, commodities or commodities contracts.
6. Make short sales of securities, maintain a short position or
purchase securities on margin, except that HighMark may obtain short-term
credits as necessary for the clearance of security transactions.
7. Act as an underwriter of securities of other issuers except as it
may be deemed an underwriter in selling a Fund security.
8. Issue senior securities (as defined in the Investment Company Act
of 1940) except in connection with permitted borrowings as described above or
as permitted by rule, regulation or order of the Securities and Exchange
Commission.
9. Purchase or retain securities of an issuer if, to the knowledge of
HighMark, an officer, trustee, partner or director of HighMark or the Advisor
or sub-advisors of HighMark owns beneficially more than 1/2 of 1% of the shares
or securities of such issuer and all such officers, trustees, partners and
directors owning more than 1/2 of 1% of such shares or securities together own
more than 5% of such shares or securities.
10. Invest in interest in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
The fundamental investment restrictions of the Stepstone Funds are in
a different format from those of the corresponding HighMark Funds, but
typically the substance of what is covered is essentially the same. The
substance of many of the fundamental restrictions of the Stepstone Funds have
been adopted by the above-listed HighMark Funds as non-fundamental policies,
which means that they may be changed without a Shareholder vote.
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<PAGE> 25
The following fundamental restrictions apply to all 13 Stepstone Funds covered
in the prospectus/proxy statement, and provide that no such Stepstone Fund may:
1. Acquire more than 10% of the voting securities of any one issuer.
For Stepstone Government Securities, this limitation applies to only 75% of the
Fund's assets.
2. Invest in companies for the purpose of exercising control.
3. Borrow money, except for temporary or emergency purposes and then
only in an amount not exceeding one-third of the value of total assets. Any
borrowing will be done from a bank and to the extent that such borrowing
exceeds 5% of the value of the Fund's assets, asset coverage of at least 300%
is required. In the event that such asset coverage shall at any time fall
below 300%, the Fund shall, within three days thereafter or such longer period
as the Securities and Exchange Commission may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. This borrowing
provision is included solely to facilitate the orderly sale of portfolio
securities to accommodate heavy redemption requests if they should occur and is
not for investment purposes. All borrowings will be repaid before making
additional investments and any interest paid on such borrowings will reduce
income.
4. Make loans, except that (a) a Fund may purchase or hold debt
instruments in accordance with its investment objective and policies; (b) a
Fund may enter into repurchase agreements, and (c) the Funds may engage in
securities lending as described in the Prospectus and in this Statement of
Additional Information.
5. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed 10% of
total assets taken at current value at the time of the incurrence of such loan,
except as permitted with respect to securities lending.
6. Purchase or sell real estate, real estate limited partnership
interests, commodities or commodities contracts (except that Stepstone
Government Securities, Stepstone Balanced, Stepstone Blue Chip Growth,
Stepstone Emerging Growth and Stepstone International Equity may invest in
futures contracts and options on futures contracts, as disclosed in the
prospectuses) and interests in a pool of securities that are secured by
interests in real estate. However, subject to their permitted investments, any
Fund may invest in companies which invest in real estate, commodities or
commodities contracts.
7. Make short sales of securities, maintain a short position or
purchase securities on margin, except that Stepstone may obtain short-term
credits as necessary for the clearance of security transactions.
8. Act as an underwriter of securities of other issuers except as it
may be deemed an underwriter in selling a Fund security.
9. Purchase securities of other investment companies except for money
market funds and then only as permitted by the 1940 Act and the rules and
regulations thereunder. Stepstone Emerging Growth, Stepstone Blue Chip Growth,
Stepstone Convertible Securities, Stepstone International Equity and Stepstone
Government Securities may also purchase the securities of non-money market
funds as permitted by the 1940 Act. Under these rules and regulations, the
Funds are prohibited from acquiring the securities of other investment
companies if, as a result of such acquisition, the Funds own more than 3% of
the total voting stock of the company; securities issued by any one investment
company represent more than 5% of the total Funds' assets; or securities (other
than treasury stock) issued by all investment companies represent more than 10%
of the total assets of the Funds. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. A Fund's
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.
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<PAGE> 26
10. Issue senior securities (as defined in the 1940 Act) except in
connection with permitted borrowings as described above or as permitted by
rule, regulation or order of the Securities and Exchange Commission.
11. Purchase or retain securities of an issuer if, to the knowledge
of Stepstone, an officer, trustee, partner or director of Stepstone or any
investment advisor of Stepstone owns beneficially more than 1/2 of 1% of the
shares or securities of such issuer and all such officers, trustees, partners
and directors owning more than 1/2 of 1% of such shares or securities together
own more than 5% of such shares or securities.
12. Invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
13. Write or purchase puts, calls, options or combinations thereof,
except that Stepstone Growth Equity, Stepstone Emerging Growth, Stepstone Blue
Chip Growth, Stepstone Balanced, Stepstone International Equity and Stepstone
Value Momentum may write covered call options with respect to any or all parts
of its Fund securities, and Stepstone Balanced, Stepstone Blue Chip Growth, and
Stepstone Emerging Growth may purchase call and purchase and sell put options
listed on national exchanges and Stepstone International Equity may purchase
call and purchase and sell put options listed on U.S. and foreign exchanges.
Stepstone California Tax-Free Money Market may purchase puts as described in
the prospectus. Stepstone Growth Equity, Stepstone Emerging Growth, Stepstone
Blue Chip Growth, Stepstone Balanced, Stepstone International Equity and
Stepstone Value Momentum may sell options previously purchased and enter into
closing transactions with respect to covered call options. In addition,
Stepstone Equity, Stepstone Emerging Growth, Stepstone Blue Chip Growth,
Stepstone Value Momentum, Stepstone International Equity and Stepstone Balanced
may purchase options on stock indices to invest cash on an interim basis.
In addition, the Stepstone Funds have adopted the following
non-fundamental policies:
No Fund may invest in warrants, except that Stepstone Growth Equity,
Stepstone Emerging Growth, Stepstone Blue Chip Growth, Stepstone Convertible
Securities, Stepstone Value Momentum, Stepstone International Equity, and
Stepstone Balanced may invest in warrants in an amount not exceeding 5% of the
Fund's net assets as valued at the lower of cost or market value. Included in
that amount, but not to exceed 2% of the Fund's net assets, may be warrants not
listed on the New York Stock Exchange or American Stock Exchange.
No Fund may invest in illiquid securities in an amount exceeding, in
the aggregate, 15% of its net assets, except that Stepstone Money Market,
Stepstone Treasury Money Market and Stepstone California Tax-Free Money Market
may not invest more than 10% of net assets in illiquid securities. An illiquid
security is a security which cannot be disposed of within seven business days
at approximately the price at which they are being carried on the Fund's books,
and includes repurchase agreements maturing in excess of seven days, time
deposits with a withdrawal penalty, non-negotiable instruments and instruments
for which no market exists.
The current fundamental investment restrictions of HighMark
Diversified Money Market, HighMark 100% U.S. Treasury Money Market, HighMark
California Tax-Free Money Market, HighMark Balanced, and HighMark Growth are as
follows. These restrictions are substantially similar to the current Stepstone
restrictions, and differ from the revised HighMark restrictions in that they
are all fundamental, and are specifically worded rather than providing
generally that the requirements of the 1940 Act will be met.
HIGHMARK 100% U.S. TREASURY MONEY MARKET
HighMark 100% U.S. Treasury Money Market may not purchase securities
other than short-term obligations issued or guaranteed as to payment of
principal and interest by the full faith and credit of the U.S. Treasury.
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<PAGE> 27
EACH OF HIGHMARK GROWTH, HIGHMARK BALANCED, HIGHMARK DIVERSIFIED MONEY MARKET,
AND HIGHMARK 100% U.S. TREASURY MONEY MARKET MAY NOT:
1. Purchase securities on margin (except that, with respect to
HighMark Growth and HighMark Balanced, such Funds may make margin payments in
connection with transactions in options and financial and currency futures
contracts), sell securities short, participate on a joint or joint and several
basis in any securities trading account, or underwrite the securities of other
issuers, except to the extent that a Fund may be deemed to be an underwriter
under certain securities laws in the disposition of "restricted securities"
acquired in accordance with the investment objectives and policies of such
Fund;
2. Purchase or sell commodities, commodity contracts (excluding, with
respect to HighMark Growth and HighMark Balanced, options and financial and
currency futures contracts), oil, gas or mineral exploration leases or
development programs, or real estate (although investments by HighMark Growth,
HighMark Balanced and HighMark Diversified Money Market in marketable
securities of companies engaged in such activities and investments by HighMark
Growth and HighMark Balanced in securities secured by real estate or interests
therein, are not hereby precluded to the extent the investment is appropriate
to such Fund's investment objective and policies);
3. Invest in any issuer for purposes of exercising control or
management;
4. Purchase or retain securities of any issuer if the officers or
Trustees of HighMark or the officers or directors of its investment advisor
owning beneficially more than one-half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities;
5. Borrow money or issue senior securities, except that a Fund may
borrow from banks or enter into reverse repurchase agreements for temporary
emergency purposes in amounts up to 10% of the value of its total assets at the
time of such borrowing; or mortgage, pledge, or hypothecate any assets, except
in connection with permissible borrowings and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of the value of the Fund's total
assets at the time of its borrowing. A Fund will not invest in additional
securities until all its borrowings (including reverse repurchase agreements)
have been repaid. For purposes of this restriction, the deposit of securities
and other collateral arrangements with respect to options and financial and
currency futures contracts, and payments of initial and variation margin in
connection therewith, are not considered a pledge of a Fund's assets; and
HIGHMARK DIVERSIFIED MONEY MARKET AND HIGHMARK 100% U.S. TREASURY MONEY MARKET
MAY NOT:
1. Buy common stocks or voting securities, or state, municipal or
private activity bonds;
2. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation, reorganization, or
acquisition of assets;
3. Write or purchase put or call options; or
4. Invest more than 10% of total assets in the securities of issuers
that together with any predecessors have a record of less than three years'
continuous operation.
HIGHMARK GROWTH AND HIGHMARK BALANCED MAY NOT:
1. Invest in securities of other investment companies except as they
may be acquired as part of a merger, consolidation, reorganization, or
acquisition of assets, provided, however, that each of the Funds may purchase
securities of a money market fund, if, immediately after such purchase, the
acquiring Fund does not own in the
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<PAGE> 28
aggregate (i) more than 3% of the acquired company's outstanding voting
securities, (ii) securities issued by the acquired company having an aggregate
value in excess of 5% of the value of the total assets of the acquiring Fund,
or (iii) securities issued by the acquired company and all other investment
companies (other than treasury stock of the acquiring Fund) having an aggregate
value in excess of 10% of the value of the acquiring Fund's total assets; and
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET MAY NOT:
1. Purchase or sell real estate; provided, however, that the Fund
may, to the extent appropriate to its investment objective, purchase Municipal
Securities secured by real estate or interests therein or securities issued by
companies investing in real estate or interests therein;
2. Purchase securities on margin, make short sales of securities or
maintain a short position;
3. Underwrite the securities of other issuers;
4. Purchase securities of companies for the purpose of exercising
control or management;
5. Invest in private activity bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation;
6. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration leases or development programs; provided,
however, the Fund may, to the extent appropriate to the Fund's investment
objective, purchase publicly traded obligations of companies engaging in whole
or in part in such activities;
7. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets;
8. Borrow money or issue senior securities, except that the Fund may
borrow from banks or enter into reverse repurchase agreements for temporary
emergency purposes in amounts up to 10% of the value of its total assets at the
time of such borrowing; or mortgage, pledge, or hypothecate any assets, except
in connection with permissible borrowings and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of the value of the Fund's total
assets at the time of its borrowing. The Fund will not invest in additional
securities until all its borrowings (including reverse repurchase agreements)
have been repaid;
9. Write or sell puts, calls, straddles, spreads, or combinations
thereof, except that the Fund may acquire puts with respect to Municipal
Securities in its portfolio and sell the puts in conjunction with a sale of the
underlying Municipal Securities;
10. Acquire a put, if, immediately after the acquisition, more than
5% of the total amortized cost value of the Fund's assets would be subject to
puts from the same institution (except that (i) up to 25% of the value of the
Fund's total assets may be subject to puts without regard to the 5% limitation
and (ii) the 5% limitation is inapplicable to puts that, by their terms, would
be readily exercisable in the event of a default in payment of principal or
interest on the underlying securities). In applying the above-described
limitation, the Fund will aggregate securities subject to puts from any one
institution with the Fund's investments, if any, in securities issued or
guaranteed by that institution. In addition, for the purpose of this
investment restriction and investment restriction No. 11 below, a put will be
considered to be from the party to whom the Fund will look for payment of the
exercise price;
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<PAGE> 29
11. Acquire a put that, by its terms, would be readily exercisable in
the event of a default in payment of principal and interest on the underlying
security or securities if, immediately after the acquisition, the amortized
cost value of the security or securities underlying the put, when aggregated
with the amortized cost value of any other securities issued or guaranteed by
the issuer of the put, would exceed 10% of the total amortized cost value of
the Fund's assets; and
12. Invest in securities of other investment companies except as they
may be acquired as part of a merger, consolidation, reorganization, or
acquisition of assets, provided, however, that the Fund may purchase securities
of a tax-exempt money market fund if, immediately after such purchase, the
acquiring Fund does not own in the aggregate (i) more than 3% of the acquired
company's outstanding voting securities, (ii) securities issued by the acquired
company having an aggregate value in excess of 5% of the value of the total
assets of the acquiring Fund, or (iii) securities issued by the acquired
company and all other investment companies (other than treasury stock of the
acquiring Fund) having an aggregate value in excess of 10% of the value of the
acquiring Fund's total assets.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
Management discussion of fund performance for HighMark Balanced and
HighMark Growth is incorporated by reference from the annual report of
HighMark, dated July 31, 1996, and attached hereto as Appendix C.
No management discussion of fund performance is included for HighMark
Value Momentum, HighMark Blue Chip Growth, HighMark Emerging Growth, HighMark
International Equity, HighMark Intermediate-Term Bond, HighMark Convertible
Securities, HighMark Government Securities or HighMark California Intermediate
Tax-Free Bond, which had not yet commenced operations as of July 31, 1996, the
end of HighMark's most recent fiscal year. No management discussion of fund
performance is required for money market funds, and therefore none is provided
for HighMark Diversified Money Market, HighMark 100% U.S. Treasury Money Market
and HighMark California Tax-Free Money Market.
Management discussion of fund performance for the Stepstone Funds is
incorporated by reference from the current prospectuses, the annual report dated
January 31, 1996 and the semi-annual report dated July 31, 1996 of Stepstone,
which are available upon request without charge by calling 1-800- 433-6884.
OPERATING PROCEDURES.
PURCHASE PROCEDURES. Because the distributor for both Stepstone and
HighMark is SEI Financial Services Company (the "Distributor"), purchase
procedures are identical for the two Fund groups. Purchase orders for Shares
are executed at a per Share price equal to the asset value next determined
after the purchase order is effective (plus any applicable sales charge). No
sales charges are imposed on Fiduciary shares and therefore no sales charges
will be imposed on the Fiduciary shares of the HighMark Funds distributed by
HighMark in the Transaction. A maximum sales charge of 4.5% of the offering
price is imposed on Retail shares of HighMark Value Momentum, HighMark Growth,
HighMark Emerging Growth and HighMark Balanced and a maximum sales charge of
4.5% of the offering price is imposed on Investment Class shares of Stepstone
Value Momentum, Stepstone Growth Equity, Stepstone Emerging Growth and
Stepstone Balanced. A maximum sales charge of 3.0% is imposed on Retail shares
of HighMark California Intermediate Tax-Free Bond and HighMark
Intermediate-Term Bond and a maximum sales charge of 3.0% is imposed on
Investment Class shares of Stepstone California Intermediate Tax-Free Bond and
Stepstone Intermediate-Term Bond. However, no sales charge will be imposed on
the Retail shares of the HighMark Funds distributed by HighMark in the
Transaction.
Shares of both the Stepstone Funds and the HighMark Funds are sold on
a continuous basis by the Distributor, either by mail, by wire, through an
Automatic Investment Plan or through financial institutions. The
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<PAGE> 30
Stepstone Funds have a minimum investment requirement of $2,000 ($1,000 for
IRAs), while the HighMark Funds have a minimum investment requirement of
$1,000. The Stepstone Funds have a subsequent minimum investment requirement
of $1,000 ($500 for IRAs) whereas the HighMark Funds generally have a
subsequent minimum investment requirement of $100.
Purchases and redemption of Shares of the Stepstone Funds and the
HighMark Funds may be made on days on which both The New York Stock Exchange
("NYSE") and the Federal Reserve wire system are open for business ("Business
Days").
EXCHANGE PRIVILEGE. Shareholders of Investment Class shares of
Stepstone Funds that have similar sales charge schedules may tender their
shares of those Funds for exchange into the number of shares (including
fractional shares) which have a value equal to the total net asset value of
shares tendered divided by the net asset value of Investment Class shares of
the Fund next determined after such order is received. Shares issued pursuant
to this offer are not subject to a sales charge or any other charge.
Each HighMark Fund's shares may be exchanged for shares of the class
of the various other Funds of HighMark which the shareholder qualifies to
purchase directly so long as the shareholder maintains the applicable minimum
account balance in each Fund in which he or she owns shares and satisfies the
minimum initial and subsequent purchase amounts of the Fund into which the
shares are exchanged. HighMark shareholders may exchange their Fiduciary shares
for Fiduciary shares of another Fund on the basis of the relative net asset
value of the Fiduciary shares exchanged. HighMark shareholders may also
exchange Fiduciary shares of a Fund for Retail shares of another Fund. Under
such circumstances, the cost of the acquired Retail shares will be the net
asset value per share plus the appropriate sales load.
HighMark shareholders may exchange their Retail shares for Retail
shares of a Fund with the same or lower sales charge on the basis of the
relative net asset value of the Retail shares exchanged. HighMark shareholders
may exchange their Retail shares for Retail shares of a Fund with a higher
sales charge by paying the difference between the two sales charges.
Shareholders may also exchange Retail shares of a money market fund for which
no sales load was paid for Retail shares of a HighMark Fund for which a sales
charge is imposed. Under such circumstances, the cost of the acquired Retail
shares will be the net asset value per share plus the appropriate sales load.
Exchange privileges for shareholders in both the Stepstone Funds and
the HighMark Funds are available only in any state where the shares of such
Fund may be legally sold. Exercise of the exchange privilege is generally
treated as a sale for Federal income tax purposes and, depending on the
circumstances, a short or long-term capital gain or loss may be realized.
Exchanges are made on the basis of the relative net asset values of
the shares exchanged plus any applicable sales charge. Neither Stepstone nor
HighMark imposes a charge for processing exchanges of shares.
REDEMPTION PROCEDURES. Because the Distributor for both Stepstone and
HighMark is SEI Financial Services Company, redemption procedures are generally
identical for the two Fund groups. Both Stepstone and HighMark redeem shares
at their net asset value next determined after receipt by the Distributor of
the redemption request. Redemptions will be made on any Business Day without
charge although there is presently a $15 charge for wiring redemption proceeds
to a shareholder's designated account. Shares may be redeemed by mail, by
telephone or through a pre-arranged systematic withdrawal plan.
HighMark reserves the right to make payment on redemptions in
securities rather than cash. Stepstone has filed a Rule 18f-1 election
commiting itself to pay in cash all requests for redemption limited in amount
with respect to each shareholder during any 90-day period to the lesser of (i)
$250,000 or (ii) one percent of the net asset value of the Stepstone Fund at
the beginning of such period.
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<PAGE> 31
Both Stepstone and HighMark reserve the right to redeem shares at net
asset value if a shareholder's account has a value of less than the minimum
initial purchase amount. Before a Fund exercises its right to redeem such
shares, a shareholder is given notice that the value of shares in his or her
account is less than the minimum amount and is allowed 60 days to make an
additional investment in the Fund.
DISTRIBUTIONS. For all of the Funds of both Stepstone and HighMark,
except those noted below, dividends are declared and paid monthly to all
shareholders of record at the close of business on the day of declaration. Net
realized capital gains, if any, are distributed at least annually to
shareholders of record. Shareholders automatically receive all income
dividends and capital gains distributions in additional full and fractional
shares of the Fund at net asset value as of the date of declaration unless the
shareholder elects to receive such dividends or distributions in cash.
For shareholders of Stepstone International Equity and HighMark
International Equity, substantially all of the net investment income (exclusive
of capital gains) of each Fund is periodically declared and paid as a dividend
to shareholders of record. Currently, capital gains of each Fund, if any, are
distributed at least annually.
For shareholders of Stepstone Money Market, HighMark Diversified Money
Market, Stepstone Treasury Money Market, HighMark 100% U.S. Treasury Money
Market, Stepstone California Tax-Free Money Market and HighMark California
Tax-Free Money Market, the net income of each Fund is declared daily as a
dividend to shareholders of record at the close of business on the day of
declaration.
Dividends paid in additional shares receive the same tax treatment as
dividends paid in cash.
The amount of dividends payable on Fiduciary shares of the HighMark
Funds and Institutional Class shares of the Stepstone Funds generally will be
more than dividends payable on Retail shares of the HighMark Funds and
Investment Class shares of the Stepstone Funds because of the distribution
expenses charged to Retail shares and Investment Class shares but not charged
to Fiduciary shares and Institutional Class shares.
NET ASSET VALUE. The net asset value of shares of the non-money
market Stepstone Funds and the non-money market HighMark Funds is determined
daily as of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business
Day.
The net asset value of shares of Stepstone Money Market, Stepstone
Treasury Money Market, and Stepstone California Tax-Free Money Market is
calculated as of 9:00 a.m. Pacific time (12:00 noon, Eastern time), on each
Business Day, based on the amortized cost method. The net asset value of
Shares of HighMark Diversified Money Market, HighMark 100% U.S. Treasury Money
Market, and HighMark California Tax-Free Money Market is calculated as of 10:00
a.m., Pacific time (1:00 p.m. Eastern time), each Business Day, based on the
amortized cost method.
Both the Stepstone and the HighMark money market funds value their
securities using the amortized cost method, which involves valuing an
instrument at its cost initially, and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument.
The securities of the remaining Stepstone Funds are valued by SEI
Fund Resources pursuant to valuations provided by an independent pricing
service. The pricing service relies primarily on prices of actual market
transactions as well as trader quotations. However, the service may also use a
matrix system to determine valuations, which system considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at valuations. The procedures of
the pricing service and its valuations are reviewed by the officers of
Stepstone under the general supervision of the Stepstone Board of Trustees.
Although the methodology and procedures are identical, the net asset value per
share of Institutional
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<PAGE> 32
Class and Investment Class shares of Stepstone Funds other than the Money
Market Funds may differ because of the distribution expenses charged to
Investment Class shares.
The securities of the remaining HighMark Funds traded on a national
exchange (or exchanges) are valued based upon their last sale price on the
principal exchange on which such securities are traded. With regard to each
such HighMark Fund, securities the principal market for which is not a
securities exchange are valued based upon the latest bid price in such
principal market. Securities and other assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith under consistently applied procedures established by and under the
general supervision of HighMark's Board of Trustees. With the exception of
short-term securities, the value of each Fund's investments may be based on
valuations provided by a pricing service. Short-term securities (i.e.,
securities with remaining maturities of 60 days or less) may be valued at
amortized cost, which approximates current value.
FEDERAL TAX CONSIDERATIONS. Consummation of the Transaction is
subject to the condition that Stepstone and HighMark receive an opinion of
Ropes & Gray to the effect that, based upon certain representations and
assumptions and subject to certain qualifications, the Transaction will not
result in the recognition of gain or loss for Federal income tax purposes for
any of the Stepstone Funds , their shareholders or the HighMark Funds .
RISK FACTORS
The investment objective and policies of each Stepstone Fund and its
corresponding HighMark Fund are substantially similar. However, in some
instances, a HighMark Fund may invest in certain securities in which the
corresponding Stepstone Fund may not invest. In some cases, although both the
HighMark Fund and the corresponding Stepstone Fund may invest in the same
securities, they may do so subject to varying limitations. This discussion is
qualified in its entirety by the disclosure set forth in the HighMark and
Stepstone Prospectuses accompanying this Combined Prospectus/Proxy Statement.
Both the Stepstone and HighMark money market funds intend to comply
with Rule 2a-7 under the 1940 Act. Shares of each Fund are priced pursuant to
the amortized cost method whereby HighMark and Stepstone seek to maintain each
Fund's net asset value per Share at $1.00. There can be, however, no assurance
that a stable net asset value of $1.00 per Share will be maintained.
Investments by both the Stepstone Funds and the HighMark Funds in
obligations of certain agencies and instrumentalities of the U.S. Government
may not be guaranteed by the full faith and credit of the U.S. Treasury, and
there can be no assurance that the U.S. Government would provide financial
support to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law.
As in the case of mortgage-related securities, loan participations and
certain asset-backed securities are subject to prepayments and there can be no
assurance that a Stepstone Fund or a HighMark Fund will be able to reinvest the
proceeds of any prepayment at the same interest rate or on the same terms as
the original investment.
With regard to loan participations, although a Stepstone or HighMark
Fund's ability to receive payments of principal and interest in connection with
a particular loan is primarily dependent on the financial condition of the
underlying borrower, the lending institution or bank may provide assistance in
collecting interest and principal from the borrower and in enforcing its rights
against the borrower in the event of a default. In selecting loan
participations on behalf of a Stepstone or HighMark Fund, the Advisor evaluates
the creditworthiness of both the borrower and the loan originator and will
treat both as an "issuer" of the loan participation for purposes of the Fund's
investment policies and restrictions.
Certain risks are inherent in both Stepstone and HighMark California
Tax-Free Money Market and Stepstone and HighMark California Intermediate
Tax-Free Bond's concentrated investment in California
-32-
<PAGE> 33
Municipal Securities, which may make an investment in such Funds riskier than
an investment in other types of funds. Because of Stepstone and HighMark
California Tax-Free Money Market and Stepstone and HighMark California
Intermediate Tax-Free Bond's investment objectives, many of the securities in
their portfolios are likely to be obligations of California governmental
issuers that rely in whole or in part, directly or indirectly, on real property
taxes as a source of revenue. The ability of the State of California and its
political sub-divisions to generate revenue through real property and other
taxes and to increase spending has been significantly restricted by various
constitutional and statutory amendments and voter-passed initiatives. Such
limitations could affect the ability of California state and municipal issuers
to pay interest or repay principal on their obligations. In addition, during
the first half of the decade, California faced severe economic and fiscal
conditions and experienced recurring budget deficits that caused it to deplete
its available cash resources and to become increasingly dependent upon external
borrowings to meet its cash needs.
The financial difficulties experienced by the State of California and
other issuers of California Municipal Securities during the recession resulted
in the credit ratings of certain of their obligations being downgraded
significantly by the major rating agencies.
Investment in both Stepstone Balanced and HighMark Balanced entails
certain risks. As with the Stepstone and HighMark Funds investing primarily in
equity securities, Stepstone Balanced and HighMark Balanced are subject to the
risk that prices of equity securities, or certain types of equity securities in
which they invest, in general will decline over short or even extended periods.
Since the Funds' shares will fluctuate in value, the Funds may be more suitable
for long-term investors who can bear the risk of short-term fluctuations. In
addition, the market value of fixed-income securities bears an inverse
relationship to changes in market interest rates, which may affect the net
asset value of shares. The longer the remaining maturity of a security, the
greater is the effect of interest rate changes on its market value. Generally,
because of their fixed-income features, convertible securities will fluctuate
in value to a lesser degree than the common stocks into which they are
convertible. Changes in the value of a Fund's fixed-income securities will not
affect cash income received from ownership of such securities, but will affect
a Fund's net asset value.
Because Stepstone Balanced and HighMark Balanced also invest in debt
securities, investors in Stepstone Balanced and HighMark Balanced, like
investors in the HighMark and Stepstone Fixed Income Funds, are also exposed to
credit risk, which relates to the ability of an issuer to make payments of
principal and interest, and market risk, which relates to changes in a
security's value as a result of interest rate changes generally. An increase
in interest rates will generally reduce the value of the investments in
Stepstone Balanced and HighMark Balanced and a decline in interest rates will
generally increase the value of those investments. Accordingly, the net asset
value of the Funds' shares will vary as a result of changes in the value of the
securities in the Funds' portfolios. Therefore, an investment in the Funds may
decline in value, resulting in a loss of principal. Because interest rates
vary, it is impossible to predict the income or yield of the Funds for any
particular period. While debt securities normally fluctuate less in price than
equity securities, there have been extended periods of cyclical increases in
interest rates that have caused significant declines in debt securities prices.
Certain fixed-income securities which may be purchased by Stepstone Balanced
and HighMark Balanced such as zero-coupon obligations, mortgage-backed and
asset-backed securities, and collateralized mortgage obligations ("CMOs") will
have greater price volatility then other fixed-income obligations. Because
declining interest rates may lead to prepayment of underlying mortgages,
automobile sales contracts or credit card receivables, the prices of
mortgage-related and asset-backed securities may not rise with a decline in
interest rates. Mortgage-backed and asset-backed securities and CMOs are
extremely sensitive to the rate of principal prepayment. Similarly, callable
corporate bonds also present risk of prepayment. During periods of falling
interest rates, securities that can be called or prepaid may decline in value
relative to similar securities that are not subject to call or prepayment.
Depending upon prevailing market conditions, Stepstone Balanced and
HighMark Balanced, like the HighMark and Stepstone Fixed Income Funds, may
purchase debt securities at a discount from face value, which
-33-
<PAGE> 34
produces a yield greater than the coupon rate. Conversely, if debt securities
are purchased at premium over face value, the yield will be lower than the
coupon rate. In making investment decisions, the Advisor will consider many
factors other than current yield, including the preservation of capital, the
potential for realizing capital appreciation, maturity, and yield to maturity.
From time to time, the equity and debt markets may fluctuate independently of
one another. In other words, a decline in equity markets may in certain
instances be offset by a rise in debt markets, or vice versa. As a result,
Stepstone Balanced and HighMark Balanced, with their balance of equity and debt
investments, may entail less investment risk (and a potentially smaller
investment return) than a mutual fund investing primarily in equity securities.
Securities rated BBB by S&P or Baa by Moody's are considered
investment grade, but are deemed by these rating services to have some
speculative characteristics, and adverse economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher-grade bonds. Should
subsequent events cause the rating of a debt security to fall below the fourth
highest rating category, the Advisor will consider such an event in determining
whether a Fund should continue to hold that security. In no event, however,
would a Fund be required to liquidate any such portfolio security where the
Fund would suffer a loss on the sale of such security.
Changes by recognized rating agencies in the rating of any fixed
income security and in the ability of an issuer to make payments of interest
and principal also affect the value of these investments. Changes in the value
of Fund securities will not affect cash income derived from these securities,
but will affect the Fund's net asset value.
High-yield, high-risk securities, which may be purchased by Stepstone
Convertible Securities and HighMark Convertible Securities, consist of
securities rated Ba or lower by Moody's or BB or lower by S&P. Lower-rated
debt securities are considered speculative and involve greater risk of loss
than investment grade debt securities, and are more sensitive to changes in the
issuer's capacity to pay.
Given the uncertainty of the future value of emerging growth companies
and companies in special equity situations, the risk of possible decline in
value of the net assets of Stepstone Emerging Growth and HighMark Emerging
Growth is significant. Companies in which Stepstone Emerging Growth and
HighMark Emerging Growth invest may offer greater opportunities for capital
appreciation than larger more established companies, but investment in such
companies may involve certain special risks. These risks may be due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and frequent lack of depth in management. The securities
of such companies are often traded in the over-the-counter market and may not
be traded in volumes typical on a national securities exchange. Thus, the
securities of emerging growth companies may be less liquid, and subject to more
abrupt or erratic market movements than securities of larger, more established
growth companies. Since a "special equity situation" may involve a significant
change from a company's past experiences, the uncertainties in the appraisal of
the future value of the company's equity securities and the risk of a possible
decline in the value of the Funds' investments are significant.
There may be certain risks connected with investing in foreign
securities, including risks of adverse political and economic developments
(including possible governmental seizure or nationalization of assets), the
possible imposition of exchange controls or other governmental restrictions,
including less uniformity in accounting and reporting requirements, the
possibility that there will be less information on such securities and their
issuers available to the public, the difficulty of obtaining or enforcing court
judgments abroad, restrictions on foreign investments in other jurisdictions,
difficulties in effecting repatriation of capital invested abroad, and
difficulties in transaction settlements and the effect of delay on shareholder
equity. Foreign securities may be subject to foreign taxes, which reduce
yield, and may be less marketable than comparable U.S. securities. The value
of a Stepstone or HighMark Fund's investments denominated in foreign currencies
will depend on the relative strengths of those currencies and the U.S. dollar,
and the Fund may be affected favorably or unfavorably by changes in the
exchange rates or exchange control regulations between foreign currencies and
the U.S. dollar.
-34-
<PAGE> 35
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by the Fund.
Forward foreign currency contracts do not eliminate fluctuations in
the underlying prices of securities. Rather, they simply establish a rate of
exchange which one can achieve at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency at the same time, they tend to limit any
potential gain which might result, should the value of such currency increase.
Stepstone International Equity and HighMark International Equity's
investments in emerging markets can be considered speculative, and therefore,
may offer higher potential for gains and losses than developed markets of the
world. With respect to any emerging country, there is the greater potential
for nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or
investments in such countries. In addition, it may be difficult to obtain and
enforce a judgment in the courts of such countries. The economies of
developing countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values
and other protectionist measures imposed or negotiated by the countries with
which they trade.
There are also risks attached to particular types of investments into
which the Stepstone Funds and the HighMark Funds may enter. For a discussion
of the risks associated with a particular investment, see "Description of
Permitted Investments" at the back of any HighMark or Stepstone Prospectus
accompanying this Combined Prospectus/Proxy Statement.
The above discussion is qualified in its entirety by the disclosure in
the Stepstone and HighMark Prospectuses and Statements of Additional
Information.
SPECIAL MEETING OF SHAREHOLDERS
Proxies will be solicited by and on behalf of the Trustees of The Stepstone
Funds ("Stepstone") for use at a Special Meeting of Shareholders of the
Stepstone Funds (the "Meeting"). The Meeting is to be held on Wednesday,
April 16, 1997 at 3:00 p.m., Eastern standard time, at SEI Fund Resources,
Oaks, PA 19456. This Combined Prospectus/Proxy Statement and the enclosed form
of proxy are being mailed to shareholders on or about March 7, 1997.
Any shareholder giving a proxy has the power to revoke it. The
shareholder revoking such proxy must either submit to Stepstone a subsequently
dated proxy, deliver to Stepstone a written notice of revocation, or otherwise
give notice of revocation in open meeting. All properly executed proxies
received in time for the meeting will be voted as specified in the proxy, or,
if no specification is made, FOR the proposal (set forth in item (1) of the
Notice of Special Meeting) to implement the reorganization of the Stepstone
Funds by the transfer of all of their assets to the corresponding HighMark
Funds, in exchange for HighMark Fiduciary or Retail shares of the corresponding
HighMark Fund (collectively, "Shares") and the assumption by the corresponding
HighMark Fund of all of the liabilities of the Stepstone Fund followed by the
dissolution and liquidation of each Stepstone Fund and the distribution of
Shares to the shareholders of the Stepstone Funds. If the Stepstone Fund
shareholder of record has Institutional Class shares, that shareholder will
receive HighMark Fiduciary shares. All other Stepstone shareholders will
receive HighMark Retail shares.
At February 12, 1997 there was outstanding the following amount of
shares of beneficial interest of the Institutional Class and the Investment
Class of each Stepstone Fund:
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<PAGE> 36
<TABLE>
<S> <C>
Stepstone Money Market Investment Class shares of beneficial interest
---
Institutional Class shares of beneficial interest
---
Stepstone Treasury Money Investment Class shares of beneficial interest
Market ---
Institutional Class shares of beneficial interest
---
Stepstone California Tax-Free Investment Class shares of beneficial interest
Money Market ---
Institutional Class shares of beneficial interest
---
Stepstone Balanced Investment Class shares of beneficial interest
---
Institutional Class shares of beneficial interest
---
Stepstone Growth Equity Investment Class shares of beneficial interest
---
Institutional Class shares of beneficial interest
---
Stepstone Value Momentum Investment Class shares of beneficial interest
---
Institutional Class shares of beneficial interest
---
Stepstone Blue Chip Growth Institutional Class shares of beneficial interest
---
Stepstone Emerging Growth Investment Class shares of beneficial interest
---
Institutional Class shares of beneficial interest
---
Stepstone International Equity Institutional Class shares of beneficial interest
---
Stepstone Intermediate-Term Bond Investment Class shares of beneficial interest
---
Institutional Class shares of beneficial interest
---
Stepstone Convertible Securities Institutional Class shares of beneficial interest
---
Stepstone Government Securities Investment Class shares of beneficial interest
---
Institutional Class shares of beneficial interest
---
Stepstone California Intermediate Investment Class shares of beneficial interest
Tax-Free Bond ---
Institutional Class shares of beneficial interest
---
</TABLE>
Only shareholders of record on February 12, 1997 will be entitled to notice of
and to vote at the meeting. Each share is entitled to one vote as of the close
of business on February 12, 1997.
Stepstone's Trustees know of no matters other than those set forth
herein to be brought before the meeting. If, however, any other matters
properly come before the meeting, it is the Trustees' intention that proxies
will be voted on such matters in accordance with the judgment of the persons
named in the enclosed form of proxy.
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<PAGE> 37
PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF
AGREEMENT AND PLAN OF REORGANIZATION
The shareholders of each Stepstone Fund are being asked to approve or
disapprove the Agreement and Plan of Reorganization by and between Stepstone
and HighMark dated as of [ DATE ] (the "Agreement"), a copy of which
is attached to this Combined Prospectus/Proxy Statement as Appendix A. The
Agreement provides, among other things, for the transfer of all of the assets
of each Stepstone Fund to the corresponding HighMark Fund in exchange for the
assumption by the corresponding HighMark Fund of all of the liabilities of the
Stepstone Fund and for a number of Shares calculated based on the value of the
net assets of the Stepstone Fund acquired by the HighMark Fund and the net
asset value per share of the HighMark Fund, all as more fully described below
under "Information about the Reorganization." After receipt of Shares each
Stepstone Fund will dissolve, distributing the Shares to its shareholders in
complete liquidation, and each Stepstone Fund will be terminated. Prior to the
date of such transfer (the "Exchange Date"), each Stepstone Fund will declare a
distribution to their respective shareholders which, together with all previous
distributions, will have the effect of distributing to their respective
shareholders all of their investment company taxable income (computed without
regard to the deduction for dividends paid) and net realized capital gains, if
any, through the Exchange Date.
At a meeting held on October 17, 1996, the Trustees of Stepstone in
attendance voted unanimously to approve the Transaction and to recommend that
shareholders of each Stepstone Fund also approve the Transaction. Approval of
each reorganization of a Stepstone Fund requires the affirmative vote of a
majority of all votes attributable to the voting securities of that Stepstone
Fund voting separately as a fund, defined as the lesser of (a) sixty seven
percent (67%) or more of the votes attributable to all voting securities of
the Stepstone Fund present at such meeting, if holders of more than 50% of the
votes attributable to the outstanding voting securities are present or
represented by proxy, or (b) more than 50% of the votes attributable to the
outstanding voting securities of the Stepstone Fund.
A shareholder of any Stepstone Fund objecting to the proposed
Transaction is not entitled under either Massachusetts law or Stepstone's
Declaration of Trust to demand payment for and an appraisal of his or her
particular Stepstone Fund shares if the Transaction is consummated over his or
her objection. However, shares of the HighMark Funds are redeemable for cash
at their net asset value on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days").
In the event that this proposal is not approved by the shareholders of
any Stepstone Fund, such Stepstone Fund will continue to be managed as a
separate fund in accordance with its current investment objectives and
policies, and the Stepstone Trustees may consider alternatives in the best
interests of the shareholders. However, the reorganization of the Stepstone
Funds for which approval of the Agreement is obtained will be consummated.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION
A meeting was held on October 17, 1996 for the Stepstone Trustees, and
a meeting was held on October 18, 1996 for the HighMark Trustees, at which
meetings all of the Trustees of each of Stepstone and HighMark, including the
Independent Trustees, unanimously determined that the reorganization would be
in the best interests of their respective registered investment companies and
existing shareholders and that the economic interests of their respective
existing shareholders would not be diluted as a result of effecting the
reorganization. At these same meetings, all of the Trustees of each of
Stepstone and HighMark, including the Independent Trustees, unanimously
approved the proposed reorganization. Stepstone's Trustees have unanimously
recommended its approval by the Stepstone Funds' shareholders.
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<PAGE> 38
In electing to approve the Agreement and recommend it to shareholders
of Stepstone, the Stepstone Trustees acted upon information provided to them,
indicating that the proposed transaction would operate in the best interests of
Stepstone shareholders. In particular, the Trustees determined that the
proposed transaction offered the following benefits:
- Participation in the Larger Fund Complex: The Trustees were
informed that the proposed transaction would, if effected,
result in a mutual fund complex consisting of sixteen
portfolios and total anticipated assets in excess of $4
billion. Stepstone shareholders who would, as part of the
proposed transaction, become part of the HighMark complex,
would be able to exchange their shares for shares of a
significantly larger number of funds than is currently the
case within Stepstone. In addition, the Trustees received
information to the effect that a larger, more diverse complex
can appeal to a broader class of institutional and retail
investors, may be able to achieve economies of scale more
quickly or efficiently and may be able to reduce costs by
taking advantage of its relatively larger size.
- Continuity of Management: The Trustees were provided with
information detailing the consolidation efforts involving
Union Capital Advisers, the adviser to Stepstone from its
inception, and MERUS Capital Management, a division of the
Bank of California, N.A., stemming from the combination of
Union Bank and Bank of California, N.A. (as well as their
respective parent organizations). It was represented to the
Trustees that, in many instances the post-reorganization
portfolios of HighMark would be managed on a day-to-day basis
by the same persons who had previously been responsible for
managing various Stepstone portfolios.
- Tax-Free Nature of Transaction: Lack of Dilution: The
Trustees were informed that the proposed transaction involving
Stepstone and HighMark would be accomplished without the
imposition of federal income taxes on either Stepstone or its
shareholders. In addition, the Trustees received
representations from Union Bank of California and its
investment management division, Pacific Alliance Capital
Management, to the effect that the Bank would defray
Stepstone's costs directly associated with participation in
the proposed transaction. Finally, the Trustees were informed
that the interests of Stepstone shareholders would not be
materially diluted as a result of the proposed transaction,
and that the Stepstone shareholders would receive shares of
HighMark portfolios equal in value to the market value (or,
where relevant, amortized cost value) of the Stepstone
portfolios' assets.
- Performance of HighMark; Fees and Expenses: The Board
received information relating to the performance of various
HighMark portfolios into which the interests of shareholders
of Stepstone would be merged. The Trustees were given details
on the performance record for each such then-existing HighMark
portfolio, both on an absolute basis and in comparison to
relevant benchmarks and industry averages. The Trustees also
received information about the fees and expenses charged or to
be charged to HighMark shareholders, which information tended
to show that Stepstone shareholders who become HighMark
shareholders as a result of the proposed transaction would in
most instances be subject to fees and expenses that were lower
than, or equal to, the fees charged by Stepstone. The
Trustees were further informed that, where the projected
HighMark fees and expenses exceeded those of the corresponding
Stepstone portfolio, such increase was due not to higher
advisory fees, but instead to HighMark's newly-introduced
shareholder service fee.
The estimated total operating expenses, stated as a percentage of average daily
net assets of each Fund, for each Stepstone Fund and the corresponding HighMark
Fund are expected to be as follows:
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<PAGE> 39
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INVESTMENT
CLASS CLASS FIDUCIARY RETAIL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stepstone Money Market .50% .75% HighMark Diversified .50% .75%
Money Market
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Treasury .45% .70% HighMark 100% U.S. Treasury .45% .70%
Money Market Money Market
- ------------------------------------------------------------------------------------------------------------------------
Stepstone California .30% .63% HighMark California Tax-Free .30% .55%
Tax-Free Money Market Money Market
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Balanced .80% 1.05% HighMark Balanced .90% 1.15%
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Growth Equity .80% 1.05% HighMark Growth .90% 1.15%
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Value Momentum .80% 1.05% HighMark Value Momentum .81% 1.06%
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Blue Chip Growth .85% HighMark Blue Chip Growth .82%
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Emerging Growth 1.05% 1.05% HighMark Emerging Growth 1.03% 1.28%
- ------------------------------------------------------------------------------------------------------------------------
Stepstone International 1.26% HighMark International 1.26%
Equity Equity
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Intermediate-Term .68% .68% HighMark Intermediate-Term .75% .75%
Bond Bond
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Convertible .85% HighMark Convertible .85%
Securities Securities
- ------------------------------------------------------------------------------------------------------------------------
Stepstone Government .75% .75% HighMark Government .75%
Securities Securities
- ------------------------------------------------------------------------------------------------------------------------
Stepstone California .22% .22% HighMark California .22% .22%
Intermediate Tax-Free Bond Intermediate Tax-Free Bond
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
INFORMATION ABOUT THE REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION. The proposed Agreement provides
that each HighMark Fund will acquire all of the assets of the corresponding
Stepstone Fund in exchange for the assumption by the HighMark Fund of all of
the liabilities of the corresponding Stepstone Fund and for Shares all as of
the Exchange Date (defined in the Agreement to be April 18, 1997 for the
following Funds: Stepstone Money Market, Stepstone Treasury Money Market,
Stepstone California Tax-Free Money Market, Stepstone Balanced and Stepstone
Growth Equity, and April 25, 1997 for the following Funds: Stepstone Value
Momentum, Stepstone Blue Chip Growth, Stepstone Emerging Growth, Stepstone
International Equity, Stepstone Intermediate-Term Bond, Stepstone Convertible
Securities, Stepstone Government Securities and Stepstone California
Intermediate Tax-Free Bond, or such other dates as may be agreed upon by the
parties). The following discussion of the Agreement is qualified in its
entirety by the full text of the Agreement, which is attached as Appendix A to
this Combined Prospectus/Proxy Statement.
As a result of the Transaction, each shareholder of the Stepstone
Funds will receive that number of full and fractional Shares equal in value at
the Exchange Date to the value of the portion of the net assets of the
Stepstone Fund transferred to the corresponding HighMark Fund attributable to
the shareholder (based on the
-39-
<PAGE> 40
proportion of the outstanding shares of the Stepstone Fund owned by the
shareholder as of the Valuation Time). The portfolio securities of the
Stepstone Funds will be valued in accordance with the generally employed
valuation procedures of Stepstone. Each reorganization is being accounted for
as a tax-free business combination. At separate meetings held on October 17,
1996 for Stepstone Trustees and October 18, 1996 for HighMark Trustees, all of
the Trustees of each of Stepstone and HighMark, including the Independent
Trustees, unanimously determined that the reorganization would be in the best
interests of their respective registered investment companies and existing
shareholders and that the economic interests of their respective existing
shareholders would not be diluted as a result of effecting the reorganization.
Immediately following the Exchange Date, each Stepstone Fund will
distribute pro rata to its respective shareholders of record as of the close of
business on the Exchange Date the full and fractional Shares received by it and
the Stepstone Funds will be liquidated and dissolved. Such liquidation and
distribution will be accomplished by the establishment of accounts on the share
records of the HighMark Funds in the name of such Stepstone Fund's
shareholders, each account representing the respective number of full and
fractional Shares due such shareholder. If the Stepstone Fund shareholder of
record has Institutional Class shares, that shareholder will receive HighMark
Fiduciary shares. All other Stepstone shareholders will receive HighMark
Retail shares.
The consummation of the reorganization is subject to the conditions
set forth in the Agreement. The Agreement may be terminated and the
reorganization abandoned at any time, before or after approval by the
shareholders, prior to the Exchange Date by mutual consent of Stepstone and
HighMark or, if any condition set forth in the Agreement has not been fulfilled
and has not been waived by the party entitled to its benefits, by such party.
All fees and expenses, including accounting expenses, portfolio
transfer taxes (if any) or other similar expenses incurred directly in
connection with the consummation of the Transaction contemplated by the
Agreement will be borne by Union Bank of California, N.A., including the costs
of proxy materials, proxy solicitation, and legal expenses. Fees and expenses
not incurred directly in connection with the consummation of the Transaction
will be borne by the party incurring such fees and expenses. The Boards of
Trustees of HighMark and Stepstone have determined that the interests of the
existing shareholders of HighMark and Stepstone will not be diluted as a result
of the Transaction. Full and fractional Shares will be issued to the Stepstone
Funds' shareholders in accordance with the procedure under the Agreement as
described above. Each HighMark Share will be fully paid and nonassessable when
issued, will be transferable without restriction, and will have no preemptive
or conversion rights. HighMark's Declaration of Trust permits HighMark to
divide its shares of any series, without shareholder approval, into one or more
classes of shares having such preferences and special or relative rights and
privileges as the Trustees may determine. Shares of certain of the HighMark
Funds are currently divided into two classes: Retail and Fiduciary Shares.
HighMark Blue Chip Growth, HighMark International Equity, HighMark Convertible
Securities and HighMark Government Securities are only offered in Fiduciary
shares. Retail and Fiduciary shares will be distributed as applicable by
HighMark in connection with the Transaction. Stepstone's Declaration of Trust
also permits multiple classes of shares, and shares of certain of the Stepstone
Funds are currently divided into two classes: Investment Class and
Institutional Class shares. Stepstone Blue Chip Growth, Stepstone
International Equity, and Stepstone Convertible Securities are only offered in
Institutional Class shares.
Under Massachusetts law, HighMark shareholders, could, under certain
circumstances, be held personally liable for the obligations of HighMark.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of HighMark. The Declaration of Trust provides for indemnification
out of HighMark property for all loss and expense of any shareholder held
personally liable for the obligations of HighMark. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which HighMark would be unable to meet its
obligations. The likelihood of such circumstances is remote.
-40-
<PAGE> 41
FEDERAL INCOME TAX CONSEQUENCES. The federal income tax consequences
of the Transaction should be as follows: (i) under Section 361 of the Code, no
gain or loss will be recognized by any Stepstone Fund as a result of the
reorganization; (ii) under Section 354 of the Code, no gain or loss will be
recognized by the shareholders of any Stepstone Fund on the distribution of
Shares to them in exchange for their shares of the Stepstone Fund; (iii) under
Section 358 of the Code, the basis of Shares that any Stepstone shareholder
receives in place of his or her Stepstone shares will be the same as the basis
of the Stepstone shares exchanged; and (iv) under Section 1223(1) of the Code,
a shareholder's holding period for the Shares received pursuant to the
Agreement will be determined by including the holding period for the Stepstone
shares exchanged for the Shares provided that the shareholder held the
Stepstone shares as a capital asset. As a condition to HighMark and
Stepstone's obligations to consummate the reorganization, Stepstone and
HighMark will receive an opinion from Ropes & Gray, counsel to HighMark, to the
effect that, on the basis of the existing provisions of the Code, current
administrative rules, court decisions, and certain representations by the
HighMark and Stepstone Funds, for federal income tax purposes the above stated
tax consequences will be applicable to the Transaction.
VOTING RIGHTS. Each shareholder of a HighMark Fund and a Stepstone
Fund is entitled to one vote per share and a proportionate fractional vote for
any fractional share. The former Stepstone Fund shareholders, as holders of
Fiduciary or Retail shares of the HighMark Funds, will vote separately as a
fund or a class on matters relating solely to that fund or class. On all other
matters, they will vote in the aggregate with shareholders of all of the
HighMark Funds. When the former shareholders of each Stepstone Fund vote in
the aggregate as shareholders of each corresponding HighMark Fund, the voting
power they will have will be less than the voting power they had when the
Stepstone Funds voted in the aggregate. For a more detailed discussion of
HighMark's voting procedures, see the HighMark Prospectuses "GENERAL
INFORMATION -- Miscellaneous."
CAPITALIZATION. The following tables set forth as of January 10,
1997, (i) the capitalization of each Stepstone Fund, (ii) the capitalization of
each HighMark Fund, and (iii) the pro forma capitalization of each HighMark
Fund as adjusted giving effect to the proposed acquisition of assets at net
asset value:
-41-
<PAGE> 42
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE TREASURY MONEY MARKET FUND AND HIGHMARK 100% U. S. TREASURY MONEY
MARKET FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 180,434 $ 421,645 $ 180,722 $ 91,688 $ 361,156 $ 513,333
SHARES (000S) 180,413 421,659 180,704 91,686 361,117 513,345
NET ASSET VALUE PER SHARE $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
</TABLE>
STEPSTONE MONEY MARKET FUND AND HIGHMARK DIVERSIFIED MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 567,393 $ 539,304 $ 260,447 $ 158,323 $ 827,840 $ 697,628
SHARES (000S) 568,339 539,442 260,738 158,403 829,078 697,845
NET ASSET VALUE PER SHARE $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 18, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
-42-
<PAGE> 43
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND AND HIGHMARK CALIFORNIA
TAX-FREE MONEY MARKET FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 41,518 $ 114,222 $ 103,923 $54,398 $ 145,441 $ 168,620
SHARES (000S) 41,516 114,226 103,959 54,410 145,475 168,636
NET ASSET VALUE PER SHARE $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 18, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
-43-
<PAGE> 44
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE GROWTH EQUITY FUND AND HIGHMARK GROWTH FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 197,720 $ 3,692 $ 56,068 $ 3,441 $ 253,788 $ 7,133
SHARES (000S) 9,975 186 4,037 247 12,804(2) 360(2)
NET ASSET VALUE PER SHARE $ 19.82 $ 19.81 $ 13.89 $ 13.91 $ 19.82 $ 19.81
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 18, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
(2) Assumes that the Highmark Growth Fund has executed a stock split on January
10, 1997 immediately preceding the Reorganization , to allow the Net Asset
Values of the Highmark Growth Fund Fiduciary and Retail shares to match the Net
Asset Values of the Stepstone Growth Equity Fund Institutional and Investment
shares, respectively. Accordingly, this resulted in an adjustment to the
number of shares outstanding in the Highmark Growth Fund of 1,208 in the
Fiduciary class and 73 in the Retail class.
If the Reorganization is consummated, the actual adjustments to the number of
shares outstanding in each respective class of the Highmark Fund may vary from
the numbers above due to changes in the Net Asset Values between January 10,
1997 and the Reorganization date.
-44-
<PAGE> 45
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE BALANCED FUND AND HIGHMARK BALANCED FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 297,622 $ 8,724 $ 44,688 $ 713 $ 342,310 $ 9,437
SHARES (000S) 20,083 589 3,563 57 23,099(2) 637(2)
NET ASSET VALUE PER SHARE $ 14.82 $ 14.81 $ 12.54 $ 12.45 $ 14.82 $ 14.81
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 18, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
(2) Assumes that the HighMark Balanced Fund has executed a stock split on
January 10, 1997 immediately preceding the Reorganization , to allow the Net
Asset Values of the HighMark Balanced Fund Fiduciary and Retail shares to match
the Net Asset Values of the Stepstone Balanced Fund Institutional and
Investment shares, respectively. Accordingly, this resulted in an adjustment
to the number of shares outstanding in the HighMark Balanced Fund of 548 in the
Fiduciary class and 9 in the Retail class.
If the Reorganization is consummated, the actual adjustments to the number of
shares outstanding in each respective class of the HighMark Fund may vary from
the numbers above due to changes in the Net Asset Values between January 10,
1997 and the Reorganization date.
-45-
<PAGE> 46
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE VALUE MOMENTUM FUND AND HIGHMARK VALUE MOMENTUM FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 287,820 $ 15,442 N/A N/A $ 287,820 $ 15,442
SHARES (000S) 13,653 733 N/A N/A 13,653 733
NET ASSET VALUE PER SHARE $ 21.08 $ 21.08 N/A N/A $ 21.08 $ 21.08
</TABLE>
STEPSTONE INTERMEDIATE-TERM BOND FUND AND HIGHMARK INTERMEDIATE-TERM BOND FUND
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 141,289 $ 5,199 N/A N/A $ 141,289 $ 5,199
SHARES (000S) 13,975 515 N/A N/A 13,975 515
NET ASSET VALUE PER SHARE $ 10.11 $ 10.10 N/A N/A $ 10.11 $ 10.10
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 25, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
-46-
<PAGE> 47
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND AND HIGHMARK CALIFORNIA
INTERMEDIATE TAX-FREE BOND FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 6,380 $ 5,726 N/A N/A $ 6,380 $ 5,726
SHARES (000S) 657 591 N/A N/A 657 591
NET ASSET VALUE PER SHARE $ 9.71 $ 9.70 N/A N/A $ 9.71 $ 9.70
</TABLE>
STEPSTONE CONVERTIBLE SECURITIES FUND AND HIGHMARK CONVERTIBLE SECURITIES FUND
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 20,527 N/A N/A N/A $ 20,527 N/A
SHARES (000S) 1,811 N/A N/A N/A 1,811 N/A
NET ASSET VALUE PER SHARE $ 11.34 N/A N/A N/A $ 11.34 N/A
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 25, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
-47-
<PAGE> 48
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE BLUE CHIP GROWTH FUND AND HIGHMARK BLUE CHIP GROWTH FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 76,988 N/A N/A N/A $ 76,988 N/A
SHARES (000S) 5,492 N/A N/A N/A 5,492 N/A
NET ASSET VALUE PER SHARE $ 14.02 N/A N/A N/A $ 14.02 N/A
</TABLE>
STEPSTONE EMERGING GROWTH FUND AND HIGHMARK EMERGING GROWTH FUND (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 55,088 $ 0 N/A N/A $ 55,088 $ 0
SHARES (000S) 4,118 0 N/A N/A 4,118 0
NET ASSET VALUE PER SHARE $ 13.38 $ 0.00 N/A N/A $ 13.38 $ 0.00
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 25, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
-48-
<PAGE> 49
CAPITALIZATION TABLES AS OF 1/10/97
STEPSTONE GOVERNMENT SECURITIES FUND AND HIGHMARK GOVERNMENT SECURITIES FUND
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
Net Assets (000s) $ 50,238 $ 0 N/A N/A $ 50,238 N/A
Shares (000s) 5,349 0 N/A N/A 5,349 N/A
Net Asset Value per share $ 9.39 $ 0.00 N/A N/A $ 9.39 N/A
</TABLE>
STEPSTONE INTERNATIONAL EQUITY FUND AND HIGHMARK INTERNATIONAL EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
---------
COMBINED
--------
STEPSTONE HIGHMARK (1)
--------- -------- ---
INSTITUTIONAL INVESTMENT FIDUCIARY RETAIL FIDUCIARY RETAIL
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS (000S) $ 47,250 N/A N/A N/A $ 47,250 N/A
SHARES (000S) 1,370 N/A N/A N/A 1,370 N/A
NET ASSET VALUE PER SHARE $ 34.50 N/A N/A N/A $ 34.50 N/A
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of January 10, 1997 for information purposes only. The actual
Effective Time of the Reorganization is expected to be April 25, 1997 at which
time the results would be reflective of the actual composition of the
shareholders' equity at that date.
-49-
<PAGE> 50
Unaudited pro forma combined financial statements of each Stepstone Fund
and each HighMark Fund as of and for the period ended July 31, 1996 are
included in the Statement of Additional Information. Because the Agreement
provides that the HighMark Funds will be the surviving funds following the
reorganization and because the HighMark Funds' investment objectives and
policies will remain unchanged, the pro forma combined financial statements
reflect the transfer of the assets and liabilities of each Stepstone Fund to
the corresponding HighMark Fund as contemplated by the Agreement.
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION
Union Bank of California, N.A. may be deemed to have an interest in the
Agreement and Plan of Reorganization and the Transaction because it provides
investment advisory services to both the Stepstone Funds and the HighMark Funds
pursuant to separate advisory agreements with each Fund group. Union Bank of
California, N.A. receives compensation from the Stepstone Funds and the
HighMark Funds for services it provides pursuant to these agreements. The
terms and provisions of these arrangements are described in the Stepstone and
HighMark Prospectuses. In addition, Union Bank of California, N.A. also serves
as custodian and sub-administrator to the HighMark Funds for which services it
receives a fee as described in the HighMark Prospectuses. Union Bank of
California, N.A. may also act as a service provider pursuant to the
Shareholder Service Plan adopted by HighMark for which services it would also
receive a fee as described in the HighMark Prospectuses.
THE HIGHMARK FUNDS
GENERAL
For a general discussion of the HighMark Funds, see the HighMark
Prospectuses. For the convenience of Stepstone shareholders, certain
cross-references to those prospectuses are set forth below.
FINANCIAL INFORMATION
For information on per-share income and capital changes of a HighMark Fund,
see "Financial Highlights" in the HighMark Prospectus pertaining to such Fund.
EXPENSES
For a discussion of a HighMark Fund's expenses, see "Fee Table" in the
HighMark Prospectus pertaining to such Fund.
INVESTMENT OBJECTIVES AND POLICIES
For a discussion of a HighMark Fund's investment objective and policies,
see "Investment Objective" and "Investment Policies" in the HighMark Prospectus
pertaining to such Fund.
TRUSTEES
Overall responsibility for management of HighMark rests with its Board of
Trustees who are elected by the shareholders of HighMark. There are currently
five Trustees, one of whom is considered to be an "interested person" of
HighMark as defined in the 1940 Act. The Trustees, in turn, elect the officers
of HighMark to supervise actively its day-to-day operations.
The Trustees of HighMark, their addresses and principal occupations during
the past five years are set forth as follows:
-50-
<PAGE> 51
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION
NAME AND ADDRESS WITH HIGHMARK DURING PAST 5 YEARS
---------------- ------------- -------------------
<S> <C> <C>
Thomas L. Braje Trustee Retired October, 1996. Prior
1000 Alfred Nobel Drive to October 1996, Vice President
Hercules, CA 94547 and Chief Financial Officer of
Bio Rad Laboratories, Inc.
David A. Goldfarb Trustee Partner, Goldfarb & Simens,
111 Pine Street Certified Public Accountants.
18th Floor
San Francisco, CA 94111
Joseph C. Jaeger Trustee Senior Vice President and Chief
100 First Street Financial Officer, Delta Dental
San Francisco, CA 94105 Plan of California.
Frederick J. Long Trustee President and Chief Executive
520 Pike Street Officer, Pettit-Morry Co. and
20th Floor Acordia Northwest Inc. (each an
Seattle, WA 98101 insurance brokerage firm).
</TABLE>
INVESTMENT ADVISOR
For a discussion of Union Bank of California, N.A. and the services
performed by it and its fees with respect to a HighMark Fund, see "The Advisor"
in the HighMark Prospectus pertaining to such Fund. For a discussion of Bank
of Tokyo-Mitsubishi Trust Company, which serves as sub-advisor to HighMark
Emerging Growth, HighMark Government Securities, HighMark Blue Chip Growth, and
HighMark Convertible Securities, and Tokyo-Mitsubishi Asset Management (U.K.),
Ltd., which serves as sub-advisor to HighMark International Equity, see "The
Sub-Advisor" in the applicable HighMark Prospectuses.
ADMINISTRATOR
For a discussion of SEI Fund Resources' activities as the HighMark Funds'
administrator, the services performed by it and its fees with respect to a
HighMark Fund, see "The Administrator" in the HighMark Prospectus pertaining to
such Fund.
DISTRIBUTOR
For a discussion of SEI Financial Services Company's activities as
distributor, see "The Distributor" in any HighMark Prospectus.
SHARES
For a discussion of voting rights of the HighMark Funds, see
"Miscellaneous" in any HighMark Prospectus.
-51-
<PAGE> 52
REDEMPTION OR REPURCHASE OF SHARES
For a discussion concerning redemption or repurchase of shares of the
HighMark Funds, see "Redemption of Shares" in any HighMark Prospectus.
DIVIDENDS AND DISTRIBUTIONS
For a discussion of the HighMark Funds' policies with respect to dividends
and distributions of a HighMark Fund, see "Dividends" in the HighMark
Prospectus pertaining to such Fund.
EXCHANGE PRIVILEGES
For a discussion of a HighMark shareholder's right to exchange particular
Class shares of a HighMark Fund for other Class shares of the same HighMark
Fund, or the same Class shares or other Class shares of another HighMark Fund,
see "Exchange Privileges" in any HighMark Prospectus.
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which HighMark is a
party.
SHAREHOLDER INQUIRIES
Shareholder inquiries relating to the HighMark Funds may be addressed to
HighMark's administrator by writing to SEI Fund Resources, Oaks, PA 19456 or
by calling 1-800-734-2922.
STEPSTONE FUNDS
GENERAL
For a general discussion of the Stepstone Funds, see the Stepstone
Prospectuses. For the convenience of Stepstone shareholders, certain
cross-references to the Stepstone Prospectuses are set forth below.
FINANCIAL INFORMATION
For information on per share income and capital changes of a Stepstone
Fund, see "Financial Highlights" in the Stepstone Prospectus pertaining to such
Fund.
EXPENSES
For a discussion of a Stepstone Fund's expenses, see "Shareholder
Transaction Expenses" in the Stepstone Prospectus pertaining to such Fund.
INVESTMENT OBJECTIVES AND POLICIES
For a discussion of a Stepstone Fund's investment objective and policies,
see "Investment Objectives" and "Investment Policies" in the Stepstone
Prospectus.
-52-
<PAGE> 53
TRUSTEES
Overall responsibility for management of Stepstone rests with its Board of
Trustees, who are elected by the shareholders of Stepstone. There are
currently five Trustees, one of whom is considered to be an "interested person"
of Stepstone as defined in the 1940 Act. The Trustees, in turn, elect the
officers of Stepstone to supervise actively its day-to-day operations.
The Trustees of Stepstone their addresses and principal occupations during
the past five years are set forth as follows:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION
NAME AND ADDRESS WITH STEPSTONE DURING PAST 5 YEARS
---------------- -------------- -------------------
<S> <C> <C>
William R. Howell Chairman of the Director, Current Income Shares, Inc.;
445 South Figueroa Street Board of Trustees Vice Chairman, Union Bank from 1976
Los Angeles, CA 90071 until retirement in 1982; Director of
Unionbanc Investment Management Company
since 1977, until retirement in 1982.
Robert A. Nesher* Trustee Retired since 1994; Executive Vice
8 South Street President of SEI, 1986-1994; Director
Kennebunkport, ME 04046 and Executive Vice President of the
Administrator and the Distributor,
September, 1981-1994.
Michael L. Noel Trustee Retired since 1996; Senior Vice
445 South Figueroa Street President and Treasurer, Southern
Los Angeles, CA 90071 California Edison Company 1980- 1996;
Assistant Treasurer, Pacific Coast
Electrical Association; Director,
Hancock Savings & Loan Association,
since 1986; Director, Software
Toolworks, Inc., since July 1989.
Paul L. Smith Trustee Retired Director of Union Bank, Retired
445 South Figueroa Street Vice Chairman and member of the Office
Los Angeles, CA 90071 of the Chief Executive of Security
Pacific Corporation, Former Director and
officer of numerous subsidiaries of such
Corporation and Security Pacific
National Bank.
Steven K. Joiner Trustee President, NAFCU Services
3138 North Tenth Street Corporation, Inc. since 1993;
Arlington, VA 22201 Executive Vice President,
Credit Union Services, Inc.,
from 1979-1993.
</TABLE>
* Mr. Nesher is considered to be an "interested person" of Stepstone as
defined in the 1940 Act.
-53-
<PAGE> 54
INVESTMENT ADVISOR
For a discussion of Union Bank of California, N.A., and the services
performed by it and its fees with respect to a Stepstone Fund, see "The
Advisor," in the Stepstone Prospectus pertaining to such Fund. For a
discussion of Bank of Tokyo-Mitsubishi Trust Company, which serves as
sub-advisor to Stepstone Emerging Growth, Stepstone Government Securities,
Stepstone Blue Chip Growth, and Stepstone Convertible Securities and
Tokyo-Mitsubishi Asset Management (U.K.), Ltd., which serves as sub-advisor to
Stepstone International Equity, see "The Sub-Advisor" in the applicable
Stepstone Prospectus.
ADMINISTRATOR
For a discussion of SEI Fund Resources' activities as the Stepstone Funds'
administrator, the services performed by it and its fees with respect to a
Stepstone Fund, see "The Administrator," in the Stepstone Prospectus pertaining
to such Fund.
DISTRIBUTOR
For a discussion of SEI Financial Services Company's activities as
distributor, see "Distribution" in any Stepstone Prospectus.
SHARES
For a discussion of voting rights of the Stepstone Funds, see "Voting
Rights" in any Stepstone Prospectus.
REDEMPTION OR REPURCHASE OF SHARES
For a discussion concerning redemption or repurchase of shares of the
Stepstone Funds, see "Redemption of Shares" in any Stepstone Prospectus.
DIVIDENDS AND DISTRIBUTIONS
For a discussion of the Stepstone Funds' policies with respect to dividends
and distributions of a Stepstone Fund, see "Dividends" in the Stepstone
Prospectus pertaining to such Fund.
EXCHANGE PRIVILEGES
For a discussion of a Stepstone shareholder's right to exchange Investment
Class shares of a Stepstone Fund for Investment Class shares of another
Stepstone Fund, see "Purchases by Exchange" in the Stepstone Prospectuses.
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which Stepstone is a
party.
SHAREHOLDER INQUIRIES
Shareholder inquiries relating to the Stepstone Funds may be addressed to
Stepstone's administrator by writing to SEI Fund Resources, Oaks, PA 19456 or
by calling 1-800- 433-6884.
-54-
<PAGE> 55
FINANCIAL STATEMENTS
The financial statements and financial highlights for the Stepstone Funds
included in the Stepstone Prospectuses and the related statement of additional
information have been audited by Arthur Andersen LLP for the periods indicated
in their report thereon which is also included in the statements of additional
information. The financial statements and financial highlights audited by
Arthur Andersen LLP have been incorporated herein by reference in reliance on
their report given on their authority as experts in accounting and auditing.
Unaudited financial statements and financial highlights for the Stepstone Funds
for the period ended July 31, 1996 are filed herewith.
The financial statements and financial highlights for the HighMark Funds
for each of the periods indicated therein included in the HighMark Prospectuses
and related statement of additional information have been incorporated by
reference in this Combined Prospectus/Proxy Statement in reliance on the report
of Deloitte & Touche LLP, independent auditors, given on the authority of that
Firm as experts in accounting and auditing. In addition, Coopers & Lybrand
L.L.P., HighMark's independent accountants prior to the fiscal year ended July
31, 1996, audited the financial statements and financial highlights of each
HighMark Fund prior to the fiscal year ended July 31, 1996.
VOTING INFORMATION
Proxies are being solicited from shareholders of each Stepstone Fund by the
Trustees of Stepstone for the Special Meeting of Shareholders to be held on
Wednesday, April 16, 1997 at 3:00 p.m., Eastern time, at SEI Fund Resources,
Oaks, PA 19456, or at such later time made necessary by adjournment. A proxy
may be revoked at any time at or before the meeting by submitting to Stepstone
a subsequently dated proxy, delivering a written notice of revocation to
Stepstone at Oaks, PA 19456, or as otherwise described in the "Introduction"
above. Unless revoked, all valid proxies will be voted in accordance with the
instructions thereon or, in the absence of instructions, will be voted FOR
approval of the Agreement and Plan of Reorganization. The Transaction
contemplated by the Agreement and Plan of Reorganization will be consummated
only if approved by the affirmative vote of a majority of all votes
attributable to the voting securities of each Stepstone Fund voting separately
as a Fund, as described above. In the event the shareholders do not approve
the reorganization, the Trustees of Stepstone will consider possible
alternative arrangements in the best interests of Stepstone and its
shareholders.
Proxies are being solicited by mail. Shareholders of record of each
Stepstone Fund at the close of business on February 12, 1997, (the "Record
Date"), will be entitled to vote at the Special Meeting of Shareholders or any
adjournment thereof. The holders of a majority of votes attributable to the
outstanding voting shares of a Stepstone Fund represented in person or by proxy
at the meeting will constitute a quorum for such Fund for the meeting, and a
majority of the shares of a Stepstone Fund voted on the Transaction is
necessary to approve the Transaction. Shareholders are entitled to one vote
per share and a proportionate fractional vote for any fractional share.
Votes cast by proxy or in person at the meeting will be counted by the
inspector of election appointed by Stepstone. The inspector of election will
count the total number of votes cast "for" approval of the proposal for
purposes of determining whether sufficient affirmative votes have been cast.
The inspector of election will count shares represented by proxies that reflect
abstentions as shares that are present and entitled to vote on the matter for
purposes of determining the presence of a quorum; however, the inspector of
election will not count "broker non-votes" (i.e., shares held by brokers or
nominees as to which (i) instructions have not been received from the
beneficial owners or the persons entitled to vote and (ii) the broker or
nominee does not have the discretionary voting power on a particular matter) as
shares that are present and entitled to
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<PAGE> 56
vote on the matter for purposes of determining the presence of a quorum. For
purposes of determining whether an issue has been approved, abstentions have
the effect of a negative vote on the proposal, and broker non-votes are treated
as "against" votes in those instances where approval of an issue requires a
certain percentage of all votes outstanding, but are given no effect in those
instances where approval of an issue requires a certain percentage of the votes
constituting the quorum for such issue.
As of __________, 1997, the officers and Trustees of Stepstone as a group
beneficially owned less than 1% of the outstanding shares of Investment Class
and Institutional Class shares of _________. As of __________, 1997, to the
best of the knowledge of Stepstone, _______ owned beneficially 5% or more of
the outstanding Investment Class shares of:
Name and Address Percent of Ownership
Stepstone Money Market
Investment Shares
Stepstone Money Market
Institutional Shares
Stepstone Treasury Money Market
Investment Shares
Stepstone Treasury Money Market
Institutional Shares
Stepstone California Tax-Free Money Market
Investment Shares
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<PAGE> 57
Name and Address Percent of Ownership
Stepstone California Tax-Free Money Market
Institutional Shares
Stepstone Balanced
Investment Shares
Stepstone Balanced
Institutional Shares
Stepstone Growth Equity
Investment Shares
Stepstone Growth Equity
Institutional Shares
Stepstone Value Momentum
Investment Shares
Stepstone Value Momentum
Institutional Shares
Stepstone Blue Chip Growth
Institutional Shares
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<PAGE> 58
Name and Address Percent of Ownership
Stepstone Emerging Growth
Investment Shares
Stepstone Emerging Growth
Institutional Shares
Stepstone International Equity
Institutional Shares
Stepstone Intermediate-Term Bond
Investment Shares
Stepstone Intermediate-Term Bond
Institutional Shares
Stepstone Convertible Securities
Institutional Shares
Stepstone Government Securities
Investment Shares
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<PAGE> 59
Name and Address Percent of Ownership
Stepstone Government Securities
Institutional Shares
Stepstone California Intermediate Tax-Free Bond
Investment Shares
Stepstone California Intermediate Tax-Free Bond
Institutional Shares
The votes of the shareholders of HighMark are not being solicited,
since their approval or consent is not necessary for approval of the Agreement.
As of __________, 1997, the officers and Trustees of HighMark as a group
beneficially owned less than 1% of the outstanding Retail and Fiduciary shares
of the HighMark Funds. At __________, 1997, to the best of the knowledge of
HighMark, _________ beneficially owned 5% or more of the outstanding shares of:
Name and Address Percent of Ownership
HighMark Diversified Money Market
Retail Shares
HighMark Diversified Money Market
Fiduciary Shares
HighMark 100% U.S. Treasury Money Market
Retail Shares
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<PAGE> 60
Name and Address Percent of Ownership
HighMark 100% U.S. Treasury Money Market
Fiduciary Shares
HighMark California Tax-Free Money Market
Retail Shares
HighMark California Tax-Free Money Market
Fiduciary Shares
HighMark Balanced
Retail Shares
HighMark Balanced
Fiduciary Shares
HighMark Growth
Retail Shares
HighMark Growth
Fiduciary Shares
HighMark Value Momentum
Retail Shares
HighMark Value Momentum
Fiduciary Shares
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<PAGE> 61
Name and Address Percent of Ownership
HighMark Blue Chip Growth
Fiduciary Shares
HighMark Emerging Growth
Retail Shares
HighMark Emerging Growth
Fiduciary Shares
HighMark International Equity
Fiduciary Shares
HighMark Intermediate-Term Bond
Retail Shares
HighMark Intermediate-Term Bond
Fiduciary Shares
HighMark Convertible Securities
Fiduciary Shares
HighMark Government Securities
Fiduciary Shares
HighMark California Intermediate Tax-Free Bond
Retail Shares
HighMark California Intermediate Tax-Free Bond
Fiduciary Shares
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<PAGE> 62
THE BOARD OF TRUSTEES OF STEPSTONE, INCLUDING THE INDEPENDENT TRUSTEES,
UNANIMOUSLY RECOMMEND APPROVAL OF THE PLAN.
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
This Combined Prospectus/Proxy Statement and the related statement of
additional information do not contain all of the information set forth in the
registration statements and the exhibits relating thereto which HighMark and
Stepstone, respectively, have filed with the Securities and Exchange Commission
under the Securities Act of 1933 and the 1940 Act to which reference is hereby
made. The SEC file numbers for the Stepstone Prospectuses and the related
statement of additional information which are incorporated by reference herein
are Registration No. 33-37687 and 811-6192. The SEC file numbers for the
HighMark Prospectuses and related statement of additional information which are
incorporated by reference herein are Registration No. 33-12608 and 811-5059.
HighMark and Stepstone are subject to the informational requirements of
the Securities Exchange Act of 1934 and in accordance therewith file reports
and other information with the SEC. Reports, proxy and information statements,
registration statements and other information filed by HighMark and Stepstone
can be inspected and copied at the public reference facilities of the SEC at
450 Fifth Street, N.W. Washington, D.C. 20549. Copies of such filings may also
be available at the following SEC regional offices: 90 Devonshire Street,
Suite 700, Boston, MA 02109; 500 West Madison Street, Suite 1400, Chicago, IL
60611-2511; and 601 Walnut Street, Suite 1005E, Philadelphia, PA 19106.
Copies of such materials can also be obtained by mail from the Public Reference
Branch, Office of Consumer Affairs and Information Services, SEC, Washington,
D.C. 20549 at prescribed rates.
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<PAGE> 63
DRAFT
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as
of [_______________] by and between HighMark Funds, a Massachusetts business
trust, ("HighMark") and the Stepstone Funds, a Massachusetts business trust
("Stepstone"). The capitalized terms used herein shall have the meaning ascribed
to them in this Agreement.
PLAN OF REORGANIZATION
(a) Stepstone will sell, assign, convey, transfer and deliver to
HighMark, and HighMark will acquire, on the Exchange Date, all of the properties
and assets existing at the Valuation Time in the following funds:
Stepstone Money Market Fund ("Stepstone Money Market")
Stepstone Treasury Money Market Fund ("Stepstone Treasury Money
Market")
Stepstone California Tax-Free Money Market Fund ("Stepstone California
Tax-Free Money Market")
Stepstone Balanced Fund ("Stepstone Balanced")
Stepstone Growth Equity Fund ("Stepstone Growth Equity")
Stepstone Value Momentum Fund ("Stepstone Value Momentum")
Stepstone Blue Chip Growth Fund ("Stepstone Blue Chip Growth")
Stepstone Emerging Growth Fund ("Stepstone Emerging Growth")
Stepstone International Equity Fund ("Stepstone International Equity")
Stepstone Intermediate-Term Bond Fund ("Stepstone Intermediate-Term
Bond")
Stepstone Convertible Securities Fund ("Stepstone Convertible
Securities")
Stepstone Government Securities Fund ("Stepstone Government
Securities")
Stepstone California Intermediate Tax-Free Bond Fund ("Stepstone
California Intermediate Tax-Free Bond")
(such funds each are a "Stepstone Fund" and are collectively the
"Stepstone Funds").
Such acquisition is to be made by the following funds:
HighMark Diversified Money Market Fund ("HighMark Diversified Money
Market")
HighMark 100% U.S. Treasury Money Market Fund ("HighMark 100% U.S.
Treasury Money Market")
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HighMark California Tax-Free Money Market Fund ("HighMark California
Tax-Free Money Market")
HighMark Balanced Fund ("HighMark Balanced")
HighMark Growth Fund ("HighMark Growth")
HighMark Value Momentum Fund ("HighMark Value Momentum")
HighMark Blue Chip Growth Fund ("HighMark Blue Chip Growth")
HighMark Emerging Growth Fund ("HighMark Emerging Growth")
HighMark International Equity Fund ("HighMark International Equity")
HighMark Intermediate-Term Bond Fund ("HighMark Intermediate-Term
Bond")
HighMark Convertible Securities Fund ("HighMark Convertible
Securities")
HighMark Government Securities Fund ("HighMark Government Securities")
HighMark California Intermediate Tax-Free Bond Fund ("HighMark
California Intermediate Tax-Free Bond")
(such funds each are a "HighMark Fund" and are collectively the
"HighMark Funds").
For purposes of this Agreement the respective Stepstone Funds correspond to the
HighMark Funds as follows:
<TABLE>
<S> <C>
Stepstone Money Market Fund HighMark Diversified Money Market Fund
Stepstone Treasury Money Market Fund HighMark 100% U.S. Treasury Money
Market Fund
Stepstone California Tax-Free Money HighMark California Tax-Free Money
Market Fund Market Fund
Stepstone Balanced Fund HighMark Balanced Fund
Stepstone Growth Equity Fund HighMark Growth Fund
Stepstone Value Momentum Fund HighMark Value Momentum Fund
Stepstone Blue Chip Growth Fund HighMark Blue Chip Growth Fund
Stepstone Emerging Growth Fund HighMark Emerging Growth Fund
Stepstone International Equity Fund HighMark International Equity Fund
Stepstone Intermediate-Term Bond Fund HighMark Intermediate-Term Bond Fund
Stepstone Convertible Securities Fund HighMark Convertible Securities Fund
Stepstone Government Securities Fund HighMark Government Securities Fund
Stepstone California Intermediate Tax-Free HighMark California Intermediate Tax-Free
Bond Fund Bond Fund
</TABLE>
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<PAGE> 65
In consideration therefor, each HighMark Fund shall, on the Exchange Date,
assume all of the liabilities of the corresponding Stepstone Fund and transfer
to the corresponding Stepstone Fund a number of full and fractional HighMark
Investor or Fiduciary Class shares of the corresponding HighMark Fund
(collectively, "Shares") having an aggregate net asset value equal to the value
of all of the assets of each Stepstone Fund transferred to the corresponding
HighMark Fund on such date less the value of all of the liabilities of each
Stepstone Fund assumed by the corresponding HighMark Fund on that date. It is
intended that each reorganization described in this Agreement shall be a
tax-free reorganization under the Internal Revenue Code of 1986, as amended (the
"Code").
(b) Upon consummation of the transactions described in paragraph (a) of
this Agreement, each Stepstone Fund shall distribute in complete liquidation to
its respective shareholders of record as of the Exchange Date the Shares
received by it, each shareholder being entitled to receive that number of Shares
equal to the proportion which the number of shares of beneficial interest of the
Stepstone Fund held by such shareholder bears to the number of such shares of
the Stepstone Fund outstanding on such date. If the Stepstone Fund shareholder
of record has Institutional Class shares, that shareholder will receive HighMark
Fiduciary shares. All other Stepstone shareholders will receive HighMark Retail
shares.
AGREEMENT
HighMark and Stepstone represent, warrant and agree as follows:
1. Representations and Warranties of Stepstone. Each of Stepstone and each
Stepstone Fund represent and warrant to and agree with HighMark and each
HighMark Fund that:
(a) Stepstone is a business trust duly established and validly existing
under the laws of the Commonwealth of Massachusetts and has power to own all of
its properties and assets and to carry out its obligations under this Agreement.
Stepstone and each Stepstone Fund is not required to qualify as a foreign
association in any jurisdiction. Stepstone and each Stepstone Fund has all
necessary federal, state and local authorizations to carry on its business as
now being conducted and to fulfill the terms of this Agreement, except as set
forth in Section 1(l).
(b) Stepstone is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company, and such
registration has not been revoked or rescinded and is in full force and effect.
Each Stepstone Fund has elected to qualify and has qualified as a regulated
investment company under Part I of Subchapter M of the Code, as of and since its
first taxable year, and qualifies and intends to continue to qualify as a
regulated investment company for its taxable year ending upon its
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<PAGE> 66
liquidation. Each Stepstone Fund has been a regulated investment company under
such sections of the Code at all times since its inception.
(c) The statements of assets and liabilities, statements of operations,
statements of changes in net assets and schedules of portfolio investments
(indicating their market values) for each Stepstone Fund at and for the year
ended January 31, 1996, such statements and schedules having been audited by
Arthur Anderson LLP, independent accountants to Stepstone, have been furnished
to HighMark. Unaudited statements of assets and liabilities, statements of
operations, statements of changes in net assets and schedules of portfolio
investments (indicating their market values) for each Stepstone Fund as of July
31, 1996 have also been furnished to HighMark. Such statements of assets and
liabilities and schedule fairly present the financial position of each Stepstone
Fund as of their respective dates and said statements of operations and changes
in net assets fairly reflect the results of operations and changes in net assets
for the periods covered thereby in conformity with generally accepted accounting
principles.
(d) The prospectuses of the Stepstone Funds dated May 28, 1996 (the
"Stepstone Prospectuses") and the Statement of Additional Information for the
Stepstone Funds dated May 28, 1996 and on file with the Securities and Exchange
Commission, which have been previously furnished to HighMark, did not as of
their dates and do not as of the date hereof contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Stepstone or any Stepstone Fund, threatened
against Stepstone or any Stepstone Fund which assert liability on the part of
Stepstone or any Stepstone Fund.
(f) There are no material contracts outstanding to which Stepstone or any
Stepstone Fund is a party, other than as disclosed in the Stepstone Prospectuses
and the corresponding Statement of Additional Information or in the Registration
Statement and the Proxy Statement.
(g) Neither Stepstone nor any Stepstone Fund has any known liabilities of a
material nature, contingent or otherwise, other than those shown as belonging to
it on its statement of assets and liabilities as of July 31, 1996 and those
incurred in the ordinary course of Stepstone's business as an investment company
since that date. Prior to the Exchange Date, Stepstone will advise HighMark of
all known material liabilities, contingent or otherwise, incurred by it and each
Stepstone Fund subsequent to July 31, 1996, whether or not incurred in the
ordinary course of business.
(h) As used in this Agreement, the term "Investments" shall mean each
Stepstone Fund's investments shown on the schedule of its portfolio investments
as of July 31, 1996 referred to in Section 1(c) hereof, as supplemented with
such changes as Stepstone or each Stepstone Fund shall make after July 31, 1996
and prior to the date of this Agreement, which
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changes have been disclosed to HighMark, and changes made on and after the date
of this Agreement after advising HighMark of such proposed changes, and changes
resulting from stock dividends, stock split-ups, mergers and similar corporate
actions.
(i) Each Stepstone Fund has filed or will file all federal and state tax
returns which, to the knowledge of Stepstone's officers, are required to be
filed by each Stepstone Fund and has paid or will pay all federal and state
taxes shown to be due on said returns or on any assessments received by each
Stepstone Fund. All tax liabilities of each Stepstone Fund have been adequately
provided for on its books, and no tax deficiency or liability of any Stepstone
Fund has been asserted, and no question with respect thereto has been raised, by
the Internal Revenue Service or by any state or local tax authority for taxes in
excess of those already paid.
(j) As of both the Valuation Time and the Exchange Date and except for
shareholder approval and otherwise as described in Section 1(l), Stepstone on
behalf of each Stepstone Fund will have full right, power and authority to sell,
assign, transfer and deliver the Investments and any other assets and
liabilities of each Stepstone Fund to be transferred to the corresponding
HighMark Fund pursuant to this Agreement. At the Exchange Date, subject only to
the delivery of the Investments and any such other assets and liabilities as
contemplated by this Agreement, HighMark will, on behalf of each HighMark Fund,
acquire the Investments and any such other assets subject to no encumbrances,
liens or security interests in favor of any third party creditor of Stepstone or
a Stepstone Fund and, except as described in Section 1(k), without any
restrictions upon the transfer thereof.
(k) No registration under the Securities Act of 1933, as amended (the "1933
Act"), of any of the Investments would be required if they were, as of the time
of such transfer, the subject of a public distribution by either of Stepstone or
HighMark, except as previously disclosed to HighMark by Stepstone.
(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Stepstone or any
Stepstone Fund of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act, state securities or blue sky laws (which
term as used herein shall include the laws of the District of Columbia and of
Puerto Rico) or the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"H-S-R Act").
(m) The registration statement (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") by HighMark on Form
N-14 relating to the Shares issuable hereunder, and the proxy statement of
Stepstone included therein (the "Proxy Statement"), on the effective date of the
Registration Statement and insofar as they relate to Stepstone and the Stepstone
Funds, (i) will comply in all material respects with the provisions of the 1933
Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and
(ii) will not contain any untrue statement of a material fact or omit to state a
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material fact required to be stated therein or necessary to make the statements
therein not misleading; and at the time of the shareholders' meeting referred to
in Section 8(a) below and on the Exchange Date, the prospectus contained in the
Registration Statement of which the Proxy Statement is a part (the "Prospectus")
,as amended or supplemented by any amendments or supplements filed with the
Commission by HighMark, insofar as it relates to Stepstone and the Stepstone
Funds, will not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the representations
and warranties in this subsection shall apply only to statements of fact
relating to Stepstone and any Stepstone Fund contained in the Registration
Statement, he Prospectus or the Proxy Statement, or omissions to state in any
thereof a material fact relating to Stepstone or any Stepstone Fund, as such
Registration Statement, Prospectus and Proxy Statement shall be furnished to
Stepstone in definitive form as soon as practicable following effectiveness of
the Registration Statement and before any public distribution of the Prospectus
or Proxy Statement.
(n) All of the issued and outstanding shares of beneficial interest of each
Stepstone Fund have been offered for sale and sold in conformity with all
applicable federal and state securities laws.
(o) Each of the Stepstone Funds is qualified, and will at all times through
the Exchange Date qualify for taxation as a "regulated investment company" under
Sections 851 and 852 of the Code.
(p) At the Exchange Date, each of the Stepstone Funds will have sold such
of its assets, if any, as necessary to assure that, after giving effect to the
acquisition of the assets pursuant to this Agreement, each of the HighMark Funds
will remain a "diversified company" within the meaning of Section 5(b)(1) of the
1940 Act and in compliance with such other mandatory investment restrictions as
are set forth in the HighMark Prospectuses previously furnished to Stepstone.
2. REPRESENTATIONS AND WARRANTIES OF HIGHMARK. HighMark and each HighMark
Fund jointly and severally represent and warrant to and agree with Stepstone and
each Stepstone Fund that:
(a) HighMark is a business trust duly established and validly existing
under the laws of The Commonwealth of Massachusetts and has power to carry on
its business as it is now being conducted and to carry out this Agreement.
HighMark and each HighMark Fund is not required to qualify as a foreign
association in any jurisdiction. HighMark and each HighMark Fund has all
necessary federal, state and local authorizations to own all of its properties
and assets and to carry on its business as now being conducted and to fulfill
the terms of this Agreement, except as set forth in Section 2(i).
(b) HighMark is registered under the 1940 Act as an open-end management
investment company, and such registration has not been revoked or rescinded and
is in full
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force and effect. Each HighMark Fund that has had active operations prior to the
Exchange Date, has elected to qualify and has qualified as a regulated
investment company under Part I of Subchapter M of the Code, as of and since its
first taxable year, and qualifies and intends to continue to qualify as a
regulated investment company for its taxable year ending upon its liquidation.
Each HighMark Fund that has had actual operations prior to the Exchange Date has
been a regulated investment company under such sections of the Code at all times
since its inception. HighMark Value Momentum, HighMark Blue Chip Growth,
HighMark Emerging Growth, HighMark International Equity, HighMark
Intermediate-Term Bond, HighMark Convertible Securities, HighMark Government
Securities, and HighMark California Intermediate Tax-Free Bond, which have not
had active operations prior to the Exchange Date, intend to qualify as regulated
investment companies under Part I of Subchapter M of the Code.
(c) The statements of assets and liabilities, statements of operations,
statements of changes in net assets and schedules of investments (indicating
their market values) for each HighMark Fund for the year ended July 31, 1996,
such statements and schedules having been audited by Deloitte & Touche LLP,
independent accountants to HighMark, have been furnished to Stepstone. Such
statements of assets and liabilities and schedules fairly present the financial
position of the HighMark Funds as of their respective dates, and said statements
of operations and changes in net assets fairly reflect the results of its
operations and changes in financial position for the periods covered thereby in
conformity with generally accepted accounting principles.
(d) The prospectuses of each HighMark Fund dated February 26, 1997,
(collectively, the "HighMark Prospectuses"), and the Statement of Additional
Information for the HighMark Funds, dated February 26, 1997 and on file with the
Securities and Exchange Commission, which have been previously furnished to
Stepstone, did not as of their dates and do not as of the date hereof contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of HighMark or any HighMark Fund, threatened
against HighMark or any HighMark Fund which assert liability on the part of
HighMark or any HighMark Fund.
(f) There are no material contracts outstanding to which HighMark or any
HighMark Fund is a party, other than as disclosed in the HighMark Prospectuses
and the corresponding Statement of Additional Information or in the Registration
Statement.
(g) Neither HighMark nor any HighMark Fund has any known liabilities of a
material nature, contingent or otherwise, other than those shown on its
statement of assets and liabilities as of July 31, 1996 referred to above and
those incurred in the ordinary course of the business of HighMark as an
investment company or any HighMark Fund since such date. Prior to the Exchange
Date, HighMark will advise Stepstone of all known material liabilities,
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contingent or otherwise, incurred by it and each HighMark Fund subsequent to
July 31, 1996, whether or not incurred in the ordinary course of business.
(h) Each HighMark Fund has filed or will file all federal and state tax
returns which, to the knowledge of HighMark's officers, are required to be filed
by each HighMark Fund and has paid or will pay all federal and state taxes shown
to be due on said returns or on any assessments received by each HighMark Fund.
All tax liabilities of each HighMark Fund have been adequately provided for on
its books, and no tax deficiency or liability of any HighMark Fund has been
asserted, and no question with respect thereto has been raised, by the Internal
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid.
(i) No consent, approval, authorization or order of any governmental
authority is required for the consummation by HighMark or any HighMark Fund of
the transactions contemplated by this Agreement, except such as may be required
under the 1933 Act, the 1934 Act, the 1940 Act, state securities or Blue Sky
laws or the H-S-R Act.
(j) As of both the Valuation Time and the Exchange Date and otherwise as
described in Section 2(i), HighMark on behalf of each HighMark Fund will have
full right, power and authority to purchase the Investments and any other assets
and assume the liabilities of each Stepstone Fund to be transferred to the
corresponding HighMark Fund pursuant to this Agreement.
(k) The Registration Statement, the Prospectus and the Proxy Statement, on
the effective date of the Registration Statement and insofar as they relate to
HighMark and the HighMark Funds: (i) will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder and (ii) will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and at the time of the
shareholders' meeting referred to in Section 8(a) and at the Exchange Date, the
Prospectus, as amended or supplemented by any amendments or supplements filed
with the Commission by HighMark or any HighMark Fund, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that none of the representations and warranties in this
subsection shall apply to statements in or omissions from the Registration
Statement, the Prospectus or the Proxy Statement made in reliance upon and in
conformity with information furnished by Stepstone or any Stepstone Fund for use
in the Registration Statement, the Prospectus or the Proxy Statement.
(l) Shares to be issued to each Stepstone Fund have been duly authorized
and, when issued and delivered pursuant to this Agreement and the Prospectus,
will be legally and validly issued and will be fully paid and nonassessable by
HighMark and no shareholder of HighMark will have any preemptive right of
subscription or purchase in respect thereof.
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(m) The issuance of Shares pursuant to this Agreement will be in compliance
with all applicable federal and state securities laws.
(n) Each of HighMark Diversified Money Market, HighMark 100% U.S. Treasury
Money Market, HighMark California Tax-Free Money Market, HighMark Balanced, and
HighMark Growth is qualified and will at all times through the Exchange Date
qualify for taxation as a "regulated investment company" under Sections 851 and
852 of the Code. HighMark Value Momentum, HighMark Blue Chip Growth, HighMark
Emerging Growth, HighMark International Equity, HighMark Intermediate-Term Bond,
HighMark Convertible Securities, HighMark Government Securities, and HighMark
California Intermediate Tax- Free Bond, upon filing of their first income tax
returns at the completion of their first taxable year will elect to be regulated
investment companies and until such time will take all steps necessary to ensure
qualification as regulated investment companies under Sections 851 and 852 of
the Code.
(o) HighMark through its administrator, transfer agent, custodian or
otherwise, will cooperate fully and in a timely manner with Stepstone and each
Stepstone Fund in completing each of the actions required of it and its agents
and necessary for consummation of the transactions described in Sections 3 (a)
and (b) of this Agreement, and in connection therewith has and will from time to
time thereafter provide to Stepstone in writing reasonably detailed descriptions
of each such action, a reasonable time projection for the accomplishment
thereof, and the HighMark person primarily responsible therefor. Upon
presentation to Stepstone of the above-described time projections, Stepstone may
promptly notify HighMark in writing that the time projections are not
reasonable. HighMark and Stepstone shall then in good faith attempt to establish
mutually acceptable time projections.
3. REORGANIZATION. (a) Subject to the requisite approval of the
shareholders of each Stepstone Fund and to the other terms and conditions
contained herein (including each Stepstone Fund's obligation to distribute to
its respective shareholders all of its investment company taxable income and net
capital gain as described in Section 9(k) hereof), Stepstone and each Stepstone
Fund agree to sell, assign, convey, transfer and deliver to the corresponding
HighMark Fund, and HighMark and each HighMark Fund agree to acquire from the
corresponding Stepstone Fund, on the Exchange Date all of the Investments and
all of the cash and other assets of each Stepstone Fund in exchange for that
number of Shares of the corresponding HighMark Fund provided for in Section 4
and the assumption by the corresponding HighMark Fund of all of the liabilities
of the Stepstone Fund. Pursuant to this Agreement, such Stepstone Fund will, as
soon as practicable after the Exchange Date, distribute in liquidation all of
the Shares received by it to its shareholders in exchange for their shares of
beneficial interest of such Stepstone Fund.
(b) Stepstone, on behalf of each Stepstone Fund, will pay or cause to be
paid to the corresponding HighMark Fund any interest and cash dividends received
by it on or after the Exchange Date with respect to the Investments transferred
to the HighMark Funds hereunder. Stepstone, on behalf of each Stepstone Fund,
will transfer to the corresponding HighMark
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Fund any rights, stock dividends or other securities received by Stepstone or
any Stepstone Fund after the Exchange Date as stock dividends or other
distributions on or with respect to the Investments transferred, which rights,
stock dividends and other securities shall be deemed included in the assets
transferred to each HighMark Fund at the Exchange Date and shall not be
separately valued, in which case any such distribution that remains unpaid as of
the Exchange Date shall be included in the determination of the value of the
assets of the Stepstone Fund acquired by the corresponding HighMark Fund.
4. EXCHANGE DATE; VALUATION TIME. On the Exchange Date, HighMark will
deliver to Stepstone a number of Shares having an aggregate net asset value
equal to the value of the assets of the corresponding Stepstone Fund acquired by
each HighMark Fund, less the value of the liabilities of such Stepstone Fund
assumed, determined as hereafter provided in this Section 4.
(a) Subject to Section 4(d) hereof, the value of each Stepstone Fund's net
assets will be computed as of the Valuation Time using the valuation procedures
for the particular Stepstone Fund set forth in the Stepstone Prospectus.
(b) Subject to Section 4(d) hereof, the net asset value of a share of each
HighMark Fund will be determined to the nearest full cent as of the Valuation
Time, using the valuation procedures set forth in the HighMark Prospectus for
the particular HighMark Fund.
(c) Subject to Section 4(d), the Valuation Time shall be [_______] Eastern
Standard time on [___________] for the following Funds: [______________], and
[______________] Eastern time on [___________] for the following Funds:
[_________], or such earlier or later days as may be mutually agreed upon in
writing by the parties hereto (the "Valuation Time").
(d) No formula will be used to adjust the net asset value of any Stepstone
Fund or HighMark Fund to take into account differences in realized and
unrealized gains and losses.
(e) Each HighMark Fund shall issue its Shares to the corresponding
Stepstone Fund on one share deposit receipt registered in the name of the
corresponding Stepstone Fund. Each Stepstone Fund shall distribute in
liquidation the Shares received by it hereunder pro rata to its shareholders by
redelivering such share deposit receipt to HighMark's transfer agent which will
as soon as practicable set up open accounts for each Stepstone Fund shareholder
in accordance with written instructions furnished by Stepstone.
(f) Each HighMark Fund shall assume all liabilities of the corresponding
Stepstone Fund, whether accrued or contingent, in connection with the
acquisition of assets and subsequent dissolution of the corresponding Stepstone
Fund or otherwise, except that recourse for assumed liabilities relating to a
particular Stepstone Fund will be limited to the corresponding HighMark Fund.
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5. EXPENSES, FEES, ETC. (a) Subject to subsections 5(b) through 5(e), all
fees and expenses, including accounting expenses, portfolio transfer taxes (if
any) or other similar expenses incurred directly in connection with the
consummation by HighMark and Stepstone of the transactions contemplated by this
Agreement will be borne by Union Bank of California, N.A., including the costs
of proxy materials, proxy solicitation, and legal expenses; provided, however,
that such expenses will in any event be paid by the party directly incurring
such expenses if and to the extent that the payment by the other party of such
expenses would result in the disqualification of any HighMark Fund or any
Stepstone Fund, as the case may be, as a "regulated investment company" within
the meaning of Section 851 of the Code. Fees and expenses not incurred directly
in connection with the consummation of the Transaction will be borne by the
party incurring such fees and expenses.
(b) In the event the transactions contemplated by this Agreement are not
consummated by reason of Stepstone being either unwilling or unable to go
forward (other than by reason of the nonfulfillment or failure of any condition
to Stepstone's obligations referred to in Section 8(a) or Section 10), Stepstone
shall pay directly all reasonable fees and expenses incurred by HighMark in
connection with such transactions, including, without limitation, legal,
accounting and filing fees.
(c) In the event the transactions contemplated by this Agreement are not
consummated by reason of HighMark being either unwilling or unable to go forward
(other than by reason of the nonfulfillment or failure of any condition to
HighMark's obligations referred to in Section 8(a) or Section 9), HighMark shall
pay directly all reasonable fees and expenses incurred by Stepstone in
connection with such transactions, including without limitation legal,
accounting and filing fees.
(d) In the event the transactions contemplated by this Agreement are not
consummated for any reason other than (i) HighMark or Stepstone being either
unwilling or unable to go forward or (ii) the nonfulfillment or failure of any
condition to Stepstone or HighMark's obligations referred to in Section 8(a),
Section 9 or Section 10 of this Agreement, then each of Stepstone and HighMark
shall bear the expenses it has actually incurred in connection with such
transactions.
(e) Notwithstanding any other provisions of this Agreement, if for any
reason the transactions contemplated by this Agreement are not consummated, no
party shall be liable to the other party for any damages resulting therefrom,
including without limitation consequential damages, except as specifically set
forth above.
6. PERMITTED ASSETS. HighMark agrees to advise Stepstone promptly if at any
time prior to the Exchange Date the assets of any Stepstone Fund include any
assets that the corresponding HighMark Fund is not permitted, or reasonably
believes to be unsuitable for it, to acquire, including without limitation any
security that, prior to its acquisition by any Stepstone Fund, HighMark has
informed Stepstone is unsuitable for the corresponding HighMark Fund to acquire.
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7. EXCHANGE DATE. Delivery of the assets of the Stepstone Funds to be
transferred, assumption of the liabilities of the Stepstone Funds to be assumed,
and the delivery of Shares to be issued shall be made at the offices of SEI Fund
Resources, Oaks, PA 19456 at [time] on April 18, 1997 for the following Funds:
Stepstone Money Market, Stepstone Treasury Money Market, Stepstone California
Tax-Free Money Market, Stepstone Balanced and Stepstone Growth Equity and
[____time_______] on April 25, 1997 for the following Funds: Stepstone Value
Momentum, Stepstone Blue Chip Growth, Stepstone Emerging Growth, Stepstone
International Equity, Stepstone Intermediate-Term Bond, Stepstone Convertible
Securities, Stepstone Government Securities, and Stepstone California
Intermediate Tax-Free Bond or at such other times and dates agreed to by
Stepstone and HighMark, the date and time upon which such delivery is to take
place being referred to herein as the "Exchange Date."
8. SPECIAL MEETING OF SHAREHOLDERS; DISSOLUTION. (a) Stepstone agrees to
call a special meeting of the shareholders of each Stepstone Fund as soon as is
practicable after the effective date of the Registration Statement for the
purpose of considering the sale of all of the assets of each Stepstone Fund to
and the assumption of all of the liabilities of each Stepstone Fund by the
corresponding HighMark Fund as herein provided, adopting this Agreement, and
authorizing the liquidation and dissolution of each Stepstone Fund, and, except
as set forth in Section 13, it shall be a condition to the obligations of each
of the parties hereto that the holders of the shares of beneficial interest of
each Stepstone Fund shall have approved this Agreement and the transactions
contemplated herein in the manner required by law and Stepstone's Declaration of
Trust at such a meeting on or before the Valuation Time.
(b) Stepstone and each Stepstone Fund agree that the liquidation and
dissolution of each Stepstone Fund will be effected in the manner provided in
Stepstone's Declaration of Trust in accordance with applicable law, that it will
not make any distributions of any Shares to the shareholders of a Stepstone Fund
without first paying or adequately providing for the payment of all of such
Stepstone Fund's known debts, obligations and liabilities.
(c) Each of HighMark and Stepstone will cooperate with the other, and each
will furnish to the other the information relating to itself required by the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder
to be set forth in the Registration Statement, including the Prospectus and the
Proxy Statement.
9. CONDITIONS TO HIGHMARK'S OBLIGATIONS. The obligations of HighMark and
each HighMark Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby, including the liquidation and dissolution of the Stepstone
Funds, shall have been approved by the shareholders of each Stepstone Fund in
the manner required by law.
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(b) Stepstone shall have furnished to HighMark a statement of each
Stepstone Fund's assets and liabilities, with values determined as provided in
Section 4 of this Agreement, together with a list of Investments with their
respective tax costs, all as of the Valuation Time, certified on Stepstone's
behalf by its President (or any Vice President) and Treasurer, and a certificate
of both such officers, dated the Exchange Date, to the effect that as of the
Valuation Time and as of the Exchange Date there has been no material adverse
change in the financial position of any Stepstone Fund since July 31, 1996,
other than changes in the Investments since that date or changes in the market
value of the Investments, or changes due to net redemptions of shares of the
Stepstone Funds, dividends paid or losses from operations.
(c) As of the Valuation Time and as of the Exchange Date, all
representations and warranties of Stepstone and each Stepstone Fund made in this
Agreement are true and correct in all material respects as if made at and as of
such dates, Stepstone and each Stepstone Fund has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to each of such dates, and Stepstone shall have furnished
to HighMark a statement, dated the Exchange Date, signed by Stepstone's
President (or any Vice President) and Treasurer certifying those facts as of
such dates.
(d) Stepstone shall have delivered to HighMark a letter from Arthur
Anderson LLP dated the Exchange Date stating that such firm reviewed the federal
and state income tax returns of each Stepstone Fund for the year ended January
31, 1996 and that, in the course of such review, nothing came to their attention
which caused them to believe that such returns did not properly reflect, in all
material respects, the federal and state income taxes of each Stepstone Fund for
the periods covered thereby, or that each Stepstone Fund would not qualify as a
regulated investment company for federal income tax purposes.
(e) There shall not be any material litigation pending with respect to the
matters contemplated by this Agreement.
(f) HighMark shall have received an opinion of Morgan, Lewis & Bockius LLP,
in form reasonably satisfactory to HighMark and dated the Exchange Date, to the
effect that (i) Stepstone is a business trust duly established and validly
existing under the laws of the Commonwealth of Massachusetts, and neither
Stepstone nor any Stepstone Fund is, to the knowledge of such counsel, required
to qualify to do business as a foreign association in any jurisdiction, (ii)
this Agreement has been duly authorized, executed, and delivered by Stepstone
and, assuming that the Registration Statement, the Prospectus and the Proxy
Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and assuming
due authorization, execution and delivery of this Agreement by HighMark, is a
valid and binding obligation of Stepstone, (iii) Stepstone and each Stepstone
Fund has power to sell, assign, convey, transfer and deliver the Investments and
other assets contemplated hereby and, upon consummation of the transactions
contemplated hereby in accordance with the terms of this Agreement, Stepstone
and each Stepstone Fund will have duly sold, assigned, conveyed, transferred and
delivered such Investments and other assets to HighMark,(iv) the execution
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and delivery of this Agreement did not, and the consummation of the transactions
contemplated hereby will not, violate Stepstone's Declaration of Trust, or
Bylaws, as amended, or any provision of any agreement known to such counsel to
which Stepstone or any Stepstone Fund is a party or by which it is bound, it
being understood that with respect to investment restrictions as contained in
Stepstone's Declaration of Trust, or Bylaws, or then-current prospectus or
statement of additional information, such counsel may rely upon a certificate of
an officer of Stepstone whose responsibility it is to advise Stepstone with
respect to such matters and (v) no consent, approval, authorization or order of
any court or governmental authority is required for the consummation by
Stepstone or any Stepstone Fund of the transactions contemplated hereby, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and
such as may be required under state securities or blue sky laws and the H-S-R
Act, and it being understood that such opinion shall not be deemed to apply to
HighMark's compliance obligations under the 1933 Act, 1934 Act, 1940 Act, state
securities or blue sky laws and H-S-R Act. For purposes of analysis regarding
the 1940 Act, Morgan, Lewis & Bockius LLP may assume, as fact solely for
purposes of this plan that the Stepstone Funds and the HighMark Funds may be
considered affiliated persons or affiliated persons of an affiliated person
solely by reason of having a common investment adviser.
(g) HighMark shall have received an opinion of Ropes & Gray, counsel to
HighMark addressed to HighMark and each HighMark Fund, in form reasonably
satisfactory to HighMark and dated the Exchange Date (which opinion would be
based upon certain factual representations and subject to certain
qualifications), to the effect that, on the basis of the existing provisions of
the Code, current administrative rules and court decisions, for Federal income
tax purposes: (i) no gain or loss will be recognized by any Stepstone Fund or
its Shareholders upon the transfer of the assets to the corresponding HighMark
Fund in exchange for Shares and the assumption by such HighMark Fund of the
liabilities of the Stepstone Fund or upon the distribution of Shares by the
Stepstone Fund to its shareholders in liquidation pursuant to this Agreement;
(ii) the basis of the Shares a Stepstone shareholder receives in connection with
the transaction will be the same as the basis of his or her Stepstone Fund
shares exchanged therefor; (iii) a Stepstone shareholder's holding period with
respect to his or her Shares will be determined by including the period for
which he or she held the Stepstone Fund shares exchanged therefor, provided that
he or she held such Stepstone Fund shares as capital assets; (iv) no gain or
loss will be recognized by any HighMark Fund upon the receipt of the assets of
the corresponding Stepstone Fund in exchange for Shares and the assumption by
the HighMark Fund of the liabilities of the corresponding Stepstone Fund; (v)
the basis in the hands of the HighMark Fund of the assets of the corresponding
Stepstone Fund transferred to the HighMark Fund will be the same as the basis of
the assets in the hands of the corresponding Stepstone Fund immediately prior to
the transfer; and (vi) each HighMark Fund's holding periods with respect to the
assets of the corresponding Stepstone Fund will include the periods for which
such assets were held by the corresponding Stepstone Fund.
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(h) The assets of each Stepstone Fund to be acquired by the corresponding
HighMark Fund will include no assets which the corresponding HighMark Fund, by
reason of limitations contained in its Declaration of Trust or of investment
restrictions disclosed in the HighMark Prospectuses in effect on the Exchange
Date, may not properly acquire. HighMark shall not change the HighMark
Declaration of Trust and the HighMark Prospectuses so as to restrict permitted
investments for each HighMark Fund except as required by the Commission or any
state regulatory authority.
(i) The Registration Statement shall have become effective under the 1933
Act and applicable Blue Sky provisions, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of HighMark
contemplated by the Commission and or any state regulatory authority.
(j) All proceedings taken by Stepstone in connection with the transactions
contemplated by this Agreement and all documents incidental thereto reasonably
shall be satisfactory in form and substance to HighMark and Ropes & Gray.
(k) Prior to the Exchange Date, each Stepstone Fund shall have declared a
dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to its shareholders all of the excess of (i) the
Stepstone Fund's investment income excludable from gross income under Section
103(a) of the Code (if any) over (ii) its deductions disallowed under Sections
265 and 171(a)(2) of the Code, all of the Stepstone Fund's investment company
taxable income (computed without regard to any deduction for dividends paid),
and all of the Stepstone Fund's net realized capital gain (after reduction for
any capital loss carryover) in each case for both the taxable year ended January
31, 1996 and the short taxable period beginning on February 1, 1996 and ending
on the Exchange Date.
(l) Stepstone shall have furnished to HighMark a certificate, signed by the
President (or any Vice President) and the Treasurer of Stepstone, as to the tax
cost to HighMark of the securities delivered to HighMark pursuant to this
Agreement, together with any such other evidence as to such tax cost as HighMark
may reasonably request.
(m) Stepstone Funds' custodian shall have delivered to HighMark a
certificate identifying all of the assets of each Stepstone Fund held by such
custodian as of the Valuation Time.
(n) Stepstone Funds' transfer agent shall have provided to HighMark (i) the
originals or true copies of all of the records of each Stepstone Fund in the
possession of such transfer agent as of the Exchange Date, (ii) a certificate
setting forth the number of shares of each Stepstone Fund outstanding as of the
Valuation Time and (iii) the name and address of each holder of record of any
such shares of each Stepstone Fund and the number of shares held of record by
each such shareholder.
(o) All of the issued and outstanding shares of beneficial interest of each
Stepstone Fund shall have been offered for sale and sold in conformity with all
applicable federal or
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state securities or blue sky laws and, to the extent that any audit of the
records of Stepstone or any Stepstone Fund or its transfer agent by HighMark or
its agents shall have revealed otherwise, either (i) Stepstone and each
Stepstone Fund shall have taken all actions that in the reasonable opinion of
HighMark or Ropes & Gray are necessary to remedy any prior failure on the part
of Stepstone to have offered for sale and sold such shares in conformity with
such laws or (ii) Stepstone shall have furnished (or caused to be furnished)
surety, or deposited (or caused to be deposited) assets in escrow, for the
benefit of HighMark in amounts sufficient and upon terms satisfactory, in the
opinion of HighMark or its counsel, to indemnify HighMark against any expense,
loss, claim, damage or liability whatsoever that may be asserted or threatened
by reason of such failure on the part of Stepstone to have offered and sold such
shares in conformity with such laws.
(p) HighMark shall have received from Deloitte & Touche LLP a letter
addressed to HighMark dated as of the Exchange Date reasonably satisfactory in
form and substance to HighMark and Stepstone to the effect that, on the basis of
limited procedures agreed upon by HighMark and Stepstone and described in such
letter (but not an examination in accordance with generally accepted auditing
standards), as of the Valuation Time the value of the assets of each Stepstone
Fund to be exchanged for the Shares have been determined in accordance with the
provisions of Stepstone's Declaration of Trust, pursuant to the procedures
customarily utilized by each Stepstone Fund in valuing its assets and issuing
its shares.
(q) Stepstone shall have duly executed and delivered to HighMark bills of
sale, assignments, certificates and other instruments of transfer ("Transfer
Documents") as HighMark may deem necessary or desirable to transfer all of
Stepstone's and each Stepstone Fund's entire right, title and interest in and to
the Investments and all other assets of each Stepstone Fund.
10. CONDITIONS TO STEPSTONE'S OBLIGATIONS. The obligations of Stepstone and
each Stepstone Fund hereunder shall be subject to the following conditions:
(a) This Agreement shall have been adopted and the transactions
contemplated hereby, including the liquidation and dissolution of the Stepstone
Funds, shall have been approved by the shareholders of each Stepstone Fund in
the manner required by law.
(b) HighMark shall have furnished to Stepstone a statement of each HighMark
Fund's net assets, together with a list of portfolio holdings with values
determined as provided in Section 4, all as of the Valuation Time, certified on
HighMark's behalf by its President (or any Vice President) and Treasurer (or any
Assistant Treasurer), and a certificate of both such officers, dated the
Exchange Date, to the effect that as of the Valuation Time and as of the
Exchange Date there has been no material adverse change in the financial
position of any HighMark Fund since July 31, 1996, other than changes in its
portfolio securities since that date, changes in the market value of its
portfolio securities, changes due to net redemptions, dividends paid or losses
from operations.
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(c) HighMark shall have executed and delivered to Stepstone an Assumption
of Liabilities dated as of the Exchange Date pursuant to which each HighMark
Fund will assume all of the liabilities of the corresponding Stepstone Fund
existing at the Valuation Time in connection with the transactions contemplated
by this Agreement.
(d) As of the Valuation Time and as of the Exchange Date, all
representations and warranties of HighMark and each HighMark Fund made in this
Agreement are true and correct in all material respects as if made at and as of
such dates, HighMark and each HighMark Fund has complied with all of the
agreements and satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates, and HighMark shall have furnished
to Stepstone a statement, dated the Exchange Date, signed by HighMark's
President (or any Vice President) and Treasurer certifying those facts as of
such dates.
(e) There shall not be any material litigation pending with respect to the
matters contemplated by this Agreement.
(f) Stepstone shall have received an opinion of Ropes & Gray, in form
reasonably satisfactory to Stepstone and dated the Exchange Date, to the effect
that (i) HighMark is a business trust and validly existing in conformity with
the laws of The Commonwealth of Massachusetts, and, to the knowledge of such
counsel, neither HighMark nor any HighMark Fund is required to qualify to do
business as a foreign association in any jurisdiction, (ii) the Shares to be
delivered to Stepstone as provided for by this Agreement are duly authorized and
upon such delivery will be validly issued and will be fully paid and
nonassessable by HighMark and no shareholder of HighMark has any preemptive
right to subscription or purchase in respect thereof, (iii) this Agreement has
been duly authorized, executed and delivered by HighMark and, assuming that the
Prospectus, the Registration Statement and the Proxy Statement comply with the
1933 Act, the 1934 Act and the 1940 Act and assuming due authorization,
execution and delivery of this Agreement by Stepstone, is a valid and binding
obligation of HighMark, (iv) the execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated hereby will not,
violate HighMark's Declaration of Trust, as amended, or Code of Regulations, or
any provision of any agreement known to such counsel to which HighMark or any
HighMark Fund is a party or by which it is bound, it being understood that with
respect to investment restrictions as contained in HighMark's Declaration of
Trust, as amended, Code of Regulations or then-current prospectus or statement
of additional information of each HighMark Fund, such counsel may rely upon a
certificate of an officer of HighMark whose responsibility it is to advise
HighMark with respect to such matters, (v) no consent, approval, authorization
or order of any court or governmental authority is required for the consummation
by HighMark or any HighMark Fund of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and
such as may be required under state securities or blue sky laws and the H-S-R
Act and it being understood that such opinion shall not be deemed to apply to
Stepstone's compliance obligations under the 1933 Act, 1934 Act, 1940 Act, state
securities or blue sky laws and the H-S-R Act; and (vi) the Registration
Statement has become effective under the 1933 Act, and to the best of the
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knowledge of such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the 1933 Act.
(g) Stepstone shall have received an opinion of Ropes & Gray addressed to
Stepstone and each Stepstone Fund in a form reasonably satisfactory to Stepstone
and dated the Exchange Date (which opinion would be based upon certain factual
representations and subject to certain qualifications), with respect to the
matters specified in Section 9(g) of this Agreement.
(h) All proceedings taken by HighMark in connection with the transactions
contemplated by this Agreement and all documents incidental thereto reasonably
shall be satisfactory in form and substance to Stepstone and Morgan, Lewis &
Bockius LLP.
(i) The Registration Statement shall have become effective under the 1933
Act and applicable Blue Sky provisions, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of Stepstone,
contemplated by the Commission or any state regulatory authority.
11. INDEMNIFICATION. (a) The Stepstone Funds will indemnify and hold
harmless HighMark, its trustees and its officers (for purposes of this
subsection, the "Indemnified Parties") against any and all expenses, losses,
claims, damages and liabilities at any time imposed upon or reasonably incurred
by any one or more of the Indemnified Parties in connection with, arising out
of, or resulting from any claim, action, suit or proceeding in which any one or
more of the Indemnified Parties may be involved or with which any one or more of
the Indemnified Parties may be threatened by reason of any untrue statement or
alleged untrue statement of a material fact relating to Stepstone or any
Stepstone Fund contained in the Registration Statement, the Prospectus or the
Proxy Statement or any amendment or supplement to any of the foregoing, or
arising out of or based upon the omission or alleged omission to state in any of
the foregoing a material fact relating to Stepstone or any Stepstone Fund
required to be stated therein or necessary to make the statements relating to
Stepstone or any Stepstone Fund therein not misleading, including, without
limitation, any amounts paid by any one or more of the Indemnified Parties in a
reasonable compromise or settlement of any such claim, action, suit or
proceeding, or threatened claim, action, suit or proceeding made with the prior
consent of Stepstone. The Indemnified Parties will notify Stepstone in writing
within ten days after the receipt by any one or more of the Indemnified Parties
of any notice of legal process or any suit brought against or claim made against
such Indemnified Party as to any matters covered by this Section 11(a).
Stepstone shall be entitled to participate at its own expense in the defense of
any claim, action, suit or proceeding covered by this Section 11(a), or, if it
so elects, to assume at its expense by counsel satisfactory to the Indemnified
Parties the defense of any such claim, action, suit or proceeding, and if
Stepstone elects to assume such defense, the Indemnified Parties shall be
entitled to participate in the defense of any such claim, action, suit or
proceeding at their expense. The Stepstone Funds' obligation under this Section
11(a)
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to indemnify and hold harmless the Indemnified Parties shall constitute a
guarantee of payment so that the Stepstone Funds will pay in the first instance
any expenses, losses, claims, damages and liabilities required to be paid by
them under this Section 11(a) without the necessity of the Indemnified Parties'
first paying the same.
(b) The HighMark Funds will indemnify and hold harmless Stepstone, its
trustees and its officers (for purposes of this subparagraph, the "Indemnified
Parties") against any and all expenses, losses, claims, damages and liabilities
at any time imposed upon or reasonably incurred by any one or more of the
Indemnified Parties in connection with, arising out of, or resulting from any
claim, action, suit or proceeding in which any one or more of the Indemnified
Parties may be involved or with which any one or more of the Indemnified Parties
may be threatened by reason of any untrue statement or alleged untrue statement
of a material fact relating to HighMark or any HighMark Fund contained in the
Registration Statement, the Prospectus or the Proxy Statement, or any amendment
or supplement to any of the foregoing, or arising out of or based upon the
omission or alleged omission to state in any of the foregoing a material fact
relating to HighMark or any HighMark Fund required to be stated therein or
necessary to make the statements relating to HighMark or any HighMark Fund
therein not misleading, including, without limitation, any amounts paid by any
one or more of the Indemnified Parties in a reasonable compromise or settlement
of any such claim, action, suit or proceeding, or threatened claim, action, suit
or proceeding made with the prior consent of HighMark. The Indemnified Parties
will notify HighMark in writing within ten days after the receipt by any one or
more of the Indemnified Parties of any notice of legal process or any suit
brought against or claim made against such Indemnified Party as to any matters
covered by this Section 11(b). HighMark shall be entitled to participate at its
own expense in the defense of any claim, action, suit or proceeding covered by
this Section 11(b), or, if it so elects, to assume at its expense by counsel
satisfactory to the Indemnified Parties the defense of any such claim, action,
suit or proceeding, and, if HighMark elects to assume such defense, the
Indemnified Parties shall be entitled to participate in the defense of any such
claim, action, suit or proceeding at their own expense. The HighMark Funds'
obligation under this Section 11(b) to indemnify and hold harmless the
Indemnified Parties shall constitute a guarantee of payment so that the HighMark
Funds will pay in the first instance any expenses, losses, claims, damages and
liabilities required to be paid by them under this Section 11(b) without the
necessity of the Indemnified Parties' first paying the same.
12. NO BROKER, ETC. Each of HighMark and Stepstone represents that there is
no person who has dealt with it who by reason of such dealings is entitled to
any broker's or finder's or other similar fee or commission arising out of the
transactions contemplated by this Agreement.
13. TERMINATION. HighMark and Stepstone may, by mutual consent of their
respective trustees, terminate this Agreement, and HighMark or Stepstone, after
consultation with counsel and by consent of their respective trustees or an
officer authorized by such trustees, may waive any condition to their respective
obligations hereunder. If the
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transactions contemplated by this Agreement have not been substantially
completed by [date], this Agreement shall automatically terminate on that date
unless a later date is agreed to by HighMark and Stepstone.
Notwithstanding any other provision in this Agreement, in the event
shareholder approval of this Agreement and the transactions contemplated by this
Agreement is obtained with respect to only one or more Stepstone Funds but not
all of the Stepstone Funds, HighMark and Stepstone agree to consummate those
transactions with respect to those Stepstone Funds that have approved this
Agreement and those transactions.
14. RULE 145. Pursuant to Rule 145 under the 1933 Act, HighMark will, in
connection with the issuance of any Shares to any person who at the time of the
transaction contemplated hereby is deemed to be an affiliate of a party to the
transaction pursuant to Rule 145(c), cause to be affixed upon the certificates
issued to such person (if any) a legend as follows:
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT
TO HighMark Funds OR ITS PRINCIPAL UNDERWRITER UNLESS (i) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (ii) IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO HighMark Funds SUCH REGISTRATION IS NOT
REQUIRED."
and, further, HighMark will issue stop transfer instructions to HighMark's
transfer agent with respect to such shares. Stepstone will provide HighMark on
the Exchange Date with the name of any shareholder of the Stepstone Funds who is
to the knowledge of Stepstone an affiliate of Stepstone on such date.
15. COVENANTS, ETC. DEEMED MATERIAL. All covenants, agreements,
representations and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any investigation made by
them or on their behalf.
16. SOLE AGREEMENT; AMENDMENTS. This Agreement supersedes all previous
correspondence and oral communications between the parties regarding the subject
matter hereof, constitutes the only understanding with respect to such subject
matter, may not be changed except by a letter of agreement signed by each party
hereto, and shall be construed in accordance with and governed by the laws of
The Commonwealth of Massachusetts.
17. AGREEMENT AND DECLARATION OF TRUST. The Stepstone Funds is a business
trust organized under Massachusetts law and under a Declaration of Trust, to
which reference is hereby made and a copy of which is on file at the office of
the Secretary of The
A-20
<PAGE> 83
Commonwealth of Massachusetts and elsewhere as required by law, and to any and
all amendments thereto so filed or hereafter filed. The obligations of the
"Stepstone Funds" entered into in the name or on behalf thereof by any of the
Trustees, officers, employees or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, officers, employees,
agents or shareholders of Stepstone personally, but bind only the assets of
Stepstone, and all persons dealing with any of the series or funds of Stepstone,
such as the Stepstone Funds, must look solely to the assets of Stepstone
belonging to such series or funds for the enforcement of any claims against
Stepstone.
The names "HighMark Funds" and "Trustees of HighMark Funds" refer
respectively to HighMark and the Trustees, as trustees but not individually or
personally, acting from time to time under a Declaration of Trust dated March
10, 1987, as amended on July 13, 1987 and July 30, 1987, to which reference is
hereby made and a copy of which is on file at the office of the Secretary of The
Commonwealth of Massachusetts and elsewhere as required by law, and to any and
all amendments thereto so filed or hereafter filed. The obligations of "HighMark
Funds" entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, Shareholders or representatives of
HighMark personally, but bind only the assets of HighMark and all persons
dealing with any series of shares of HighMark such as the HighMark Funds, must
look solely to the assets of HighMark belonging to such series for the
enforcement of any claims against HighMark.
A-21
<PAGE> 84
This Agreement may be executed in any number of counter-parts, each of
which, when executed and delivered, shall be deemed to be an original.
STEPSTONE FUNDS
By:
---------------------------
HIGHMARK FUNDS
By:
----------------------------
A-22
<PAGE> 85
APPENDIX B
FEE TABLES
Below are fee tables showing the current fees for the Stepstone and HighMark
Funds.
HIGHMARK DIVERSIFIED MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
Diversified
Money Market
Fund
------------------
Retail Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as
applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if
applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction) 0.30%
12b-1 Fees 0.25%
Other Expenses (after voluntary reduction)(c) 0.20%
-----
Total Fund Operating 0.75%
=====
Expenses(d)
</TABLE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<PAGE> 86
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Diversified Money Market Fund
Retail Shares $8 $24 $42 $93
</TABLE>
The purpose of the tables above is to assist an investor in the
Diversified Money Market Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Diversified Money Market Fund on
behalf of their customers may charge customers fees for services
provided in connection with the investment in, redemption of, and
exchange of Shares. (See HOW TO PURCHASE SHARES, EXCHANGE PRIVILEGES,
REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(c) Absent voluntary fee waivers, OTHER EXPENSES would be 0.47% for the
Retail Shares of the Diversified Money Market Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.02% for the Retail Shares of the Diversified Money Market Fund.
-2-
<PAGE> 87
STEPSTONE MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INVESTMENT CLASS
(As a percentage of average net assets)
Money
Market
Fund
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30%
12b-1 Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- ---------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . .75%
=========================================================================================================
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40% of the Money
Market Fund. The Distributor reserves the right to terminate its waiver
at any time in its sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be .90% for the
Money Market Fund.
Example:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . $8 $24 $42 $93
==================================================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class shares of the Funds which are
subject to the same expenses, except there are no distribution expenses.
Additional information may be found under "The Administrator" and "The
Advisor."
-3-
<PAGE> 88
HIGHMARK DIVERSIFIED MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
Diversified
Money Market
Fund
------------------
Fiduciary Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction) 0.30%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(d) 0.20%
-----
Total Fund Operating 0.50%
====
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period
-4-
<PAGE> 89
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Diversified Money Market Fund
Fiduciary Shares $5 $16 $28 $63
</TABLE>
The purpose of the tables above is to assist an investor in the
Diversified Money Market Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Diversified Money Market Fund on
behalf of their customers may charge customers fees for services
provided in connection with the investment in, redemption of, and
exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE
PRIVILEGES and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
PURCHASE AND REDEMPTION OF SHARES below.)
(c) Absent voluntary fee waivers, OTHER EXPENSES would be 0.47% for the
Fiduciary Shares of the Diversified Money Market Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
0.77% for the Fiduciary Shares of the Diversified Money Market Fund.
-5-
<PAGE> 90
STEPSTONE MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of average net assets)
Money
Market
Fund
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- ----------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . .50%
==========================================================================================================
</TABLE>
Example:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . $5 $16 $28 $63
==================================================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds
which are subject to the same expenses, except that Investment Class shares are
subject to certain distribution expenses. Additional information may be found
under "The Administrator" and "The Advisor."
-6-
<PAGE> 91
HIGHMARK 100% U.S. TREASURY MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
100% U.S. Treasury
Money
Market Fund
-----------------------
Retail Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.24%
12b-1 Fees 0.25%
Other Expenses (after voluntary reduction)(d) 0.21%
-----
Total Fund Operating 0.70%
=====
Expenses(e)
</TABLE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-7-
<PAGE> 92
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
100% U.S. Treasury Money Market Fund
Retail Shares $7 $22 $39 $87
</TABLE>
The purpose of the tables above is to assist an investor in the 100%
U.S. Treasury Money Market Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the 100% U.S. Treasury Money Market
Fund on behalf of their customers may charge customers fees for
services provided in connection with the investment in, redemption of,
and exchange of Shares. (See HOW TO PURCHASE SHARES, EXCHANGE
PRIVILEGES, REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.30% for the
Retail Shares of the 100% U.S. Treasury Money Market Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.48% for the
Retail Shares of the 100% U.S. Treasury Money Market Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.03% for the Retail Shares of the 100% U.S. Treasury Money Market
Fund.
-8-
<PAGE> 93
STEPSTONE TREASURY MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INVESTMENT CLASS
(As a percentage of average net assets)
Treasury
Money Market
Fund
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%(1)
12b-1 Fees (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- -------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (3) . . . . . . . . . . . . . . . . . . . . . .70%
=============================================================================================================
</TABLE>
(1) The Advisor has voluntarily agreed to waive fees to the extent necessary
in order to limit Total Operating Expenses of the Treasury Money Market
Fund. The Advisor reserves the right to terminate its waiver at any time
in its sole discretion. Absent this fee waiver, the Advisory Fees would
be .30% for the Treasury Money Market Fund.
(2) Absent voluntary fee waivers, 12b-1 Fees would be .40% of the Treasury
Money Market Fund. The Distributor reserves the right to terminate its
waiver at any time in its sole discretion.
(3) Absent fee waivers, "Total Operating Expenses" would be .90% for the
Treasury Money Market Fund.
Example:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Treasury Money Market Fund . . . . . . . . . . . . . . . . . $7 $22 $39 $87
==================================================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class shares of the Funds which are
subject to the same expenses, except there are no distribution expenses.
Additional information may be found under "The Administrator" and "The
Advisor."
-9-
<PAGE> 94
HIGHMARK 100% U.S. TREASURY MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
100% U.S. Treasury
Money Market
Fund
--------------------------
Fiduciary Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.24%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(d) 0.21%
-----
Total Fund Operating 0.45%
====
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period
-10-
<PAGE> 95
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
100% U.S. Treasury Money Market Fund
Fiduciary Shares $5 $14 $25 $57
</TABLE>
The purpose of the tables above is to assist an investor in the 100%
U.S. Treasury Money Market Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the 100% U.S. Treasury Money Market
Fund on behalf of their customers may charge customers fees for
services provided in connection with the investment in, redemption of,
and exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES,
EXCHANGE PRIVILEGES and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
PURCHASE AND REDEMPTION OF SHARES below.)
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.30% for the
Fiduciary Shares of the 100% U.S. Treasury Money Market Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.48% for the
Fiduciary Shares of the 100% U.S. Treasury Money Market Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
0.78% for the Fiduciary Shares of the 100% U.S. Treasury Money Market
Fund.
-11-
<PAGE> 96
STEPSTONE TREASURY MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of average net assets)
Treasury
Money Market
Fund
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%(1)
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- -------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . .45%(1)
=============================================================================================================
</TABLE>
(1) The Advisor has voluntarily agreed to waive fees to the extent necessary
in order to limit "Total Operating Expenses" to not more than .45% for
the Treasury Money Market Fund. The Advisor reserves the right to
terminate its waiver at any time in its sole discretion. Absent fee
waivers, the "Advisory Fees" and "Total Operating Expenses" would be .30%
for the Treasury Money Market Fund.
Example:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Treasury Money Market Fund . . . . . . . . . . . . . . . $5 $14 $25 $57
=============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds
which are subject to the same expenses, except that Investment Class shares are
subject to certain distribution expenses. Additional information may be found
under "The Administrator" and "The Advisor."
-12-
<PAGE> 97
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
California Tax-Free
Money Market Fund
-----------------
Retail Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.09%
12b-1 Fees 0.25%
Other Expenses (after voluntary reduction)(d) 0.21%
-----
Total Fund Operating 0.55%
=====
Expenses(e)
</TABLE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-13-
<PAGE> 98
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
California Tax-Free Money Market Fund
Retail Shares $6 $18 $31 $69
</TABLE>
The purpose of the tables above is to assist an investor in the
California Tax-Free Money Market Fund in understanding the various costs and
expenses that a Shareholder will bear directly or indirectly. For a more
complete discussion of the Fund's annual operating expenses, see SERVICE
ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the California Tax-Free Money Market
Fund on behalf of their customers may charge customers fees for
services provided in connection with the investment in, redemption of,
and exchange of Shares. (See HOW TO PURCHASE SHARES, EXCHANGE
PRIVILEGES, REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.30% for the
Retail Shares of the California Tax-Free Money Market Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.48% for the
Retail Shares of the California Tax-Free Money Market Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.03% for the Retail Shares of the California Tax-Free Money Market
Fund.
-14-
<PAGE> 99
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INVESTMENT CLASS
(As a percentage of average net assets)
California
Tax-Free
Money Market
Fund
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10%(1)
12b-1 Fees (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- -----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (3) . . . . . . . . . . . . . . . . . . . . . .63%
=================================================================================================================
</TABLE>
(1) The Advisor has voluntarily agreed to waive fees to the extent necessary
in order to limit Total Operating Expenses of the California Tax-Free
Money Market Fund. The Advisor reserves the right to terminate its
waiver at any time in its sole discretion. Absent this fee waiver, the
Advisory Fees would be .30% for the California Tax-Free Money Market
Fund.
(2) Absent voluntary fee waivers, 12b-1 Fees would be .40% of the California
Tax-Free Money Market Fund. The Distributor reserves the right to
terminate its waiver at any time in its sole discretion.
(3) Absent fee waivers, "Total Operating Expenses" would be .90% for the
California Tax-Free Money Market Fund. "Total Operating Expenses" of the
California Tax-Free Money market Fund have been restated to reflect
current fees and fee waivers.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
California Tax-Free Money Market Fund . . . . . . . . . . $6 $20 $35 $79
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class shares of the Funds which are
subject to the same expenses, except there are no distribution expenses.
Additional information may be found under "The Administrator" and "The
Advisor."
-15-
<PAGE> 100
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
California Tax-Free
Money Market Fund
-----------------
Fiduciary Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.09%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(d) 0.21%
-----
Total Fund Operating 0.30%
====
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period
-16-
<PAGE> 101
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
California Tax-Free Money Market Fund
Fiduciary Shares $3 $10 $17 $38
</TABLE>
The purpose of the tables above is to assist an investor in the
California Tax-Free Money Market Fund in understanding the various costs and
expenses that a Shareholder will bear directly or indirectly. For a more
complete discussion of the Fund's annual operating expenses, see SERVICE
ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the California Tax-Free Money Market
Fund on behalf of their customers may charge customers fees for
services provided in connection with the investment in, redemption of,
and exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES,
EXCHANGE PRIVILEGES and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
PURCHASE AND REDEMPTION OF SHARES below.)
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.30% for the
California Tax-Free Money Market Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.48% for the
Fiduciary Shares of the California Tax-Free Money Market Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
0.78% for the Fiduciary Shares of the California Tax-Free Money Market
Fund.
-17-
<PAGE> 102
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of average net assets)
California
Tax-Free
Money
Market
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10%(1)
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) . . . . . . . . . . . . . . . . . . . . . . . .30%(1)
==============================================================================================================
</TABLE>
(1) The Advisor has voluntarily agreed to waive fees to the extent necessary
in order to limit "Total Operating Expenses" to not more than .30% for
the California Tax-Free Money Market Fund. The Advisor reserves the
right to terminate its waiver at any time in its sole discretion. Absent
fee waivers, the "Advisory Fees" and "Total Operating Expenses" would be
.50%, for the California Tax Free Money Market Fund. "Total Operating
Expenses" of the California Tax-Free Money Market Fund have been restated
to reflect current fees and fee waivers.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
California Tax-Free Money Market Fund . . . . . . . . . . $3 $10 $17 $38
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds
which are subject to the same expenses, except that Investment Class shares are
subject to certain distribution expenses. Additional information may be found
under "The Administrator" and "The Advisor."
-18-
<PAGE> 103
HIGHMARK BALANCED FUND FEE TABLE
<TABLE>
<CAPTION>
Balanced Fund
Retail Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 4.50%
Purchases (as a percentage of offering price)
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)(b)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(c)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0.25%
Other Expenses (after voluntary reduction)(d) 0.30%
Total Fund Operating 1.15%
====
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-19-
<PAGE> 104
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced Fund
Retail Shares $56 $80 $105 $178
</TABLE>
The purpose of the table above is to assist an investor in the
Balanced Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Balanced Fund on behalf of their
customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See HOW TO PURCHASE SHARES, EXCHANGE PRIVILEGES, REDEMPTION
OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against
the proceeds of any redemption request relating to Retail Shares of
the Fund that were purchased without a sales charge in reliance upon
the waiver accorded to purchases in the amount of $1 million or more,
but only where such redemption request is made within one year of the
date the Shares were purchased.
(c) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(d) Absent voluntary fee waivers, OTHER EXPENSES would be .48% for the
Retail Shares of the Balanced Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be
1.33% for the Retail Shares of the Balanced Fund.
-20-
<PAGE> 105
STEPSTONE BALANCED FUND FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%
Maximum Contingent Deferred Sales Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Wire Redemption Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of
the Fund that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares
were purchased.
ANNUAL OPERATING EXPENSES
(As a percentage of offering price)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Balanced
Fund
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
12b-1 Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . 1.05%
==============================================================================================================
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40 for the Balanced
Fund. The Distributor reserves the right to terminate its waiver at any
time in its sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.20% for the
Balanced Fund.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) imposition of the
maximum sales charge; (2) 5% return and
(3) redemption at the end of each time period.
Balanced Fund . . . . . . . . . . . . . . . . . . . . $55 $77 $100 $167
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER
-21-
<PAGE> 106
OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor
in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Investment Class shares of the Funds. The
Trust also offers Institutional Class shares of the Funds, which are subject to
the same expenses except there are no sales charges or distribution costs.
Additional information may be found under "The Administrator," "The Advisor"
and "The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
-22-
<PAGE> 107
HIGHMARK BALANCED FUND FEE TABLE
<TABLE>
<CAPTION>
Balanced Fund
Fiduciary Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of offering price)
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(c) 0.30%
Total Fund Operating 0.90%
====
Expenses(d)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-23-
<PAGE> 108
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced Fund
Fiduciary Shares $9 $29 $50 $111
</TABLE>
The purpose of the table above is to assist an investor in the
Balanced Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Balanced Fund on behalf of their
customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES,
and SERVICE ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
PURCHASE AND REDEMPTION OF SHARES below.)
(c) Absent voluntary fee waivers, OTHER EXPENSES would be 0.48% for the
Fiduciary Shares of the Balanced Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be
1.08% for the Fiduciary Shares of the Balanced Fund.
-24-
<PAGE> 109
STEPSTONE BALANCED FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Balanced
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80%
==============================================================================================================
</TABLE>
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Balanced Fund . . . . . . . . . . . . . . . . . . . . . . $ 8 $26 $44 $ 99
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except that Investment Class shares are
subject to sales charges and distribution expenses. Additional information may
be found under "The Administrator," "The Advisor" and "The SubAdvisor."
-25-
<PAGE> 110
HIGHMARK GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
Growth
Fund
----
Retail
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 4.50%
Purchases (as a percentage of offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as
applicable)(b)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(c)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0.25%
Other Expenses (after voluntary 0.30%
reduction)(d)
Total Fund Operating 1.15 %
======
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-26-
<PAGE> 111
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth Fund
Retail Shares $56 $80 $105 $178
</TABLE>
The purpose of the tables above is to assist an investor in the Growth
Fund in understanding the various costs and expenses that a Shareholder will
bear directly or indirectly. For a more complete discussion of the Fund's
annual operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Growth Fund on behalf of their
customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See HOW TO PURCHASE SHARES, EXCHANGE PRIVILEGES, REDEMPTION
OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against
the proceeds of any redemption request relating to Retail Shares of
the Fund that were purchased without a sales charge in reliance upon
the waiver accorded to purchases in the amount of $1 million or more,
but only where such redemption request is made within one year of the
date the Shares were purchased.
(c) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(d) Absent voluntary fee waivers, OTHER EXPENSES would be: 0.48% for the
Retail Shares of the Growth Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.33% for the Retail Shares of the Growth Fund.
-27-
<PAGE> 112
STEPSTONE GROWTH EQUITY FUND FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%
Maximum Contingent Deferred Sales Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Wire Redemption Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of
the Fund that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares
were purchased.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of offering price)
- --------------------------------------------------------------------------------------------------------------
Growth
Equity
Fund
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
12b-1 Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . 1.05%
==============================================================================================================
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40 for the Growth
Equity Fund. The Distributor reserves the right to terminate its waiver
at any time in its sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.20% for the
Growth Equity Fund.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) imposition of the
maximum sales charge; (2) 5% return and
(3) redemption at the end of each time period.
Growth Equity Fund . . . . . . . . . . . . . . . . . $55 $77 $100 $167
==============================================================================================================
</TABLE>
-28-
<PAGE> 113
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class shares of the Funds, which
are subject to the same expenses except there are no sales charges or
distribution costs. Additional information may be found under "The
Administrator," "The Advisor" and "The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
-29-
<PAGE> 114
HIGHMARK GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
Growth Fund
-----------
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0%
Other Expenses (after voluntary 0.30%
reduction)(c)
Total Fund Operating 0.90%
=====
Expenses(d)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-30-
<PAGE> 115
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth Fund
Fiduciary Shares $9 $29 $50 $111
</TABLE>
The purpose of the tables above is to assist an investor in the Growth
Fund in understanding the various costs and expenses that a Shareholder will
bear directly or indirectly. For a more complete discussion of the Fund's
annual operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Growth Fund on behalf of their
customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES,
and SERVICE ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
Redemption of Shares below.)
(c) Absent voluntary fee waivers, OTHER EXPENSES would be 0.48% for the
Fiduciary Shares of the Growth Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.08% for the Fiduciary Shares of the Growth Fund.
-31-
<PAGE> 116
STEPSTONE GROWTH EQUITY FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Growth
Equity
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80%
==============================================================================================================
</TABLE>
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Growth Equity Fund . . . . . . . . . . . . . . . . . . . $ 8 $26 $44 $ 99
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except that Investment Class shares are
subject to sales charges and distribution expenses. Additional information may
be found under "The Administrator," "The Advisor" and "The SubAdvisor."
-32-
<PAGE> 117
HIGHMARK VALUE MOMENTUM FUND FEE TABLE
<TABLE>
<CAPTION>
Value Momentum
Fund
----
Retail
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 4.50%
Purchases (as a percentage of offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as
applicable)(b)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(c)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0.25%
Other Expenses (after voluntary 0.21%
reduction)(d)
Total Fund Operating 1.06%
=====
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-33-
<PAGE> 118
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Momentum Fund
Retail Shares $55 $77 $101 $169
</TABLE>
The purpose of the tables above is to assist an investor in the Value
Momentum Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Value Momentum Fund on behalf of
their customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See HOW TO PURCHASE SHARES, EXCHANGE PRIVILEGES, REDEMPTION
OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against
the proceeds of any redemption request relating to Retail Shares of
the Fund that were purchased without a sales charge in reliance upon
the waiver accorded to purchases in the amount of $1 million or more,
but only where such redemption request is made within one year of the
date the Shares were purchased.
(c) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(d) OTHER EXPENSES for the Value Momentum Fund are based on the Fund's
estimated expenses for the current fiscal year. Absent voluntary fee
waivers, OTHER EXPENSES would be: 0.48% for the Retail Shares of the
Value Momentum Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.33% for the Retail Shares of the Value Momentum Fund.
-34-
<PAGE> 119
STEPSTONE VALUE MOMENTUM FUND FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%
Maximum Contingent Deferred Sales Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Wire Redemption Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of
the Fund that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares
were purchased.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of offering price)
- --------------------------------------------------------------------------------------------------------------
Value
Momentum
Fund
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
12b-1 Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . 1.05%
==============================================================================================================
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40 for the Value
Momentum Fund. The Distributor reserves the right to terminate its
waiver at any time in its sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.20% for the
Value Momentum Fund.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) imposition of the
maximum sales charge; (2) 5% return and
(3) redemption at the end of each time period.
Value Momentum Fund . . . . . . . . . . . . . . . . . $55 $77 $100 $167
==============================================================================================================
</TABLE>
-35-
<PAGE> 120
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class shares of the Funds, which
are subject to the same expenses except there are no sales charges or
distribution costs. Additional information may be found under "The
Administrator," "The Advisor" and "The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
-36-
<PAGE> 121
HIGHMARK VALUE MOMENTUM FUND FEE TABLE
<TABLE>
<CAPTION>
Value
Momentum
Fund
----
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0%
Other Expenses (after voluntary 0.21%
reduction)(c)
Total Fund Operating 0.81%
=====
Expenses(d)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-37-
<PAGE> 122
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Momentum Fund
Fiduciary Shares $8 $26 $45 $100
</TABLE>
The purpose of the tables above is to assist an investor in the Value
Momentum Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Value Momentum Fund on behalf of
their customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES,
and SERVICE ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
Redemption of Shares below.)
(c) OTHER EXPENSES for the Value Momentum Fund are based on the Fund's
estimated expenses for the current fiscal year. Absent voluntary fee
waivers, OTHER EXPENSES would be 0.48% for the Fiduciary Shares of the
Value Momentum Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.08% for the Fiduciary Shares of the Value Momentum Fund.
-38-
<PAGE> 123
STEPSTONE VALUE MOMENTUM FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Value
Momentum
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80%
==============================================================================================================
</TABLE>
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Value Momentum Fund . . . . . . . . . . . . . . . . . . . $ 8 $26 $44 $ 99
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except that Investment Class shares are
subject to sales charges and distribution expenses. Additional information may
be found under "The Administrator," "The Advisor" and "The SubAdvisor."
-39-
<PAGE> 124
HIGHMARK BLUE CHIP GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
Blue Chip
Growth
Fund
------------
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0%
Other Expenses (after voluntary reduction)(c) 0.22%
Total Fund Operating 0.82%
=====
Expenses(d)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-40-
<PAGE> 125
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Blue Chip Growth Fund
Fiduciary Shares $8 $26 $46 $101
</TABLE>
The purpose of the tables above is to assist an investor in the Blue
Chip Growth Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Blue Chip Growth Fund on behalf
of their customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES,
and SERVICE ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
Redemption of Shares below.)
(c) OTHER EXPENSES for the Blue Chip Growth Fund are based on the Fund's
estimated expenses for the current fiscal year. Absent voluntary fee
waivers, OTHER EXPENSES would be 0.49% for the Fiduciary Shares of the
Blue Chip Growth Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.09% for the Fiduciary Shares of the Blue Chip Growth Fund.
-41-
<PAGE> 126
STEPSTONE BLUE CHIP GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Blue Chip
Growth
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85%(1)
==============================================================================================================
</TABLE>
(1) "Total Operating Expenses" of the Blue Chip Growth Fund have been restated
to reflect current fees.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Blue Chip Growth Fund . . . . . . . . . . . . . . . . . . $ 9 $27 $47 $105
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except that Investment Class shares are
subject to sales charges and distribution expenses. Additional information may
be found under "The Administrator," "The Advisor" and "The SubAdvisor."
-42-
<PAGE> 127
HIGHMARK EMERGING GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
Emerging
Growth Fund
-----------
Retail
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 4.50%
Purchases (as a percentage of offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)(b)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(c)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.80%
12b-1 Fees 0.25%
Other Expenses (after voluntary reduction)(d) 0.23%
Total Fund Operating 1.28%
=====
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-43-
<PAGE> 128
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Emerging Growth Fund
Retail Shares $57 $84 $112 $193
</TABLE>
The purpose of the tables above is to assist an investor in the
Emerging Growth Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Emerging Growth Fund on behalf
of their customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See HOW TO PURCHASE SHARES, EXCHANGE PRIVILEGES, REDEMPTION
OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against
the proceeds of any redemption request relating to Retail Shares of
the Fund that were purchased without a sales charge in reliance upon
the waiver accorded to purchases in the amount of $1 million or more,
but only where such redemption request is made within one year of the
date the Shares were purchased.
(c) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(d) OTHER EXPENSES for the Emerging Growth Fund are based on the Fund's
estimated expenses for the current fiscal year. Absent voluntary fee
waivers, OTHER EXPENSES would be: 0.50% for the Retail Shares of the
Emerging Growth Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.55% for the Retail Shares of the Emerging Growth Fund.
-44-
<PAGE> 129
STEPSTONE EMERGING GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%
Maximum Contingent Deferred Sales Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Wire Redemption Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of
the Fund that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares
were purchased.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of offering price)
- --------------------------------------------------------------------------------------------------------------
Emerging
Growth
Fund
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80%
12b-1 Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .00%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . 1.05%
==============================================================================================================
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40 for the Emerging
Growth Fund. The Distributor reserves the right to terminate its waiver
at any time in its sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.45% for the
Emerging Growth Fund.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) imposition of the
maximum sales charge; (2) 5% return and
(3) redemption at the end of each time period.
Emerging Growth Fund . . . . . . . . . . . . . . . . $55 $77 $100 $167
==============================================================================================================
</TABLE>
-45-
<PAGE> 130
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class shares of the Funds, which
are subject to the same expenses except there are no sales charges or
distribution costs. Additional information may be found under "The
Administrator," "The Advisor" and "The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
-46-
<PAGE> 131
HIGHMARK EMERGING GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
Emerging
Growth
Fund
-----------
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.80%
12b-1 Fees 0%
Other Expenses (after voluntary 0.23%
reduction)(c)
Total Fund Operating 1.03%
=====
Expenses(d)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-47-
<PAGE> 132
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Emerging Growth Fund
Fiduciary Shares $11 $33 $57 $126
</TABLE>
The purpose of the tables above is to assist an investor in the
Emerging Growth Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion
of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Emerging Growth Fund on behalf
of their customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES,
and SERVICE ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
Redemption of Shares below.)
(c) OTHER EXPENSES for the Emerging Growth Fund are based on the Fund's
estimated expenses for the current fiscal year. Absent voluntary fee
waivers, OTHER EXPENSES would be 0.50% for the Fiduciary Shares of the
Emerging Growth Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.29% for the Fiduciary Shares of the Emerging Growth Fund.
-48-
<PAGE> 133
STEPSTONE EMERGING GROWTH FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Emerging
Growth
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.05%
==============================================================================================================
</TABLE>
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Emerging Growth Fund . . . . . . . . . . . . . . . . . . $11 $33 $58 $128
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except that Investment Class shares are
subject to sales charges and distribution expenses. Additional information may
be found under "The Administrator," "The Advisor" and "The SubAdvisor."
-49-
<PAGE> 134
HIGHMARK INTERNATIONAL EQUITY FUND FEE TABLE
<TABLE>
<CAPTION>
International Equity Fund
Fiduciary Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of offering price)
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as
applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.95%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(c) 0.31%
Total Fund Operating 1.26%
====
Expenses(d)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-50-
<PAGE> 135
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
International Equity Fund
Fiduciary Shares $13 $40 $69 $152
</TABLE>
The purpose of the table above is to assist an investor in the
International Equity Fund in understanding the various costs and expenses that
a Shareholder will bear directly or indirectly. For a more complete discussion
of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the International Equity Fund on
behalf of their customers may charge customers fees for services
provided in connection with the investment in, redemption of, and
exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE
PRIVILEGES, and SERVICE ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
PURCHASE AND REDEMPTION OF SHARES below.)
(c) OTHER EXPENSES are based on the Fund's estimated expenses for the
current fiscal year. Absent voluntary fee waivers, OTHER EXPENSES
would be 0.58% for the Fiduciary Shares of the International Equity
Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be
1.53% for the Fiduciary Shares of the International Equity Fund.
-51-
<PAGE> 136
STEPSTONE INTERNATIONAL EQUITY FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
International
Equity
Fund
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . .85%
Other Expenses (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41%
- ----------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (3) . . . . . . . . . . . . . . . . . . . 1.26%
==========================================================================================================
</TABLE>
(1) The Advisor has agreed to waive a portion of its fee. Fee waivers are
voluntary and may be terminated at anytime in the Advisor's sole
discretion. Absent this voluntary fee waiver, the Advisor's fee would be
.95%.
(2) "Other Expenses" reflects estimates for the current fiscal year.
(3) "Total Operating Expenses" have been restated to reflect current fees and
fee waivers. Absent fee waivers, "Total Operating Expenses" would have
been 1.36% for the Fund.
Example:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5% return and
(2) redemption at the end of each time period.
Investment Equity Fund . . . . . . . . . . . . . . . $13 $40 $69 $152
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Fund
which are subject to the same expenses, except that Investment Class shares are
subject to sales charges and distribution expenses. Additional information may
be found under "The Administrator," "The Advisor" and "The SubAdvisor."
-52-
<PAGE> 137
HIGHMARK INTERMEDIATE-TERM BOND FUND FEE TABLE
<TABLE>
<CAPTION>
Intermediate-Term
Bond Fund
-------------------
Retail
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 3.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable)(b) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(c) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.50%
12b-1 Fees (after voluntary reduction)(d) 0.00%
Other Expenses (after voluntary reduction)(e) 0.25%
Total Fund Operating Expenses (after voluntary
reduction)(f) 0.75%
====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Intermediate-Term Bond Fund
Retail Shares $37 $53 $70 $120
</TABLE>
-53-
<PAGE> 138
The purpose of the tables above is to assist an investor in the
Intermediate-Term Bond Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Intermediate-Term Bond Fund on
behalf of their customers may charge customers fees for services
provided in connection with the investment in, redemption of, and
exchange of Shares. (See HOW TO PURCHASE SHARES, EXCHANGE PRIVILEGES,
REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against
the proceeds of any redemption request relating to Retail Shares of
the Intermediate-Term Bond Fund that were purchased without a sales
charge in reliance upon the waiver accorded to purchases in the amount
of $1 million or more, but only where such redemption request is made
within one year of the date the Shares were purchased.
(c) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(d) As indicated under SERVICE ARRANGEMENTS--The Distribution Plan below,
the Distributor may voluntarily reduce the 12b-1 fee. Absent
voluntary fee waivers, 12b-1 fees would be 0.25% for the
Intermediate-Term Bond Fund. The Distributor reserves the right to
terminate its waiver at any time in its sole discretion.
(e) OTHER EXPENSES for the Intermediate-Term Bond Fund are based on the
Fund's estimated expenses for the current fiscal year. Absent
voluntary fee waivers, OTHER EXPENSES would be 0.49% for the Retail
Shares of the Intermediate-Term Bond Fund.
(f) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.24% for the Retail Shares of the Intermediate-Term Bond Fund.
-54-
<PAGE> 139
STEPSTONE INTERMEDIATE-TERM BOND FUND FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%
Maximum Contingent Deferred Sales Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Wire Redemption Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of
the Fund that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares
were purchased.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
- --------------------------------------------------------------------------------------------------------------
Intermediate-
Term Bond
Fund
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50%
12b-1 Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .00%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . .68%
==============================================================================================================
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40 for the
Intermediate-Term Bond Fund. The Distributor reserves the right to
terminate its waiver at any time in its sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.08% for the
Intermediate-Term Bond Fund.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) imposition of the
maximum sales charge; (2) 5% return and
(3) redemption at the end of each time period.
Intermediate-Term Bond Fund . . . . . . . . . . . . . $37 $51 $67 $112
==============================================================================================================
</TABLE>
-55-
<PAGE> 140
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class Shares of the Funds which are
subject to the same expenses, except there are no sales charges or distribution
costs. Additional information may be found under "The Administrator," "The
Advisor" and "The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
-56-
<PAGE> 141
HIGHMARK INTERMEDIATE-TERM BOND FUND FEE TABLE
<TABLE>
<CAPTION>
Intermediate-Term
Bond Fund
-------------------
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(c) 0.25%
----
Total Fund Operating Expenses (after voluntary reduction)(d) 0.75%
====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Intermediate-Term Bond Fund
Fiduciary Shares $8 $24 $42 $93
</TABLE>
The purpose of the tables above is to assist an investor in the
Intermediate-Term Bond Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
-57-
<PAGE> 142
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Intermediate-Term Bond Fund on
behalf of their customers may charge customers fees for services
provided in connection with the investment in, redemption of, and
exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE
PRIVILEGES, and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder.
(c) OTHER EXPENSES for the Intermediate-Term Bond Fund are based on the
Fund's estimated expenses for the current fiscal year. Absent
voluntary fee waivers, OTHER EXPENSES would be 0.49% for the Fiduciary
Shares of the Intermediate-Term Bond Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
0.99% for the Fiduciary Shares of the Intermediate-Term Bond Fund.
-58-
<PAGE> 143
STEPSTONE INTERMEDIATE-TERM BOND FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Intermediate
Term
Bond Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68%
==============================================================================================================
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Intermediate-Term Bond Fund . . . . . . . . . . . . . . . $7 $22 $38 $ 85
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except there are distribution and sales
charges.
Additional information may be found under "The Administrator," "The Advisor"
and "The SubAdvisor."
-59-
<PAGE> 144
HIGHMARK CONVERTIBLE SECURITIES FUND FEE TABLE
<TABLE>
<CAPTION>
Convertible Securities Fund
---------------------------
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.59%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(d) 0.26%
----
Total Fund Operating Expenses (after voluntary reduction)(e) 0.85%
====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Convertible Securities Fund
Fiduciary Shares $9 $27 $47 $105
</TABLE>
-60-
<PAGE> 145
The purpose of the tables above is to assist an investor in the
Convertible Securities Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Convertible Securities Fund on
behalf of their customers may charge customers fees for services
provided in connection with the investment in, redemption of, and
exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE
PRIVILEGES, and SERVICE ARRANGEMENTS below)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder.
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be .60% for the
Fiduciary Shares of the Convertible Securities Fund.
(d) OTHER EXPENSES for the Convertible Securities Fund are based on the
Fund's estimated expenses for the current fiscal year. Absent
voluntary fee waivers, OTHER EXPENSES would be .53% for the Fiduciary
Shares of the Convertible Securities Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.13% for the Fiduciary Shares of the Convertible Securities Fund.
-61-
<PAGE> 146
STEPSTONE CONVERTIBLE SECURITIES FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Convertible
Securities
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85%
==============================================================================================================
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Convertible Securities Fund . . . . . . . . . . . . . . . $9 $27 $47 $105
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except there are distribution and sales
charges.
Additional information may be found under "The Administrator," "The Advisor"
and "The SubAdvisor."
-62-
<PAGE> 147
STEPSTONE GOVERNMENT SECURITIES FUND FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%
Maximum Contingent Deferred Sales Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Wire Redemption Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of
the Fund that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares
were purchased.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
- --------------------------------------------------------------------------------------------------------------
Government
Securities
Fund
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50%
12b-1 Fees (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .00%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . .75%
==============================================================================================================
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40 for the Government
Securities Fund. The Distributor reserves the right to terminate its
waiver at any time in its sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.15% for the
Government Securities Fund.
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) imposition of the
maximum sales charge; (2) 5% return and
(3) redemption at the end of each time period.
Government Securities Fund . . . . . . . . . . . . . $37 $53 $70 $120
==============================================================================================================
</TABLE>
-63-
<PAGE> 148
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Funds. The Trust also offers Institutional Class Shares of the Funds which are
subject to the same expenses, except there are no sales charges or distribution
costs. Additional information may be found under "The Administrator," "The
Advisor" and "The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
-64-
<PAGE> 149
HIGHMARK GOVERNMENT SECURITIES FUND FEE TABLE
<TABLE>
<CAPTION>
Government
Securities Fund
----------------
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(c) 0.25%
----
Total Fund Operating Expenses (after voluntary reduction)(d) 0.75%
====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Government Securities Fund
Fiduciary Shares $8 $24 $42 $93
</TABLE>
The purpose of the tables above is to assist an investor in the
Government Securities Fund in understanding the various costs and expenses that
a Shareholder will bear directly or indirectly. For a more complete discussion
of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
-65-
<PAGE> 150
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Government Securities Fund on
behalf of their customers may charge customers fees for services
provided in connection with the investment in, redemption of, and
exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE
PRIVILEGES, and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder.
(c) OTHER EXPENSES for the Government Securities Fund are based on the
Fund's estimated expenses for the current fiscal year. Absent
voluntary fee waivers, OTHER EXPENSES would be 0.52% for the Fiduciary
Shares of the Government Securities Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.02% for the Fiduciary Shares of the Government Securities Fund.
-66-
<PAGE> 151
STEPSTONE GOVERNMENT SECURITIES FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
Government
Securities
Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75%
==============================================================================================================
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Government Securities Fund . . . . . . . . . . . . . . . $8 $24 $42 $ 93
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Funds. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Funds,
which are subject to the same expenses, except there are distribution and sales
charges.
Additional information may be found under "The Administrator," "The Advisor"
and "The SubAdvisor."
-67-
<PAGE> 152
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE
<TABLE>
<CAPTION>
California Intermediate
Tax-Free Bond Fund
------------------
Retail
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 3.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable)(b) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(c) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(d) 0.00%
12b-1 Fees (after voluntary reductions)(e) 0.00%
Other Expenses (after voluntary reduction)(f) 0.22%
----
Total Fund Operating Expenses (after voluntary reduction)(g) 0.22%
====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
California Intermediate
Tax-Free Bond Fund
Retail Shares $32 $37 $42 $57
</TABLE>
The purpose of the tables above is to assist an investor in the
California Intermediate Tax-Free Bond Fund in understanding the various costs
and expenses that a Shareholder will bear directly or indirectly. For a more
complete discussion of the Fund's annual operating expenses, see SERVICE
-68-
<PAGE> 153
ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the California Intermediate Tax-Free
Bond Fund on behalf of their customers may charge customers fees for
services provided in connection with the investment in, redemption of,
and exchange of Shares. (See HOW TO PURCHASE SHARES, EXCHANGE
PRIVILEGES, REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS below)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against
the proceeds of any redemption request relating to Retail Shares of
the Fund that were purchased without a sales charge in reliance upon
the waiver accorded to purchases in the amount of $1 million or more,
but only where such redemption request is made within one year of the
date the Shares were purchased.
(c) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below)
(d) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.50% for the
Retail Shares of the California Intermediate Tax-Free Bond Fund.
(e) As indicated under SERVICE ARRANGEMENTS -- the Distribution Plan
below, the Distributor may voluntarily reduce the 12b-1 fee. Absent
voluntary fee waivers, 12b-1 fees would 0.25% for the Fund. The
Distributor reserves the right to terminate its waiver at any time in
its sole discretion.
(f) OTHER EXPENSES for the California Intermediate Tax-Free Bond Fund are
based on that Fund's estimated expenses for the current fiscal year.
Absent voluntary fee waivers, OTHER EXPENSES would be 0.74% for the
Retail Shares of the California Intermediate Tax-Free Bond Fund.
(g) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.49% for the Retail Shares of the California Intermediate Tax-Free
Bond Fund.
-69-
<PAGE> 154
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
California Intermediate
Tax-Free Bond Fund
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%
Maximum Contingent Deferred Sales Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Wire Redemption Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of
the Funds that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares
were purchased.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of offering price)
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fee (After Fee Waivers) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01%
12b-1 Fees (After Fee Waivers) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .00%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (1) (2) (3) . . . . . . . . . . . . . . . . . . . . .22%
==============================================================================================================
</TABLE>
(1) The Advisor has agreed to waive its fee to the extent necessary to limit
Total Operating Expenses to 0.22%. Absent such waiver, the advisory fee
would have been .50%. The Advisor may terminate its waiver at any time
in its sole discretion.
(2) Absent voluntary fee waivers, 12b-1 Fees would be .40% for the Fund. The
Distributor reserves the right to terminate its waiver at any time in its
sole discretion.
(3) "Total Operating Expenses" have been restated to reflect current expenses
and fee waivers. Absent fee waivers, "Total Operating Expenses" would
have been 1.11%
Example:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) imposition of the
maximum sales charge; (2) 5% return and
(3) redemption at the end of each time period . . . . . . $32 $37 $42 $57
==============================================================================================================
</TABLE>
-70-
<PAGE> 155
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Fund. The Trust also offers Institutional Class shares of the Fund, which are
subject to the same expenses except there are no sales charges or distribution
costs. Additional information may be found under "The Administrator" and "The
Advisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
-71-
<PAGE> 156
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE
<TABLE>
<CAPTION>
California Intermediate
Tax-Free Bond Fund
------------------
Fiduciary
Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction) (c) 0.00%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(d) 0.22%
----
Total Fund Operating Expenses (after voluntary reduction)(e) 0.22%
====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
California Intermediate
Tax-Free Bond Fund
Fiduciary Shares $2 $7 $12 $28
</TABLE>
The purpose of the tables above is to assist an investor in the
California Intermediate Tax-Free Bond Fund in understanding the various costs
and expenses that a Shareholder will bear directly or indirectly. For a more
complete discussion of the Fund's annual operating expenses, see SERVICE
ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A
-72-
<PAGE> 157
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the California Intermediate Tax-Free
Bond Fund on behalf of their customers may charge customers fees for
services provided in connection with the investment in, redemption of,
and exchange of Shares. (See PURCHASE AND REDEMPTION OF SHARES,
EXCHANGE PRIVILEGES, and SERVICE ARRANGEMENTS below)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder.
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.50% for the
Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
(d) OTHER EXPENSES for the California Intermediate Tax-Free Bond Fund are
based on that Fund's estimated expenses for the current fiscal year.
Absent voluntary fee waivers, OTHER EXPENSES would be 0.74% for the
Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.24% for the Fiduciary Shares of the California Intermediate Tax-Free
Bond Fund.
-73-
<PAGE> 158
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of average net assets)
California Intermediate
Tax-Free Bond Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers)(1) . . . . . . . . . . . . . . . . . . . .01%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers) (1) . . . . . . . . . . . . . .22%
==============================================================================================================
</TABLE>
(1) The Advisor has agreed to waive its fees to the extent necessary to limit
"Total Operating Expenses" to .22%. "Total Operating Expenses" have been
restated to reflect current expenses and fee waivers. Absent fee
waivers, "Advisory Fees" would have been .50% and "Total Operating
Expenses" would have been .71%. The Advisor may terminate its waiver at
any time in its sole discretion.
EXAMPLE:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period. . . . . $2 $7 $12 $28
==============================================================================================================
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the
investor in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Institutional Class shares of the Funds.
Financial institutions that are the record owner of shares for the account of
their customers may impose separate fees for account services to their
customers. The Trust also offers Investment Class shares of the Fund which are
subject to the same expenses, except that Investment Class shares are subject to
a sales load and distribution expenses. Additional information may be found
under "The Administrator" and "The Advisor."
-74-
<PAGE> 159
ADMINISTRATION FEES
SEI Fund Resources (the "Stepstone Administrator"), a subsidiary of SEI
Corporation ("SEI"), and Stepstone are parties to an administration agreement
(the "Stepstone Administration Agreement"). Under the terms of the Stepstone
Administration Agreement, the Stepstone Administrator provides Stepstone with
certain management services, including all necessary office space, equipment,
personnel, and facilities.
The Stepstone Administrator is entitled to a fee, which is calculated daily and
paid monthly, at an annual rate of .15% of the average daily net assets of
Stepstone up to $1 billion, .12% of the average daily net assets between $1
billion and $2 billion, and .10% of the average daily net assets over $2
billion. The Stepstone Administrator may waive its fee or reimburse various
expenses to the extent necessary to limit the total operating expenses of a
Fund's Investment Class shares. Any such waiver is voluntary and may be
terminated at any time in the Administrator's sole discretion.
SEI Fund Resources (the "HighMark Administrator") and HighMark are parties to
an administration agreement (the "HighMark Administration Agreement"). Under
the terms of the HighMark Administration Agreement, the HighMark Administrator
provides HighMark with certain management services, including all necessary
office space, equipment, personnel and facilities.
The HighMark Administrator is entitled to a fee, which is calculated daily and
paid monthly, at an annual rate of .20% of the HighMark Funds' average daily
net assets. The HighMark Administrator may waive its fee or reimburse various
expenses to the extent necessary to limit the total operating expenses of a
HighMark Fund's Shares. Any such waiver is voluntary and may be terminated at
any time in the HighMark Administrator's sole discretion. Currently, the
HighMark Administrator has agreed to waive its fee to the rate of .18% of the
average daily net assets of the HighMark Funds for each HighMark Fund except
HighMark California Intermediate Tax-Free Bond, for which the HighMark
Administrator has agreed to waive its fee to the rate of .15% of the average
daily net assets of the HighMark Funds.
Pursuant to a separate agreement with the HighMark Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of the HighMark
Funds, for which it receives a fee paid by the HighMark Administrator at the
annual rate of up to 0.05% of the HighMark Funds' average daily net assets.
Union Bank of California has voluntarily agreed to reduce this fee to 0.03%,
but reserves the right to terminate its waiver at any time in its sole
discretion.
-75-
<PAGE> 160
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. In consideration of services
provided by any service provider, which may include Union Bank of California,
N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective affiliates, each
HighMark Fund may pay a fee at the rate of up to 0.25% of its average daily net
assets to such service provider. The service provider may waive such fees at
any time. Any such waiver is voluntary and may be terminated at any time.
Currently, such fees are being waived to the rate of 0.00% of average daily net
assets.
-76-
<PAGE> 161
APPENDIX C
[HIGHMARK LOGO]
ANNUAL REPORT
JULY 31, 1996
----------------
NOT FDIC INSURED
<PAGE> 162
Message from the Chairman and the Investment Adviser
Page 1
Report of Independent Auditors'
Page 24
Statements of Assets and Liabilities
Page 25
Statements of Operations
Page 28
Statements of Changes in Net Assets
Page 31
Schedules of Portfolio Investments
Page 35
Notes to Financial Statements
Page 67
Financial Highlights
Page 83
Results of Special Shareholder Meeting
Page 94
LOGO TABLE OF CONTENTS
<PAGE> 163
MESSAGE FROM THE CHAIRMAN
DEAR SHAREHOLDER:
We are pleased to report strong results for The HighMark Mutual Fund Group for
the fiscal year ended July 31, 1996, despite volatility in the stock and bond
markets during this period.
INCOME EQUITY FUND RECEIVES INDUSTRY RECOGNITION
In particular, we would like to highlight the performance of the Income Equity
Fund, which was once again ranked among the top funds in its category as
reported by The Wall Street Journal. The fund (Fiduciary Shares) was ranked 13th
out of the top 15 equity income funds by Lipper Analytical Services based on
total return for the one-year period ending August 1, 1996. For the five years
ending on that date it ranked 26 out of 58 similar funds.(1)
In addition, the fund's Fiduciary Shares received a 5-star rating from
Morningstar out of 2,917 equity funds for the one-year period ending July 31,
1996. For the three, five- and 10-year periods ending on that date, the fund was
awarded four stars.(2)
WEATHERPROOFING YOUR PORTFOLIO
The past fiscal year serves as a vivid illustration of the power of
diversification. At various times during the year, large-company stocks
outperformed small-company stocks and vice versa. At times, the growth style of
investing outperformed value and vice versa. And stocks as a whole outperformed
bonds for much of the year, except for two months early in 1996. By staying
diversified across different types of investments, investors are able to
capitalize on those sectors that are outperforming at any given time.
The HighMark fund family contains a variety of different stock and bond funds
that can give most investors the tools they need to diversify a portfolio both
by security and asset class. Your investment professional will be happy to
review your current investments and suggest changes in your asset mix if needed.
A COMMITMENT TO MAINTAINING YOUR TRUST
At HighMark, we are committed to providing you with conservatively managed funds
designed to balance the pursuit of higher returns with a rigorous approach to
managing risk. We know how important it is to you to preserve your principal
while aiming to achieve the kind of returns you seek.
LOGO
1
LOGO
<PAGE> 164
In this report, we've changed the format for the fund discussions that follow
this letter and the Investment Adviser's commentary. The fund managers are now
directly answering some basic questions about their investment strategies and
their funds' performance. We hope you'll find it more helpful to read what they
have to say in their own words.
As always, we urge you to read the entire report closely to help you monitor the
progress of your investment in the HighMark funds. If you have any questions
about your investment in The HighMark Group, or would like a prospectus or other
information about any of our funds, please call your investment representative
or HighMark at 1-800-433-6884.
Sincerely,
/s/ Stephen G. Mintos
Stephen G. Mintos
Chairman
The HighMark Group
August 22, 1996
- ---------------
(1) Past performance is no guarantee of future results.
(2) The Income Equity Fund's Fiduciary Shares received a 4-star rating based on
performance (649 out of 1,606 equity funds) for the 3-year period, (396 out
of 1,007 equity funds) for the five-year period and (208 out of 541 funds)
for the 10-year period ending on July 31, 1996. Morningstar proprietary
ratings reflect historical risk-adjusted performance and are calculated from
a fund's 3- and 5-year average annual returns, with fee adjustments, in
excess of 90-day Treasury bill returns and a risk factor that reflects fund
performance below 90-day Treasury bill returns. The one-year rating is
calculated using the same methodology but is not a component of the overall
rating. Ten percent of the funds in an investment category receive 5 stars,
and 22.5% receive 4 stars.
For more complete information on any HighMark fund, including fees, expenses and
sales charges, please call 1-800-433-6884 for a prospectus. Please read the
prospectus carefully before you invest or send money.
Mutual funds:
- are not FDIC insured
- have no bank guarantee
- may lose value
LOGO
2
LOGO
<PAGE> 165
MESSAGE FROM THE INVESTMENT ADVISER
DEAR SHAREHOLDER:
The fiscal year ended July 31, 1996, started out strong. Between August 1, 1995,
and January 31, 1996, the stock and bond markets continued their upward march.
During the first half of our fiscal year, the Standard & Poor's 500 Stock Index
rose 14.54%, while the Lehman Brothers Aggregate Bond Index returned 7.24%.
But the second half of the year was quite different, with the S&P 500 advancing
just 2% and bonds actually falling about 2%. It was in this half that investors
began to become concerned about a fast-growing economy and the return of
inflation. The equity markets were also surprised when some high-visibility
growth companies reported disappointing earnings.
LONG-TERM INTEREST RATES CROSS THE 7% MARK
Although its moves were closely followed, the Federal Reserve Board was
relatively inactive during the fiscal year, lowering short-term interest rates
on just two occasions last winter to 5.25%. Long-term interest rates weren't
much higher; indeed, the benchmark 30-year U.S. Treasury bond yielded about 6%
at December 31, 1995.
However, by late February, investors were surprised by extremely strong
employment data from the federal government. Anticipating that the Fed might
have to raise short-term interest rates, long-term interest rates surged beyond
7%. Although there was a concern about inflation, there was very little
supporting evidence. By early summer, the economy appeared to be moderating, and
inflation fears cooled. At the end of the fiscal year on July 31, the bond
market rallied sharply, as the yield on the long bond fell to 6.8%.
STOCKS SUFFER MINI-CORRECTION
While the bond market was volatile during the spring, the stock market remained
steady. On May 22, the Dow Jones Industrial Average set a record--5780. However,
for the next two months, the stock market would come as close to a normal
"correction" as it had in six years. Rising interest rates, weaker corporate
profit comparisons (with the prior year) and historically high valuations
combined to send the market down anywhere from 5% to 20%, depending upon the
sector. Small-capitalization stocks--which had run up sharply during early
1996--were hit the worst. During June and July, the bond market outperformed the
stock market. But by July 31, 1996, the stock market recovered, coming within
range of its all-time high once again.
LOGO
3
LOGO
<PAGE> 166
LOOKING AHEAD
Upward pressure on the U.S. economy may come from our trading partners in Europe
and Japan, which are beginning to show signs of economic recovery after several
years of sluggishness. Their recovery could generate stronger U.S. exports,
which, in turn, would stimulate our economy and create more new jobs. This is
both good and bad news. If consumer spending, employment, inventory building,
fiscal policy and continued job growth are strong, then we could be confronted
with higher inflation. This, in turn, could cause the Federal Reserve Board to
raise interest rates for the first time in nearly two years.
Between now and the presidential election, any Federal Reserve Board action
could be interpreted in a political context and is, therefore, unlikely. Once
the election is over, however, the outlook on the economy and inflation will
once again largely determine the direction of the stock and bond markets. While
we remain optimistic, we will continue to monitor events, and asset allocation
and security selection will remain critically important.
Sincerely,
/s/ Luke Mazur
Chief Investment Officer
MERUS-UCA Capital Management
August 22, 1996
LOGO
4
LOGO
<PAGE> 167
HIGHMARK INCOME EQUITY FUND
For the year ended July 31, 1996, the HighMark Income Equity Fund produced a
total return of 18.21% (Investor Shares at NAV), outperforming the 16.59% return
of the Standard & Poor's 500 Stock Index during the same period. The average
equity income fund as measured by Lipper Analytical Services rose 14.17% during
the year.
Thomas M. Arrington, CFA, is the team leader for the HighMark Income Equity
Fund. Mr. Arrington, who holds an MBA from San Francisco State University and a
bachelor's degree in economics from UCLA, has a decade of investment management
experience.
HOW WOULD YOU ASSESS YOUR PERFORMANCE FOR THE YEAR?
We are pleased with the performance of the income equity strategy for the latest
year. Our strategy outperformed the S&P 500 and the average equity income fund.
Our goal is to outperform the market over the long term with less risk. As
reported in The Wall Street Journal (August 8, 1996), the fund was ranked 13th
out of 136 comparable funds by Lipper Analytical Services based on its total
return for the one-year period ending August 1, 1996.(1)
WHAT IS YOUR STRATEGY FOR SELECTING STOCKS?
Following our income equity strategy, we invest in dividend-paying stocks of
established companies. Such an emphasis offers three important advantages:
reduced volatility, a relatively steady source of investment return potential
and enhanced total return through the reinvesting and compounding of dividends.
Our discipline compares the dividend yield of the stock with the yield of the
market as a whole, tracking that relationship over a 20-to-30-year time frame.
We can see how a stock's relative yield has moved over time to determine when to
buy or sell it.
WHAT AREAS OF THE MARKET PERFORMED WELL, AND WHERE DO YOU CURRENTLY SEE VALUE?
A very strong area of the market has been the pharmaceutical group. We bought
stocks such as American Home Products, Bristol-Myers Squibb, Eli Lilly and Merck
very cheaply in 1993 when there were concerns about a government takeover of
health care. These stocks have performed very well, showing that they can
increase their earnings and develop new products. We have since scaled back on
drug companies because they have reached our predetermined sell targets. In the
natural gas area, Consolidated Natural Gas is a relatively large holding (2.37%
of the portfolio). The company has benefited from the strong demand for natural
gas, which burns cleanly and is relatively inexpensive to use.
Every one of our bank holdings outperformed the market during the past year.
Banks continue to generate 10% earnings gains, despite concerns about rising
consumer delinquencies. The banks have shown that they are well reserved and
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continue to maintain control over their loans. In other areas, B.F. Goodrich's
stock rose 38% during the year, as management continues to generate increased
profitability in the chemical and aerospace divisions. Energy was a strong
sector, with big oil companies such as Texaco up 33%. Tobacco stocks posted
strong returns for the year, and we sold them in August. Although the retail
industry lagged for the year, we continue to think that it's an attractive area.
For instance, J.C. Penney has a good balance sheet and strong private brands.
The company should benefit from demographic trends--baby boomers are pressed for
time and will increasingly go to department stores for their one-stop shopping
convenience.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We continue to find good value using our discipline. If the market continues to
rise, these stocks, in our opinion, should turn in a strong performance. If the
market goes down, then these stocks may help preserve principal. Even with the
downdraft in the market earlier this summer, we still haven't seen a real
correction--in which stocks fall 10%--since 1990. Typically, the market goes
down 10% every two years. When the market truly becomes volatile, we believe
that our strategy will likely outperform the market.
As of July 31, 1996, the fund's top five holdings were Philip Morris (3.28%),
J.C. Penney (3.16%), Atlantic Richfield (3.11%), Bank One Corp. (2.71%) and J.P.
Morgan & Co. (2.46%).+
- ---------------
(1) Performance rankings are based on total returns for the period. Past
performance is no guarantee of future results. For the 5-year period, the
fund was ranked 26th out of 58 comparable funds.
+ The composition of the fund's holdings is subject to change.
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<TABLE>
HIGHMARK INCOME EQUITY FUND
<CAPTION>
GROWTH OF A $10,000 INVESTMENT
MORNINGSTAR
MEASUREMENT PERIOD INVESTOR FIDUCIARY EQUITY
(FISCAL YEAR COVERED) SHARES SHARES S&P 500 INCOME INDEX
<S> <C> <C> <C> <C>
2/84 9543 10000 10000 10000
7/84 9026 9458 9774 9774
7/85 12350 12941 12953 12761
7/86 15764 16518 16637 15787
7/87 20003 20960 23181 18946
7/88 19714 20657 20497 18193
7/89 25265 26474 27035 22478
7/90 25053 26252 28792 22601
7/91 28210 29561 32463 25153
7/92 32734 34301 36615 28911
7/93 35926 37646 39812 32469
7/94 37445 39238 41866 33766
7/95 44004 46011 52786 39274
7/96 52017 54409 61542 44839
</TABLE>
<TABLE>
<CAPTION>
HighMark Income Equity Fund
Performance Average Annual
Total Return as of 7/31/96
----------------------------------------
1 Year 5 Years 10 Years Since
Inception
(2/9/84)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
Investor* 12.93% 11.99% 12.17% 14.12%
Fiduciary 18.25% 12.98% 12.66% 14.53%
</TABLE>
The performance of the HighMark Income Equity Fund is measured against the S&P
500 Stock Index, an unmanaged index generally considered to be representative of
the U.S. stock market, and the Morningstar Equity Income Average, a composite of
managed equity income funds. The index does not reflect the deduction of
expenses associated with a mutual fund, such as investment management and fund
accounting fees. However, the fund's performance and the Morningstar Equity
Income Average reflect these value-added services. Past performance is not
predictive of future results. The investment return and NAV will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than the
original cost.
- ---------------
* Reflects 4.50% sales charge.
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<PAGE> 170
HIGHMARK GROWTH FUND
For the year ended July 31, 1996, the HighMark Growth Fund produced a total
return of 12.88% (Investor Shares at NAV). In comparison, the Standard & Poor's
500 Stock Index rose 16.59% during the same period.
The HighMark Growth Fund is managed by Scott A. Chapman, CFA. Mr. Chapman, who
holds an MBA from Golden Gate University and a bachelor's degree in accounting
from Santa Clara University, has 16 years' experience in the investment
business.
HOW WOULD YOU ASSESS YOUR PERFORMANCE FOR THE YEAR?
Although we underperformed the S&P 500, we outperformed our peer universe of
other growth funds as measured by Lipper Analytical Services, Inc. For the one
year ended July 31, 1996, the HighMark Growth Fund was ranked 217 out of 622
such funds based on total return, which gives it a 35th percentile rank.(1) So
we outperformed almost two-thirds of the growth funds in the country over that
one-year period. We underperformed the S&P 500 because we were underweighted in
certain industries that did well, such as chemical and international oil
companies. We were also overweighted in semiconductors, which underperformed.
WHAT INDUSTRIES IN THE PORTFOLIO DID PARTICULARLY WELL?
Industries where we outperformed were defense/electronics, soft drinks and
pharmaceuticals. In defense, two companies in the portfolio were taken over. One
was E-Systems, acquired by Raytheon. The other was Loral, acquired by Lockheed
Martin Marietta. Even if they hadn't been acquired, both E-Systems and Loral
would have remained in the portfolio due to their strong growth prospects.
Although defense spending is falling, there are selective opportunities in such
areas as surveillance and satellite technology.
Coca-Cola is our biggest position in the soft-drink industry. Over 80% of its
earnings come from overseas. One can argue that Coca-Cola is the best-known
brand name in the world, especially after the Olympics. Investors are willing to
pay for the visibility of their earnings stream, and that's why the stock keeps
doing well. We believe that the stock, currently selling at about 35 times 1996
estimated earnings, has become more expensive relative to the market, so we've
scaled back our holding from 3% to 2% of the portfolio. With a return on equity
of 57%, there is no other large-capitalization growth company that can match
their profitability.
In the drug area, we own Pfizer, Merck and Pharmacia-Upjohn. Pfizer has the best
new product pipeline of any company in the industry. Between now and the year
2000 a lot of drugs are going off patent, and there is a need to replace them
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<PAGE> 171
with drugs that add value. In the past, the strategy of many drug companies was
to produce many "me-too" drugs in the hope that they would simply outsell the
competition. The reality in the industry today is that the drugs have to have
added value because HMOs have very narrow approved lists of drugs.
WHAT IS YOUR STRATEGY FOR MANAGING THE FUND?
We have ten commandments that we use when selecting a company: 1) a seasoned,
blue-chip growth company; 2) demonstrated consistent earnings growth; 3) strong
cash flow; 4) a recurring revenue base; 5) a unique product or service,
preferably with an increasing barrier to entry; 6) an attractive or improving
return on capital; 7) a leading company rather than a number three or number
four that's trying to catch up; 8) a management team that is owner-oriented,
seasoned, communicative and respected; 9) a willingness to buy back shares; and
10) a company that's attractively priced.
WHAT IS YOUR OUTLOOK FOR THE FUND?
I can't tell you what the markets will do next year, but I can say that we will
try to capitalize on any volatility. For example, during July, when the NASDAQ
was down 8.8%, double the S&P's decline, we took the opportunity to increase our
holdings in technology. If the economy weakens, we believe that investors would
want to pay more for our types of companies that continue to grow even though
the economy is slowing.
As of July 31, 1996, the fund's top five holdings were Chase Manhattan (2.51%),
McDonald's (2.48%), Intel (2.25%), Gillette (2.20%) and General Electric
(2.20%).+
- ---------------
(1) Past performance is no guarantee of future results.
+ The composition of the fund's holdings is subject to change.
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<TABLE>
HIGHMARK GROWTH FUND
<CAPTION>
GROWTH OF A $10,000 INVESTMENT
MEASUREMENT PERIOD INVESTOR FIDUCIARY MORNINGSTAR GROWTH
(FISCAL YEAR COVERED) SHARES SHARES S&P 500 AVERAGE INDEX
<S> <C> <C> <C> <C>
11/18/93 9551 10000 10000 10000
7/31/94 9382 9813 10003 9952
7/31/95 11737 12289 12613 12453
7/31/96 13250 13852 14706 13464
</TABLE>
<TABLE>
<CAPTION>
HighMark Growth Fund
Performance Average Annual
Total Return as of 7/31/96
----------------------------
1 Year Since
Inception
(11/18/93)
<S> <C> <C>
- -----------------------------------------------------
Investor* 7.80% 10.97%
Fiduciary 12.72% 12.81%
</TABLE>
The performance of the HighMark Growth Fund is measured against the S&P 500
Stock Index, an unmanaged index generally considered to be representative of the
U.S. stock market, and the Morningstar Growth Average, a composite of managed
growth funds. The index does not reflect the deduction of expenses associated
with a mutual fund, such as investment management and fund accounting fees.
However, the fund's performance and the Morningstar Growth Average reflect these
value-added services. Past performance is not predictive of future results. The
investment return and NAV will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than the original cost.
- ---------------
* Reflects 4.50% sales charge.
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HIGHMARK INCOME & GROWTH FUND
For the year ended July 31, 1996, the HighMark Income & Growth Fund produced a
total return of 15.02% (Investor Shares at NAV). In comparison, the Standard &
Poor's 500 Stock Index rose 16.59% during the same period.
The HighMark Income & Growth Fund is managed by David L. Freeman, CFA. Mr.
Freeman, who holds a bachelor's degree in economics and psychology from Western
Michigan University and performed graduate work at UCLA, has 14 years'
experience in the investment business.
WHAT FACTORS AFFECTED YOUR PERFORMANCE?
We saw a very large increase in long-term interest rates, especially since early
1996. This exerted downward pressure on the interest-rate-sensitive segments of
the stock market. The other factor affecting the fund was the roller-coaster
ride in technology stocks. About a year ago, they were hitting new highs. Then
they came down very sharply through the middle of January, rallied again to new
highs and came down sharply again in July. We increased the weighting in
high-quality technology stocks this past year when the stocks sold off.
WHAT STOCKS IN THE PORTFOLIO HAVE BEEN THE STRONGEST PERFORMERS?
Examples: Intel has outperformed its counterparts, thanks to a diversified
product line that allows it to weather downturns much better than a smaller
company with a single product. General Electric is a very good stock for our
style of income and growth investing, which seeks to provide above-average
dividend yield, as well as above-average potential for earnings growth. GE
manufactures aircraft engines, appliances, power generators--and owns NBC,
currently number one in the television ratings. Anheuser-Busch, the number-one
beer company in the U.S., has the potential for growth overseas as it expands
further into Europe, Latin America and the Far East. Over the past few months, a
developing theme has been a focus on interest-rate sensitive stocks. We've added
a significant weighting in bank, insurance, electric and telephone companies, as
well as construction companies. We believe that these stocks offer better-
than-average value going forward. We have also added to our technology holdings,
taking advantage of the sharp sell-off in technology that took place in late
1995 and in July of 1996.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We see slow growth in the economy in the second half of this year, with the
economy continuing to grow at a subdued rate of 2% to 3% in 1997. We expect that
the higher interest rates of earlier this year will cause housing, auto sales
and other interest-rate-sensitive segments of the economy to slow. However, we
expect long-term interest rates to decline
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<PAGE> 174
to a range of 6.25% to 6.50% over the next 12 months. Inflation that was feared
in the first half of the year never materialized and should remain at low
levels. Over the next few years, we are optimistic on stocks and the U.S.
economy as we expect our trading partners in Europe and Japan to continue to
show improvement. We believe this should be bullish for U.S. exports and the
industrial side of the economy at a time when the U.S. consumer may be slowed by
a fairly heavy debt burden.
As of July 31, 1996, the fund's top five holdings were General Electric (2.70%),
Anheuser-Busch (2.33%), Intel (1.88%), Motorola (1.69%) and Minnesota Mining &
Manufacturing (1.57%)+
- ---------------
+ The portfolio's composition is subject to change.
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<PAGE> 175
<TABLE>
HIGHMARK INCOME & GROWTH FUND
<CAPTION>
GROWTH OF A $10,000 INVESTMENT
MEASUREMENT PERIOD INVESTOR FIDUCIARY
(FISCAL YEAR COVERED) SHARES SHARES S&P 500
<S> <C> <C> <C>
11/14/93 9551 10000 10000
7/31/94 9716 10163 10003
7/31/95 11724 12265 12613
7/31/96 13485 14109 14706
</TABLE>
<TABLE>
<CAPTION>
HighMark Income & Growth Fund
Performance Average Annual
Total Return as of 7/31/96
------------------------------
1 Year Since
Inception
(11/14/93)
<S> <C> <C>
- ---------------------------------------------------------
Investor* 9.88% 11.64%
Fiduciary 15.04% 13.52%
</TABLE>
The performance of the HighMark Income & Growth Fund is measured against the S&P
500 Stock Index, an unmanaged index generally considered to be representative of
the U.S. stock market. The index does not reflect the deduction of expenses
associated with a mutual fund, such as investment management and fund accounting
fees. However, the fund's performance reflects these value-added services. Past
performance is not predictive of future results. The investment return and NAV
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than the original cost.
- ---------------
* Reflects 4.50% sales charge.
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<PAGE> 176
HIGHMARK BALANCED FUND
For the year ended July 31, 1996, the HighMark Balanced Fund produced a total
return of 10.94% (Investor Shares at NAV). In comparison, the fund's benchmarks,
the Standard & Poor's 500 Stock Index and the Lehman Brothers Aggregate Bond
Index, were up 16.59% and 5.52%, respectively.
The HighMark Balanced Fund is managed by David L. Freeman, CFA, who also manages
the Income & Growth Fund, and E. Jack Montgomery, CFA, who also manages the Bond
Fund. Mr. Freeman, who holds a bachelor's degree in economics and psychology
from Western Michigan University and performed graduate work at UCLA, has 14
years' experience in the investment business. Mr. Montgomery, who holds an MBA
from the University of Oregon and a bachelor's degree from the University of
Oklahoma, has 15 years' experience in financial analysis and portfolio
management.
HOW DID THE MIXTURE OF STOCKS, BONDS AND CASH CHANGE DURING THE PERIOD?
In late May, the portfolio shifted from 60% stocks, 35% bonds and 5% cash to 55%
stocks, 40% bonds and 5% cash. As of fiscal year end, the portfolio was
comprised of 53% stocks, 38% bonds and 9% cash. With stock prices continuing to
rise, our asset allocation model--which analyzes risk and return for various
assets--began to favor bonds. Although it has been a difficult year for bonds,
they outperformed stocks in June and July of 1996.
HOW WOULD YOU ASSESS THE PERFORMANCE OF THE BOND PORTION OF THE BALANCED FUND?
The fiscal year ended July 31, 1996, can be divided into two discrete periods.
In the first half, interest rates fell, and we outperformed our benchmark.
Because of our longer-than-average duration (the degree to which the portfolio
is affected by changing interest rates), we tend to do better in a falling
interest-rate environment. But during the second half of the fiscal year,
interest rates rose. We underperformed during the second half of the fiscal year
for the same reasons that we outperformed earlier. In a period such as the one
between February and July 1996, when interest rates were rising, a longer
duration was a disadvantage. We continue to maintain a longer duration because
we believe that inflation is not going to be a problem in the immediate future.
Even if inflation is 3%, long-term bonds at 7% are a pretty good value.
WHAT STOCKS HAVE BEEN THE STRONGEST?
Intel has performed better than its counterparts in technology. It's one of the
largest technology companies with a diversified product line that allows it to
weather downturns much better than a smaller company with a single product.
General Electric is a good stock for our style of equity investing, which seeks
both above-average dividend yield as well
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<PAGE> 177
as above-average potential for earnings growth. The company is diversified and
owns NBC, which is currently the number-one-rated television network.
Anheuser-Busch, another excellent performer, is expanding further into Europe,
Latin America and the Far East. Our overall approach is to own a
well-diversified portfolio of companies with above-average growth prospects,
with better-than-average value than the stock market as a whole.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We expect the economy to grow slowly in the second half of 1996, followed by
continued growth at a subdued rate of 2% to 3% in 1997. Housing, auto sales and
other interest-rate-sensitive segments of the economy will probably slow due to
the effects of higher interest rates earlier in the year. We also expect
longer-term interest rates to decline to a range of 6.25% to 6.5%. Inflation
fears so far have proved unwarranted. Over the next few years, we are optimistic
about stocks and the U.S. economy since we expect the economies of our trading
partners in Europe and Japan to continue to strengthen. We believe that this
will be bullish for U.S. exports at a time when the U.S. consumer seems pretty
heavily burdened with debt.
As of July 31, 1996, the fund's top five equity holdings were General Electric
(1.58%), Anheuser-Busch (1.15%), Intel (1.05%), Corning Glass (.99%), and
BankAmerica (.95%).+
- ---------------
+ The composition of the fund's holdings is subject to change.
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<TABLE>
HIGHMARK BALANCED FUND
<CAPTION>
GROWTH OF A $10,000 INVESTMENT LEHMAN
BROTHERS MORNINGSTAR
MEASUREMENT PERIOD INVESTOR FIDUCIARY AGGREGATE BALANCED
(FISCAL YEAR COVERED) SHARES SHARES S&P 500 BOND INDEX
<S> <C> <C> <C> <C> <C>
11/14/93 9551 10000 10000 10000 10000
7/31/94 9527 10026 10003 9773 9929
7/31/95 11013 11592 12613 10767 11468
7/31/96 12218 12874 14706 11361 12560
</TABLE>
<TABLE>
<CAPTION>
HighMark Balanced Fund
Performance Average Annual
Total Return as of 7/31/96
----------------------------
1 Year Since
Inception
(11/14/93)
<S> <C> <C>
- ------------------------------------------------------
Investor* 5.93% 7.66%
Fiduciary 11.06% 9.75%
</TABLE>
The performance of the HighMark Balanced Fund is measured against the S&P 500
Stock Index, an unmanaged index generally considered to be representative of the
U.S. stock market, the Lehman Brothers Aggregate Bond Index, an unmanaged
broad-based index generally considered to be representative of the bond market
as a whole, and the Morningstar Balanced Average, a composite of managed
balanced funds. These indices do not reflect the deduction of expenses
associated with a mutual fund, such as investment management and fund accounting
fees. However, the fund's performance and the Morningstar Balanced Average
reflect these value-added services. Past performance is not predictive of future
results. The investment return and NAV will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than the original cost.
- ---------------
* Reflects 4.50% sales charge.
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HIGHMARK BOND FUND
For the year ended July 31, 1996, the HighMark Bond Fund produced a total return
of 4.95% (Investor Shares at NAV). In comparison, the Lehman Brothers Aggregate
Bond Index was up 5.52%.
The HighMark Bond Fund is managed by E. Jack Montgomery, CFA. Mr. Montgomery,
who holds an MBA from the University of Oregon and a bachelor's degree from the
University of Oklahoma, has 15 years' experience in financial analysis and
portfolio management.
HOW WOULD YOU ASSESS THE PERFORMANCE OF THE HIGHMARK BOND FUND?
The fiscal year ended July 31, 1996, can be divided into two discrete periods.
In the first half, interest rates fell, and we outperformed our benchmark.
Because of our longer-than-average duration, we tend to do better in a falling
interest-rate environment. (Duration measures the sensitivity of a portfolio to
changes in interest rates. The value of a share in a longer-duration portfolio
will go up more than a share in a short-duration fund when interest rates fall;
it will fall more steeply when interest rates rise.) During the second half of
the fiscal year, interest rates rose, and we underperformed for the same reasons
that we outperformed earlier. When interest rates are rising, as they did
between February and July 1996, a longer duration is a disadvantage.
WHY HAVE YOU CONTINUED TO MAINTAIN A LONG DURATION?
It is our continuing belief that inflation is not going to be a problem in the
immediate future. Last year, the economy surprised us on the downside. It was
slower than expected, but this year the opposite has happened. The job numbers
have been particularly strong. With low unemployment and job growth healthy,
investors started paying attention to wages. But the latest wage numbers are
still very benign. The year-over-year growth in average hourly earnings is just
2.9%. Even if inflation is 3%, long-term bonds at 7% are a pretty good value.
Our duration at 5.2 years is about 10% beyond the index, so it's not a huge bet.
We're watching these things very carefully, and our strategy is subject to
change. But so far, we're not convinced that we have a problem on our hands.
HOW HAS THE PORTFOLIO SHIFTED IN TERMS OF SECTORS?
In the last six months, corporate bonds have been reduced by about 5%. Some of
that cash has been redeployed into mortgage-backed securities, which offer more
yield and currently represent more value than corporate bonds. Mortgages have
been the best-performing sector this year, primarily due to their shorter
duration and higher yield. Right now, the yield spread between corporates and
U.S. Treasuries is very narrow. A 30-year AAA-rated corporate bond offers only
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<PAGE> 180
half a percentage point more than a comparable U.S. Treasury bond. And within
the corporate market, there's very little difference in yield between a AAA and
a AA credit. As a result, we've opted for higher quality. Treasuries and
mortgage-backed and asset-backed securities, all rated AAA, represent about 75%
of the portfolio. The portfolio currently does not contain any bonds rated BBB.
If the economy weakens, we believe that the corporate bond market will likely
suffer. As a result, the corporate bonds that we own have short maturities. We
are focusing our exposure on longer maturities in the U.S. Treasury market.
WHAT IS YOUR OUTLOOK FOR THE REST OF 1996?
A rally in the bond market started July 31, when bond yields fell from 7.2% to
about 6.7% in a period of three days. That was the result of
weaker-than-expected employment data. In addition, average hourly wage inflation
for July was revised downward to 2.8%. We don't think inflation is going to be a
problem, nor do we see the economy running away on the upside, so interest rates
should remain well behaved. One engine of the economy, government spending, is
down sharply. Excluding interest payments, the federal budget is actually in a
surplus by $100 billion. We're no longer creating new federal spending programs
with money we don't have. The environment has changed on spending and that's
good.
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<TABLE>
HIGHMARK BOND FUND
<CAPTION>
GROWTH OF A $10,000 INVESTMENT
MORNINGSTAR
CORPORATE LEHMAN
BOND HIGH BROTHERS
MEASUREMENT PERIOD INVESTOR FIDUCIARY QUALITY AGGREGATE
(FISCAL YEAR COVERED) SHARES SHARES INDEX BOND INDEX
<S> <C> <C> <C> <C>
2/84 9695 10000 10000 10000
7/84 9479 9778 10077 10275
7/85 11804 12175 12225 12733
7/86 14947 15417 14436 15470
7/87 15186 15664 15140 16180
7/88 16073 16579 16119 17394
7/89 18450 19030 18127 200039
7/90 19468 20081 19231 21452
7/91 21218 21886 20994 23749
7/92 24280 25044 23768 27262
7/93 26725 27566 25693 30037
7/94 25707 26699 25832 30061
7/95 28096 29217 27820 33098
7/96 29488 30622 29203 34925
</TABLE>
<TABLE>
<CAPTION>
HighMark Bond Fund
Performance Average Annual
Total Return as of 7/31/96
----------------------------------------
1 Year 5 Years 10 Years Since
Inception
(2/15/84)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
Investor* 1.79% 6.15% 6.71% 9.06%
Fiduciary 4.81% 6.95% 7.10% 9.39%
</TABLE>
The performance of the HighMark Bond Fund is measured against the Lehman
Brothers Aggregate Bond Index, an unmanaged broad-based index generally
considered to be representative of the bond market as a whole, and the
Morningstar Corporate Bond High Quality Average, a composite of managed
corporate bond funds. The index does not reflect the deduction of expenses
associated with a mutual fund, such as investment management and fund accounting
fees. However, the fund's performance and the Morningstar Corporate Bond
High Quality Average reflect these value-added services. Past performance is not
predictive of future results. The investment return and NAV will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than the
original cost.
- ---------------
* Reflects 3.00% sales charge.
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HIGHMARK GOVERNMENT BOND FUND
For the year ended July 31, 1996, the HighMark Government Bond Fund, which
invests primarily in U.S. Government securities maturing in one to five years,
produced a total return of 4.79% (Investor Shares at NAV). In comparison, the
Lehman Brothers Mutual Fund Short Government Index returned 5.34%.
The HighMark Government Bond Fund is managed by Bill Howard, who has 15 years'
experience in the investment business and holds an MBA from Golden Gate
University and a bachelor's degree from Seattle University.
HOW WOULD YOU ASSESS THE FUND'S PERFORMANCE?
Interest rates rose sharply beginning in February, and that had a negative
impact on the bond market as a whole, including the Government Bond Fund. To
offset rising interest rates, we shortened the maturity of the bond portfolio.
However, the fund still underperformed because the portfolio has a longer
average maturity than the benchmark. On the plus side, we hope the fund will be
able to take advantage of the recent rally and outperform the market during the
early part of the new fiscal year.
WHAT WAS YOUR STRATEGY DURING THE PAST 12 MONTHS?
The rationale for the sell-off in the market was a perception that the economy
was far more robust than had been expected and was going to remain so for an
extended period of time. However, our outlook on the economy was basically
unchanged, and trying to time the market by picking its peaks and valleys is a
loser's game. So we didn't take any significant action other than let the
portfolio naturally become shorter through the passage of time. If you try to
time the market by trying to shorten the portfolio through trading activity,
then you've got to lengthen it once you're into a rally. That process of
shortening and lengthening is extremely difficult to do effectively, and it's
very costly from a trading standpoint.
WHAT IS YOUR OUTLOOK FOR THE REST OF THE YEAR?
We think the interest-rate increases earlier in the year will keep the economy
from overheating and getting too far ahead of itself. Indeed, recent employment
and inflation data have taken a lot of fear out of the market.
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<PAGE> 183
<TABLE>
HIGHMARK GOVERNMENT BOND FUND
GROWTH OF A $10,000 INVESTMENT
<CAPTION>
MEASUREMENT PERIOD INVESTOR FIDUCIARY LEHMAN BROTHERS
(FISCAL YEAR COVERED) SHARES SHARES MUTUAL FUND
SHORT GOVT.
INDEX
<S> <C> <C> <C>
11/14/93 9699 10000 10000
7/31/94 9465 9841 9868
7/31/95 10172 10560 10633
7/31/96 10659 11061 11203
</TABLE>
<TABLE>
<CAPTION>
HighMark Government Bond Fund
Performance Average Annual
Total Return as of 7/31/96
--------------------------------
1 Year Since
Inception
(11/14/93)
<S> <C> <C>
- --------------------------------------------------------
Investor* 1.66% 2.38%
Fiduciary 4.75% 3.78%
</TABLE>
The performance of the HighMark Government Bond Fund is measured against the
Lehman Brothers Mutual Fund Short Government Index, an unmanaged broad-based
index generally considered to be representative of U.S. Government securities
with maturities of one to five years. The index does not reflect the deduction
of expenses associated with a mutual fund, such as investment management and
fund accounting fees. However, the fund's performance reflects these value-added
services. Past performance is not predictive of future results. The investment
return and NAV will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than the original cost.
- ---------------
* Reflects 3.00% sales charge.
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<PAGE> 184
HIGHMARK MONEY MARKET FUNDS
<TABLE>
<CAPTION>
7 DAYS ENDING 7/31/96
EFFECTIVE*
YIELD YIELD*
INVESTOR FIDUCIARY INVESTOR FIDUCIARY
HIGHMARK FUND CLASS CLASS CLASS CLASS
<S> <C> <C> <C> <C>
Diversified Obligations Fund 4.87 4.87 4.76 4.76
U.S. Government Obligations Fund 4.71 4.72 4.60 4.61
100% U.S. Treasury Obligations Fund 4.56 4.56 4.46 4.46
California Tax-Free Fund 2.75 2.75 2.71 2.71
Tax-Free Fund 2.74 2.74 2.70 2.70
</TABLE>
* Effective yield assumes reinvestment of dividends. Yields shown are annualized
7-day effective and 7-day yields for the period ending July 31, 1996. Past
performance is not predictive of future performance as yields on money market
funds fluctuate daily. An investment in any of the HighMark money market funds
is neither insured nor guaranteed by the U.S. Government. Although such funds
are managed to maintain a stable net asset value of $1.00 per share, there can
be no assurance that they will be able to do so.
Some of the fees of the California Tax-Free Fund and the Tax-Free Fund are
currently being waived, resulting in higher yields in the funds than would
occur if full fees were charged. If full fees had been charged, the 7-day
effective and 7-day yields for the Investor Shares of the California Tax-Free
Fund would have been 2.54% and 2.51% and 2.52% and 2.49% for the Fiduciary
Shares, respectively, for the period ending July 31, 1996. If full fees had
been charged, the 7-day effective and 7-day yields for the Investor Shares of
the Tax-Free Fund would have been 2.58% and 2.55% and 2.45% and 2.42% for the
Fiduciary Shares, respectively, for the period ending July 31, 1996.
THE TAXABLE MONEY MARKET FUNDS
For the year ended July 31, 1996, the Diversified Obligations Fund, which holds
primarily certificates of deposit, commercial paper and repurchase agreements,
produced a total return of 5.01%. The U.S. Government Obligations Fund,
comprised mostly of U.S. Government agency issues, produced a total return of
4.86% for Investor Shares and 4.88% for Fiduciary Shares. The 100% U.S. Treasury
Obligations Fund produced a total return of 4.74%.
In December and January, the Federal Reserve Board reduced short-term interest
rates by a total of half a percentage point to stimulate the economy. By early
spring, it became apparent that the economy was indeed robust. When interest
rates on longer-term securities began to rise, the money market funds took on a
number of longer positions, extending average maturities, which added
significantly to each portfolio's yield.
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<PAGE> 185
Since recent economic data suggest that the economy is moderating, it currently
appears that the Federal Reserve Board will not have to raise short-term rates.
THE TAX-FREE MONEY MARKET FUNDS+
For the year ended July 31, 1996, the California Tax-Free Money Market Fund
produced a total return of 2.91%. The Tax-Free Money Market Fund, which includes
municipal bonds issued throughout the country, produced a total return of 2.87%.
Both funds currently maintain maturities in the 20-25-day range to enhance
liquidity. Most of the bonds held in these funds are credit-enhanced, meaning
they are insured or backed by irrevocable bank letters of credit.
- ---------------
+ Some or all of the income may be subject to certain state and local taxes,
and, depending on a shareholder's tax bracket, to the federal alternative
minimum tax.
The HighMark Group is a family of mutual funds distributed by BISYS Fund
Services, independent of Union Bank of California, N.A., and its affiliates.
Certain fees of some funds are currently being waived, which may result in
higher fund total returns than would occur if full fees were charged. Past
performance is not predictive of future results. The composition of the funds'
holdings is subject to change.
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<PAGE> 186
REPORT OF INDEPENDENT AUDITORS'
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
THE HIGHMARK GROUP
We have audited the accompanying statements of assets and liabilities including
the schedules of portfolio investments of The HighMark Group (the "Funds"),
including Diversified Obligations Fund, U.S. Government Obligations Fund, 100%
U.S. Treasury Obligations Fund, California Tax-Free Fund, Tax-Free Fund, Bond
Fund, Government Bond Fund, Income Equity Fund, Balanced Fund, Growth Fund, and
Income & Growth Fund, as of July 31, 1996, the related statements of operations,
statements of changes in net assets and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
highlights for the other years presented and the statement of changes in net
assets for the year ended July 31, 1995 were audited by other auditors whose
report, dated September 22, 1995, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1996 by correspondence with the Funds' custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Funds at July 31, 1996, the results of
their operations, the changes in their net assets, and the financial highlights
for the year then ended, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
September 13, 1996
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<PAGE> 187
STATEMENTS OF ASSETS AND LIABILITIES
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
100% U.S.
DIVERSIFIED U.S. GOVERNMENT TREASURY CALIFORNIA
OBLIGATIONS OBLIGATIONS OBLIGATIONS TAX-FREE TAX-FREE
FUND FUND FUND FUND FUND
----------- --------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in securities, at amortized cost............ $ 413,900 $ 188,438 $ 274,306 $ 148,504 $43,994
Repurchase agreements, at cost.......................... 21,502 39,183 -- -- --
-------- -------- -------- -------- -------
Total Investments..................................... 435,402 227,621 274,306 148,504 43,994
Cash.................................................... 3 16 -- 897 215
Interest receivable..................................... 2,256 557 910 432 158
Receivable from brokers for investments sold............ -- -- -- 2,500 --
Prepaid expenses and other assets....................... 14 17 12 10 1
-------- -------- -------- -------- -------
Total Assets........................................ 437,675 228,211 275,228 152,343 44,368
-------- -------- -------- -------- -------
LIABILITIES:
Distributions payable................................... 1,690 863 1,088 287 78
Payable to brokers for investments purchased............ 5,000 -- -- -- --
Accrued expenses and other payables:
Investment advisory fees.............................. 143 76 98 31 12
Administration fees................................... 19 10 12 5 1
Shareholder services fees............................. 1 1 1 1 --
Custodian, accounting and transfer agent fees......... 26 26 13 14 13
Other................................................. 69 38 53 26 7
-------- -------- -------- -------- -------
Total Liabilities................................... 6,948 1,014 1,265 364 111
-------- -------- -------- -------- -------
NET ASSETS:
Capital................................................. 431,097 227,373 273,958 152,028 44,273
Accumulated undistributed net realized gains (losses) on
investment transactions............................... (370) (176) 5 (49) (16)
-------- -------- -------- -------- -------
Net Assets.......................................... $ 430,727 $ 227,197 $ 273,963 $ 151,979 $44,257
======== ======== ======== ======== =======
Net Assets
Investor.............................................. $ 185,952 $ 75,714 $ 100,623 $ 53,627 $16,148
Fiduciary............................................. 244,775 151,483 173,340 98,352 28,109
-------- -------- -------- -------- -------
Total............................................... $ 430,727 $ 227,197 $ 273,963 $ 151,979 $44,257
======== ======== ======== ======== =======
Outstanding units of beneficial interest (shares)
Investor.............................................. 186,031 75,727 100,626 53,639 16,153
Fiduciary............................................. 245,066 151,646 173,332 98,389 28,120
-------- -------- -------- -------- -------
Total............................................... 431,097 227,373 273,958 152,028 44,273
======== ======== ======== ======== =======
Net asset value -- offering and redemption price per
share
Investor.............................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Fiduciary............................................. 1.00 1.00 1.00 1.00 1.00
======== ======== ======== ======== =======
</TABLE>
See notes to financial statements.
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<PAGE> 188
STATEMENTS OF ASSETS AND LIABILITIES
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
INCOME
BOND GOVERNMENT EQUITY
FUND BOND FUND FUND
-------- ---------- ----------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value (cost $59,354; $4,334; and $232,422,
respectively)............................................................... $ 58,799 $4,295 $ 266,771
Repurchase agreements, at cost................................................ 2,237 121 4,858
------- ------ --------
Total Investments......................................................... 61,036 4,416 271,629
Interest and dividends receivable............................................. 912 94 796
Receivable from brokers for investments sold.................................. -- -- 2,930
Prepaid expenses and other assets............................................. 2 12 6
------- ------ --------
Total Assets.............................................................. 61,950 4,522 275,361
------- ------ --------
LIABILITIES:
Distributions payable......................................................... 319 24 586
Payable for capital shares redeemed........................................... 42 -- --
Payable to brokers for investments purchased.................................. -- -- 1,726
Accrued expenses and other payables:
Investment advisory fees.................................................... 23 -- 154
Administration fees......................................................... 2 -- 12
Custodian, accounting and transfer agent fees............................... 15 5 21
Other....................................................................... 18 3 59
------- ------ --------
Total Liabilities......................................................... 419 32 2,558
------- ------ --------
NET ASSETS:
Capital....................................................................... 65,254 4,837 223,480
Net unrealized appreciation (depreciation) on investments..................... (555) (39) 34,349
Undistributed net investment income........................................... 32 2 --
Accumulated undistributed net realized gains (losses) on investment
transactions................................................................ (3,200) (310) 14,974
------- ------ --------
Net Assets................................................................ $ 61,531 $4,490 $ 272,803
======= ====== ========
Net Assets
Investor.................................................................... $ 1,157 $1,104 $ 10,143
Fiduciary................................................................... 60,374 3,386 262,660
------- ------ --------
Total..................................................................... $ 61,531 $4,490 $ 272,803
======= ====== ========
Outstanding units of beneficial interest (shares)
Investor.................................................................... 114 119 710
Fiduciary................................................................... 5,900 362 18,413
------- ------ --------
Total..................................................................... 6,014 481 19,123
======= ====== ========
Net asset value
Investor -- redemption price per share...................................... $ 10.15 $ 9.28 $ 14.29
Fiduciary -- offering and redemption price per share........................ 10.23 9.35 14.27
======= ====== ========
Maximum Sales Charge (Investor Shares)........................................ 3.00% 3.00% 4.50%
======= ====== ========
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net asset value
adjusted to nearest cent) per share (Investor Shares)....................... $ 10.46 $ 9.57 $ 14.96
======= ====== ========
</TABLE>
See notes to financial statements.
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<PAGE> 189
STATEMENTS OF ASSETS AND LIABILITIES
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
INCOME &
BALANCED GROWTH GROWTH
FUND FUND FUND
-------- ------- --------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value (cost $32,159; $39,610; and $4,969,
respectively).................................................................. $36,273 $43,527 $6,022
Repurchase agreements, at cost................................................... 3,787 900 386
--------- --------- -------
Total Investments............................................................ 40,060 44,427 6,408
Interest and dividends receivable................................................ 278 55 12
Receivable from brokers for investments sold..................................... -- 216 --
Prepaid expenses................................................................. 9 5 5
--------- --------- -------
Total Assets................................................................. 40,347 44,703 6,425
--------- --------- -------
LIABILITIES:
Distributions payable............................................................ 118 28 9
Payable to brokers for investments purchased..................................... -- 301 --
Accrued expenses and other payables:
Investment advisory fees....................................................... 20 21 --
Administration fees............................................................ 2 2 --
Custodian, accounting and transfer agent fees.................................. 5 5 6
Other.......................................................................... 6 8 3
--------- --------- -------
Total Liabilities............................................................ 151 365 18
--------- --------- -------
NET ASSETS:
Capital.......................................................................... 35,830 38,047 5,100
Net unrealized appreciation on investments....................................... 4,114 3,917 1,053
Undistributed net investment income.............................................. 1 -- --
Accumulated undistributed net realized gains on investment transactions.......... 251 2,374 254
--------- --------- -------
Net Assets................................................................... $40,196 $44,338 $6,407
========= ========= =======
Net Assets
Investor....................................................................... $ 694 $ 2,843 $ 394
Fiduciary...................................................................... 39,502 41,495 6,013
--------- --------- -------
Total........................................................................ $40,196 $44,338 $6,407
========= ========= =======
Outstanding units of beneficial interest (shares)
Investor....................................................................... 60 226 31
Fiduciary...................................................................... 3,392 3,300 480
--------- --------- -------
Total........................................................................ 3,452 3,526 511
========= ========= =======
Net asset value
Investor -- redemption price per share......................................... $ 11.56 $ 12.60 $12.52
Fiduciary -- offering and redemption price per share........................... 11.64 12.58 12.51
========= ========= =======
Maximum Sales Charge (Investor Shares)........................................... 4.50% 4.50% 4.50%
========= ========= =======
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net asset value
adjusted to nearest cent) per share (Investor Shares).......................... $ 12.10 $ 13.19 $13.11
========= ========= =======
</TABLE>
See notes to financial statements.
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<PAGE> 190
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
U.S. 100% U.S.
DIVERSIFIED GOVERNMENT TREASURY CALIFORNIA
OBLIGATIONS OBLIGATIONS OBLIGATIONS TAX-FREE TAX-FREE
FUND FUND FUND FUND FUND
----------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income.................................. $22,468 $ 13,070 $16,193 $5,301 $1,554
------- ------- ------- ------ ------
Total Income................................. 22,468 13,070 16,193 5,301 1,554
------- ------- ------- ------ ------
EXPENSES:
Investment advisory fees......................... 1,591 944 1,203 618 172
Administration fees.............................. 795 472 602 309 86
Distribution fees (Investor shares).............. 396 194 267 122 36
Shareholder services fees........................ 994 590 752 386 108
Custodian and accounting fees.................... 264 181 177 121 83
Legal and audit fees............................. 63 37 52 29 5
Trustees' fees and expenses...................... 11 7 9 5 1
Transfer agent fees.............................. 89 44 50 47 34
Registration and filing fees..................... 47 16 28 5 4
Printing costs................................... 51 69 42 23 6
Other............................................ 13 7 9 4 2
------- ------- ------- ------ ------
Total Expenses............................... 4,314 2,561 3,191 1,669 537
Expenses voluntarily reduced..................... (1,327) (739) (978) (824) (207)
------- ------- ------- ------ ------
Net Expenses................................. 2,987 1,822 2,213 845 330
------- ------- ------- ------ ------
Net Investment Income............................ 19,481 11,248 13,980 4,456 1,224
------- ------- ------- ------ ------
REALIZED GAINS ON INVESTMENTS:
Net realized gains (losses) on investments....... 16 15 (51) -- --
------- ------- ------- ------ ------
Change in net assets resulting from operations... $19,497 $ 11,263 $13,929 $4,456 $1,224
======= ======= ======= ====== ======
</TABLE>
See notes to financial statements.
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<PAGE> 191
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
GOVERNMENT INCOME
BOND BOND EQUITY
FUND FUND FUND
------ ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income...................................................... $4,316 $304 $ 425
Dividend income...................................................... -- -- 9,943
------ ---- -------
Total Income....................................................... 4,316 304 10,368
------ ---- -------
EXPENSES:
Investment advisory fees............................................. 534 43 1,755
Administration fees.................................................. 123 9 521
Distribution fees (Investor shares).................................. 2 2 20
Shareholder services fees............................................ 154 11 651
Custodian and accounting fees........................................ 85 64 174
Legal and audit fees................................................. 10 3 44
Trustees' fees and expenses.......................................... 2 -- 7
Transfer agent fees.................................................. 54 32 106
Registration and filing fees......................................... 6 1 19
Printing costs....................................................... 22 2 47
Other................................................................ 3 -- 8
------ ---- -------
Total Expenses................................................... 995 167 3,352
Expenses voluntarily reduced......................................... (445) (87) (666)
------ ---- -------
Total expenses before expense reimbursements..................... 550 80 2,686
Expense reimbursements........................................... -- (43) --
------ ---- -------
Net Expenses..................................................... 550 37 2,686
------ ---- -------
Net Investment Income................................................ 3,766 267 7,682
------ ---- -------
REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on investment transactions............... (369) (8) 19,384
Net change in unrealized appreciation (depreciation) on
investments........................................................ (465) (67) 13,911
------ ---- -------
Net realized/unrealized gains (losses) on investments................ (834) (75) 33,295
------ ---- -------
Change in net assets resulting from operations....................... $2,932 $192 $ 40,977
====== ==== =======
</TABLE>
See notes to financial statements.
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<PAGE> 192
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
INCOME &
BALANCED GROWTH GROWTH
FUND FUND FUND
-------- ------ --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income........................................................ $ 996 $ 82 $ 21
Dividend income........................................................ 549 607 163
------ ------ ------
Total Income......................................................... 1,545 689 184
------ ------ ------
EXPENSES:
Investment advisory fees............................................... 348 362 62
Administration fees.................................................... 70 72 12
Distribution fees (Investor shares).................................... 2 5 1
Shareholder services fees.............................................. 87 90 16
Custodian and accounting fees.......................................... 64 78 74
Legal and audit fees................................................... 6 6 3
Trustees' fees and expenses............................................ 1 1 --
Transfer agent fees.................................................... 33 42 33
Registration and filing fees........................................... 3 4 1
Printing costs......................................................... 6 6 --
Other.................................................................. 1 2 --
------ ------ ------
Total Expenses..................................................... 621 668 202
Expenses voluntarily reduced........................................... (293) (333 ) (119)
------ ------ ------
Total expenses before expense reimbursements....................... 328 335 83
Expense reimbursements............................................. -- -- (23)
------ ------ ------
Net Expenses....................................................... 328 335 60
------ ------ ------
Net Investment Income.................................................. 1,217 354 124
------ ------ ------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment transactions.......................... 446 3,272 628
Net change in unrealized appreciation on investments................... 1,716 155 56
------ ------ ------
Net realized/unrealized gains on investments........................... 2,162 3,427 684
------ ------ ------
Change in net assets resulting from operations......................... $3,379 $3,781 $808
====== ====== ======
</TABLE>
See notes to financial statements.
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<PAGE> 193
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
DIVERSIFIED U.S. GOVERNMENT
OBLIGATIONS FUND OBLIGATIONS FUND
-------------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.......................... $ 19,481 $ 17,476 $ 11,248 $ 8,697
Net realized gains (losses) on investment
transactions................................. 16 (29) 15 34
----------- ----------- ----------- -----------
Change in net assets resulting from operations... 19,497 17,447 11,263 8,731
----------- ----------- ----------- -----------
DISTRIBUTIONS TO INVESTOR SHAREHOLDERS:
From net investment income..................... (7,738) (5,516) (3,707) (2,084)
DISTRIBUTIONS TO FIDUCIARY SHAREHOLDERS:
From net investment income..................... (11,743) (11,960) (7,541) (6,613)
----------- ----------- ----------- -----------
Change in net assets from shareholder
distributions.................................. (19,481) (17,476) (11,248) (8,697)
----------- ----------- ----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued.................... 1,943,043 1,562,243 1,933,728 1,760,626
Dividends reinvested........................... 7,326 4,915 3,487 1,950
Cost of shares redeemed........................ (1,918,325) (1,473,121) (1,918,254) (1,740,538)
----------- ----------- ----------- -----------
Change in net assets from share transactions..... 32,044 94,037 18,961 22,038
----------- ----------- ----------- -----------
Change in net assets............................. 32,060 94,008 18,976 22,072
NET ASSETS:
Beginning of period............................ 398,667 304,659 208,221 186,149
----------- ----------- ----------- -----------
End of period.................................. $ 430,727 $ 398,667 $ 227,197 $ 208,221
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 194
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
100% U.S. TREASURY CALIFORNIA
OBLIGATIONS FUND TAX-FREE FUND TAX-FREE FUND
----------------------- ---------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995 1996 1995
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income........... $ 13,980 $ 10,640 $ 4,456 $ 4,619 $ 1,224 $ 1,405
Net realized gains (losses) on
investment transactions....... (51) 57 -- (23) -- (13)
---------- --------- --------- --------- --------- ---------
Change in net assets resulting
from operations................. 13,929 10,697 4,456 4,596 1,224 1,392
---------- --------- --------- --------- --------- ---------
DISTRIBUTIONS TO INVESTOR
SHAREHOLDERS:
From net investment income...... (4,948) (2,706) (1,404) (1,089) (400) (422)
DISTRIBUTIONS TO FIDUCIARY
SHAREHOLDERS:
From net investment income...... (9,032) (7,934) (3,052) (3,530) (824) (983)
---------- --------- --------- --------- --------- ---------
Change in net assets from
shareholder distributions....... (13,980) (10,640) (4,456) (4,619) (1,224) (1,405)
---------- --------- --------- --------- --------- ---------
CAPITAL TRANSACTIONS:
Proceeds from shares issued..... 1,004,680 736,668 343,893 354,814 132,220 156,974
Dividends reinvested............ 4,571 2,106 1,425 1,035 419 429
Cost of shares redeemed......... (1,014,501) (659,445) (339,625) (356,054) (131,897) (164,192)
---------- --------- --------- --------- --------- ---------
Change in net assets from share
transactions.................... (5,250) 79,329 5,693 (205) 742 (6,789)
---------- --------- --------- --------- --------- ---------
Change in net assets.............. (5,301) 79,386 5,693 (228) 742 (6,802)
NET ASSETS:
Beginning of period............. 279,264 199,878 146,286 146,514 43,515 50,317
---------- --------- --------- --------- --------- ---------
End of period................... $ 273,963 $ 279,264 $ 151,979 $ 146,286 $ 44,257 $ 43,515
========== ========= ========= ========= ========= =========
</TABLE>
See notes to financial statements.
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<PAGE> 195
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
BOND FUND GOVERNMENT BOND FUND INCOME EQUITY FUND
---------------------- ---------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income............ $ 3,766 $ 3,824 $ 267 $ 294 $ 7,682 $ 7,595
Net realized gains (losses) on
investment transactions........ (369) (1,512) (8) (55) 19,384 8,944
Net change in unrealized
appreciation (depreciation) on
investments.................... (465) 3,052 (67) 79 13,911 17,456
-------- -------- ------- -------- -------- --------
Change in net assets resulting from
operations....................... 2,932 5,364 192 318 40,977 33,995
-------- -------- ------- -------- -------- --------
DISTRIBUTIONS TO INVESTOR
SHAREHOLDERS:
From net investment income....... (63) (18) (53) (3) (239) (43)
From net realized gains on
investments.................... (1) -- -- -- (277) (16)
DISTRIBUTIONS TO FIDUCIARY
SHAREHOLDERS:
From net investment income....... (3,703) (3,806) (214) (291) (7,443) (7,552)
From net realized gains on
investments.................... (32) -- (2) -- (11,279) (7,309)
-------- -------- ------- -------- -------- --------
Change in net assets from
shareholder distributions........ (3,799) (3,824) (269) (294) (19,238) (14,920)
-------- -------- ------- -------- -------- --------
CAPITAL TRANSACTIONS:
Proceeds from shares issued...... 15,630 11,393 1,352 1,376 63,282 36,043
Dividends reinvested............. 3,043 3,125 266 297 17,495 13,535
Cost of shares redeemed.......... (16,591) (19,934) (1,035) (2,884) (54,919) (56,799)
-------- -------- ------- -------- -------- --------
Change in net assets from share
transactions..................... 2,082 (5,416) 583 (1,211) 25,858 (7,221)
-------- -------- ------- -------- -------- --------
Change in net assets............... 1,215 (3,876) 506 (1,187) 47,597 11,854
NET ASSETS:
Beginning of period.............. 60,316 64,192 3,984 5,171 225,206 213,352
-------- -------- ------- -------- -------- --------
End of period.................... $ 61,531 $ 60,316 $4,490 $ 3,984 $272,803 $225,206
======== ======== ======= ======== ======== ========
</TABLE>
See notes to financial statements.
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33
LOGO
<PAGE> 196
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND INCOME & GROWTH FUND
---------------------- ---------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income............ $ 1,217 $ 992 $ 354 $ 272 $ 124 $ 133
Net realized gains on investment
transactions................... 446 21 3,272 915 628 42
Net change in unrealized
appreciation on investments.... 1,716 2,804 155 3,752 56 961
------- ------- ------- ------- ------ -------
Change in net assets resulting from
operations....................... 3,379 3,817 3,781 4,939 808 1,136
------- ------- ------- ------- ------ -------
DISTRIBUTIONS TO INVESTOR
SHAREHOLDERS:
From net investment income....... (23) (3) (21) (5) (6) (1)
From net realized gains on
investments.................... -- -- (94) (3) (14) --
DISTRIBUTIONS TO FIDUCIARY
SHAREHOLDERS:
From net investment income....... (1,194) (989) (333) (267) (118) (132)
From net realized gains on
investments.................... (2) -- (1,566) (240) (314) --
------- ------- ------- ------- ------ -------
Change in net assets from
shareholder distributions........ (1,219) (992) (2,014) (515) (452) (133)
------- ------- ------- ------- ------ -------
CAPITAL TRANSACTIONS:
Proceeds from shares issued...... 15,840 10,356 19,239 9,727 2,923 1,771
Dividends reinvested............. 1,172 986 1,965 503 434 127
Cost of shares redeemed.......... (9,404) (9,590) (4,947) (3,594) (4,190) (788)
------- ------- ------- ------- ------ -------
Change in net assets from share
transactions..................... 7,608 1,752 16,257 6,636 (833) 1,110
------- ------- ------- ------- ------ -------
Change in net assets............... 9,768 4,577 18,024 11,060 (477) 2,113
NET ASSETS:
Beginning of period.............. 30,428 25,851 26,314 15,254 6,884 4,771
------- ------- ------- ------- ------ -------
End of period.................... $ 40,196 $ 30,428 $ 44,338 $ 26,314 $6,407 $6,884
======= ======= ======= ======= ====== =======
</TABLE>
See notes to financial statements.
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34
LOGO
<PAGE> 197
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT (23.4%):
Euro Certificates of Deposit (3.7%):
$ 5,000 Abbey National Treasury
Services, 5.72%, 9/11/96... $ 5,000
6,000 Abbey National Treasury
Services, 5.22%, 3/4/97 5,983
5,000 Bayerische Vereinsbank,
5.49%, 11/13/96 5,001
--------
15,984
--------
Yankee Certificates of Deposit (19.7%):
10,000 ABN-AMRO Bank N.V., 5.53%,
3/18/97.................... 9,996
5,000 Commerzbank, 5.66%, 4/24/97.. 4,997
10,000 Dresdner Bank, 5.05%,
2/26/97.................... 9,999
10,000 Deutsche Bank, 5.57%,
3/31/97.................... 10,001
5,000 Rabobank Nederland N.V.,
5.82% 8/14/96.............. 5,000
10,000 Sanwa Bank Ltd., 5.62%,
10/16/96................... 10,002
10,000 Society Generale, 5.65%,
4/1/97..................... 9,993
5,000 Society Generale, 5.80%,
4/15/97.................... 5,002
10,000 Sumitomo Bank Ltd., 5.48%,
8/26/96.................... 10,000
5,000 Sumitomo Bank Ltd., 5.46%,
9/3/96..................... 5,000
5,000 Sumitomo Bank Ltd., 6.01%,
10/30/96................... 5,000
--------
84,990
--------
Total Certificates of Deposit 100,974
--------
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------
<S> <C> <C> <C>
COMMERCIAL PAPER/MASTER DEMAND NOTES (67.5%):
Automotive (6.9%):
$ 5,000 Daimler-Benz North America
Corp., 5.35%, 1/6/97....... $ 4,876
5,000 Daimler-Benz North America
Corp., 5.53%, 1/13/97...... 4,873
5,000 Ford Motor Credit Corp.,
5.27%, 8/13/96............. 4,991
10,000 Ford Motor Credit Corp.,
5.34%, 8/15/96............. 9,979
5,000 Ford Motor Credit Corp.,
5.42%, 9/6/96.............. 4,973
--------
29,692
--------
Banking (9.2%):
5,000 ANZ (De) Inc., 5.38%,
9/10/96.................... 4,970
5,000 ANZ (De) Inc., 5.40%,
9/9/96..................... 4,971
5,000 ANZ (De) Inc., 5.47%,
10/9/96.................... 4,948
5,000 Abbey National North America
Inc., 5.54%, 9/25/96....... 4,958
5,000 Abbey National North America
Inc., 5.40%, 12/4/96....... 4,906
5,000 Commerzbank U.S. Finance
Inc., 5.35%, 8/8/96........ 4,995
5,000 Den Danske Corporation Inc.,
5.38%, 8/6/96.............. 4,996
5,000 Den Danske Corporation Inc.,
5.42%, 10/1/96............. 4,954
--------
39,698
--------
</TABLE>
Continued
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35
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<PAGE> 198
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMERCIAL PAPER/MASTER DEMAND NOTES,
CONTINUED:
Business Credit Institutions (21.9%):
$10,000 Alpha Finance Corp., 5.48%,
10/11/96................... $ 9,892
10,000 Assets Securitization
Cooperative Corp., 5.37%,
8/5/96..................... 9,994
5,000 Assets Securitization
Cooperative Corp., 5.40%,
9/17/96.................... 4,965
5,000 Beta Finance Inc., 5.53%,
1/3/97..................... 4,881
10,000 Ciesco, L.P., 5.26%,
8/16/96.................... 9,978
5,000 Ciesco, L.P., 5.32%,
9/9/96..................... 4,971
5,200 Corporate Receivables Corp.,
5.35%, 8/22/96............. 5,184
10,000 Corporate Receivables Corp.,
5.40%, 9/12/96............. 9,937
5,000 Corporate Receivables Corp.,
5.42%, 10/8/96............. 4,949
5,000 CXC, Inc., 5.38%, 8/1/96..... 5,000
10,000 CXC, Inc., 5.40%, 9/3/96..... 9,950
5,000 Falcon Asset Securitization
Corp., 5.40%, 8/19/96...... 4,986
5,000 Falcon Asset Securitization
Corp., 5.55%, 1/21/97...... 4,867
5,000 Jet Funding Corp., 5.50%,
9/30/96.................... 4,954
---------
94,508
---------
Electronic & Electrical--General (4.6%):
10,000 Panasonic Finance Inc.,
5.38%, 9/9/96.............. 9,942
10,000 Panasonic Finance Inc.,
5.34%, 9/17/96............. 9,930
---------
19,872
---------
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
COMMERCIAL PAPER/MASTER DEMAND NOTES,
CONTINUED:
Insurance (1.2%):
$ 5,000 TransAmerica Corp., 5.36%,
8/9/96..................... $ 4,994
---------
Mining (1.1%):
5,000 RTZ America Inc., 5.30%,
8/22/96.................... 4,985
---------
Multiple Industry (6.9%):
10,000 BTR Dunlop Finance Inc.,
5.37%, 8/7/96.............. 9,991
5,000 BTR Dunlop Finance Inc.,
5.27%, 8/26/96............. 4,982
5,000 BTR Dunlop Finance Inc.,
5.40%, 9/16/96............. 4,965
10,000 General Electric Capital
Corp., 5.29%, 9/5/96....... 9,949
---------
29,887
---------
Retail (3.5%):
5,000 J.C. Penney Funding Corp.,
5.38%, 8/7/96.............. 4,996
10,000 J.C. Penney Funding Corp.,
5.34%, 8/29/96............. 9,958
---------
14,954
---------
Technology (1.7%):
7,200 Hewlett Packard Co., 5.29%,
8/27/96.................... 7,172
---------
Tobacco & Tobacco Products (1.2%):
5,000 B.A.T. Capital Corp., 5.33%,
8/16/96.................... 4,989
---------
</TABLE>
Continued
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36
LOGO DIVERSIFIED OBLIGATIONS FUND
<PAGE> 199
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMERCIAL PAPER/MASTER DEMAND NOTES,
CONTINUED:
Trading Company (3.5%):
$10,000 Cargill Financial Services
Corp. 5.33%, 8/16/96....... $ 9,978
5,000 Cargill Inc., 5.35%,
8/2/96..................... 4,999
---------
14,977
---------
Telecommunications (3.5%):
10,000 AT&T Corp., 5.30%, 8/8/96.... 9,990
5,000 AT&T Corp., 5.42%, 9/18/96... 4,964
---------
14,954
---------
Utility (2.3%):
10,000 National Rural Utilities
Co-op. Finance Corp.,
5.37%, 8/9/96.............. 9,988
---------
Total Commercial Paper / Master Demand
Notes 290,670
---------
MEDIUM TERM NOTES/CORPORATE BONDS (2.9%):
Banking (2.3%):
10,000 Sanwa Business Credit Corp.,
5.56%, 12/4/96 *........... 10,000
---------
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
Manufacturing--Consumer Goods (0.6%):
$ 2,500 Gillette Co., 4.75%,
8/15/96.................... $ 2,499
---------
Total Medium Term Notes/Corporate Bonds
12,499
---------
U.S. TREASURY BILLS (2.3%):
10,000 4.62%, 2/6/97................ 9,757
---------
Total U.S. Treasury Bills 9,757
---------
Total Investments, at value 413,900
---------
REPURCHASE AGREEMENTS (5.0%);
21,502 C.S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 18,006
U.S. Treasury Bonds, 8.75%,
8/15/20, market value
$21,970)................... 21,502
---------
Total Repurchase Agreements 21,502
---------
Total $435,402 (a)
==========
</TABLE>
- ------------
Percentages indicated are based on net assets of $430,727.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity arrangements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of market
interest rates. The rate reflected on the Schedule of Portfolio Investments is
the rate in effect on July 31, 1996.
See notes to financial statements.
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37
LOGO DIVERSIFIED OBLIGATIONS FUND
<PAGE> 200
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ------------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. TREASURY BILLS (4.3%):
$10,000 4.62%, 2/6/97................ $ 9,757
--------
Total U.S. Treasury Bills 9,757
--------
U.S. GOVERNMENT AGENCIES (78.6%):
Federal Home Loan Bank:
7,500 Discount note, 5.32%,
8/14/96.................... 7,486
5,000 Discount note, 5.22%,
8/20/96.................... 4,986
5,000 Discount note, 5.31%,
9/25/96.................... 4,959
5,000 Discount note, 5.19%,
10/15/96................... 4,946
5,000 Discount note, 5.37%,
11/1/96.................... 4,931
5,000 Discount note, 5.25%,
11/4/96.................... 4,931
5,000 Discount note, 5.19%,
1/14/97.................... 4,881
5,000 Discount note, 5.21%,
1/21/97.................... 4,875
4,610 5.26%, 1/29/97............... 4,610
Federal Home Loan Mortgage Corp.:
5,000 Discount note, 5.34%,
9/16/96.................... 4,966
Federal National Mortgage Assoc.:
5,000 Discount note, 5.30%,
8/1/96..................... 5,000
5,000 Discount note, 5.25%,
8/15/96.................... 4,990
5,000 Discount note, 5.24%,
8/21/96.................... 4,985
5,000 Discount note, 5.33%,
9/9/96..................... 4,971
5,000 Discount note, 5.35%,
9/10/96.................... 4,970
5,000 Discount note, 5.34%,
9/11/96.................... 4,970
10,000 Discount note, 5.27%,
9/17/96.................... 9,931
5,000 Discount note, 5.26%,
9/23/96.................... 4,961
5,540 Discount note, 5.30%,
9/24/96.................... 5,496
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ------------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Federal National Mortgage Assoc., continued:
$ 5,000 Discount note, 5.38%,
10/15/96................... $ 4,944
5,000 Discount note, 5.29%,
12/6/96.................... 4,907
6,940 7.60%, 1/10/97............... 6,999
20,000 5.30%, 5/5/97 *.............. 19,987
Overseas Private Investment Corp.:
20,000 5.40%, 1/15/09 *............. 20,000
Student Loan Marketing Assoc.:
10,000 5.57%, 9/23/96 *............. 9,999
10,000 5.49%, 7/18/97 *............. 10,000
--------
Total U.S. Government Agencies 178,681
--------
Total Investments, at value 188,438
--------
REPURCHASE AGREEMENTS (17.2%):
39,183 C. S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 32,811
U.S. Treasury Bonds,
8.75%, 8/15/20, market
value--$40,034).............. 39,183
--------
Total Repurchase Agreements 39,183
--------
Total $227,621 (a)
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $227,197.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of market
interest rates. The rate reflected on the Schedule of Portfolio Investments is
the rate in effect at July 31, 1996.
See notes to financial statements.
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38
LOGO U.S. GOVERNMENT OBLIGATIONS FUND
<PAGE> 201
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. TREASURY BILLS (85.5%):
$ 1,355 4.99%, 8/1/96*............... $ 1,355
15,000 5.00%, 8/8/96*............... 14,985
2,303 5.01%, 8/8/96*............... 2,301
2,226 5.02%, 8/8/96*............... 2,224
5,000 5.03%, 8/8/96*............... 4,995
5,000 5.04%, 8/8/96*............... 4,995
10,192 4.96%, 8/15/96*.............. 10,172
7,425 5.01%, 8/15/96*.............. 7,411
5,000 5.03%, 8/15/96*.............. 4,990
2,777 5.04%, 8/15/96*.............. 2,772
1,067 4.95%, 8/22/96*.............. 1,064
10,000 4.98%, 8/22/96*.............. 9,971
10,000 5.02%, 8/22/96*.............. 9,971
2,000 5.48%, 8/22/96*.............. 1,993
2,500 5.50%, 8/22/96*.............. 2,492
4,744 4.98%, 8/29/96*.............. 4,725
10,000 5.05%, 8/29/96*.............. 9,961
2,023 5.04%, 9/5/96*............... 2,013
312 5.06%, 9/5/96*............... 310
4,572 5.07%, 9/5/96*............... 4,550
865 5.08%, 9/5/96*............... 861
15,000 5.10%, 9/5/96*............... 14,925
3,640 5.04%, 9/12/96*.............. 3,618
892 5.07%, 9/12/96*.............. 887
5,000 5.10%, 9/12/96*.............. 4,970
7,703 5.11%, 9/12/96*.............. 7,657
5,225 5.12%, 9/12/96*.............. 5,193
385 5.07%, 9/19/96*.............. 382
6,651 5.09%, 9/19/96*.............. 6,605
5,410 5.11%, 9/19/96*.............. 5,373
4,828 5.13%, 9/19/96*.............. $ 4,794
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. TREASURY BILLS, CONTINUED:
$ 5,936 5.14%, 9/19/96*.............. 5,895
5,000 5.04%, 10/3/96*.............. 4,956
1,227 5.09%, 10/3/96*.............. 1,216
3,162 5.11%, 10/3/96*.............. 3,134
3,077 5.11%, 10/10/96*............. 3,046
5,000 5.15%, 10/10/96*............. 4,950
5,000 5.05%, 10/17/96*............. 4,946
2,034 5.09%, 10/17/96*............. 2,012
7,639 5.11%, 10/17/96*............. 7,556
4,000 5.07%, 10/24/96*............. 3,953
5,000 5.12%, 10/24/96*............. 4,940
5,000 5.34%, 1/9/97*............... 4,881
5,000 5.24%, 1/23/97*.............. 4,873
5,000 4.91%, 2/6/97*............... 4,871
5,000 5.11%, 2/6/97*............... 4,866
5,000 5.16%, 4/3/97*............... 4,825
5,000 5.32%, 4/3/97*............... 4,819
--------
Total U.S. Treasury Bills 234,254
--------
U.S. TREASURY NOTES (12.8%):
10,000 7.25%, 8/31/96............... 10,013
10,000 7.25%, 8/31/96............... 10,011
10,000 6.63%, 3/31/97............... 10,072
5,000 6.50%, 4/30/97............... 5,031
--------
Total U.S. Treasury Notes 35,127
--------
U.S. TREASURY STRIPS (1.8%):
5,000 5.12%, 11/15/96*............. 4,925
--------
Total U.S. Treasury Strips 4,925
--------
Total $274,306 (a)
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $273,963.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Discount yield at date of purchase.
See notes to financial statements.
LOGO
39
LOGO 100% U.S. TREASURY OBLIGATIONS FUND
<PAGE> 202
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- --------- ----------------------------------------------------------------------------------- ---------
<C> <S> <C>
MUNICIPAL SECURITIES $(90.1%):
California (90.1%)
$ 5,025 Contra Costa County, Park Regency, Series 1992, 3.70%, 8/1/32, AMT*................ $ 5,025
2,500 Department of Water Resources, 3.35%, 11/29/96..................................... 2,500
3,300 Health Facilities Authority, Enloe Memorial Hospital, 3.00%, 1/1/16*............... 3,300
6,800 Health Facilities Authority, Memorial Health Services, 3.25%, 10/1/24*............. 6,800
6,600 Health Finance Authority, Catholic Healthcare West, 3.25%, 7/1/05*................. 6,600
900 Health Finance Authority, Catholic Healthcare West, 3.25%, 7/1/09*................. 900
6,900 Health Finance Authority, Kaiser Permanente Series, 3.25%, 5/1/28*................. 6,900
1,700 Health Finance Authority, Pooled Program, Series 1990 A, 3.40%, 9/1/20*............ 1,700
2,400 Health Finance Authority, Pooled Program, Series B, 3.40%, 10/1/10*................ 2,400
1,200 Health Finance Authority, Santa Barbara Cottage, 3.25%, 9/1/15*.................... 1,200
1,000 Health Finance Authority, Santa Barbara Cottage, Series B, 3.25%, 9/1/05*.......... 1,000
1,200 Kern County Public Facilities, Project Series B, 3.35%, 8/1/06*.................... 1,200
1,700 Lancaster Multi-Family Housing, Westwood Park Apartments, 3.40%, 12/1/07*.......... 1,700
6,800 Los Angeles County Metro Transportation Authority, Union Station Gateway Project, 6,800
3.25%, 7/2/25*...................................................................
4,700 Los Angeles County Transportation, 3.40%, 7/1/12*.................................. 4,700
700 Los Angeles Multi-Family Housing, Crescent Gardens, 3.40%, 7/1/14*................. 700
3,700 Los Angeles Multi-Family Housing, Series K, 3.25%, 7/1/10*......................... 3,700
7,500 Los Angeles Multi-Family Housing, Southpark Apartment Project, 3.55%, 12/1/05*..... 7,500
3,700 Metropolitan Water District of Southern California, 3.25%, 6/1/23.................. 3,700
2,800 Oxnard Housing Authority, Seawood Apartments Project, 3.65%, 12/1/20, AMT*......... 2,800
7,200 Pollution Control Finance Authority, Burney Forest 1988, 3.70%, 9/1/20, AMT*....... 7,200
1,900 Pollution Control Finance Authority, Delano Project 1989, 3.65%, 8/1/19, AMT*...... 1,900
2,310 Pollution Control Finance Authority, Delano Project 1990, 3.65%, 8/1/19, AMT*...... 2,310
3,000 Pollution Control Finance Authority, Delano Project 1991, 3.65%, 8/1/19, AMT*...... 3,000
2,600 Pollution Control Finance Authority, Honey Lake Power Project, Series 88, 3.65%,
9/1/18, AMT...................................................................... 2,600
1,700 Pollution Control Finance Authority, North County Recycling Center, Series B,
3.40%, 7/1/17*................................................................... 1,700
500 Pollution Control Finance Authority, Pacific Gas & Electric, Series 88C, 3.35%,
8/15/96.......................................................................... 500
</TABLE>
Continued
LOGO
40
LOGO CALIFORNIA TAX-FREE FUND
<PAGE> 203
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------
<C> <S> <C>
MUNICIPAL SECURITIES, CONTINUED:
California, continued:
$ 3,200 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.55%, $ 3,200
9/24/96..........................................................................
1,000 Pollution Control Finance Authority, Southern California Edison, Series 85D, 3.35%, 1,000
9/10/96..........................................................................
2,600 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.55%, 2,600
9/6/96...........................................................................
500 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.60%, 500
1/15/97..........................................................................
1,550 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.15%, 1,550
8/1/96...........................................................................
500 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.20%, 500
9/10/96..........................................................................
4,000 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.35%, 4,000
10/1/96..........................................................................
1,200 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.45%, 1,200
11/14/96.........................................................................
1,100 Pollution Control Finance Authority, Southern California Edison, Series 86A, 3.40%, 1,100
2/28/08*.........................................................................
1,400 Pollution Control Finance Authority, Southern California Edison, Series 86B, 3.40%, 1,400
2/28/08*.........................................................................
2,000 Pollution Control Finance Authority, Southern California Edison, Series 86C, 3.40%, 2,000
2/28/08..........................................................................
2,200 Pollution Control Finance Authority, Southern California Edison, Series 86D, 3.40%, 2,200
2/28/08..........................................................................
2,200 Sacramento County Multi-Family Housing Authority, River Oaks Apartments, 3.55%, 2,200
9/15/07*.........................................................................
5,000 San Bernardino County, TRANs, 4.50%, 6/30/97....................................... 5,027
500 San Jose, Multi-Family Housing, Somerset Park, 3.55%, 11/1/17, AMT*................ 500
2,900 SCAPPA, Revenue, 91 Refunding Series, 3.40%, 7/1/19*............................... 2,900
3,000 State of California, Tax Exempt Commercial Paper, 3.10%, 8/7/96.................... 3,000
1,000 State of California, Tax Exempt Commercial Paper, 3.35%, 11/14/96.................. 1,000
2,000 State of California, Tax Exempt Commercial Paper, 3.55%, 9/13/96................... 2,000
6,865 Statewide Community Development Authority, Series 95A, 3.45%, 5/15/25*............. 6,866
900 Vacaville Multi-Family Housing, The Sycamores Apartments, 3.40%, 4/1/05*........... 900
1,000 Walnut Creek Multi-Family Housing, Creekside Drive Apartments, 3.40%, 4/1/07*...... 1,000
--------
Total Municipal Securities 136,978
--------
</TABLE>
Continued
LOGO
41
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<PAGE> 204
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- --------- ----------------------------------------------------------------------------------- ---------
INVESTMENT COMPANIES $(7.6%):
<C> <S> <C>
5,214 Goldman Sachs California Tax-Exempt Money Market Fund.............................. $ 5,214
6,312 Provident California Money Market Fund............................................. 6,312
--------
Total Investment Companies 11,526
--------
Total $148,504 (a)
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $151,979.
<TABLE>
<C> <S>
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of credit or other credit and/or
liquidity agreements. The interest rate, which will change periodically, is based upon bank prime rates or an
index of market interest rates. The rate reflected on the Schedule of Portfolio Investments is the rate in
effect at July 31, 1996.
AMT Alternative Minimum Tax Paper
TRANs Tax Revenue Anticipation Notes
</TABLE>
See notes to financial statements.
LOGO
42
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<PAGE> 205
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- --------------------------------------------------------------------------------- ---------
<S> <C> <C> <C>
MUNICIPAL SECURITIES (90.4%):
Arizona (4.8%):
$1,200 Maricopa County, PCR, Southern California Edison,
Series D, 3.25%, 12/1/09....................................................... $ 1,200
500 Maricopa County, PCR, Southern California Edison,
Series D, 3.35%, 12/1/09....................................................... 500
400 Maricopa County, PCR, Southern California Edison,
Series 85F, 3.50%, 2/1/09...................................................... 400
-------
2,100
-------
California (22.7%):
700 Health Facilities Finance Authority Revenue,
Kaiser Permanente Series B, 3.24%, 5/1/28...................................... 700
1,000 Health Facilities Finance Authority Revenue,
Memorial Health Services, 3.24%, 10/1/24....................................... 1,000
100 Los Angeles County Metro Transportation Authority,
Union Station Gateway Project, 3.24%, 7/1/25................................... 100
200 Los Angeles MFH Crescent Gardens Apartments, 3.40%, 7/1/14....................... 200
1,700 Los Angeles MFH, Series K, 3.49%, 7/1/10......................................... 1,700
400 Los Angeles MFH, Southpark Apartment Project, 3.54%,
12/1/05........................................................................ 400
100 Pollution Control Finance Authority,
Burney Forest 1988, 3.70%, 9/1/20, AMT......................................... 100
1,390 Pollution Control Finance Authority,
Delano Project 1990, 3.65%, 8/1/19............................................. 1,390
200 Pollution Control Finance Authority Revenue,
Southern California Edison, Series 85C, 3.15%, 3/1/08.......................... 200
500 Pollution Control Finance Authority Revenue,
Southern California Edison, Series 85C, 3.20%, 3/1/08.......................... 500
1,200 Pollution Control Finance Authority Revenue,
Southern California Edison, Series 85D, 3.20%, 3/1/08.......................... 1,200
250 Pollution Control Finance Authority Revenue,
Southern California Edison, Series 88C, 3.40%, 10/1/20......................... 250
</TABLE>
Continued
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43
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<PAGE> 206
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- --------------------------------------------------------------------------------- -------
<S> <C> <C> <C>
MUNICIPAL SECURITIES, CONTINUED:
California, continued:
$1,000 San Bernardino County, TRANS, 4.50%, 6/30/97..................................... $ 1,005
1,000 State of California, Tax Exempt Commercial Paper, 3.50%, 10/24/96................ 1,000
300 Statewide Community Development Authority,
Series 95A, 3.45%, 5/15/25..................................................... 300
-------
10,045
-------
Florida (6.1%):
800 Broward County Housing Authority, Welleby Apartments
Project, 3.70%, 12/1/06........................................................ 800
1,900 Indian Trace Community Development, Water
Management Special Benefit, 3.54%, 11/1/99..................................... 1,900
-------
2,700
-------
Hawaii (4.1%):
1,800 Hawaii State Housing Finance, Affordable Rental
Housing, Series A, 3.54%, 7/1/27............................................... 1,800
-------
Illinois (4.0%):
300 Illinois Health Facilities Finance Authority, Methodist
Medical Center, Series 1985B, 3.65%, 10/1/14................................... 300
1,485 Illinois Housing Development Authority, MFH,
Revenue, 4.15%, 2/1/24......................................................... 1,485
-------
1,785
-------
Indiana (4.7%):
600 City of Sullivan, PCR, Hoosier 85, 3.65%, 9/24/96................................ 600
1,000 Jasper County, PCR Indiana Public Services, 3.65%, 11/1/16....................... 1,000
500 Jasper County, PCR, Indiana Public Services,
Series 1988C, 3.25%, 11/1/16................................................... 500
-------
2,100
-------
Kentucky (2.0%):
885 Clark County, PCR, East Kentucky Power Co-Op,
3.40%, 10/15/96................................................................ 885
-------
</TABLE>
Continued
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44
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<PAGE> 207
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- --------------------------------------------------------------------------------- -------
<S> <C> <C> <C>
MUNICIPAL SECURITIES, CONTINUED:
Louisiana (3.8%):
$1,700 Public Facilities
Authority for Kenner Hotel, Ltd., 3.65%, 12/1/15............................... $ 1,700
-------
Minnesota (0.2%):
100 Hubbard County Solid Waste Disposal Revenue,
Potlatch Corp. Project, Series 1, 3.70%, 8/1/14................................ 100
-------
Missouri (2.7%):
1,200 St. Charles, Sun River Village Apartments, 3.65%, 12/1/07........................ 1,200
-------
Nevada (4.3%):
1,900 Clark County Airport, Sub Lien Revenue, Series
1995A-1, 3.54%, 7/1/25......................................................... 1,900
-------
New Mexico (4.3%):
1,900 Albuquerque Airport Revenue, Sub Lien Revenue,
Series 1995, 3.54%, 7/1/14..................................................... 1,900
-------
New York (4.5%):
200 GO, Series 1993, 3.70%, 10/1/20.................................................. 200
200 GO, Series 1993, 3.70%, 10/1/22.................................................. 200
1,600 Triborough Bridge Authority, 3.40%, 1/1/24....................................... 1,600
-------
2,000
-------
Oregon (4.0%):
1,760 Port Morrow Revenue, Portland General Electric
Co., Series A, 3.70%, 10/1/13.................................................. 1,760
-------
Pennsylvania (0.5%):
200 Lehigh County Industrial Development Authority, PCR,
Allegheny Electric Co-Op, Inc., Series A, 3.40%, 12/1/15....................... 200
-------
Rhode Island (0.9%):
400 State Student Loan Authority, Student Loan Revenue,
Series 1995, 3.70%, 7/1/19..................................................... 400
-------
Texas (4.6%):
2,040 Amoco Gulf Coast Waste Disposal, 3.65%, 10/1/17.................................. 2,040
-------
</TABLE>
Continued
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45
LOGO TAX-FREE FUND
<PAGE> 208
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- --------------------------------------------------------------------------------- ---------
<S> <C> <C> <C>
MUNICIPAL SECURITIES, CONTINUED:
Utah (2.3%):
$1,000 Emery County, PCR, Pacific Corp. Project, 3.60%, 7/1/15.......................... $ 1,000
-------
Virginia (8.8%):
2,100 Alexandria Redevelopment & Housing Authority,
MFH Revenue, Crystal City Apartments
Project, 3.65%, 12/15/18....................................................... 2,100
100 Amelia County Industrial Development Authority,
Chambers Waste Power Project, Series 1991, 3.85%,
7/1/07......................................................................... 100
1,700 Charles County Industrial Development Authority,
Chamber Development of Virginia Inc. Project, 3.85%,
10/1/04........................................................................ 1,700
-------
3,900
-------
Wyoming (1.1%):
500 Sweetwater County, PCR, Pacific Corp. Project,
Series 1990A, 3.49%, 7/1/15.................................................... 500
-------
Total Municipal Securities 40,015
-------
INVESTMENT COMPANIES (9.0%):
1,851 Goldman Sachs Tax Exempt National Fund........................................... 1,851
2,128 SEI Institutional Tax Exempt Money Market Fund................................... 2,128
-------
Total Investment Companies 3,979
-------
Total $43,994(a)
=======
</TABLE>
- ------------
Percentages indicated are based on total net assets of $44,257.
(a) Cost for federal income tax and financial reporting purposes are the same.
<TABLE>
<S> <C>
AMT Alternative Minimum Tax Paper
GO General Obligation
MFH Multi-Family Housing
PCR Pollution Control Revenue
TRANs Tax Revenue Anticipation Notes
</TABLE>
See notes to financial statements.
LOGO
46
LOGO TAX-FREE FUND
<PAGE> 209
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
ASSET BACKED SECURITIES (17.4%):
$ 374 Advanta Mortgage Loan Trust,
7.90%, 3/25/07............... $ 375
1,000 Carco Auto Loan Master Trust,
Series 1994-2, 7.88%,
8/15/97...................... 1,018
860 Carco Auto Loan Master Trust,
Series 1991-3,
7.88%,3/15/98................ 869
1,125 Contimortgage Home Equity Loan
Trust, 8.09%, 9/15/09........ 1,144
1,000 Contimortgage Home Equity Loan
Trust, 8.05%, 7/15/12........ 1,016
1,200 EQCC Home Equity Loan Trust,
7.80%, 12/15/10.............. 1,196
1,250 Green Tree Financial Corp.,
6.80%, 1/15/26............... 1,221
500 MBNA Credit Card, 7.25%,
6/15/99...................... 502
738 Mid State Trust 4, 8.33%,
4/1/30....................... 765
531 Premier Auto Receivable Trust,
4.90%, 10/15/98.............. 525
1,000 Standard Credit Card Master
Trust, 4.65%, 3/7/99......... 987
600 UCFC Home Equity Loan, 7.78%,
12/10/06..................... 608
496 UFSB Grantor Trust, 5.08%,
5/15/00...................... 489
-------
Total Asset Backed Securities 10,715
-------
COLLATERALIZED MORTGAGE OBLIGATIONS (14.4%):
Bear Stearns Secured Investors:
500 7.50%, 1/20/99................. 504
Country Wide Mortgage:
1,021 6.75%, 3/25/08................. 995
Federal Home Loan Mortgage Corp.:
1,500 6.25%, 1/15/24................. 1,347
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS, CONTINUED:
Federal National Mortgage Assoc.:
$ 2,000 6.20%, 9/25/02................. $ 1,928
1,500 6.50%, 3/25/13................. 1,421
GE Capital Mortgage Service, Inc.:
1,850 6.50%, 1/25/24................. 1,740
Residential Funding Mortgage:
950 6.75%, 11/25/07................ 910
-------
Total Collateralized Mortgage Obligations 8,845
-------
CORPORATE BONDS (24.7%):
Automotive (3.9%):
2,290 General Motors Acceptance
Corp., 8.00%, 10/1/99........ 2,364
-------
Banking (5.2%):
1,785 Bank of America, 6.00%,
7/15/97...................... 1,779
600 Citicorp, 6.75%, 8/15/05....... 572
900 U.S. Bancorp, 6.75%,
10/15/05..................... 858
-------
3,209
-------
Computer Hardware (1.4%):
800 IBM Corp., 8.38%, 11/1/19...... 861
-------
Financial Services (1.0%):
650 Golden West Financial, 6.70%,
7/1/02....................... 634
-------
Governments (Foreign) (2.7%):
825 Hydro-Quebec, 8.05, 7/7/24..... 869
785 Norske Hydro, 7.75, 6/15/23.... 786
-------
1,655
-------
Industrial Goods & Services (1.3%):
860 Caterpillar Tractor Co., 6.00%,
5/1/07....................... 772
-------
Retail Stores (5.8%):
980 J.C. Penney Inc., 6.00%,
5/1/06....................... 883
900 Sears Roebuck Co., 9.25%,
8/1/97....................... 925
</TABLE>
Continued
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47
LOGO BOND FUND
<PAGE> 210
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
CORPORATE BONDS, CONTINUED:
Retail Stores, continued:
$ 1,850 Wal-Mart Stores, 6.38,
3/1/03....................... $ 1,785
-------
3,593
-------
Telecommunications (3.4%):
1,500 Bell Atlantic-Maryland, 8.00%,
10/15/29..................... 1,581
500 New England Telephone &
Telegraph, 7.88%, 11/15/29... 524
-------
2,105
-------
Total Corporate Bonds 15,193
-------
U.S. GOVERNMENT AGENCIES (19.6%):
Federal Home Loan Bank:
300 8.38%, 10/25/99................ 315
Federal National Mortgage Assoc.:
1,000 9.05%, 4/10/00................. 1,074
1,750 5.45%, 10/10/03................ 1,610
1,625 6.50%, 3/1/24, Pool # 276510... 1,526
1,659 8.50%, 5/1/25, Pool # 303300... 1,696
1,018 6.50%, 5/1/26, Pool # 342718... 950
Government National Mortgage Association:
1,836 6.50%, 6/15/23, Pool #
354601....................... 1,717
616 6.50%, 12/15/23, Pool #
369270....................... 574
823 7.50%, 1/15/24, Pool #
352844....................... 811
157 7.50%, 1/15/24, Pool #
360285....................... 154
34 7.50%, 1/15/24, Pool #
362734....................... 34
299 7.50%, 1/15/24, Pool #
368677....................... 294
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Government National Mortgage Assoc., continued:
$ 371 7.50%, 2/15/24, Pool #
353297....................... $ 366
70 7.50%, 2/15/24, Pool #
336245....................... 69
906 7.00%, 4/15/24, Pool #
392055....................... 869
-------
Total U.S. Government Agencies 12,059
-------
U.S. TREASURY BONDS (16.4%):
1,500 10.38%, 11/15/12............... 1,894
2,500 7.25%, 5/15/16................. 2,546
2,360 8.75%, 8/15/20................. 2,804
2,800 7.13%, 2/15/23................. 2,813
-------
Total U.S. Treasury Bonds 10,057
-------
U.S. TREASURY NOTES (3.1%):
1,000 8.13%, 2/15/98................. 1,029
430 9.00%, 5/15/98................. 450
420 8.50%, 11/15/00................ 451
-------
Total U.S. Treasury Notes 1,930
-------
Total Investments, at value 58,799
-------
REPURCHASE AGREEMENTS (3.6%):
2,237 C.S. First Boston Corp., 5.62%,
8/1/96 (Collateralized by
2,046 U.S. Treasury Bonds,
8.75%, 11/15/08, market
value--$2,287)............... 2,237
-------
Total Repurchase Agreements 2,237
-------
Total (Cost--$61,591)(a) $61,036
=======
</TABLE>
- ------------
Percentages indicated are based on net assets of $61,531.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation............................................ $ 816
Unrealized depreciation............................................ (1,371)
------
Net unrealized depreciation........................................ $ (555)
======
</TABLE>
See notes to financial statements.
LOGO
48
LOGO BOND FUND
<PAGE> 211
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES (95.7%):
Federal Home Loan Bank:
$ 240 9.25%, 11/25/98................ $ 254
200 9.30%, 1/25/99................. 212
50 5.43%, 2/25/99................. 49
660 6.31%, 4/6/99.................. 656
330 7.91%, 11/7/01................. 346
Federal Home Loan Mortgage Corp.:
315 5.88%, 3/22/00................. 307
240 6.22%, 3/24/03................. 231
Federal National Mortgage Assoc.:
370 8.20%, 3/10/98................. 380
255 4.88%, 10/15/98................ 247
215 9.55%, 3/10/99................. 230
500 8.55%, 8/30/99................. 527
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Federal National Mortgage Assoc., continued:
$ 320 9.05%, 4/10/00................. $ 344
300 8.25%, 12/18/00................ 317
200 6.16%, 4/3/01.................. 195
-------
Total U.S. Government Agencies 4,295
-------
Total Investments, at value 4,295
-------
REPURCHASE AGREEMENTS (2.7%):
121 C.S. First Boston Corp., 5.62%,
8/1/96, (Collateralized by 99
U.S. Treasury Bonds, 10.38%
11/15/12, market
value--$126)................. 121
-------
Total Repurchase Agreements 121
-------
Total (Cost--$4,455)(a) $ 4,416
=======
</TABLE>
- ------------
Percentages indicated are based on net assets of $4,490.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation............................................. $ 47
Unrealized depreciation............................................. (86)
-----
Net unrealized depreciation......................................... $ (39)
=====
</TABLE>
See notes to financial statements
LOGO
49
LOGO GOVERNMENT BOND FUND
<PAGE> 212
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS (97.8%):
Aerospace (2.0%):
153,100 B.F. Goodrich Co........... $ 5,550
--------
Banks (12.7%):
213,650 Banc One Corp.............. 7,398
82,200 BankAmerica Corp........... 6,555
122,800 Fleet Financial Group,
Inc...................... 4,973
77,900 J. P. Morgan & Co.......... 6,699
82,700 National City Corp......... 2,864
95,050 U.S. Bancorp............... 3,256
64,700 Wachovia Corp.............. 2,863
--------
34,608
--------
Beverages (2.0%):
72,000 Anheuser-Busch Co.......... 5,382
--------
Business Equipment & Services (0.6%):
34,600 Pitney Bowes, Inc.......... 1,678
--------
Chemicals-Petroleum & Inorganic (2.1%):
77,200 Dow Chemical Co............ 5,742
--------
Chemicals-Specialty (1.8%):
55,200 Betz Labs, Inc............. 2,505
83,500 Witco Corp................. 2,421
--------
4,926
--------
Commercial Goods & Services (1.2%):
87,000 National Services
Industries, Inc.......... 3,317
--------
Consumer Goods & Services (1.2%):
36,600 Clorox Co.................. 3,326
--------
Cosmetics & Toiletries (0.9%):
56,300 International Flavors &
Fragrances, Inc.......... 2,407
--------
Electrical Equipment (1.0%):
70,800 Thomas & Betts Corp........ 2,584
--------
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Environmental Services (0.3%):
37,700 Browning-Ferris Industries,
Inc...................... $ 844
--------
Financial Services (3.2%):
105,100 American General Corp...... 3,652
33,800 Beneficial Corp............ 1,825
106,700 Federal National Mortgage
Assoc.................... 3,388
--------
8,865
--------
Food & Related (2.6%):
94,300 General Mills, Inc......... 5,116
63,150 H.J. Heinz Co.............. 2,092
--------
7,208
--------
Forest & Paper Products (4.8%):
43,700 Georgia-Pacific Corp....... 3,267
92,470 International Paper Co..... 3,502
154,700 Weyerhaeuser Co............ 6,459
--------
13,228
--------
Health Care (5.9%):
77,000 Bristol-Myers Squibb Co.... 6,670
102,000 Pharmacia & Upjohn Co...... 4,208
48,800 SmithKline Beecham PLC
ADR...................... 2,623
44,100 Warner-Lambert Co.......... 2,403
--------
15,904
--------
Insurance-Life (0.8%):
45,125 Jefferson Pilot Corp....... 2,369
--------
Insurance-Multiline (1.8%):
53,600 Marsh & McLennan Cos.,
Inc...................... 4,857
--------
</TABLE>
Continued
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50
LOGO INCOME EQUITY FUND
<PAGE> 213
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Insurance-Property & Casualty (3.1%):
42,500 Lincoln National Corp...... $ 1,812
78,300 SAFECO Corp................ 2,696
70,800 St. Paul Cos., Inc......... 3,664
--------
8,172
--------
Machinery & Equipment (1.2%):
80,900 Cooper Industries, Inc..... 3,185
--------
Medical Equipment & Supplies (0.6%):
39,000 Baxter International,
Inc...................... 1,623
--------
Motor Vehicle Parts (0.9%):
58,500 Genuine Parts Co........... 2,479
--------
Motor Vehicles (0.9%):
86,600 Chrysler Corp.............. 2,457
--------
Multiple Industry (3.1%):
43,300 General Electric Co........ 3,567
76,000 Minnesota Mining &
Manufacturing Co......... 4,940
--------
8,507
Petroleum-Domestic (4.5%):
73,200 Atlantic Richfield Co...... 8,491
83,400 Dresser Industries Inc..... 2,252
41,700 Phillips Petroleum Co...... 1,647
--------
12,390
--------
Petroleum-Internationals (7.3%):
95,300 Amoco Corp................. 6,373
58,300 Chevron Corp............... 3,374
52,300 Exxon Corp................. 4,302
68,500 Texaco, Inc................ 5,822
--------
19,871
--------
Publishing (0.9%):
61,400 McGraw-Hill, Inc........... 2,395
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
COMMON STOCKS, CONTINUED:
Railroad (0.5%):
20,500 Union Pacific Corp......... $ 1,404
--------
Retail-General Merchandise (4.1%):
173,100 J.C. Penney, Inc........... 8,612
59,000 May Department Stores
Co....................... 2,647
--------
11,259
--------
Telecommunications (7.2%):
25,600 Ameritech Corp............. 1,421
67,300 Bell Atlantic Corp......... 3,979
63,400 BellSouth Corp............. 2,599
118,500 GTE Corp................... 4,888
91,300 Nynex Corp................. 4,097
86,170 U.S. West, Inc............. 2,618
--------
19,602
--------
Tobacco (6.5%):
94,500 American Brands, Inc....... 4,300
85,400 Phillip Morris Cos.,
Inc...................... 8,935
139,400 UST, Inc................... 4,635
--------
17,870
--------
Utilities-Electric (8.3%):
123,400 Baltimore Gas & Electric
Co....................... 3,178
115,400 Central & South West
Corp..................... 3,087
36,600 Dominion Resources......... 1,377
72,500 Florida Progress Corp...... 2,429
70,000 PacifiCorp................. 1,461
118,900 Teco Energy, Inc........... 2,764
102,400 Texas Utilities Co......... 4,301
147,200 Wisconsin Energy Corp...... 3,919
--------
22,516
--------
</TABLE>
Continued
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51
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<PAGE> 214
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Gas & Pipeline (3.8%):
128,200 Consolidated Natural Gas
Co....................... $ 6,458
44,100 Nicor, Inc................. 1,251
51,500 Tenneco, Inc............... 2,537
--------
10,246
--------
Total Common Stocks 266,771
--------
Total Investments, at value 266,771
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
REPURCHASE AGREEMENTS (1.8%):
$4,857,527 C. S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 3,888
U.S. Treasury Bonds,
10.38%, 11/15/12, market
value--$4,961)........... $ 4,858
--------
Total Repurchase Agreements 4,858
--------
Total (Cost--$237,280)(a) $271,629
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $272,803.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of
approximately $64 (amount in thousands). Cost for federal income tax
purposes differs from value by net unrealized appreciation of securities as
follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $ 38,217
Unrealized depreciation.......................................... (3,932)
--------
Net unrealized appreciation...................................... $ 34,285
=======
</TABLE>
ADR -- American Depository Receipt
PLC -- Public Limited Company
See notes to financial statements.
LOGO
52
LOGO INCOME EQUITY FUND
<PAGE> 215
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
ASSET BACKED SECURITIES (4.0%)
$ 205,000 Carco Auto Loan Master
Trust, Series 1994-2,
7.88%, 3/15/98........... $ 207
190,000 Carco Auto Loan Master
Trust, Series 1991-3,
7.88%, 8/15/97........... 194
200,000 Contimortgage Home Equity
Loan Trust, 8.09%,
9/15/09.................. 203
200,000 Contimortgage Home Equity
Loan Trust, 7.44%,
9/15/12.................. 197
250,000 Green Tree Financial Corp.,
6.80%, 1/15/26........... 244
400,000 Standard Credit Card
MasterTrust, 4.65%,
3/7/99................... 395
165,324 UFSB Grantor Trust, 5.08%,
5/15/00.................. 163
--------
Total Asset Backed Securities 1,603
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.3%):
86,516 Country Wide Mortgage,
6.75%, 3/25/08........... 84
500,000 Federal Home Loan Mortgage
Corp., 6.25%, 1/15/24.... 449
250,000 GE Capital Mortgage
Service, Inc., 1994-1,
6.50%, 1/25/24........... 235
175,000 Residential Funding
Mortgage, 6.75%,
11/25/07................. 168
--------
Total Collateralized Mortgage Obligations
936
--------
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS (52.6%):
Aerospace (0.5%):
5,800 B.F. Goodrich Co........... $ 210
--------
Air Transportation (0.4%):
1,300 Federal Express Corp.
(b)...................... 101
2,200 Southwest Airlines Co...... 55
--------
156
--------
Banks (3.9%):
2,970 Banc One Corp.............. 103
4,800 BankAmerica Corp........... 383
3,300 Chase Manhattan Corp....... 229
8,000 Fleet Financial Group,
Inc...................... 324
1,300 J.P. Morgan & Co........... 112
3,300 National City Corp......... 114
6,000 Norwest Corp............... 213
2,400 Wachovia Corp.............. 106
--------
1,584
--------
Beverages (2.5%):
6,200 Anheuser-Busch Co.......... 463
5,600 Coca-Cola Co............... 263
8,200 PepsiCo, Inc............... 259
--------
985
--------
Building Materials (0.4%):
5,600 Masco Corp................. 156
--------
Business Equipment & Services (0.6%):
1,900 Dun & Bradstreet Corp...... 109
2,800 Pitney Bowes, Inc.......... 136
--------
245
--------
</TABLE>
Continued
LOGO
53
LOGO BALANCED FUND
<PAGE> 216
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Chemicals--Petroleum & Inorganic (0.9%):
1,400 Dow Chemical Co............ $ 104
1,400 duPont, (E.I.) de Nemours
Co....................... 113
5,000 Monsanto Corp.............. 156
--------
373
--------
Chemicals--Specialty (0.3%):
3,000 Betz Labs, Inc............. 136
--------
Commercial Goods & Services (0.3%):
3,000 National Services
Industries, Inc.......... 114
--------
Computers--Main & Mini (0.5%):
2,000 International Business
Machines Corp............ 216
--------
Computers (0.3%):
2,800 Seagate Technology, Inc.
(b)...................... 136
--------
Computer Software (1.0%):
1,900 Electronic Data Systems
Corp. (b)................ 101
1,300 Microsoft Corp. (b)........ 153
2,400 Shared Medical Systems
Corp..................... 132
--------
386
--------
Construction Materials (0.3%):
3,700 Fleetwood Enterprises,
Inc...................... 112
--------
Cosmetics & Toiletries (0.8%):
2,900 Colgate-Palmolive Co....... 228
2,600 International Flavors &
Fragrances, Inc.......... 111
--------
339
--------
Defense (0.7%):
5,400 Raytheon Co................ 262
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
COMMON STOCKS, CONTINUED:
Electrical Equipment (4.5%):
7,600 AMP, Inc................... $ 294
2,600 Duracell International,
Inc...................... 117
2,500 Emerson Electric Co........ 211
7,700 General Electric Co........ 634
5,600 Intel Corp................. 421
3,300 Thomas & Betts Corp........ 120
--------
1,797
--------
Electronics (0.6%):
4,800 Motorola, Inc.............. 259
--------
Electronic Instruments (0.4%):
4,100 Texas Instruments, Inc..... 177
--------
Environmental Services (0.3%):
6,000 Browning-Ferris Industries,
Inc...................... 134
--------
Financial Services (1.2%):
6,600 American General Corp...... 230
7,600 Federal National Mortgage
Assoc.................... 241
--------
471
--------
Food & Related (1.6%):
3,700 General Mills, Inc......... 201
6,450 H. J. Heinz Co............. 213
1,500 Hershey Foods Corp......... 123
1,700 Ralston-Purina Co.......... 107
--------
644
--------
Forest & Paper Products (1.4%):
2,700 Georgia Pacific Corp....... 202
2,200 International Paper Co..... 83
</TABLE>
Continued
LOGO
54
LOGO BALANCED FUND
<PAGE> 217
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Forest & Paper Products, continued:
1,500 Kimberly Clark Corp........ $ 114
4,000 Weyerhaeuser Co............ 167
--------
566
--------
Health Care--General (1.1%):
2,500 Bristol-Myers Squibb Co.... 217
5,000 Johnson & Johnson.......... 239
--------
456
--------
Hospital Supply & Management (0.5%):
4,100 Columbia/HCA Healthcare
Corp..................... 210
--------
Household--General Products (0.4%):
6,100 Rubbermaid, Inc............ 175
--------
Insurance--Life (0.3%):
2,250 Jefferson Pilot Corp....... 118
--------
Insurance--Multiline (0.9%):
1,761 Allstate Corp.............. 79
3,300 Marsh & McLennan
Cos., Inc................ 299
--------
378
--------
Insurance--Property & Casualty (1.0%):
1,500 General Re Corp............ 220
2,100 Hartford Steam Boiler
Inspection & Insurance
Co....................... 92
1,900 St. Paul Cos., Inc......... 98
--------
410
--------
Machinery & Equipment (0.5%):
4,300 Snap-On, Inc............... 191
--------
Manufacturing (0.7%):
500 Imation Corp. (b).......... 11
2,700 Ingersoll-Rand Co.......... 115
2,500 Service Corp.
International............ 138
--------
264
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
COMMON STOCKS, CONTINUED:
Medical Equipment & Supplies (0.5%):
5,000 Baxter International,
Inc...................... $ 208
--------
Motor Vehicle Parts (0.3%):
2,400 Genuine Parts Co........... 102
--------
Motor Vehicles (0.5%):
5,900 Ford Motor Co.............. 192
--------
Multiple Industry (1.8%):
10,800 Corning, Inc............... 398
5,000 Minnesota Mining &
Manufacturing Co......... 325
--------
723
--------
Petroleum--Domestic (1.2%):
1,900 Atlantic Richfield Co...... 220
6,700 Phillips Petroleum Co...... 265
--------
485
--------
Petroleum--Internationals (3.2%):
4,600 Amoco Corp................. 308
5,600 Chevron Corp............... 324
2,700 Exxon Corp................. 222
2,000 Mobil Corp................. 221
2,400 Texaco, Inc................ 204
--------
1,279
--------
Petroleum--Services (0.9%):
9,300 Baker Hughes, Inc.......... 273
2,000 Halliburton Co............. 104
--------
377
--------
</TABLE>
Continued
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55
LOGO BALANCED FUND
<PAGE> 218
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Pharmaceuticals (2.3%):
2,600 Abbott Laboratories........ $ 114
3,800 Merck & Co., Inc........... 244
3,300 Pfizer, Inc................ 231
1,800 Schering-Plough Corp....... 99
4,600 Warner Lambert Co.......... 251
--------
939
--------
Photographic Equipment (0.3%):
1,600 Eastman Kodak Co........... 120
--------
Publishing (0.6%):
3,500 Gannett Co., Inc........... 230
--------
Railroad (1.0%):
3,100 Burlington Northern Santa
Fe....................... 245
2,100 Union Pacific Corp......... 144
--------
389
--------
Restaurants (0.2%):
6,800 Brinker International,
Inc. (b)................. 89
--------
Retail--General Merchandise (1.3%):
4,400 J.C. Penney, Inc........... 219
2,800 Sears Roebuck & Co......... 115
6,900 Wal-Mart Stores, Inc....... 165
--------
499
--------
Retail--Specialty Stores (0.5%):
5,500 Albany International, Class
A........................ 102
2,200 Home Depot, Inc............ 111
--------
213
--------
Tobacco (1.2%):
2,500 Phillip Morris Cos.,
Inc...................... 262
6,200 UST, Inc................... 206
--------
468
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
COMMON STOCKS, CONTINUED:
Tools (0.3%):
3,800 Stanley Works.............. $ 108
--------
Toys (0.3%):
4,250 Mattel, Inc................ 105
--------
Utilities--Electric (2.5%):
4,600 FPL Group, Inc............. 209
9,500 PacifiCorp................. 198
9,000 Potomac Electric Power
Co. (b).................. 217
6,500 Public Service Enterprise
Group, Inc............... 170
5,100 Texas Utilities Co......... 214
--------
1,008
--------
Utilities--Gas & Pipeline (0.9%):
2,600 Consolidated Natural Gas
Co....................... 131
4,100 Pacific Enterprises........ 121
1,900 Tenneco, Inc............... 94
--------
346
--------
Utilities--Telephone (4.0%):
11,400 AirTouch Communications,
Inc. (b)................. 313
3,800 Ameritech Corp............. 211
4,500 AT&T Corp.................. 235
5,000 BellSouth Corp............. 205
2,100 DSC Communications
Corp. (b)................ 63
5,700 GTE Corp................... 235
400 Lucent Technologies,
Inc...................... 15
3,500 MCI Telecommunications
Corp..................... 86
</TABLE>
Continued
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56
LOGO BALANCED FUND
<PAGE> 219
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Telephone, continued:
4,000 Network Equipment
Technologies, Inc. (b)... $ 53
6,100 U.S. West, Inc............. 185
--------
1,601
--------
Total Common Stocks 21,141
--------
CORPORATE BONDS (6.8%):
Automotive (1.6%):
$ 300,000 Ford Capital, 9.38%,
1/1/98................... 312
305,000 General Motors Acceptance
Corp., 8.00%, 10/1/99.... 315
--------
627
--------
Banking (1.1%):
215,000 Bank of America, 6.00%,
7/15/97.................. 214
100,000 Citicorp, 6.75%, 8/15/05... 96
150,000 U.S. Bancorp, 6.75%,
10/15/05................. 143
--------
453
--------
Beverages (0.2%):
95,000 Bass America, Inc., 6.75%,
8/1/99................... 95
--------
Computer Hardware (0.5%):
200,000 IBM Corp., 8.38%,11/1/19... 215
--------
Financial Services (0.2%):
100,000 Golden West Financial
Corp., 6.70%, 7/1/02..... 97
--------
Governments (Foreign) (0.8%):
$ 100,000 Hydro-Quebec, 8.05%,
7/7/24................... 106
215,000 Norske Hydro, 7.75%,
6/15/23.................. 215
--------
321
--------
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
CORPORATE BONDS, CONTINUED:
Industrial Goods & Services (0.5%):
205,000 Caterpillar Tractor Co.,
6.00%, 5/1/07............ $ 184
--------
Retail Stores (1.1%):
100,000 J.C. Penney, Inc., 6.00%,
5/1/06................... 90
150,000 Sears Roebuck Co., 9.25%,
8/1/97................... 154
200,000 Wal-Mart Stores, Inc.,
6.38%, 3/1/03............ 193
--------
437
--------
Telecommunications (0.8%):
175,000 Bell Atlantic Maryland,
8.00%,10/15/29........... 184
125,000 New England Telephone &
Telegraph Co., 7.88%,
11/15/29................. 131
--------
315
--------
Total Corporate Bonds 2,744
--------
U.S. GOVERNMENT AGENCIES (10.2%):
Federal National Mortgage Assoc.:
1,350,000 5.45%, 10/10/03............ 1,242
316,003 6.50%, 3/1/24, Pool
#276510.................. 297
999,999 8.00%, 7/1/26.............. 1,006
</TABLE>
Continued
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57
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<PAGE> 220
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Government National Mortgage Assoc.
$ 95,076 6.50%, 2/15/24, Pool
#388599.................. $ 88
484,019 7.50%, 5/15/24, Pool
#386494.................. 476
1,016,375 7.00%, 2/15/26............. 972
--------
Total U.S. Government Agencies 4,081
--------
U.S. TREASURY BONDS (6.3%):
1,150,000 7.25%, 5/15/16............. 1,171
205,000 8.75%, 8/15/20............. 244
1,125,000 7.13%, 2/15/23............. 1,130
--------
Total U.S. Treasury Bonds 2,545
--------
U.S. TREASURY NOTES (8.0%):
200,000 8.13%, 2/15/98............. 206
1,000,000 8.25%, 7/15/98............. 1,037
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
U.S. TREASURY NOTES, CONTINUED:
$1,000,000 5.50%, 4/15/00............. $ 969
500,000 8.50%, 11/15/00............ 536
500,000 5.88%, 2/15/04............. 475
--------
Total U.S. Treasury Notes 3,223
--------
Total Investments, at value 36,273
--------
REPURCHASE AGREEMENTS (9.4%):
3,786,776 C.S. First Boston Corp.,
Repurchase Agreement,
5.62%, 8/1/96
(Collateralized by 3,033
U.S. Treasury Bonds,
10.38%, 11/15/12 , market
value $3,870)............ 3,787
--------
Total Repurchase Agreements 3,787
--------
Total (Cost--$35,946)(a) $ 40,060
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $40,196.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of
approximately $14 (amount in thousands). Cost for federal income tax
purposes differs from value by net unrealized appreciation of securities as
follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $ 4,702
Unrealized depreciation.......................................... (602)
--------
Net unrealized appreciation...................................... $ 4,100
=======
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements.
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58
LOGO BALANCED FUND
<PAGE> 221
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS (98.2%):
Aerospace (2.0%):
24,565 B.F. Goodrich................ $ 890
--------
Banks (8.4%):
10,365 BankAmerica Corp............. 827
3,280 Barnett Banks, Inc........... 201
16,030 Chase Manhattan.............. 1,114
16,830 Fleet Financial Group,
Inc........................ 681
3,825 Wells Fargo & Co............. 891
--------
3,714
--------
Beverages (5.4%):
8,985 Anheuser-Busch Co............ 672
19,215 Coca-Cola Co................. 901
26,390 PepsiCo, Inc................. 834
--------
2,407
--------
Business Equipment & Services (0.3%):
9,080 OfficeMax, Inc. (b).......... 120
--------
Capital Equipment (0.5%):
3,240 Illinois Tool Works.......... 209
--------
Chemicals--Petroleum & Inorganic (0.4%):
3,750 Hercules, Inc................ 188
--------
Computers--Main & Mini (4.0%):
9,610 Ceridan Corp. (b)............ 418
14,660 Hewlett Packard Co........... 645
4,375 International Business
Machines................... 472
4,685 Silicon Graphics, Inc. (b)... 110
2,140 Sun Microsystems, Inc. (b)... 117
--------
1,762
--------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Computer Software (10.6%):
2,885 Automatic Data Processing,
Inc........................ $ 114
17,005 Cisco Systems (b)............ 880
11,888 Computer Associates
International, Inc......... 605
3,355 Computer Sciences (b)........ 228
17,770 Electronic Data Systems
Corp. (b).................. 940
11,588 First Data Corp.............. 899
3,705 Microsoft Corp. (b).......... 437
10,045 Oracle Systems Corp. (b)..... 393
5,350 Parametric Technology Corp.
(b)........................ 223
--------
4,719
--------
Computers (2.0%):
5,840 Digital Equipment (b)........ 207
14,390 Seagate Technology (b)....... 696
--------
903
--------
Consumer Goods & Services (1.6%):
21,715 Xilinx, Inc. (b)............. 703
--------
Cosmetics & Toiletries (4.1%):
4,720 Avon Products................ 208
5,485 Colgate-Palmolive Co......... 430
15,360 Gillette Co.................. 977
5,110 Ingersoll-Rand Co............ 218
--------
1,833
--------
Durable Goods (0.6%):
15,870 Coleman, Inc. (b)............ 282
--------
Electronics (0.6%):
5,170 Motorola, Inc................ 279
--------
</TABLE>
Continued
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59
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<PAGE> 222
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Electrical Equipment (6.5%):
5,480 AMP, Inc..................... $ 212
10,640 Duracell International,
Inc........................ 480
11,860 General Electric Co.......... 977
13,275 Intel Corp................... 997
14,810 National Semiconductor
Corp. (b).................. 209
--------
2,875
--------
Electronic Components (0.2%):
3,245 Applied Materials, Inc.
(b)........................ 77
--------
Electronic Instruments (0.4%):
4,220 Texas Instruments, Inc....... 183
--------
Entertainment (0.8%):
7,080 Circus Circus Enterprises,
Inc. (b)................... 217
6,715 Harrah's Entertainment (b)... 148
--------
365
--------
Financial Services (7.2%):
14,835 American Express Co.......... 649
5,745 Federal Home Loan Mortgage
Corp....................... 484
30,635 Federal National Mortgage
Assoc...................... 973
1,405 Household International,
Inc........................ 105
10,926 Mutual Risk Management
Ltd........................ 307
15,935 Travelers Corp. (b).......... 673
--------
3,191
--------
Food & Related (1.6%):
2,550 General Mills, Inc........... 138
2,950 Hershey Foods................ 242
5,397 Ralston-Purina Co............ 339
--------
719
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
COMMON STOCKS, CONTINUED:
Forest & Paper Products (1.1%):
5,605 Albany International Corp.,
Class A.................... $ 104
1,220 Georgia Pacific Corp......... 91
2,340 International Paper Co....... 89
5,280 Weyerhaeuser Co.............. 220
--------
504
--------
Healthcare--Drugs (8.1%):
4,962 Abbott Laboratories.......... 218
3,820 American Home Products
Corp....................... 217
8,501 Amgen, Inc. (b).............. 464
7,240 Merck & Co................... 465
9,090 Pfizer, Inc.................. 635
15,850 Pharmacia & Upjohn Co........ 654
11,240 Schering Plough Corp......... 620
6,270 Warner-Lambert Co............ 342
--------
3,615
--------
Healthcare--General (2.0%):
18,230 Johnson & Johnson............ 870
--------
Hospital Supply & Management (0.5%):
4,081 Columbia/HCA Healthcare
Corp....................... 209
--------
Hotel Management & Related Services (0.4%):
7,392 Promus Hotel Corp. (b)....... 202
--------
Household-General Products (0.5%):
2,270 Proctor & Gamble Co.......... 203
--------
Insurance--Multiline (0.5%):
2,547 Allstate Corp................ 114
1,400 Marsh & McLennan Cos.,
Inc........................ 127
--------
241
--------
</TABLE>
Continued
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60
LOGO GROWTH FUND
<PAGE> 223
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Insurance--Property & Casualty (2.3%):
5,955 American International Group,
Inc........................ $ 560
1,560 General Re Corp.............. 229
2,985 MBIA, Inc.................... 226
--------
1,015
--------
Leisure Time Industry (2.2%):
17,405 The Walt Disney Co........... 968
--------
Machinery & Equipment (0.4%):
5,275 Deere & Co................... 189
--------
Manufacturing (1.1%):
8,480 Service Corp.
International.............. 468
--------
Medical Equipment & Supplies (1.3%):
6,469 Chiron Corp. (b)............. 569
--------
Petroleum--Internationals (2.1%):
7,515 Amoco Corp................... 503
5,305 Exxon Corp................... 436
--------
939
--------
Petroleum--Services (1.3%):
4,835 Baker Hughes, Inc............ 142
3,655 Dresser Industries Inc....... 99
4,520 Halliburton Co............... 236
1,215 Schlumberger Ltd............. 97
--------
574
--------
Pharmaceuticals (2.0%):
17,370 ALZA Corp., Class A (b)...... 430
4,900 Astra AB, Class A (b)........ 207
4,500 SmithKline Beecham
PLC-ADR.................... 242
--------
879
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
COMMON STOCKS, CONTINUED:
Publishing (2.0%):
13,535 Gannett Co., Inc............. $ 888
--------
Restaurants (2.5%):
23,720 McDonald's Corp.............. 1,100
--------
Retail--Food Stores (0.8%):
9,425 Safeway, Inc. (b)............ 339
--------
Retail--General Merchandise (1.5%):
11,480 Price/Costco, Inc. (b)....... 235
10,625 Sears Roebuck & Co........... 436
--------
671
--------
Retail--Speciality Stores (1.4%):
8,190 Home Depot, Inc.............. 414
7,215 Toys R Us (b)................ 190
--------
604
--------
Telecommunications (1.3%):
12,585 Airtouch (b)................. 346
6,555 Lucent Technologies, Inc..... 243
--------
589
--------
Telecommunications--Equipment (0.2%):
5,115 Network Equipment
Technologies (b)........... 68
--------
Tobacco (2.3%):
8,700 Phillip Morris Cos., Inc..... 910
3,105 UST.......................... 103
--------
1,013
--------
Toys (1.4%):
25,040 Mattel, Inc.................. 620
--------
Utilities--Gas & Pipeline (0.3%):
2,305 Tenneco, Inc................. 114
--------
</TABLE>
Continued
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61
LOGO GROWTH FUND
<PAGE> 224
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Telephone (1.5%):
3,550 Ameritech Corp............... $ 197
5,260 AT&T Corp.................... 274
4,500 GTE Corp..................... 186
--------
657
--------
Total Common Stocks 43,527
--------
Total Investments, at value 43,527
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
REPURCHASE AGREEMENTS (2.0%):
$ 899,983 C. S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 825 U.S.
Treasury Bonds, 8.75%,
11/15/08, market
value--$922)............... $ 900
--------
Total Repurchase Agreements 900
--------
Total (Cost -- $40,510)(a) $ 44,427
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $44,338.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of
approximately $208 (amount in thousands). Cost for federal income tax
purposes differs from value by net unrealized appreciation of securities as
follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $ 5,175
Unrealized depreciation.......................................... (1,466)
--------
Net unrealized appreciation...................................... $ 3,709
=======
</TABLE>
(b) Represents non-income producing securities.
ADR -- American Depository Receipt
PLC -- Public Limited Company
See notes to financial statements.
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62
LOGO GROWTH FUND
<PAGE> 225
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amounts)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS (94.0%):
Aerospace (0.9%):
1,600 B.F. Goodrich Co............. $ 58
--------
Air Transportation (0.9%):
500 Federal Express Corp. (b).... 39
800 Southwest Airlines Co........ 20
--------
59
--------
Banks (6.5%):
870 Banc One Corp................ 30
900 BankAmerica Corp............. 72
1,000 Chase Manhattan Corp......... 69
2,200 Fleet Financial Group,
Inc........................ 89
500 J. P. Morgan & Co............ 43
900 National City Corp........... 31
1,500 Norwest Corp................. 53
600 Wachovia Corp................ 27
--------
414
--------
Beverages (4.6%):
2,000 Anheuser-Busch Co............ 149
1,600 Coca-Cola Co................. 75
2,200 PepsiCo, Inc................. 70
--------
294
--------
Building Materials (0.9%):
2,000 Masco Corp................... 56
--------
Business Equipment & Services (0.9%):
500 Dun & Bradstreet Corp........ 29
600 Pitney Bowes, Inc............ 29
--------
58
--------
Chemicals--Petroleum & Inorganic (1.2%):
400 Dow Chemical Co.............. 30
400 du Pont (E.I.) de Nemours
Co......................... 32
500 Monsanto Corp................ 16
--------
78
--------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Chemicals--Specialty (0.5%):
700 Betz Labs, Inc............... $ 32
--------
Commercial Goods & Services (0.5%):
900 National Services Industries,
Inc........................ 34
--------
Computer (0.7%):
900 Seagate Technology, Inc.
(b)........................ 44
--------
Computer--Main & Mini (1.0%):
600 International Business
Machines Corp.............. 65
--------
Computer Software (1.9%):
600 Electronic Data Systems Corp.
(b)........................ 32
600 Microsoft Corp. (b).......... 70
400 Shared Medical Systems
Corp....................... 22
--------
124
--------
Construction Materials (0.5%):
1,100 Fleetwood Enterprises,
Inc........................ 33
--------
Cosmetics & Toiletries (1.5%):
800 Colgate-Palmolive Co......... 63
800 International Flavors &
Fragrances, Inc............ 34
--------
97
--------
Defense (1.0%):
1,300 Raytheon Co.................. 63
--------
</TABLE>
Continued
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63
LOGO INCOME & GROWTH FUND
<PAGE> 226
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amounts)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Electrical Equipment (7.7%):
1,600 AMP, Inc..................... $ 62
800 Duracell International,
Inc........................ 36
800 Emerson Electric Co.......... 67
2,100 General Electric Co.......... 173
1,600 Intel Corp................... 120
900 Thomas & Betts Corp.......... 33
--------
491
--------
Electronics (1.7%):
2,000 Motorola, Inc................ 108
--------
Electronic Instruments (0.8%):
1,200 Texas Instruments, Inc....... 52
--------
Environment Services (0.7%):
1,900 Browning-Ferris Industries,
Inc........................ 43
--------
Financial Services (2.0%):
1,900 American General Corp........ 66
2,000 Federal National Mortgage
Assoc...................... 64
--------
130
--------
Food & Related (2.7%):
1,000 General Mills, Inc........... 54
1,900 H. J. Heinz Co............... 63
300 Hershey Foods Corp........... 25
500 Ralston-Purina Co............ 31
--------
173
--------
Forest & Paper Products (3.0%):
1,000 Georgia-Pacific Corp......... 75
800 International Paper Co....... 30
400 Kimberly Clark Corp.......... 31
1,300 Weyerhaeuser Co.............. 54
--------
190
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
COMMON STOCKS, CONTINUED:
Health Care--General (1.9%):
600 Bristol-Myers Squibb Co...... $ 52
1,400 Johnson & Johnson............ 67
--------
119
--------
Hospital Supply & Management (0.8%):
1,000 Columbia/HCA Healthcare
Corp....................... 51
--------
Household--General Products (1.0%):
2,300 Rubbermaid, Inc.............. 66
--------
Insurance--Life (0.5%):
575 Jefferson Pilot Corp......... 30
--------
Insurance--Multiline (1.8%):
756 Allstate Corp................ 34
900 Marsh & McLennan Cos.,
Inc........................ 81
--------
115
--------
Insurance--Property & Casualty (1.6%):
300 General Re Corp.............. 44
600 Hartford Steam Boiler
Inspection & Insurance
Co......................... 26
600 St. Paul Cos., Inc........... 31
--------
101
--------
Machinery & Equipment (1.5%):
800 Ingersoll-Rand Co............ 34
1,400 Snap-On, Inc................. 62
--------
96
--------
Manufacturing (0.7%):
155 Imation Corp. (b)............ 3
700 Service Corp.
International.............. 39
--------
42
--------
Medical Equipment & Supplies (0.8%):
1,300 Baxter International, Inc.... 54
--------
</TABLE>
Continued
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64
<PAGE> 227
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amounts)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Motor Vehicle Parts (1.6%):
850 Genuine Parts Co............. $ 36
1,900 Ford Motor Co................ 62
--------
98
--------
Multiple Industry (3.1%):
2,700 Corning, Inc................. 99
1,550 Minnesota Mining &
Manufacturing Co........... 101
--------
200
--------
Petroleum--Domestic (1.5%):
300 Atlantic Richfield Co........ 35
1,600 Phillips Petroleum Co........ 63
--------
98
--------
Petroleum--Internationals (5.8%):
1,400 Amoco Corp................... 94
1,600 Chevron Corp................. 92
800 Exxon Corp................... 66
600 Mobil Corp................... 66
600 Texaco, Inc.................. 51
--------
369
--------
Petroleum--Services (1.5%):
2,300 Baker Hughes, Inc............ 68
500 Halliburton Co............... 26
--------
94
--------
Pharmaceuticals (4.6%):
700 Abbott Laboratories.......... 31
900 Merck & Co................... 58
1,200 Pacific Enterprises.......... 35
1,000 Pfizer, Inc.................. 70
600 Schering-Plough Corp......... 33
1,200 Warner-Lambert Co............ 65
--------
292
--------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Photographic Equipment (0.3%):
300 Eastman Kodak Co............. $ 22
--------
Publishing (1.1%):
1,100 Gannett Co., Inc............. 72
--------
Railroad (1.8%):
700 Burlington Northern Santa
Fe......................... 55
900 Union Pacific Corp........... 62
--------
117
--------
Restaurants (0.4%):
1,900 Brinker International, Inc.
(b)........................ 25
--------
Retail--General Merchandise (2.2%):
1,300 J.C. Penney, Inc............. 65
600 Sears Roebuck & Co........... 24
2,200 Wal-Mart Stores, Inc......... 53
--------
142
--------
Retail--Specialty Stores (1.0%):
1,600 Albany International, Class
A.......................... 30
700 Home Depot, Inc.............. 35
--------
65
--------
Telecommunications (7.1%):
1,800 AT&T Corp.................... 94
3,200 AirTouch Telecommunications
(b)........................ 88
1,100 Ameritech Corp............... 61
1,600 BellSouth Corp............... 66
1,500 General Telephone Electric
Corp. (b).................. 62
</TABLE>
Continued
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65
<PAGE> 228
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amounts)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Telecommunications, continued:
100 Lucent Technologies, Inc..... $ 4
1,000 MCI Telecommunications
Corp....................... 25
1,800 U.S. West, Inc............... 55
--------
455
--------
Telecommunications--Equipment (0.6%):
700 DSC Communications Corp.
(b)........................ 21
1,200 Network Equipment
Technologies (b)........... 16
--------
37
--------
Tobacco (2.1%):
700 Phillip Morris Co., Inc...... 73
1,900 UST, Inc..................... 63
--------
136
--------
Tools (0.5%):
1,200 Stanley Works................ 34
--------
Toys (0.4%):
1,125 Mattel, Inc.................. 28
--------
Utilities--Electric (4.7%):
1,400 FPL Group, Inc............... 64
2,600 PacifiCorp................... 54
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Electric, continued:
2,600 Potomac Electric Power Co.
(b)........................ $ 63
2,100 Public Service Enterprise
Group, Inc................. 55
1,600 Texas Utilities Co........... 67
--------
303
--------
Utilities--Gas & Pipeline (1.0%):
800 Consolidated Natural Gas
Co......................... 40
500 Tenneco, Inc................. 25
--------
65
--------
Total Common Stocks 6,022
--------
Total Investments, at value 6,022
--------
REPURCHASE AGREEMENTS (6.0%):
$ 386,342 First Boston, 5.62%, 8/1/96
(Collateralized by 303 U.S.
Treasury Bonds, 9.88%,
11/15/15, market
value--$396)............... 386
--------
Total Repurchase Agreements 386
--------
Total (Cost--$5,355)(a) $ 6,408
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $6,407.
<TABLE>
<S> <C>
(a) Represents cost for financial reporting purposes and differs from cost basis for federal income tax purposes
by the amount of losses recognized for financial reporting in excess of federal income tax reporting of
approximately $5 (amount in thousands). Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows (amounts in thousands):
Unrealized appreciation................................................... 1,162
Unrealized depreciation................................................... (114)
------
Net unrealized appreciation............................................... 1,048
======
(b) Represents non-income producing securities.
</TABLE>
See notes to financial statements.
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66
<PAGE> 229
JULY 31, 1996
1. ORGANIZATION:
The HighMark Group (the "Group") was organized on March 10, 1987 and is
registered under the Investment Company Act of 1940 as amended (the "1940
Act"), as a diversified, open-end investment company established as a
Massachusetts business trust.
The Group is authorized to issue an unlimited number of shares which are
units of beneficial interest without par value. The Group presently offers
shares in the Diversified Obligations Fund, the U.S. Government Obligations
Fund, the 100% U.S. Treasury Obligations Fund, the California Tax-Free Fund,
the Tax-Free Fund, the Bond Fund, the Government Bond Fund, the Income
Equity Fund, the Balanced Fund, the Growth Fund and the Income & Growth Fund
(collectively, "the Funds" and individually, "a Fund"). Sales of shares may
be made to customers of Union Bank of California, NA ("Union Bank of
California") and to its affiliates, to all accounts of its correspondent
banks, to institutional investors, and to the general public. MERUS-UCA
Capital Management, ("MERUS-UCA"), a division of Union Bank of California,
serves as investment adviser to the Group.
The investment objective of the Diversified Obligations Fund, the U.S.
Government Obligations Fund, and the 100% U.S. Treasury Obligations Fund is
to seek current income with liquidity and stability of principal. The
Diversified Obligations Fund invests in obligations issued or guaranteed by
the U.S. Government, its agencies, or instrumentalities, and additionally
invests in other high-quality money market instruments and other unrated
instruments deemed to be of comparable high quality by the investment
adviser pursuant to guidelines established by the Group's Board of Trustees.
Some of the obligations and money market instruments in which the
Diversified Obligations Fund invests may be subject to repurchase
agreements. The U.S. Government Obligations Fund invests in obligations
issued or guaranteed by the U.S. Treasury, and additionally invests in
obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government. Some of the obligations in which the U.S. Government
Obligations Fund invests may be subject to repurchase agreements. The 100%
U.S. Treasury Obligations Fund invests exclusively in direct U.S. Treasury
obligations guaranteed as to timely payment of principal and interest by the
full faith and credit of the U.S. Treasury. The California Tax-Free Fund's
investment objective is to seek as high a level of current interest income
free from federal income tax and California personal income tax as is
consistent with the preservation of capital and relative stability of
principal. The Tax-Free Fund's investment objective is to seek as high a
level of current interest income free from federal income taxes as is
consistent with the preservation of capital and relative stability of
principal. The California Tax-Free Fund and the Tax-Free Fund invest
primarily in bonds and notes issued by or on behalf of states (primarily, in
the case of the California Tax-Free Fund, the State of California),
territories and possessions of the United States, and the District of
Columbia and their respective authorities, agencies, instrumentalities and
political sub-divisions ("Municipal Securities"). The investment objective
of the Bond Fund is to seek current income through investments in long-term,
fixed-income securities. The
Continued
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67
LOGO NOTES TO FINANCIAL STATEMENTS
<PAGE> 230
JULY 31, 1996
investment objective of the Government Bond Fund is to seek current income
and relative stability of principal through investments in short- to
intermediate-term U.S. Government Securities. The investment objective of
the Income Equity Fund is to seek investments in equity securities that
provide current income through the regular payment of dividends, with the
goal that the Fund will have a high current yield and a low level of price
volatility. Opportunities for long-term growth of asset value is a secondary
consideration. The primary investment objective of the Balanced Fund is to
seek total return. Conservation of capital is a secondary objective. The
investment objective of the Growth Fund is to seek investments in equity
securities that provide opportunity for long-term capital appreciation. The
production of current income is an incidental objective. The investment
objective of the Income and Growth Fund is to seek current income above the
average current income of companies included in the Standard & Poor's 500
Stock Index (the "S&P 500") and to seek total return (dividends plus price
appreciation) at least equal to that of the S&P 500 while maintaining lower
price volatility than the S&P 500. There can, however, be no assurance that
any of the funds' investment objectives will be achieved.
On December 1, 1990, the Diversified Obligations Fund, the U.S. Government
Obligations Fund, the 100% U.S. Treasury Obligations Fund, the California
Tax-Free Fund, and the Tax-Free Fund (collectively, "the money market
funds") commenced offering Class A Shares and designated existing shares as
Class B Shares. As of June 20, 1994, Class A and Class B Shares were
designated as "Investor" and "Fiduciary" Shares, respectively. On June 20,
1994, the Bond Fund, the Government Bond Fund, the Income Equity Fund, the
Balanced Fund, the Growth Fund and the Income & Growth Fund (collectively,
"the variable net asset value funds") commenced offering Investor Shares and
designated existing shares as Fiduciary Shares. Investor and Fiduciary
Shares represent interests in the same portfolio investments of a Fund and
are identical in all respects except that Investor Shares bear the expense,
if any, of the distribution fee under the Group's Distribution Plan (the
"Distribution Plan"), which will cause the Investor Shares to have a higher
expense ratio and to pay lower dividends than Fiduciary Shares. Investor
Shares have certain exclusive voting rights with respect to the Distribution
Plan.
In addition, Investor Shares of the variable net asset value funds are
subject to initial sales charges imposed at the time of purchase, in
accordance with the Funds' prospectuses.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Group in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The preparation
of financial statements requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Continued
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68
LOGO NOTES TO FINANCIAL STATEMENTS, CONTINUED
<PAGE> 231
JULY 31, 1996
SECURITIES VALUATION:
Investments in the money market funds are valued at either amortized cost,
which approximates market value, or at original cost, which when combined
with accrued interest, approximates market value. Under the amortized cost
valuation method, discount or premium is amortized on a constant basis to
the maturity of the security. In addition, the money market funds may not a)
purchase any instrument with a remaining maturity greater than thirteen
months unless such investment is subject to a demand feature, or b) maintain
a dollar weighted average portfolio maturity which exceeds 90 days.
Investments in common stocks and preferred stocks, corporate notes,
commercial paper, and U.S. Government securities of the variable net asset
value funds are valued at their market values determined on the basis of the
mean of the latest available bid prices in the principal market (closing
sales prices if the principal market is an exchange) in which such
securities are normally traded. Investments in investment companies are
valued at their net asset values as reported by such companies. Securities,
including restricted securities, for which market quotations are not readily
available, are valued at fair market value under the supervision of the
Fund's Board of Trustees. The differences between cost and market values of
investments held by the variable net asset value funds are reflected as
either unrealized appreciation or depreciation.
SECURITIES TRANSACTIONS AND RELATED INCOME:
Securities transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable for the money market funds, the pro
rata amortization of premium. The Funds accrete discounts of securities on
the same basis for both financial reporting and federal income tax purposes,
with the applicable portion of market discount recognized as ordinary income
upon disposition or maturity. Dividend income is recorded on the ex-dividend
date. Gains or losses realized on sales of securities are determined by
comparing the identified cost of the security lot sold with the net sales
proceeds.
REPURCHASE AGREEMENTS:
The Funds may enter into repurchase agreements with financial institutions,
such as banks and broker-dealers, which MERUS-UCA deems creditworthy under
guidelines approved by the Group's Board of Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed-upon
date and price. The repurchase price generally equals the price paid by a
Fund plus interest negotiated on the basis of current short-term rates,
which may be more or less than the rate on the underlying portfolio
securities. The seller, under a repurchase agreement, is required to pledge
securities as collateral pursuant to the agreement at not less than 102% of
the repurchase price (including accrued interest). Securities subject to
repurchase agreements are held by the Funds' custodian in
Continued
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69
LOGO NOTES TO FINANCIAL STATEMENTS, CONTINUED
<PAGE> 232
JULY 31, 1996
the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income are declared daily and paid monthly
for the money market funds. Distributions from net investment income are
declared and paid monthly for the variable net asset value funds.
Distributable net realized capital gains, if any, are declared and
distributed at least annually for each of the Funds.
Distributions from net investment income and from net realized capital gains
are determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
primarily due to differing treatments for expiring capital loss
carryforwards and deferrals of certain losses for income tax purposes.
FEDERAL INCOME TAXES:
It is the policy of each of the Funds to continue to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or substantially
all, federal income taxes. Accordingly, no provision for federal income tax
is required.
OTHER:
Expenses that are directly related to one of the Funds are charged directly
to that Fund and are allocated to each class of shares based on the relative
net assets of each class. Other operating expenses of the Group are prorated
to the Funds on the basis of relative net assets.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended July 31, 1996 are as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Bond Fund..................................................... $ 12,838,463 $ 12,390,087
Government Bond Fund.......................................... $ 2,334,192 $ 1,857,187
Income Equity Fund............................................ $120,339,920 $104,047,894
Balanced Fund................................................. $ 11,733,334 $ 4,060,963
Growth Fund................................................... $ 42,228,828 $ 27,423,180
Income & Growth Fund.......................................... $ 2,120,488 $ 3,323,657
</TABLE>
Continued
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JULY 31, 1996
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for the Group for the years ended July 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS
DIVERSIFIED OBLIGATIONS FUND FUND
------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- -------------
Amounts in Thousands
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares issued............................... $ 1,099,638 $ 646,263 $ 712,337 $ 394,176
Dividends reinvested...................................... 7,260 4,895 3,476 1,948
Shares redeemed........................................... (1,049,143) (598,685) (688,578) (371,715)
------------- ------------- ------------- -------------
Change in net assets from Investor Share transactions..... $ 57,755 $ 52,473 $ 27,235 $ 24,409
============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares issued............................... $ 843,405 $ 915,980 $ 1,221,391 $ 1,366,450
Dividends reinvested...................................... 66 20 11 2
Shares redeemed........................................... (869,182) (874,436) (1,229,676) (1,368,823)
------------- ------------- ------------- -------------
Change in net assets from Fiduciary Share transactions.... $ (25,711) $ 41,564 $ (8,274) $ (2,371)
============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued.................................................... 1,099,638 646,263 712,337 394,176
Reinvested................................................ 7,260 4,895 3,476 1,948
Redeemed.................................................. (1,049,143) (598,685) (688,578) (371,715)
------------- ------------- ------------- -------------
Change in Investor Shares................................. 57,755 52,473 27,235 24,409
============ ============ ============ ============
FIDUCIARY SHARES:
Issued.................................................... 843,405 915,980 1,221,391 1,366,450
Reinvested................................................ 66 20 11 2
Redeemed.................................................. (869,182) (874,436) (1,229,676) (1,368,823)
------------- ------------- ------------- -------------
Change in Fiduciary Shares................................ (25,711) 41,564 (8,274) (2,371)
============ ============ ============ ============
</TABLE>
Continued
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JULY 31, 1996
<TABLE>
<CAPTION>
100% U.S. TREASURY CALIFORNIA
OBLIGATIONS FUND TAX-FREE FUND TAX-FREE FUND
------------------------------ ------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- ------------- ------------- -------------
Amounts in Thousands
<S> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares
issued..................... $ 463,343 $ 310,873 $ 120,369 $ 99,160 $ 36,847 $ 44,420
Dividends reinvested......... 4,526 2,090 1,419 1,027 402 412
Shares redeemed.............. (455,887) (263,475) (108,705) (91,159) (33,803) (52,158)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets from
Investor Share
transactions............... $ 11,982 $ 49,488 $ 13,083 $ 9,028 $ 3,446 $ (7,326)
============ ============ ============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares
issued..................... $ 541,337 $ 425,795 $ 223,524 $ 255,654 $ 95,373 $ 112,554
Dividends reinvested......... 45 16 6 8 17 17
Shares redeemed.............. (558,614) (395,970) (230,920) (264,895) (98,094) (112,034)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets from
Fiduciary Share
transactions............... $ (17,232) $ 29,841 $ (7,390) $ (9,233) $ (2,704) $ 537
============ ============ ============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued....................... 463,343 310,873 120,369 99,160 36,847 44,420
Reinvested................... 4,526 2,090 1,419 1,027 402 412
Redeemed..................... (455,887) (263,475) (108,705) (91,159) (33,803) (52,158)
------------- ------------- ------------- ------------- ------------- -------------
Change in Investor Shares.... 11,982 49,488 13,083 9,028 3,446 (7,326)
============ ============ ============ ============ ============ ============
FIDUCIARY SHARES:
Issued....................... 541,337 425,795 223,524 255,654 95,373 112,554
Reinvested................... 45 16 6 8 17 17
Redeemed..................... (558,614) (395,970) (230,920) (264,895) (98,094) (112,034)
------------- ------------- ------------- ------------- ------------- -------------
Change in Fiduciary Shares... (17,232) 29,841 (7,390) (9,233) (2,704) 537
============ ============ ============ ============ ============ ============
</TABLE>
Continued
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<PAGE> 235
JULY 31, 1996
<TABLE>
<CAPTION>
BOND FUND GOVERNMENT BOND FUND INCOME EQUITY FUND
------------------------------ ------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- ------------- ------------- -------------
Amounts in Thousands
<S> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares
issued..................... $ 754 $ 626 $ 1,055 $ 97 $ 10,342 $ 4,131
Dividends reinvested......... 60 14 47 2 501 52
Shares redeemed.............. (177) (113) (33) (32) (5,008) (506)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets from
Investor Share
transactions............... $ 637 $ 527 $ 1,069 $ 67 $ 5,835 $ 3,677
============ ============ ============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares
issued..................... $ 14,876 $ 10,767 $ 297 $ 1,279 $ 52,940 $ 31,913
Dividends reinvested......... 2,983 3,111 219 295 16,994 13,482
Shares redeemed.............. (16,414) (19,821) (1,002) (2,852) (49,911) (56,293)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets from
Fiduciary Share
transactions............... $ 1,445 $ (5,943) $ (486) $ (1,278) $ 20,023 $ (10,898)
============ ============ ============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued....................... 71 63 110 11 721 331
Reinvested................... 6 1 5 -- 35 5
Redeemed..................... (17) (11) (3) (4) (344) (40)
------------- ------------- ------------- ------------- ------------- -------------
Change in Investor Shares.... 60 53 112 7 412 296
============ ============ ============ ============ ============ ============
FIDUCIARY SHARES:
Issued....................... 1,421 1,074 32 137 3,719 2,625
Reinvested................... 284 311 22 32 1,200 1,154
Redeemed..................... (1,563) (1,974) (104) (305) (3,529) (4,658)
------------- ------------- ------------- ------------- ------------- -------------
Change in Fiduciary Shares... 142 (589) (50) (136) 1,390 (879)
============ ============ ============ ============ ============ ============
</TABLE>
Continued
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JULY 31, 1996
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND INCOME & GROWTH FUND
------------------------------ ------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- ------------- ------------- -------------
Amounts in Thousands
<S> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares
issued..................... $ 526 $ 480 $ 1,796 $ 1,230 $ 213 $ 205
Dividends reinvested......... 22 2 107 5 17 1
Shares redeemed.............. (358) (20) (370) (144) (66) --
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets from
Investor Share
transactions............... $ 190 $ 462 $ 1,533 $ 1,091 $ 164 $ 206
============ ============ ============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares
issued..................... $ 15,314 $ 9,876 $ 17,443 $ 8,497 $ 2,710 $ 1,566
Dividends reinvested......... 1,150 984 1,858 498 417 126
Shares redeemed.............. (9,046) (9,570) (4,577) (3,450) (4,124) (788)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets from
Fiduciary Share
transactions............... $ 7,418 $ 1,290 $ 14,724 $ 5,545 $ (997) $ 904
============ ============ ============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued....................... 46 45 143 115 17 18
Reinvested................... 2 -- 9 1 1 --
Redeemed..................... (31) (2) (29) (13) (5) --
------------- ------------- ------------- ------------- ------------- -------------
Change in Investor Shares.... 17 43 123 103 13 18
============ ============ ============ ============ ============ ============
FIDUCIARY SHARES:
Issued....................... 1,321 976 1,397 836 220 150
Reinvested................... 100 99 154 50 35 12
Redeemed..................... (789) (964) (365) (334) (343) (73)
------------- ------------- ------------- ------------- ------------- -------------
Change in Fiduciary Shares... 632 111 1,186 552 (88) 89
============ ============ ============ ============ ============ ============
</TABLE>
Continued
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JULY 31, 1996
5. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Group by MERUS-UCA. Under
the terms of the investment advisory agreement, Union Bank of California, of
which MERUS-UCA is a division, is entitled to receive fees based on a
percentage of the average net assets of each of the Funds. Union Bank of
California also serves as custodian, sub-transfer agent and
sub-administrator for the Group.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
an Ohio Limited Partnership, and BISYS Fund Services Ohio, Inc. ("BISYS
Ohio") are subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Group as administrator. Such officers and trustees are paid no
fees directly by the Funds for serving as officers and trustees of the
Group. Under the terms of the administration agreement, BISYS' fees are
computed daily as a percentage of the average net assets of the Funds. BISYS
also serves as the Group's distributor. As distributor, BISYS is entitled to
receive fees from the Funds for providing distribution services. For the
year ended July 31, 1996, BISYS received $212,765 for commissions earned on
sales of shares of the Group's variable net asset value funds, of which
$23,664 was reallowed to affiliated parties. BISYS Ohio, serves the Group as
transfer agent and mutual fund accountant. Transfer agent fees are computed
on a sliding scale, based upon the number of shareholders.
The Group has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act pursuant to which each Fund may pay the Distributor as compensation
for its services in connection with the Distribution Plan a distribution
fee, computed daily and paid monthly, at a maximum annual rate of
twenty-five one-hundredths of one percent (0.25%) of the average daily net
assets attributable to the Funds' Investor Shares. A Fund's Fiduciary Shares
are not subject to the Distribution Plan or a distribution fee. The
Distributor has agreed to voluntarily reduce payments to be received
pursuant to the Distribution Plan with respect to a money market fund to the
extent necessary to ensure that such payments do not exceed the income
attributable to such Fund's shares on any day.
The Group has also adopted a Shareholder Services Plan permitting payment of
compensation to financial institutions that agree to provide certain
administrative support services for their customers who are Fund
shareholders. Each Fund has entered into a specific arrangement with BISYS
for the provision of such services and reimburses BISYS for its cost of
providing these services, subject to a maximum annual rate of twenty-five
one-hundredths of one percent (0.25%) of each Fund's average daily net
assets.
Fees may be voluntarily reduced or reimbursed to assist the Funds in
maintaining competitive expense ratios. Such fees are permanently waived.
Continued
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JULY 31, 1996
Information regarding these transactions is as follows for the year ended
July 31, 1996: (amounts in thousands)
<TABLE>
<CAPTION>
DIVERSIFIED U.S. GOVERNMENT 100% U.S. TREASURY
OBLIGATIONS FUND OBLIGATIONS FUND OBLIGATIONS FUND
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee (percentage of
average net assets)................ 0.40% 1st $500 million 0.40% 1st $500 million 0.40% 1st $500 million
0.35% next $500 million 0.35% next $500 million 0.35% next $500 million
0.30% remaining 0.30% remaining 0.30% remaining
ADMINISTRATION FEES:
Annual fee (percentage of
average net assets)................ 0.20% 0.20% 0.20%
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary
fee reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 395 $ 179 $ 267
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary
fee reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 932 $ 560 $ 711
CUSTODIAN FEES: (percentage of
average net assets) 0.02% (minimum $2,500) 0.02% (minimum $2,500) 0.02% (minimum $2,500)
ACCOUNTING FEES: (percentage of
average net assets) 0.03% (minimum $40,000) 0.03% (minimum $40,000) 0.03% (minimum $40,000)
</TABLE>
Continued
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<PAGE> 239
JULY 31, 1996
<TABLE>
<CAPTION>
CALIFORNIA
TAX-FREE FUND TAX-FREE FUND
----------------------- -----------------------
<S> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........................... 0.40% 1st $500 million 0.40% 1st $500 million
0.35% next $500 million 0.35% next $500 million
0.30% remaining 0.30% remaining
Voluntary fee reductions....................................... $ 266 $ 24
ADMINISTRATION FEES:
Annual fee (percentage of average net assets).................. 0.20% 0.20%
Voluntary fee reductions....................................... $ 77 $ 46
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary fee reductions
(percentage of average net assets)........................... 0.25% 0.25%
Voluntary fee reductions....................................... $ 122 $ 36
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........................... 0.25% 0.25%
Voluntary fee reductions....................................... $ 359 $ 101
CUSTODIAN FEES: (percentage of average net assets) 0.02% (minimum $2,500) 0.02% (minimum $2,500)
ACCOUNTING FEES: (percentage of average net assets) 0.03% (minimum $40,000) 0.03% (minimum $40,000)
</TABLE>
Continued
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JULY 31, 1996
<TABLE>
<CAPTION>
BOND FUND GOVERNMENT BOND FUND INCOME EQUITY FUND
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 1.00% 1st $40 million 1.00% 1st $40 million 1.00% 1st $40 million
0.60% remaining 0.60% remaining 0.60% remaining
Voluntary fee reductions............. $ 257 $ 43 $ 33
ADMINISTRATION FEES:
Annual fee (percentage of
average net assets)................ 0.20% 0.20% 0.20%
Voluntary fee reductions............. $ 43 $ 9 --
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 2 $ 2 $ 20
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 143 $ 10 $ 613
CUSTODIAN FEES: (percentage of
average net assets) 0.02% (minimum $2,500) 0.02% (minimum $2,500) 0.02% (minimum $2,500)
Voluntary fee reductions $ 23
ACCOUNTING FEES: (percentage of
average net assets) 0.03% (minimum $40,000) 0.03% (minimum $40,000) 0.03% (minimum $40,000)
</TABLE>
Continued
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JULY 31, 1996
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND INCOME & GROWTH FUND
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 1.00% 1st $40 million 1.00% 1st $40 million 1.00% 1st $40 million
0.60% remaining 0.60% remaining 0.60% remaining
Voluntary fee reductions............. $ 161 $ 182 $ 62
ADMINISTRATION FEES:
Annual fee (percentage of
average net assets)................ 0.20% 0.20% 0.20%
Voluntary fee reductions............. -- -- $ 12
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 2 $ 5 $ 1
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 82 $ 87 $ 14
CUSTODIAN FEES: (percentage of
average net assets) 0.02% (minimum $2,500) 0.02% (minimum $2,500) 0.02% (minimum $2,500)
Voluntary fee reductions............. $ 29 $ 40 $ 30
ACCOUNTING FEES: (percentage of
average net assets) 0.03% (minimum $40,000) 0.03% (minimum $40,000) 0.03% (minimum $40,000)
Voluntary fee reductions............. $ 19 $ 19 --
</TABLE>
Continued
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JULY 31, 1996
6. CONCENTRATION OF CREDIT RISK:
The California Tax-Free Fund invests substantially all of its assets in a
diversified portfolio of tax-exempt debt obligations primarily consisting of
securities issued by the State of California, its municipalities, counties,
and other taxing districts. The issuers' abilities to meet their obligations
may be affected by domestic and foreign or California economic, regional and
political developments.
At July 31, 1996, The California Tax-Free Fund had the following
concentrations by industry sector (as a percentage of total investments):
<TABLE>
<CAPTION>
TAX-EXEMPT CALIFORNIA
INDUSTRY CLASS TAX-FREE FUND
--------------------------------------------------------------------- -------------
<S> <C>
Utilities -- Electric................................................ 23.2%
Housing.............................................................. 22.1%
Hospitals............................................................ 20.7%
Pollution Control.................................................... 10.6%
Governments.......................................................... 8.2%
Money Markets........................................................ 7.8%
Utilities -- Water & Sewer........................................... 4.2%
Transportation & Shipping............................................ 3.2%
------
100.0%
</TABLE>
7. ELIGIBLE DISTRIBUTIONS (UNAUDITED):
The Group designates the following eligible distributions for the dividends
received deduction for corporations for the Fund's taxable year ended July
31, 1996:
<TABLE>
<CAPTION>
INCOME BALANCED GROWTH INCOME &
EQUITY FUND FUND FUND GROWTH FUND
----------- -------- ------ -----------
<S> <C> <C> <C> <C>
Dividend Income (in thousands)...... $ 9.943 $ 549 $ 607 $ 163
Dividend Income Per Share........... $ 0.402 $0.142 $0.107 $ 0.221
</TABLE>
Continued
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JULY 31, 1996
8. EXEMPT-INTEREST INCOME DESIGNATION (UNAUDITED):
The Group designates the following exempt-interest dividends for the Fund's
taxable year ended July 31, 1996.
<TABLE>
<CAPTION>
CALIFORNIA
TAX-FREE FUND TAX-FREE FUND
------------- -------------
<S> <C> <C>
Exempt-interest dividends........................... $ 5.255 $ 1.537
Exempt-interest dividends per share................. 0.028 0.028
</TABLE>
The following information indicates by state the percentage of income earned
by the California Tax-Free Fund and the Tax-Free Fund for the year ended
July 31, 1996:
<TABLE>
<CAPTION>
CALIFORNIA
TAX-FREE FUND TAX-FREE FUND
------------- -------------
<S> <C> <C>
Alaska.............................................. 2.6%
Arizona............................................. 3.4
California.......................................... 100.0% 21.0
Colorado............................................ 2.6
Florida............................................. 6.5
Hawaii.............................................. 3.0
Illinois............................................ 4.6
Indiana............................................. 4.9
Kentucky............................................ 3.1
Louisiana........................................... 4.1
Michigan............................................ 3.8
Minnesota........................................... 0.2
Missouri............................................ 2.8
Nevada.............................................. 4.7
New Mexico.......................................... 4.2
New York............................................ 4.4
Oregon.............................................. 1.9
Pennsylvania........................................ 0.5
Rhode Island........................................ 1.3
Texas............................................... 1.2
Utah................................................ 2.3
Virginia............................................ 10.3
Wyoming............................................. 1.3
Other Territories................................... 5.3
------ ------
100.0% 100.0%
============== ==============
</TABLE>
Continued
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<PAGE> 244
JULY 31, 1996
For the year ended July 31, 1996, 18.9% of the income earned by the Tax-Free
Fund and 16.9% of the income earned by the California Tax-Free Fund may be
subject to the alternative minimum tax.
For California residents, 100.0% of the income earned by the California
Tax-Free Fund for the year ended July 31, 1996 is designated as tax-exempt
income.
The following information indicates by type the percentage of income earned
by the 100% U.S. Treasury Obligations Fund for the year ended July 31, 1996:
<TABLE>
<CAPTION>
100% U.S. TREASURY
TYPE OBLIGATIONS FUND
---------------------------------------------------------------- ------------------
<S> <C>
Federal obligations (such as U.S. Treasury bills, notes,
bonds)........................................................ 100.0%
===================
</TABLE>
For California residents, the 100% U.S. Treasury Obligations Fund met the
quarterly diversification tests for each fiscal quarter ended during the
year ended July 31, 1996. In addition, for California residents, 100% of the
income earned by the 100% U.S. Treasury Obligations Fund for the year ended
July 31, 1996 is designated as tax-exempt income.
Please consult your tax advisor for the proper treatment of the information
reflected in Notes 7 and 8.
9. FEDERAL INCOME TAXES:
For federal income tax purposes, the following funds have capital loss
carryforwards as of July 31, 1996, which are available to offset future
capital gains, if any:
<TABLE>
<CAPTION>
AMOUNT EXPIRES
---------- -------
<S> <C> <C>
Diversified Obligations Fund................................. $ 341,422 2001
29,246 2002
U.S. Government Obligations Fund............................. 174,662 2001
100% U.S. Treasury Obligations Fund.......................... 6,637 2004
California Tax-Free Fund..................................... 24,741 2002
22,777 2003
Tax-Free Fund................................................ 9,016 2002
13,234 2003
Bond Fund.................................................... 2,766,351 2003
54,397 2004
Government Bond Fund......................................... 243,536 2002
55,189 2003
10,219 2004
</TABLE>
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<PAGE> 245
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.049 0.049 0.049 0.049 0.028 0.028 0.027 0.027 0.043 0.043
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.049) (0.049 ) (0.049) (0.049 ) (0.028) (0.028 ) (0.027) (0.027 ) (0.043) (0.043 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 5.01% 5.01% 4.99% 4.99% 2.88% 2.88% 2.75% 2.75% 4.41% 4.41%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at
end of
period
(000)...... $185,952 $244,775 $128,191 $270,476 $ 75,725 $228,934 $ 77,589 $254,034 $ 17,600 $337,485
Ratio of
expenses to
average net
assets..... 0.75% 0.75% 0.74% 0.74% 0.74% 0.74% 0.72% 0.72% 0.72% 0.72%
Ratio of net
investment
income to
average net
assets..... 4.89% 4.91% 4.92% 4.88% 2.83% 2.83% 2.72% 2.72% 4.34% 4.34%
Ratio of
expenses to
average net
assets*.... 1.23% 0.99% 1.23% 0.98% 1.14% 0.89% 0.79% 0.73% 0.97% 0.72%
Ratio of net
investment
income to
average net
assets*.... 4.41% 4.67% 4.43% 4.64% 2.42% 2.67% 2.65% 2.71% 4.09% 4.34%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
LOGO
83
LOGO DIVERSIFIED OBLIGATIONS FUND
<PAGE> 246
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.048 0.048 0.048 0.048 0.027 0.027 0.027 0.027 0.042 0.042
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.048) (0.048 ) (0.048) (0.048 ) (0.027) (0.027 ) (0.027) (0.027 ) (0.042) (0.042 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 4.86% 4.88% 4.86% 4.87% 2.74% 2.74% 2.72% 2.72% 4.25% 4.25%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at
end of
period
(000)...... $ 75,714 $151,483 $ 48,474 $159,747 $ 24,055 $162,094 $ 37,332 $166,182 $ 12,527 $ 94,252
Ratio of
expenses to
average net
assets..... 0.79% 0.77% 0.78% 0.78% 0.77% 0.78% 0.71% 0.71% 0.73% 0.73%
Ratio of net
investment
income to
average net
assets..... 4.77% 4.76% 4.82% 4.76% 2.63% 2.70% 2.67% 2.67% 4.15% 4.15%
Ratio of
expenses to
average net
assets*.... 1.26% 1.00% 1.27% 1.02% 1.17% 0.94% 0.79% 0.74% 0.99% 0.74%
Ratio of net
investment
income to
average net
assets*.... 4.30% 4.53% 4.33% 4.52% 2.23% 2.54% 2.59% 2.65% 3.89% 4.14%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
LOGO
84
LOGO U.S. GOVERNMENT OBLIGATIONS FUND
<PAGE> 247
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.046 0.046 0.046 0.046 0.026 0.026 0.026 0.026 0.040 0.040
Net realized
and
unrealized
gains on
investments... -- -- -- -- -- -- -- -- 0.001 0.001
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total from
Investment
Activities.. 0.046 0.046 0.046 0.046 0.026 0.026 0.026 0.026 0.041 0.041
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.046) (0.046 ) (0.046) (0.046 ) (0.026) (0.026 ) (0.026) (0.026 ) (0.040) (0.040 )
From net
investment
income..... -- -- -- -- -- -- -- -- (0.001) (0.001 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total
Distributions... (0.046) (0.046 ) (0.046) (0.046 ) (0.026) (0.026 ) (0.026) (0.026 ) (0.041) (0.041 )
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 4.74% 4.74% 4.69% 4.69% 2.68% 2.68% 2.64% 2.64% 4.18% 4.18%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at
end of
period
(000)...... $100,623 $173,340 $ 88,660 $190,604 $ 39,157 $160,721 $ 32,629 $191,946 $ 11,551 $219,451
Ratio of
expenses to
average net
assets..... 0.74% 0.74% 0.73% 0.73% 0.74% 0.74% 0.67% 0.67% 0.65% 0.65%
Ratio of net
investment
income to
average net
assets..... 4.64% 4.64% 4.68% 4.60% 2.68% 2.63% 2.60% 2.60% 3.99% 3.99%
Ratio of
expenses to
average net
assets*.... 1.23% 0.97% 1.22% 0.97% 1.15% 0.90% 0.75% 0.72% 0.97% 0.72%
Ratio of net
investment
income to
average net
assets*.... 4.15% 4.41% 4.19% 4.36% 2.27% 2.48% 2.52% 2.55% 3.67% 3.92%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
LOGO
85
LOGO 100% U.S. TREASURY OBLIGATIONS FUND
<PAGE> 248
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.029 0.029 0.031 0.031 0.020 0.020 0.021 0.021 0.032 0.032
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.029) (0.029 ) (0.031) (0.031 ) (0.020) (0.020 ) (0.021) (0.021 ) (0.032) (0.032 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 2.91% 2.91% 3.16% 3.16% 1.99% 1.99% 2.13% 2.13% 3.20% 3.20%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at
end of
period
(000)...... $ 53,627 $ 98,352 $ 40,544 $105,742 $ 31,521 $114,993 $ 44,410 $142,939 $ 4,609 $116,062
Ratio of
expenses to
average net
assets..... 0.55% 0.55% 0.50% 0.50% 0.50% 0.50% 0.44% 0.44% 0.54% 0.54%
Ratio of net
investment
income to
average net
assets..... 2.89% 2.88% 3.14% 3.11% 1.96% 1.96% 2.08% 2.08% 3.15% 3.15%
Ratio of
expenses to
average net
assets*.... 1.25% 1.00% 1.26% 1.01% 1.18% 0.93% 0.79% 0.73% 0.99% 0.74%
Ratio of net
investment
income to
average net
assets*.... 2.19% 2.43% 2.38% 2.60% 1.28% 1.53% 1.73% 1.78% 2.70% 2.95%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
LOGO
86
LOGO CALIFORNIA TAX-FREE FUND
<PAGE> 249
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.028 0.028 0.030 0.030 0.019 0.019 0.021 0.021 0.033 0.033
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.028) (0.028 ) (0.030) (0.030 ) (0.019) (0.019 ) (0.021) (0.021 ) (0.033) (0.033 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 2.87% 2.87% 3.00% 3.00% 1.96% 1.96% 2.16% 2.16% 3.35% 3.35%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at
end of
period
(000)...... $ 16,148 $ 28,109 $ 12,702 $ 30,813 $ 20,032 $ 30,285 $ 40,010 $ 29,799 $ 23,780 $ 27,136
Ratio of
expenses to
average net
assets..... 0.77% 0.76% 0.73% 0.73% 0.69% 0.69% 0.53% 0.53% 0.57% 0.57%
Ratio of net
investment
income to
average net
assets..... 2.81% 2.86% 2.90% 2.95% 1.93% 1.95% 2.12% 2.12% 3.31% 3.31%
Ratio of
expenses to
average net
assets*.... 1.42% 1.16% 1.39% 1.14% 1.27% 1.02% 0.96% 0.84% 1.09% 0.84%
Ratio of net
investment
income to
average net
assets*.... 2.16% 2.46% 2.24% 2.54% 1.36% 1.62% 1.69% 1.82% 2.79% 3.05%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
LOGO
87
LOGO TAX-FREE FUND
<PAGE> 250
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, YEAR
1994 TO ENDED
YEAR ENDED YEAR ENDED JULY 31, JULY 31, YEAR ENDED JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A)(B) 1994(B)
---------------------- ---------------------- ---------- --------- -------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY 1993 1992
-------- --------- -------- --------- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $10.29 $ 10.38 $10.04 $ 10.11 $10.12 $ 11.13 $ 11.02 $ 10.29
-------- --------- -------- --------- ---------- --------- ------- -------
INVESTMENT ACTIVITIES
Net investment
income............... 0.69 0.66 0.66 0.64 0.07 0.63 0.70 0.67
Net realized and
unrealized gains
(losses) on
investments.......... (0.18) (0.16) 0.23 0.27 (0.05) (0.97) 0.35 0.77
-------- --------- -------- --------- ---------- --------- ------- -------
Total from Investment
Activities......... 0.51 0.50 0.89 0.91 0.02 (0.34) 1.05 1.44
-------- --------- -------- --------- ---------- --------- ------- -------
DISTRIBUTIONS
From net investment
income............... (0.65) (0.65) (0.64) (0.64) (0.10) (0.63) (0.70) (0.67)
From net realized
gains................ -- -- -- -- -- (0.01) (0.24) (0.04)
In excess of net
realized gains....... -- -- -- -- -- (0.04) -- --
-------- --------- -------- --------- ---------- --------- ------- -------
Total
Distributions...... (0.65) (0.65) (0.64) (0.64) (0.10) (0.68) (0.94) (0.71)
-------- --------- -------- --------- ---------- --------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $10.15 $ 10.23 $10.29 $ 10.38 $10.04 $ 10.11 $ 11.13 $ 11.02
========= =========== ========= =========== =============== =========== ======== ========
Total Return (excludes
sales charges)......... 4.95% 4.81% 9.29% 9.43% (3.81)%(c) (3.14)% 10.07% 14.43%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at end of
period (000)......... $1,157 $60,374 $ 558 $59,758 $ 7 $64,185 $33,279 $21,651
Ratio of expenses to
average net assets... 0.89% 0.89% 0.92% 0.92% 0.99%(d) 0.86% 0.93% 0.91%
Ratio of net investment
income to average net
assets............... 6.10% 6.10% 6.29% 6.35% 5.77%(d) 6.11% 6.41% 6.23%
Ratio of expenses to
average net
assets*.............. 1.85% 1.61% 1.89% 1.64% 2.96%(d) 1.37% 1.55% 1.55%
Ratio of net investment
income to average net
assets*.............. 5.14% 5.38% 5.32% 5.62% 3.80%(d) 5.60% 5.79% 5.59%
Portfolio turnover..... 20.65%(e) 20.88%(e) 36.20%(e) 36.20%(e) 44.33%(e) 44.33%(e) 58.81% 79.56%
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) Period from commencement of operations.
(b) On June 20, 1994, the Bond Fund commenced offering Investor Shares and designated existing shares as Fiduciary Shares.
(c) Represents total return for the Fiduciary shares for the period from August 1, 1993 to June 19, 1994 plus the total return
for the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
*During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
88
LOGO BOND FUND
<PAGE> 251
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, NOVEMBER 14,
1994 TO 1993 TO
YEAR ENDED YEAR ENDED JULY 31, JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A) 1994(A)
---------------------- ---------------------- --------- ------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 9.43 $ 9.50 $ 9.36 $ 9.44 $ 9.47 $10.00
-------- --------- -------- --------- --------- ------
INVESTMENT ACTIVITIES
Net investment income....................... 0.62 0.60 0.66 0.60 0.01 0.40
Net realized and unrealized gains (losses)
on investments............................ (0.18) (0.16) 0.01 0.06 (0.02) (0.56)
-------- --------- -------- --------- --------- ------
-------- --------- -------- --------- --------- ------
DISTRIBUTIONS
From net investment income.................. (0.59) (0.59) (0.60) (0.60) (0.10) (0.40)
-------- --------- -------- --------- --------- ------
NET ASSET VALUE, END OF PERIOD............... $ 9.28 $ 9.35 $ 9.43 $ 9.50 $ 9.36 $ 9.44
========= =========== ========= =========== ========== ==============
Total Return (excludes sales charges)........ 4.79% 4.75% 7.47% 7.30% (2.42)%(b)(e) (1.59)%(e)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........... $1,104 $ 3,386 $ 68 $ 3,916 $ -- $5,171
Ratio of expenses to average net assets..... 0.85% 0.85% 0.85% 0.85% 0.87%(c) 0.85%(c)
Ratio of net investment income to average
net assets................................ 6.22% 6.12% 6.25% 6.32% 4.37%(c) 5.84%(c)
Ratio of expenses to average net assets*.... 4.05% 3.80% 2.54% 2.29% 0.87%(c) 3.09%(c)
Ratio of net investment income to average
net assets*............................... 3.02% 3.17% 4.56% 4.88% 4.37%(c) 3.60%(c)
Portfolio turnover (d)...................... 44.72% 44.72% 67.49% 67.49% 176.26% 176.26%
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) Period from commencement of operations. On June 20, 1994, the Government Bond Fund commenced offering Investor Shares and
designated existing shares as Fiduciary Shares.
(b) Represents total return for the Fiduciary Shares from commencement of operations to June 19, 1994, plus the total return for
the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
(e) Not annualized.
*During the period, certain fees were voluntarily reduced. In addition, certain expenses were reimbursed. If such voluntary
fee reductions and expense reimbursements had not occurred, the ratios would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
89
LOGO GOVERNMENT BOND FUND
<PAGE> 252
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, YEAR
1994 TO ENDED
YEAR ENDED YEAR ENDED JULY 31, JULY 31, YEAR ENDED JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A)(B) 1994(B)
----------------------- ---------------------- ---------- --------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY 1993 1992
-------- --------- -------- --------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $ 13.03 $ 13.00 $11.92 $ 11.92 $11.85 $ 12.13 $ 11.42 $ 10.22
-------- --------- -------- --------- ---------- --------- -------- -------
INVESTMENT ACTIVITIES
Net investment
income............. 0.42 0.42 0.42 0.44 0.04 0.39 0.38 0.40
Net realized and
unrealized gains on
investments........ 1.92 1.93 1.55 1.50 0.08 0.12 0.71 1.20
-------- --------- -------- --------- ---------- --------- -------- -------
Total from
Investment
Activities....... 2.34 2.35 1.97 1.94 0.12 0.51 1.09 1.60
-------- --------- -------- --------- ---------- --------- -------- -------
DISTRIBUTIONS
From net investment
income............. (0.42 ) (0.42 ) (0.44) (0.44 ) (0.05) (0.39 ) (0.38) (0.40)
From net realized
gains.............. (0.66 ) (0.66 ) (0.42) (0.42 ) -- (0.33 ) -- --
-------- --------- -------- --------- ---------- --------- -------- -------
Total
Distributions.... (1.08 ) (1.08 ) (0.86) (0.86 ) (0.05) (0.72 ) (0.38) (0.40)
-------- --------- -------- --------- ---------- --------- -------- -------
NET ASSET VALUE, END
OF PERIOD............ $ 14.29 $ 14.27 $13.03 $ 13.00 $11.92 $ 11.92 $ 12.13 $ 11.42
========= =========== ========= =========== =============== =========== ========== ========
Total Return (excludes
sales charges)....... 18.21 % 18.25 % 17.52% 17.26 % 4.23%(c) 4.23 % 9.75% 16.04%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at end of
period (000)....... $10,143 $262,660 $3,881 $221,325 $ 24 $213,328 $104,840 $74,478
Ratio of expenses to
average net
assets............. 1.03 % 1.03 % 1.06% 1.06 % 1.10%(d) 1.06 % 1.15% 1.16%
Ratio of net
investment income
to average net
assets............. 2.89 % 2.95 % 3.06% 3.59 % 0.93%(d) 3.29 % 3.27% 3.76%
Ratio of expenses to
average net
assets*............ 1.51 % 1.27 % 1.55% 1.30 % 1.33%(d) 1.10 % 1.21% 1.29%
Ratio of net
investment income
to average net
assets*............ 2.41 % 2.71 % 2.57% 3.34 % 0.71%(d) 3.24 % 3.22% 3.64%
Portfolio turnover... 41.51 %(e) 41.51 %(e) 36.64%(e) 36.64 %(e) 33.82%(e) 33.82 %(e) 29.58% 23.05%
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) Period from commencement of operations.
(b) On June 20, 1994, the Income Equity Fund commenced offering Investor Shares and designated existing shares as Fiduciary
Shares.
(c) Represents total return for the Fiduciary Shares for the period from August 1, 1993 to June 19, 1994 plus the total return
for the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
*During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
90
LOGO INCOME EQUITY FUND
<PAGE> 253
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, NOVEMBER 14,
1994 TO 1993 TO
YEAR ENDED YEAR ENDED JULY 31, JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A) 1994(A)
---------------------- ---------------------- --------- ------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $10.79 $ 10.85 $ 9.71 $ 9.76 $ 9.71 $ 10.00
-------- --------- -------- --------- --------- ------------
INVESTMENT ACTIVITIES
Net investment income....................... 0.40 0.40 0.43 0.39 -- 0.26
Net realized and unrealized gains (losses)
on investments............................ 0.77 0.79 1.04 1.09 0.06 (0.24)
-------- --------- -------- --------- --------- ------------
Total from Investment Activities.......... 1.17 1.19 1.47 1.48 0.06 0.02
-------- --------- -------- --------- --------- ------------
DISTRIBUTIONS
From net investment income.................. (0.40) (0.40) (0.39) (0.39) (0.06) (0.26)
-------- --------- -------- --------- --------- ------------
NET ASSET VALUE, END OF PERIOD............... $11.56 $ 11.64 $10.79 $ 10.85 $ 9.71 $ 9.76(e)
========= =========== ========= =========== ========== ============
Total Return (excludes sales charges)........ 10.94% 11.06% 15.60% 15.62% (0.25)%(b) (0.26)%(e)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........... $ 694 $39,502 $ 467 $29,961 -- $ 25,851
Ratio of expenses to average net assets..... 0.94% 0.94% 0.90% 0.89% -- 0.87%(c)
Ratio of net investment income to average
net assets................................ 3.48% 3.49% 3.78% 3.93% -- 3.77%(c)
Ratio of expenses to average net assets*.... 2.03% 1.78% 2.05% 1.80% -- 1.79%(c)
Ratio of net investment income to average
net assets*............................... 2.39% 2.85% 2.63% 3.02% -- 2.85%(c)
Portfolio turnover (d)...................... 12.84% 12.84% 20.70% 20.70% 44.14% 44.14%
- ---------------
(a) Period from commencement of operations. On June 20, 1994, the Balanced Fund commenced offering Investor Shares and designated
existing shares as Fiduciary Shares.
(b) Represents total return for the Fiduciary Shares from commencement of operations to June 19, 1994 plus the total return for
the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
(e) Not annualized.
*During the period, certain fees were voluntarily reduced. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
91
LOGO BALANCED FUND
<PAGE> 254
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, NOVEMBER 18,
1994 TO 1993 TO
YEAR ENDED YEAR ENDED JULY 31, JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A) 1994(A)
---------------------- ---------------------- --------- ------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $11.87 $ 11.87 $ 9.77 $ 9.76 $ 9.74 $ 10.00
-------- --------- -------- --------- --------- ------------
INVESTMENT ACTIVITIES
Net investment income....................... 0.11 0.12 0.15 0.15 -- 0.05
Net realized and unrealized gains (losses)
on investments............................ 1.38 1.35 2.25 2.26 0.04 (0.24)
-------- --------- -------- --------- --------- ------------
Total from Investment Activities.......... 1.49 1.47 2.40 2.41 0.04 (0.19)
-------- --------- -------- --------- --------- ------------
DISTRIBUTIONS
From net investment income.................. (0.12) (0.12) (0.15) (0.15) (0.01) (0.05)
From net realized gains..................... (0.64) (0.64) (0.15) (0.15) -- --
-------- --------- -------- --------- --------- ------------
Total Distributions....................... (0.76) (0.76) (0.30) (0.30) (0.01) (0.05)
-------- --------- -------- --------- --------- ------------
NET ASSET VALUE, END OF PERIOD............... $12.60 $ 12.58 11.87 $ 11.87 $ 9.77 $ 9.76
========= =========== ========= =========== ========== ============
Total Return (excludes sales charges)........ 12.88% 12.72% 25.10% 25.23% (1.77)%(b) (1.87)%(e)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........... $2,843 $41,495 $1,218 $25,096 -- $ 15,254
Ratio of expenses to average net assets..... 0.93% 0.93% 0.84% 0.79% -- 0.77%(c)
Ratio of net investment income to average
net assets................................ 0.96% 0.98% 1.17% 1.40% -- 0.86%(c)
Ratio of expenses to average net assets*.... 1.91% 1.67% 2.11% 1.92% -- 2.61%(c)
Ratio of net investment income (loss) to
average net assets*....................... (0.02)% 0.23% (0.10)% 0.26% -- (0.98)%(c)
Portfolio turnover (d)...................... 78.58% 78.58% 67.91% 67.91% 123.26% 123.26%
- ---------------
<FN>
(a) Period from commencement of operations. On June 20, 1994, the Growth Fund commenced offering Investor Shares and designated
existing shares as Fiduciary Shares.
(b) Represents total return for the Fiduciary Shares from commencement of operations to June 19, 1994 plus the total return for
the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
(e) Not annualized.
*During the period, certain fees were voluntarily reduced. In addition, certain expenses were reimbursed. If such voluntary
fee reductions and expense reimbursements had not occurred, the ratios would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
92
LOGO GROWTH FUND
<PAGE> 255
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, NOVEMBER 14,
1994 TO 1993 TO
YEAR ENDED YEAR ENDED JULY 31, JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A) 1994(A)
---------------------- ---------------------- --------- ------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $11.75 $ 11.74 $ 9.97 $ 9.96 $ 9.86 $10.00
-------- --------- -------- --------- --------- ------
INVESTMENT ACTIVITIES
Net investment income....................... 0.22 0.25 0.27 0.25 -- 0.20
Net realized and unrealized gains (losses)
on investments............................ 1.49 1.46 1.76 1.78 0.14 (0.04)
-------- --------- -------- --------- --------- ------
Total from Investment Activities.......... 1.71 1.71 2.03 2.03 0.14 0.16
-------- --------- -------- --------- --------- ------
DISTRIBUTIONS
From net investment income.................. (0.25) (0.25) (0.25) (0.25) (0.03) (0.20)
From net realized gains..................... (0.69) (0.69) -- -- -- --
-------- --------- -------- --------- --------- ------
Total Distributions....................... (0.94) (0.94) (0.25) (0.25) (0.03) (0.20)
-------- --------- -------- --------- --------- ------
NET ASSET VALUE, END OF PERIOD............... $12.52 $ 12.51 $11.75 $ 11.74 $ 9.97 $ 9.96
========= =========== ========= =========== ========== =========
Total Return (excludes sales charges)........ 15.02% 15.04% 20.67% 20.68% 1.73%(b) 1.63%(e)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........... $ 394 $ 6,013 $ 215 $ 6,669 -- $4,771
Ratio of expenses to average net assets..... 0.98% 0.98% 0.97% 0.97% 0.88%(c) 0.95%(c)
Ratio of net investment income to average
net assets................................ 1.96% 2.00% 2.23% 2.37% 0.88%(c) 2.86%(c)
Ratio of expenses to average net assets*.... 3.52% 3.27% 2.66% 2.41% 0.88%(c) 3.27%(c)
Ratio of net investment income (loss) to
average net assets*....................... (0.58)% (0.29)% 0.54% 0.93% 0.88%(c) 0.54%(c)
Portfolio turnover (d)...................... 36.64% 36.64% 15.01% 15.01% 97.24% 97.24%
- ---------------
<FN>
(a) Period from commencement of operations. On June 20, 1994, the Income & Growth Fund commenced offering Investor Shares and
designated existing shares as Fiduciary Shares.
(b) Represents total return for the Fiduciary Shares from commencement of operations to June 19, 1994 plus the total return for
the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
(e) Not annualized.
*During the period, certain fees were voluntarily reduced. In addition, certain expenses were reimbursed. If such voluntary
fee reductions and expense reimbursements had not occurred, the ratios would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
93
LOGO INCOME & GROWTH FUND
<PAGE> 256
On March 11, 1996, a special meeting of the shareholders of the Group was
held to consider Proposal 1 -- the approval of a new investment advisory
agreement, ratification of the continuation of the sub-administration
agreement, ratification of the continuation of the sub-transfer agency
agreement, and ratification of the continuation of the custodian agreement,
Proposal 2 -- the election of five Trustees, and Proposal 3 -- the
ratification of the selection of Deloitte & Touche LLP as the Group's
independent certified public accountants.
Proposal 1 -- The shareholders of the Group were requested to approve a new
investment advisory agreement between Union Bank of California and the
Group, ratify the continuation of the sub-administration agreement between
BISYS and Union Bank of California, ratify the sub-transfer agency agreement
between BISYS Ohio and Union Bank of California and ratification of the
continuation of the custodian agreement between the Group and Union Bank of
California. The Shareholders approved the proposal. The results of the vote
were as follows:
<TABLE>
<CAPTION>
VOTES FOR THE VOTES AGAINST THE
PROPOSAL PROPOSAL ABSTAIN
- -------------- ----------------- ----------
<S> <C> <C>
731,393,746 5,804,523 5,354,321
</TABLE>
Proposal 2 -- The shareholders were requested to vote for the election of
the group to act as the Board of Trustees of the Group: Thomas L. Braje,
David A. Goldfarb, Joseph C. Jaegar, Frederick J. Long and Stephen G.
Mintos. The shareholders approved the proposal. The results were as follows:
<TABLE>
<CAPTION>
VOTES FOR THE VOTES AGAINST THE
PROPOSAL PROPOSAL ABSTAIN
- -------------- ----------------- ----------
<S> <C> <C>
688,829,237 -- 4,879,329
</TABLE>
Proposal 3 -- The shareholders of the Group ratified the appointment of
Deloitte & Touche LLP as the Group's independent certified public
accountants for the fiscal year ended July 31, 1996 as follows:
<TABLE>
<CAPTION>
VOTES FOR THE VOTES AGAINST THE
PROPOSAL PROPOSAL ABSTAIN
- -------------- ----------------- ----------
<S> <C> <C>
680,104,384 5,566,071 6,882,134
</TABLE>
LOGO
94
LOGO RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED)
<PAGE> 257
[HIGHMARK LOGO]
Annual Report
July 31, 1996
Investment Adviser
MERUS-UCA Capital Management,
A division of Union Bank of California, N.A.
400 California Street
P.O. Box 45000
San Francisco, CA 94104
Custodian
Union Bank of California, N.A.
400 California Street
P.O. Box 45000
San Francisco, CA 94104
Administrator & Distributor
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
Not FDIC Insured
<PAGE> 258
THE STEPSTONE FUNDS
STEPSTONE BALANCED FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Balanced Fund ("Stepstone Balanced") to
HighMark Balanced Fund ("HighMark Balanced") in exchange for Shares of
HighMark Balanced and the assumption by HighMark Balanced of all of
the liabilities of Stepstone Balanced, followed by the dissolution and
liquidation of Stepstone Balanced and the distribution of Shares of
HighMark Balanced to the shareholders of Stepstone Balanced.
X-1
<PAGE> 259
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 260
THE STEPSTONE FUNDS
STEPSTONE MONEY MARKET FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Money Market Fund ("Stepstone Money
Market") to HighMark Diversified Money Market Fund ("HighMark
Diversified Money Market") in exchange for Shares of HighMark
Diversified Money Market and the assumption by HighMark Diversified
Money Market of all of the liabilities of Stepstone Money Market,
followed by the dissolution and liquidation of Stepstone Money Market
and the distribution of Shares of HighMark Diversified Money Market to
the shareholders of Stepstone Money Market.
X-1
<PAGE> 261
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 262
THE STEPSTONE FUNDS
STEPSTONE TREASURY MONEY MARKET FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Treasury Money Market Fund ("Stepstone
Treasury Money Market") to HighMark 100% U.S. Treasury Money Market
Fund ("HighMark 100% U.S. Treasury Money Market") in exchange for
Shares of HighMark 100% U.S. Treasury Money Market and the assumption
by HighMark 100% U.S. Treasury Money Market of all of the liabilities
of Stepstone Treasury Money Market, followed by the dissolution and
liquidation of Stepstone Treasury Money Market and the distribution of
Shares of
X-1
<PAGE> 263
HighMark 100% U.S. Treasury Money Market to the shareholders of
Stepstone Treasury Money Market.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 264
THE STEPSTONE FUNDS
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone California Tax-Free Money Market Fund
("Stepstone California Tax-Free Money Market") to HighMark California
Tax-Free Money Market Fund ("HighMark California Tax-Free Money
Market") in exchange for Shares of HighMark California Tax-Free Money
Market and the assumption by HighMark California Tax-Free Money Market
of all of the liabilities of Stepstone California Tax-Free Money
Market, followed by the dissolution and liquidation of Stepstone
California Tax-Free Money
X-1
<PAGE> 265
Market and the distribution of Shares of HighMark California Tax-Free
Money Market to the shareholders of Stepstone California Tax-Free
Money Market.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 266
THE STEPSTONE FUNDS
STEPSTONE GROWTH EQUITY FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Growth Equity Fund ("Stepstone Growth
Equity") to HighMark Growth Fund("HighMark Growth") in exchange for
Shares of HighMark Growth and the assumption by HighMark Growth of all
of the liabilities of Stepstone Growth Equity, followed by the
dissolution and liquidation of Stepstone Growth Equity and the
distribution of Shares of HighMark Growth to the shareholders of
Stepstone Growth Equity.
X-1
<PAGE> 267
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 268
THE STEPSTONE FUNDS
STEPSTONE VALUE MOMENTUM FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Value Momentum Fund ("Stepstone Value
Momentum") to HighMark Value Momentum Fund ("HighMark Value Momentum")
in exchange for Shares of HighMark Value Momentum and the assumption
by HighMark Value Momentum of all of the liabilities of Stepstone
Value Momentum, followed by the dissolution and liquidation of
Stepstone Value Momentum and the distribution of Shares of HighMark
Value Momentum to the shareholders of Stepstone Value Momentum.
X-1
<PAGE> 269
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 270
THE STEPSTONE FUNDS
STEPSTONE BLUE CHIP GROWTH FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Blue Chip Growth Fund ("Stepstone Blue
Chip Growth") to HighMark Blue Chip Growth Fund ("HighMark Blue Chip
Growth") in exchange for Shares of HighMark Blue Chip Growth and the
assumption by HighMark Blue Chip Growth of all of the liabilities of
Stepstone Blue Chip Growth, followed by the dissolution and
liquidation of Stepstone Blue Chip Growth and the distribution of
Shares of HighMark Blue Chip Growth to the shareholders of Stepstone
Blue Chip Growth.
X-1
<PAGE> 271
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 272
THE STEPSTONE FUNDS
STEPSTONE EMERGING GROWTH FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Emerging Growth Fund ("Stepstone
Emerging Growth") to HighMark Emerging Growth Fund ("HighMark Emerging
Growth") in exchange for Shares of HighMark Emerging Growth and the
assumption by HighMark Emerging Growth of all of the liabilities of
Stepstone Emerging Growth, followed by the dissolution and liquidation
of Stepstone Emerging Growth and the distribution of Shares of
HighMark Emerging Growth to the shareholders of Stepstone Emerging
Growth.
X-1
<PAGE> 273
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 274
THE STEPSTONE FUNDS
STEPSTONE INTERNATIONAL EQUITY FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone International Equity Fund ("Stepstone
International Equity") to HighMark International Equity Fund
("HighMark International Equity") in exchange for Shares of HighMark
International Equity and the assumption by HighMark International
Equity of all of the liabilities of Stepstone International Equity,
followed by the dissolution and liquidation of Stepstone International
Equity and the distribution of Shares of HighMark International Equity
to the shareholders of Stepstone International Equity.
X-1
<PAGE> 275
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 276
THE STEPSTONE FUNDS
STEPSTONE INTERMEDIATE-TERM BOND FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Intermediate-Term Bond Fund ("Stepstone
Intermediate-Term Bond") to HighMark Intermediate-Term Bond Fund
("HighMark Intermediate-Term Bond") in exchange for Shares of HighMark
Intermediate-Term Bond and the assumption by HighMark
Intermediate-Term Bond of all of the liabilities of Stepstone
Intermediate-Term Bond, followed by the dissolution and liquidation of
Stepstone Intermediate-Term Bond and the distribution of Shares of
HighMark Intermediate-Term Bond to the shareholders of Stepstone
Intermediate-Term Bond.
X-1
<PAGE> 277
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 278
THE STEPSTONE FUNDS
STEPSTONE CONVERTIBLE SECURITIES FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Convertible Securities Fund ("Stepstone
Convertible Securities") to HighMark Convertible Securities Fund
("HighMark Convertible Securities") in exchange for Shares of HighMark
Convertible Securities and the assumption by HighMark Convertible
Securities of all of the liabilities of Stepstone Convertible
Securities, followed by the dissolution and liquidation of Stepstone
Convertible Securities and the distribution of Shares of HighMark
Convertible Securities to the shareholders of Stepstone Convertible
Securities.
X-1
<PAGE> 279
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 280
THE STEPSTONE FUNDS
STEPSTONE GOVERNMENT SECURITIES FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone Government Securities Fund ("Stepstone
Government Securities") to HighMark Government Securities Fund
("HighMark Government Securities") in exchange for Shares of HighMark
Government Securities and the assumption by HighMark Government
Securities of all of the liabilities of Stepstone Government
Securities, followed by the dissolution and liquidation of Stepstone
Government Securities and the distribution of Shares of HighMark
Government Securities to the shareholders of Stepstone Government
Securities.
X-1
<PAGE> 281
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 282
THE STEPSTONE FUNDS
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE STEPSTONE FUNDS.
The undersigned hereby appoints Kevin B. Robins and Cassandra Arnold, and each
of them separately, proxies, with power of substitution, and hereby authorizes
them to represent and to vote, as designated below, at the Special Meeting of
Shareholders of the Stepstone Funds on Wednesday, April 16, 1997, at 3:00 p.m.,
Eastern Time, and at any adjournments thereof, all of the shares of the Fund
which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such, if a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
CHANGE OF ADDRESS NOTIFICATION. Has your address changed? Please use this
form to inform us of any change in address or telephone number. Detach this
form from the Proxy Ballot and return it with your executed proxy in the
enclosed envelope.
1. Approval of the Agreement and Plan of Reorganization by and between
The Stepstone Funds and HighMark Funds providing for the transfer of
all of the assets of Stepstone California Intermediate Tax-Free Bond
Fund ("Stepstone California Intermediate Tax-Free Bond") to HighMark
California Intermediate Tax-Free Bond Fund ("HighMark California
Intermediate Tax-Free Bond") in exchange for Shares of HighMark
California Intermediate Tax-Free Bond and the assumption by HighMark
California Intermediate Tax-Free Bond of all of the liabilities of
Stepstone California Intermediate Tax-Free Bond, followed by the
dissolution and liquidation of Stepstone California Intermediate
Tax-Free Bond and the distribution of Shares of HighMark California
X-1
<PAGE> 283
Intermediate Tax-Free Bond to the shareholders of Stepstone California
Intermediate Tax-Free Bond.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<C> <C> <C>
[ ] [ ] [ ]
</TABLE>
Please be sure to sign and date this Proxy.
----------------------------------------
Shareholder sign here
----------------------------------------
Co-owner sign here
Dated: , 1997
--------------
X-2
<PAGE> 284
HIGHMARK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information contains information which may be
of interest to investors but which is not included in the Combined
Prospectus/Proxy Statement (the "Prospectus") of HighMark Funds dated
[_________, 1997] relating to the transfer of assets from the Stepstone Funds
to the corresponding HighMark Funds as follows:
<TABLE>
<S> <C>
Stepstone Money Market Fund HighMark Diversified Money Market Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Treasury Money Market Fund HighMark 100% U.S. Treasury Money Market Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone California Tax-Free Money Market HighMark California Tax-Free Money Market Fund
Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Balanced Fund HighMark Balanced Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Growth Equity Fund HighMark Growth Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Value Momentum Fund HighMark Value Momentum Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Blue Chip Growth Fund HighMark Blue Chip Growth Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Emerging Growth Fund HighMark Emerging Growth Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone International Equity Fund HighMark International Equity Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Intermediate-Term Bond Fund HighMark Intermediate-Term Bond Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Convertible Securities Fund HighMark Convertible Securities Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone Government Securities Fund HighMark Government Securities Fund
- -----------------------------------------------------------------------------------------------------------
Stepstone California Intermediate Tax-Free HighMark California Intermediate Tax-Free Bond
Bond Fund Fund
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Statement of Additional Information for the Stepstone Funds dated May 28
1996, and the Statement of Additional Information for the HighMark Funds dated
[__________, 1997] have been filed with the Securities and Exchange Commission
and are incorporated herein by reference. This Statement is not a Prospectus and
is authorized for distribution only when it accompanies or follows delivery of
the Prospectus. This Statement of Additional Information should be read in
conjunction with the Prospectus. A copy of the [_____________, 1997]
B-1
<PAGE> 285
Prospectus may be obtained, without charge, by writing SEI Financial Services
Company, Oaks, PA 19456 or by calling 1-800-734-2922.
The date of this Statement of Additional Information is [________, 1997].
B-2
<PAGE> 286
TABLE OF CONTENTS
Financial Statements of the
combined Funds on a pro-forma
basis for the year ended
July 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . B-4
B-3
<PAGE> 287
HIGHMARK DIVERSIFIED MONEY MARKET FUND
STEPSTONE MONEY MARKET FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Statement of Operations reflect the accounts of the HighMark Diversified
Money Market Fund and the Stepstone Money Market Fund as of and for the year
ended July 31, 1996. These statements have been derived from the Funds' books
and records utilized in calculating daily net asset value at July 31, 1996. The
accompanying Pro Forma Combining Statement of Operations reflects the accounts
of HighMark Diversified Money Market Fund and Stepstone Money Market Fund for
the year ended July 31, 1996, the most recent fiscal year end of the
Registrant.
HIGHMARK DIVERSIFIED MONEY MARKET FUND
STEPSTONE MONEY MARKET FUND
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
DIVERSIFIED MONEY DIVERSIFIED MONEY
MONEY MARKET PRO FORMA MONEY MARKET PRO FORMA
MARKET FUND COMBINED MARKET FUND COMBINED
FUND FUND
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT VALUE VALUE VALUE
(000'S)
(000'S)
<S> <C> <C> <C> <C> <C> <C>
CERTIFICATES OF DEPOSIT -- EURO (1.2%)
5,000 5,000 Abbey National Treasury Services, 5.72%, $ 5,000 $ 5,000
9/11/96 5,983 5,983
6,000 6,000 Abbey National Treasury Services, 5.22%,
3/4/97 5,001 5,001
5,000 5,000 Bayerische Vereinsbank, 5.49%, 11/13/96
15,984 15,984
Total Certificates of Deposit -- Euro
CERTIFICATES OF DEPOSIT -- YANKEE
(18.0%) Bank of Nova Scotia, New York
25,000 25,000 5.000%, 08/06/96 $ 25,000 25,000
10,000 10,000 ABN-AMRO Bank N.V., 5.53%, 3/18/97 9,996 9,996
Banque Nationale de Paris, San Francisco
30,000 30,000 5.400%, 08/02/96 30,000 30,000
Bayer.Hypotheken-und Wenschel Bk AG, NY
30,000 30,000 5.300%, 08/26/96 30,000 30,000
5,000 5,000 Commerzbank, 5.66%, 4/24/97 4,997 4,997
10,000 10,000 Deutsche Bank AG, New York 5.530%, 04/02/97 9,988 9,988
10,000 10,000 Deutsche Bank, 5.57%, 3/31/97 10,001 10,001
13,000 13,000 Dresdner Bank AG, New York 5.010%, 02/26/97 12,965 12,965
</TABLE>
B-4
<PAGE> 288
<TABLE>
<CAPTION>
<C> <C> <C> <S> <C> <C> <C>
10,000 10,000 Dresdner Bank, 5.05%, 2/26/97 9,999 9,999
National Westminster Bank PLC, New York
30,000 30,000 5.400%, 09/06/96 30,000 30,000
5,000 5,000 Rabobank Nederland N.V., 5.82% 8/14/96 5,000 5,000
10,000 10,000 Sanwa Bank Ltd., 5.62%, 10/16/96 10,002 10,002
5,000 5,000 Societe Generale, New York 5.720%, 04/14/97 4,996 4,996
10,000 10,000 Society Generale, 5.65%, 4/1/97 9,993 9,993
5,000 5,000 Society Generale, 5.80%, 4/15/97 5,002 5,002
5,000 5,000 Sumitomo Bank Ltd., 5.46%, 9/3/96 5,000 5,000
10,000 10,000 Sumitomo Bank Ltd., 5.48%, 8/26/96 10,000 10,000
5,000 5,000 Sumitomo Bank Ltd., 6.01%, 10/30/96 5,000 5,000
Swiss Bank Corporation, New York 5.960%,
10,000 10,000 06/03/97 10,006 10,006
Total Certificates of Deposit -- Yankee 84,990 152,955 237,945
BANK NOTES (1.1%)
10,000 10,000 Bank of Hawaii, Honolulu, 5.500%. 1/3/97 10,002 10,002
5,000 5,000 NBD Bank, N.A. (Detroit) 6.500%, 06/02/97 5,022 5,022
Total Bank Notes -- Domestic 15,024 15,024
COMMERCIAL PAPER (34.5%) (B)
5,000 5,000 Abbey National North America Inc., 5.54%, 4,958 4,958
9/25/96
5,000 5,000 Abbey National North America Inc., 5.40%, 4,906 4,906
12/4/96
10,000 10,000 Alpha Finance Corp., 5.48%, 10/11/96 9,892 9,892
5,000 5,000 ANZ (De) Inc., 5.38%, 9/10/96 4,970 4,970
5,000 5,000 ANZ (De) Inc., 5.40%, 9/9/96 4,971 4,971
5,000 5,000 ANZ (De) Inc., 5.47%, 10/9/96 4,948 4,948
10,000 10,000 Assets Securitization Cooperative Corp., 9,994 9,994
5.37%, 8/5/96
5,000 5,000 Assets Securitization Cooperative Corp., 4,965 4,965
5.40%, 9/17/96
10,000 10,000 AT&T Corp., 5.30%, 8/8/96 9,990 9,990
5,000 5,000 AT&T Corp., 5.42%, 9/18/96 4,964 4,964
5,000 5,000 B.A.T. Capital Corp., 5.33%, 8/16/96 4,989 4,989
5,000 5,000 Beta Finance Inc., 5.53%, 1/3/97 4,881 4,881
10,000 10,000 BTR Dunlop Finance Inc., 5.37%, 8/7/96 9,991 9,991
5,000 5,000 BTR Dunlop Finance Inc., 5.27%, 8/26/96 4,982 4,982
5,000 5,000 BTR Dunlop Finance Inc., 5.40%, 9/16/96 4,965 4,965
10,000 10,000 Cargill Financial Services Corp. 5.33%, 8/16/96 9,978 9,978
5,000 5,000 Cargill Inc., 5.35%, 8/2/96 4,999 4,999
10,000 10,000 Ciesco, L.P., 5.26%, 8/16/96 9,978 9,978
5,000 5,000 Ciesco, L.P., 5.32%, 9/9/96 4,971 4,971
5,000 5,000 Commerzbank U.S. Finance Inc., 5.35%, 8/8/96 4,995 4,995
5,200 5,200 Corporate Receivables Corp., 5.35%, 8/22/96 5,184 5,184
10,000 10,000 Corporate Receivables Corp., 5.40%, 9/12/96 9,937 9,937
5,000 5,000 Corporate Receivables Corp., 5.42%, 10/8/96 4,949 4,949
5,000 5,000 CXC, Inc., 5.38%, 8/1/96 5,000 5,000
</TABLE>
B-5
<PAGE> 289
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
10,000 10,000 CXC, Inc., 5.40% 9/3/96 9,950 9,950
5,000 5,000 Daimler-Benz North America Corp., 5.35%,
1/6/97 4,876 4,876
5,000 5,000 Daimler-Benz North America Corp., 5.53%,
1/13/97 4,873 4,873
5,000 5,000 Den Danske Corporation Inc., 5.38%, 8/6/96 4,996 4,996
5,000 5,000 Den Danske Corporation Inc., 5.42%, 10/1/96 4,954 4,954
21,000 21,000 Eli Lilly & Co., 4.840%, 08/16/96 (c) 20,958 20,958
5,000 5,000 Falcon Asset Securitization Corp., 5.40%,
8/19/96 4,986 4,986
5,000 5,000 Falcon Asset Securitization Corp., 5.55%,
1/21/97 4,867 4,867
30,000 30,000 Ford Motor Credit Company, 5.380%, 29,969 29,969
08/08/96(c)
5,000 5,000 Ford Motor Credit Corp., 5.27%, 8/13/96 4,991 4,991
10,000 10,000 Ford Motor Credit Corp., 5.34%, 8/15/96 9,979 9,979
5,000 5,000 Ford Motor Credit Corp., 5.42%, 9/6/96 4,973 4,973
10,000 10,000 General Electric Capital Corp., 5.29%, 9/5/96 9,949 9,949
30,000 30,000 Goldman Sachs Group, LP, 5.330%, 08/12/96 (c) 29,951 29,951
7,200 7,200 Hewlett Packard Co., 5.29%, 8/27/96 7,172 7,172
5,000 5,000 J.C. Penney Funding Corp., 5.38%, 8/7/96 4,996 4,996
10,000 10,000 J.C. Penney Funding Corp., 5.34%, 8/29/96 9,958 9,958
5,000 5,000 Jet Funding Corp., 5.50%, 9/30/96 4,954 4,954
Merrill Lynch & Company, Inc., 5.380%,
30,000 30,000 08/26/96 (c) 29,888 29,888
25,000 25,000 Morgan Stanley Group, Inc., 5.330%, 24,870 24,870
09/05/96(c)
30,000 30,000 Motorola, Inc. 5.280%, 08/19/96(c) 29,921 29,921
National Rural Utilities Co-op. Finance Corp.,
10,000 10,000 5.37%, 8/9/96 9,988 9,988
10,000 10,000 Panasonic Finance Inc., 5.38%, 9/9/96 9,943 9,943
10,000 10,000 Panasonic Finance Inc., 5.34%, 9/17/96 9,930 9,930
5,000 5,000 RTZ America Inc., 5.30%, 8/22/96 4,985 4,985
5,000 5,000 TransAmerica Corp., 5.36%, 8/9/96 4,994 4,994
Total Commercial Paper 290,670 165,557 456,227
CORPORATE OBLIGATIONS (6.3%)
10,000 10,000 BankAmerica Corp., 7.550%, 11/29/96 10,064 10,064
30,000 30,000 Bear Stearns Companies, Inc., 5.507%,
05/20/97(b) 30,000 30,000
20,000 20,000 General Electric Capital Corporation, 7.750%,
12/30/96
2,500 2,500 Gillette Co., 4.75%, 8/15/96 2,499 2,499
10,000 10,000 Norwest Financial, Inc., 6.500%, 05/15/97 10,055 10,055
10,000 10,000 Sanwa Business Credit Corp., 5.56%, 12/4/96 (a) 10,000 10,000
Total Corporate Obligations 12,499 70,290 82,789
U.S. TREASURY OBLIGATIONS (6.0%)
U.S. Treasury Notes
15,000 15,000 4.375%, 08/15/96 14,992 14,992
10,000 10,000 6.500%, 09/30/96 10,013 10,013
</TABLE>
B-6
<PAGE> 290
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
30,000 30,000 6.875%, 10/31/96 30,127 30,127
10,000 10,000 4.62%, 2/6/97 9,757 9,757
10,000 10,000 6.500%, 05/15/97 10,056 10,056
5,000 5,000 5.625%, 06/30/97 4,986 4,986
Total U.S. Treasury Obligations 9,757 70,174 79,931
U.S. GOVERNMENT AGENCY OBLIGATIONS (3.4%)
FHLB
5,415 5,415 4.400%, 01/21/97 5,396 5,396
20,000 20,000 5.035%, 03/06/97 19,978 19,978
FNMA
9,200 9,200 5.680%, 10/07/96 9,202 9,202
10,000 10,000 5.390%, 12/04/96 9,998 9,998
Total U.S. Government Agency Obligations 44,574 44,574
REPURCHASE AGREEMENTS (29.5%)
Deutsche Morgan Grenfell/C.J. Lawrence,
Inc. 5.65%, dated 07/31/96, matures
08/01/96, repurchase price $173,898,179
(collateralized by various FHLMC
obligations total par value $148,221,200,
5.971%-6.225%, 01/01/20-7/1/34: various
FNMA obligations total various FNMA
obligations total par value $168,475,449,
6.124%-9000%, 07/01/21-02/01/35: U.S.
Treasury Note, 01/01/20-7/1/34: various
FNMA obligations total various FNMA
obligations total par value $168,475,449,
6.124%-9000%, 07/01/21-02/01/35: U.S.
Treasury Note, 01/01/20-7/1/34: various
FNMA obligations total various FNMA
obligations total par value $168,475,449,
6.124%-9000%, 07/01/21-02/01/35: U.S.
Treasury Note, par value $9,227,000,
7.500%, matures 10/31/99: U.S. Treasury
STRIPS, par value $40,000,000, matures
173,871 173,871 02/15/03: total value 173,871 173,871
SBC Capital Markets, Inc. 5.65%, dated
07/31/96, matures 08/1/96, repurchase price
$13,594,630 (collateralized by FNMA
obligations, par value $14,027,000, 6.554%,
matures 08/01/25: U.S. Treasury Bill, par
value $3,073,000, matures 08/29/96: total
13,593 13,593 market value $14,320,404) 13,593 13,593
</TABLE>
B-7
<PAGE> 291
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Nomura Securites International, Inc. 5.65%,
dated 07/31/96, matures 08/01/96,
repurchase price $160,285,254
(collateralized by various FHLMC
obligations, total par value $150,917,688,
5.50%-8.50%, 05/01/99- 05/01/25: various
FNMA obligations, total par value
$44,937,640, 6.12%-9.00%, 03/01/03-
05/01/34: various GNMA obligations, total
par value $147,088,489, 6.00%-11.50%,
03/15/07-07/15/26: total market value
160,260 160,260 $163,465,304) 160,260 160,260
C. S. First Boston Corp., 5.62%, 8/1/96
(Collaterized by 18,006 U.S. Treasury
Bonds, 8.75%, 8/15/20, market value,
21,502 21,502 $21,970) 21,502 21,502
Merrill Lynch Government Securities, Inc.
5.65%, dated 07/31/96, matures 08/01/96,
repurchase price $20,472,932
(collateralized by various FNMA obligations
total par value $27,675,051, 5.50%-7.50:
20,470 20,470 market value $20,881,617) 20,470 20,470
Total Repurchase Agreements 21,502 368,194 389,696
Total Investments (100.0%) (Cost
1,322,170) 435,402 886,768 1,322,170
</TABLE>
(a) Variable rate securities having liquidity sources through bank letters of
credit of other credit and/or liquidity arrangements. The interest rate,
which will change periodically, is based upon bank prime rated or an index
of market interest rates. The rate reflected on the Schedule of Portfolio
Investments is the rate in effect on July 31, 1996.
(b) Floating Rate Security -- The rate reflected on the Statement of Net
Assets is the rate in effect on July 31, 1996.
(c) The rate reflected on the Statement of Net Assets represents the security's
discount yield.
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
STRIPS Separate Trading of Registered Interest and Principal of
Securities
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-8
<PAGE> 292
HIGHMARK DIVERSIFIED MONEY MARKET FUND
STEPSTONE MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands)
HIGHMARK
DIVERSIFIED STEPSTONE
MONEY MONEY PRO FORMA PRO FORMA
MARKET FUND MARKET FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $ 413,900 $ 518,574 $ 932,474
Repurchase Agreements 21,502 368,194 389,696
------------------------------ ----------------
Total Investments 435,402 886,768 1,322,170
Cash 3 (1,647) $ 597 (A) (1,047)
Interest & Dividends Receivable 2,256 6,007 8,263
Prepaid Expenses and Other Assets 14 17 31
Capital Shares Sold Receivable - - -
----------------------------------------------------------------------
Total Assets 437,675 891,145 597 1,329,417
LIABILITIES:
Distributions Payable 1,690 3,496 5,186
Payable to Brokers 5,000 - 5,000
Accrued Expenses and Other Payables: 258 745 1,003
----------------------------------------------------------------------
Total Liabilities 6,948 4,241 - 11,189
NET ASSETS:
Capital 431,097 888,072 1,319,169
Undistributed net investment income - - 597 (A) 597
Accumulated undistributed net realized gain (loss) on (370) (1,168) (1,538)
investment transactions
----------------------------------------------------------------------
NET ASSETS $ 430,727 $ 886,904 $ 597 $ 1,318,228
======================================================================
Net Assets:
Fiduciary $ 244,775 $ 545,654 (A)(B) $ 790,429
Retail 185,952 341,847 (A)(B) 527,799
Institutional $ 545,296 (545,296) (B) -
Investment 341,608 (341,608) (B) -
----------------------------------------------------------------------
TOTAL $ 430,727 $ 886,904 $ 597 $1,318,228
======================================================================
</TABLE>
B-9
<PAGE> 293
<TABLE>
<S> <C> <C> <C> <C>
Shares Outstanding:
Fiduciary 245,066 546,290 (B) 791,356
Retail 186,031 341,783 (B) 527,814
Institutional 546,290 (546,290) (B) -
Investment 341,783 (341,783) (B) -
---------------------------------------------------------------------
TOTAL SHARES OUTSTANDING 431,097 888,073 0 1,319,170
=====================================================================
Net Asset Value and Redemption Price Per Share:
Fiduciary $ 1.00 - $ 1.00
Retail 1.00 - $ 1.00
Institutional - $ 1.00 -
Investment - 1.00 -
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments on
the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization (differences are due to rounding).
(See Notes to Pro Forma Financial Statements)
B-10
<PAGE> 294
HIGHMARK DIVERSIFIED MONEY MARKET FUND
STEPSTONE MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK
DIVERSIFIED STEPSTONE
MONEY MONEY PRO FORMA PRO FORMA
MARKET FUND MARKET FUND ADJUSTMENTS COMBINED
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Interest Income $ 22,468 $ 42,926 $ 65,394
----------------------------- ---------------
Total Income 22,468 42,926 65,394
EXPENSES:
Investment Adviser Fee 1,591 2,301 $ (402) (A) 3,490
Shareholder Services Fees 994 - - 994
Administration Fees 795 1,000 531 (B) 2,326
Custodian/Wire Agent Fee 221 76 (146) (C) 151
Professional Fees 63 113 (61) (C) 115
Registration Fees 47 108 (57) (C) 98
Distribution Fee 396 1,045 1,441
Trustees Fees 11 21 (10) (C) 22
Printing Costs 51 85 (74) (C) 62
Other 145 118 (210) (C) 53
---------------------------------------------------------------------
Total Expenses 4,314 4,867 (429) 8,752
Distribution Fee Waiver (392) (392)
Expenses Voluntarily Reduced (1,327) (168) (D) (1,495)
---------------------------------------------------------------------
Total Net Expenses 2,987 4,475 (597) 6,865
Net Investment Income 19,481 38,451 597 58,529
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments 16 - 16
---------------------------------------------------------------------
Change in net assets resulting from operations $ 19,497 $ 38,451 $ 597 $ 58,545
=====================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .30% of the Diversified
Money Market Fund (the "Fund") average daily net assets.
(B) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average aggregate
net assets of the Fund for the period.
(C) The adjustment is made to reflect the expense reductions due to the
combining of two portfolios into one.
(D) The Adviser has voluntarily agreed to waive fees to the extent necessary in
order to limit total operating expenses to not more than 75% for the Retail
Class of Shares and 50% for the Fiduciary Class of Shares for the Diversified
Money Market Fund.
(See Notes to Pro Forma Financial Statements)
B-11
<PAGE> 295
HIGHMARK DIVERSIFIED MONEY MARKET FUND
STEPSTONE MONEY MARKET FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Diversified Money Market Fund and Stepstone Money
Market Fund, collectively (the "Funds") as of July 31, 1996. These statements
have been derived from the books and records utilized in calculating daily net
assets values at July 31, 1996. The Pro Forma Combining Statement of Operations
reflects the accounts of HighMark Diversified Money Market Fund and Stepstone
Money Market Fund for the twelve months ended July 31, 1996, the most recent
fiscal year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Money Market Fund in exchange for Retail and Fiduciary
Class of Shares of the HighMark Diversified Money Market Fund. Under generally
accepted accounting principles, the Stepstone Money Market Fund will be the
surviving entity for accounting purposes with its historical cost of investment
securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 546,290
Fiduciary Class and 341,783 Retail Class shares of HighMark Diversified Money
Market Fund in exchange for 546,290 Institutional Class shares and 341,783
Investment Class shares, respectively.
B-12
<PAGE> 296
HIGHMARK 100% U.S. TREASURY MONEY MARKET FUND
STEPSTONE TREASURY MONEY MARKET FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the HighMark
100% U.S. Treasury Money Market Fund and the Stepstone Treasury Money Market
Fund as of and for the year ended July 31, 1996. These statements have been
derived from the Funds' books and records utilized in calculating daily net
asset value at July 31, 1996. The accompanying Pro Forma Combining Statement of
Operations reflects the accounts of HighMark 100% U.S. Treasury Money Market
Fund and Stepstone Treasury Money Market Fund for the year ended July 31, 1996,
the most recent fiscal year end of the Registrant.
HIGHMARK 100% U.S. TREASURY MONEY MARKET FUND
STEPSTONE TREASURY MONEY MARKET FUND
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
July 31, 1996
<TABLE>
<CAPTION>
HIGHMARK HIGHMARK
100% STEPSTONE 100% STEPSTONE
U.S. TREASURY U.S. TREASURY
TREASURY MONEY PRO FORMA TREASURY MONEY PRO FORMA
OBLIGATIONS MARKET COMBINED OBLIGATIONS MARKET COMBINED
FUNDS FUND FUNDS FUND
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT VALUE VALUE VALUE
(000's) (000'S)
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS
U.S. TREASURY BILLS (37.6%)
1,355 1,355 4.99%, 8/1/96(a) $ 1,355 $ 1,355
15,000 15,000 5.00%, 8/8/96(a) 14,985 14,985
2,303 2,303 5.01%, 8/8/96(a) 2,301 2,301
2,226 2,226 5.02%, 8/8/96(a) 2,224 2,224
5,000 5,000 5.03%, 8/8/96(a) 4,995 4,995
5,000 5,000 5.04%, 8/8/96(a) 4,995 4,995
10,192 10,192 4.96%, 8/15/96(a) 10,172 10,172
7,425 7,425 5.01%, 8/15/96(a) 7,411 7,411
5,000 5,000 5.03%, 8/15/96(a) 4,990 4,990
2,777 2,777 5.04%, 8/15/96(a) 2,772 2,772
1,067 1,067 4.95%, 8/22/96(a) 1,064 1,064
10,000 10,000 4.98%, 8/22/96(a) 9,971 9,971
10,000 10,000 5.02%, 8/22/96(a) 9,971 9,971
5,000 5,000 5.330%, 8/22/96(b) 4,984 4,984
2,000 2,000 5.48%, 8/22/96(a) 1,993 1,993
2,500 2,500 5.50%, 8/22/96(a) 2,492 2,492
4,744 4,744 4.98%, 8/29/96(a) 4,725 4,725
10,000 10,000 5.05%, 8/29/96(a) 9,961 9,961
</TABLE>
B-13
<PAGE> 297
<TABLE>
<S> <C> <C> <C> <C> <C>
2,023 2,023 5.04%, 9/5/96(a) 2,013 2,013
312 312 5.06%, 9/5/96(a) 310 310
4,572 4,572 5.07%, 9/5/96(a) 4,550 4,550
865 865 5.08%, 9/5/96(a) 861 861
15,000 15,000 5.10%, 9/5/96(a) 14,925 14,925
3,640 3,640 5.04%, 9/12/96(a) 3,618 3,618
892 892 5.07%, 9/12/96(a) 887 887
5,000 5,000 5.10%, 9/12/96(a) 4,970 4,970
7,703 7,703 5.11%, 9/12/96(a) 7,657 7,657
5,225 5,225 5.12%, 9/12/96(a) 5,193 5,193
5,000 5,000 5.050%, 9/19/96(b) 4,966 4,966
385 385 5.07%, 9/19/96(a) 382 382
6,651 6,651 5.09%, 9/19/96(a) 6,605 6,605
5,410 5,410 5.11%, 9/19/96(a) 5,373 5,373
4,828 4,828 5.13%, 9/19/96(a) 4,794 4,794
5,936 5,936 5.14%, 9/19/96(a) 5,895 5,895
5,000 5,000 5.04%, 10/3/96(a) 4,956 4,956
5,000 5,000 5.050%, 10/03/96(b) 4,965 4,956
1,227 1,227 5.09%, 10/3/96(a) 1,216 1,216
3,162 3,162 5.11%, 10/3/96(a) 3,134 3,134
3,077 3,077 5.11%, 10/10/96(a) 3,046 3,046
5,000 5,000 5.15%, 10/10/96(a) 4,950 4,950
5,000 5,000 5.005%, 10/17/96(b) 4,946 4,946
5,000 5,000 5.05%, 10/17/96(a) 4,946 4,946
2,034 2,034 5.09%, 10/17/96(a) 2,012 2,012
7,639 7,639 5.11%, 10/17/96(a) 7,556 7,556
4,000 4,000 5.07%, 10/24/96(a) 3,953 3,953
5,000 5,000 5.12%, 10/24/96(a) 4,940 4,940
5,000 5,000 5.34%, 1/9/97(a) 4,881 4,881
5,000 5,000 5.24%, 1/23/97(a) 4,873 4,873
5,000 5,000 4.91%, 2/6/97(a) 4,871 4,871
5,000 5,000 5.11%, 2/6/97(a) 4,866 4,866
10,000 10,000 5.170%, 2/06/97(b) 9,739 9,739
5,000 5,000 5.080%, 3/06/97(b) 4,847 4,847
5,000 5,000 5.16%, 4/3/97(a) 4,825 4,825
5,000 5,000 5.32%, 4/3/97(a) 4,819 4,819
5,000 5,000 5.270%, 5/01/97(b) 4,800 4,800
5,000 5,000 5.395%, 5/29/97(b) 4,774 4,774
Total U.S. Treasury Bills 234,254 44,012 278,266
U.S. TREASURY NOTES (12.2%)
10,000 10,000 7.25%, 8/31/96 10,013 10,013
10,000 10,000 7.25%, 8/31/96 10,011 10,011
10,000 10,000 6.500%, 09/30/96 10,013 10,013
5,000 5,000 6.875%, 10/31/96 5,021 5,021
5,000 5,000 7.250%, 11/15/96 5,029 5,029
5,000 5,000 7.500%, 01/31/97 5,063 5,063
5,000 5,000 6.875%, 02/28/97 5,044 5,044
10,000 5,000 15,000 6.625%, 03/31/97 10,072 5,035 15,107
5,000 5,000 8.500%, 04/15/97 5,093 5,093
5,000 5,000 10,000 6.500%, 04/30/97 5,031 5,028 10,059
</TABLE>
B-14
<PAGE> 298
<TABLE>
<S> <C> <C> <C> <C> <C>
10,000 10,000 6.500%, 05/15/97 10,052 10,052
Total U.S. Treasury Notes 35,127 55,378 90,505
U.S. TREASURY STRIPS (0.7%)
$5,000 $5,000 5.12%, 11/15/96(a) 4,925 4,925
Total U.S. Treasury strips 4,925 4,925
REPURCHASE AGREEMENTS (49.6%)
BZW Securities, Inc. 5.57%, dated
07/31/96, matures, 8/01/96, repurchase
price $21,020,834 (collateralized by
U.S. Treasury Note, par value
$21,051,000, matures 5/15/97: market
21,018 21,018 value $21,438,729) 21,018 21,018
Deutsche Morgan Grenfell/C.J. Lawrence,
Inc. 5.57%, dated 07/31/96, matures
08/01/96, repurchase price $109,672,965
(collateralized by various U.S. Treasury
Notes, total par value $56,736,000,
5.125% - 9.125%, 7/31/97 - 5/15/99:
various U.S. Treasury STRIPS, total par
value $291,000, 11/15/00 - 2/15/02:
U.S. Treasury Bill, par value
$55,512,000, matures 11/14/96: total
109,656 109,656 market value $111,849,455) 109,656 109,656
JP Morgan Securities, Inc. 5.57%, dated
07/31/96, matures 08/01/96, repurchase
price $21,699,282 (collateralized by
U.S. Treasury Note, par value
$22,085,000, matures 6/30/97: market
21,696 21,696 value $22,130,696) 21,696 21,696
Merrill Lynch Government Securities,
Inc. 5.57%, dated 07/31/96, matures
08/01/96, repurchase price $20,942,475
(collateralized by various U.S. Treasury
STRIPS, total par value $25,845,000,
7.875%-11.625%, 2/15/99-11/15/04: total
20,939 20,939 market value $21,359,466) 20,939 20,939
Morgan Stanley & Company, Inc. 5.57%,
dated 07/31/96, matures 08/01/96,
repurchase price $21,009,101
(collateralized by U.S.Treasury Note,
par value $20,905,000, 6.25%, matures
21,006 21,006 08/31/96: market value $21,454,36 21,006 21,006
Nomura Securities International, Inc.
5.57%, dated 07/31/96, matures 08/01/96,
repurchase price $41,356,048
(collateralized by various U.S. Treasury
Notes, total par value $33,386,000,
5.25%-8.75, 9/30/96-5/31/98: U.S.
Treasury Bonds, par value $6,685,000,
8.875%, matures 2/15/19: total market
41,350 41,350 value $42,177,205) 41,350 41,350
</TABLE>
B-15
<PAGE> 299
<TABLE>
<S> <C> <C> <C> <C> <C>
SBC Capital Markets, Inc. 5.57%, dated
07/31/96, matures 08/01/96, repurchase
price $21,470,650 (collateralized by
various U.S. Treasury Bills, total par
value $22,334,000,10/10/96 - 1/23/97:
21,467 21,467 total market value $21,901,787) 21,467 21,467
UBS Securities, Inc. 5.57%, dated
07/31/96, matures 08/01/96, repurchase
price $109,958,945 (collateralized by
various U.S. Treasury STRIPS, total par
value $242,405,000, 5/15/05-5/15/09:
109,942 109,942 total market value $112,142,600) 109,942 109,942
Total Repurchase Agreements (Cost $367,074) 367,074 367,074
Total Investments (100.0%)(Cost $740,770) $274,306 $466,464 $740,770
</TABLE>
(a) Discount yield at date of purchase.
(b) The rate reflected on the Statement of Net Assets represents the security's
effective yield.
STRIPS -- Separate Trading of Registered Interest and Principal of Securities
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-16
<PAGE> 300
HIGHMARK 100% U.S. TREASURY MONEY MARKET FUND
STEPSTONE TREASURY MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK
100% U.S. STEPSTONE
TREASURY TREASURY
MONEY MONEY PRO FORMA PRO FORMA
MARKET FUND MARKET FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $ 274,306 $ 99,390 $ 373,696
Repurchase Agreements - 367,074 367,074
----------------------------- ---------------
Total Investments 274,306 466,464 740,770
Cash - (1,390) $ 597 (A) (793)
Interest & Dividends Receivable 910 2,416 3,326
Prepaid Expenses and Other Assets 12 36 48
---------------------------------------------------------------------
Total Assets 275,228 467,526 597 743,351
LIABILITIES:
Distributions Payable 1,088 1,732 2,820
Payable for Capital Shares Redeemed - - -
Payable to Brokers - - -
Accrued Expenses and Other Payables 177 286 463
---------------------------------------------------------------------
Total Liabilities 1,265 2,018 - 3,283
NET ASSETS:
Capital 273,958 465,510 739,468
Undistributed net investment income - - 597 (A) 597
Accumulated undistributed net realized gain (loss) on
investment transactions 5 (2) 3
---------------------------------------------------------------------
NET ASSETS $ 273,963 $ 465,508 $ 597 $ 740,068
=====================================================================
Net Assets:
Fiduciary $ 173,340 $ 179,004 (A)(B) $ 352,344
Retail 100,623 287,101 (A)(B) 387,724
Institutional $ 178,720 (178,720) (B) -
Investment 286,788 (286,788) (B) -
---------------------------------------------------------------------
TOTAL $ 273,963 $ 465,508 $ 597 $ 740,068
=====================================================================
Shares Outstanding:
Fiduciary 173,332 178,701 (B) 352,033
Retail 100,626 286,809 (B) 387,435
Institutional 178,701 (178,701) (B) -
Investment 286,809 (286,809) (B) -
---------------------------------------------------------------------
TOTAL SHARES OUTSTANDING 273,958 465,510 0 739,466
=====================================================================
Net Asset Value and Redemption Price Per Share:
Fiduciary $ 1.00 - $ 1.00
Retail 1.00 - $ 1.00
</TABLE>
B-17
<PAGE> 301
<TABLE>
<S> <C> <C> <C> <C>
Institutional - $ 1.00 -
Investment - 1.00 -
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments on
the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization (differences are due to rounding).
(See Notes to Pro Forma Financial Statements)
B-18
<PAGE> 302
HIGHMARK 100% U.S. TREASURY MONEY MARKET FUND
STEPSTONE TREASURY MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK
100% U.S. STEPSTONE
TREASURY TREASURY
MONEY MONEY PRO FORMA PRO FORMA
MARKET FUND MARKET FUND ADJUSTMENTS COMBINING
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 16,193 $ 21,447 $ 37,640
Dividend Income - - -
----------------------------- --------------
Total Income 16,193 21,447 37,640
EXPENSES:
Investment Adviser Fee 1,203 1,170 (302) (A) 2,071
Shareholder Services Fees 752 - (B) 752
Administration Fees 602 508 271 (C) 1,381
Custodian/Wire Agent Fee 127 29 (66) (D) 90
Professional Fees 52 60 (44) (D) 68
Registration Fees 28 78 (48) (D) 58
Distribution Fee 267 847 1,114
Trustees Fees 9 8 (4) (D) 13
Printing Costs 42 33 (38) (D) 37
Other 109 66 (85) (D) 90
--------------------------------------------------------------------
Total Expenses 3,191 2,799 (317) 5,673
Investment Adviser Fee Waiver (195) (219) (A) (414)
Distribution Fee Waiver (318) (318)
Expenses Voluntarily Reduced (978) (61) (E) (1,039)
--------------------------------------------------------------------
Total Net Expenses 2,213 2,286 (597) 3,902
Net Investment Income 13,980 19,161 597 33,738
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments (51) 5 (46)
--------------------------------------------------------------------
Change in net assets resulting from operations $ 13,929 $ 19,166 $ 597 $ 33,692
====================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .30% of the 100% U.S.
Treasury Money Market Fund (the "Fund") average daily net assets. The Adviser
has voluntarily agreed to waive fees to the extent necessary in order to limit
total operating expenses. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
(B) To support the provision of Shareholder Services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. In consideration of services
provided by any service provider, which may include Union Bank of California,
N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective affiliates, the Fund
may pay a fee at the rate of up to .25% of its average daily net assets for the
period to such service provider. The service provider may voluntarily choose to
waive such fees at any time at its sole discretion. Currently such fees are
being waived to the rate of 0.00% of average daily net assets.
B-19
<PAGE> 303
(C) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average aggregate
net assets of the Fund for the period.
(D) The adjustment is made to reflect the expense reductions due to the
combining of two portfolios into one.
(E) The Adviser has voluntarily agreed to waive fees to the extent necessary in
order to limit total operating expenses to not more than .70% for the Retail
Class of Shares and .45% for the Fiduciary Class of Shares for the 100% U.S.
Treasury Money Market Fund.
(See Notes to Pro Forma Financial Statements)
B-20
<PAGE> 304
HIGHMARK 100% U.S. TREASURY MONEY MARKET FUND
STEPSTONE TREASURY MONEY MARKET FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark 100% U.S. Treasury Money Market Fund and Stepstone
Treasury Money Market Fund, collectively (the "Funds") as of July 31, 1996.
These statements have been derived from the books and records utilized in
calculating daily net assets values at July 31, 1996. The Pro Forma Combining
Statement of Operations reflects the accounts of HighMark 100% U.S. Treasury
Money Market Fund and Stepstone Treasury Money Market Fund for the twelve months
ended July 31, 1996, the most recent fiscal year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Treasury Money Market Fund in exchange for Retail and
Fiduciary Class of Shares of the HighMark 100% U.S. Treasury Money Market Fund.
Under generally accepted accounting principles, the Stepstone Treasury Money
Market Fund will be the surviving entity for accounting purposes with its
historical cost of investment securities and results of operations being
carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 178,701
Fiduciary Class and 287,809 Retail Class shares of HighMark 100% U.S. Treasury
Money Market Fund in exchange for 178,701 Institutional Class shares and 286,809
Investment Class shares, respectively.
B-21
<PAGE> 305
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the HighMark
California Tax-Free Money Market Fund and the Stepstone California Tax-Free
Money Market Fund as of and for the year ended July 31, 1996. These statements
have been derived from the Funds' books and records utilized in calculating
daily net asset value at July 31, 1996. The accompanying Pro Forma Combining
Statement of Operations reflects the accounts of HighMark California Tax-Free
Money Market Fund and Stepstone California Tax-Free Money Market Fund for the
year ended July 31, 1996, the most recent fiscal year end of the Registrant.
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
TAX- TAX- TAX- TAX-
FREE FREE FREE FREE
MONEY MONEY MONEY MONEY
MARKET MARKET PRO FORMA MARKET MARKET PRO FORMA
FUND FUND COMBINED FUND FUND COMBINED
PRINCIPAL PRINCIPAL PRINCIPAL VALUE VALUE VALUE
AMOUNT AMOUNT AMOUNT (000'S)
(000'S)
<S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (95.7%)
Alameda County, Multi-Family Housing, VRDN,
900 900 RB (A) (B) (C) 3.350%, 08/07/96 $ 900 $ 900
Anaheim Public Improvement Corporation, 1995
Police Facilities Refinancing Project, COP,
2,500 2,500 AMBAC Insured (A) 3.400%, 08/07/96 2,500 2,500
California Education Facilities Authority
California Institute of Technology, RB
760 760 5.700%, 01/01/97 766 766
California Education Facilities Authority
Carnegie Institute of Washington, TECP
2,000 2,000 3.450%, 09/06/96 2,000 2,000
California Education Facilities Authority
Carnegie Institute of Washington, TECP
1,000 1,000 3.600%, 08/23/96 1,000 1,000
California Education Facilities Authority
University of Southern California, Ser B, RB
700 700 6.450%, 10/01/96 703 703
California Health Facilities Finance
Authority St. Francis Medical, Ser F, RB,
3,000 3,000 MBIA Insured (A) 3.350%, 08/07/96 3,000 3,000
California Health Facilities Financing
Authority, Adventist Health Systems, VRDN,
1,500 1,500 RB (A) (B) (C) 3.250%, 08/07/96 1,500 1,500
</TABLE>
B-22
<PAGE> 306
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
California Health Facilities Financing
Authority, Catholic Health Care, Ser A,
1,000 1,000 VRDN, RB, MBIA Insured (A) (B) 3.350%, 08/07/96 1,000 1,000
California Health Facilities Financing
Authority, Kaiser Permanente, Ser A, 1989,
500 500 RB (A) (B) 6.500%, 10/01/96 502 502
California Health Facilities Financing
Authority, Kaiser Permanente, Ser A, 1993,
5,000 5,000 VRDN, RB (A) (B) 3.250%, 08/07/96 5,000 5,000
California Health Facilities Financing
Authority, Memorial Health Services, VRDN,
5,040 5,040 RB (A) (B) 3.250%, 08/07/96 5,040 5,040
California Health Facilities Financing
Authority, Pooled Loan Program, Ser B, VRDN,
500 500 RB, FGIC Insured (A) (B) 3.400%, 08/07/96 500 500
California Health Facilities Financing
Authority, Santa Barbara Cottage Hospital,
2,900 2,900 VRDN, RB (A) (B) (C) 3.250%, 08/07/96 2,900 2,900
California Health Facilities Financing
Authority, Sutter Health, Ser A, VRDN, RB
1,300 1,300 (A) (B) 3.550%, 08/07/96 1,300 1,300
California Pollution Control Finance
Authority Chevron U.S.A. Inc. Project,
1,460 1,460 3.700%, 05/15/97 1,460 1,460
California Pollution Control Finance
Authority, Exxon Project, VRDN, RB (A) (B)
5,000 5,000 (C) 3.400%, 08/07/96 5,000 5,000
California Pollution Control Finance
Authority, Ser A, Shell Oil, VRDN, RB (A)
3,200 3,200 (B) 3.500%, 08/07/96 3,200 3,200
California Pollution Control Finance
Authority, Ser B, Shell Oil, VRDN, RB (A)
300 300 (B) (C) 3.500%, 08/07/96 300 300
California Pollution Control Finance, GO
Authority, Southern California Edison, Ser
1,600 1,600 C, VRDN, RB (A) (B) 3.400%, 08/07/96 1,600 1,600
California Pollution Control Financing
1,000 1,000 Authority TECP (C) 3.600%, 08/15/96 1,000 1,000
California State, GO TECP (C) 3.300%,
2,000 2,000 08/22/96 2,000 2,000
California Statewide Communities Development
1,007 1,007 Authority, Ser A, GO FSA Insured 4.750%, 06/30/97 1,007 1,007
California Statewide Community Development
Authority, St. Joseph Health System, COP,
1,600 1,600 VRDN, RB (A) (B) 3.250%, 08/07/96 1,600 1,600
Contra Costa County, Park Regency Apartment,
5,025 5,025 Series 1992, 3.70%, 8/1/32, AMT (A) 5,025 5,025
Del Mar Racetrack Authority TECP (C) 3.450%,
1,000 1,000 08/15/96 1,000 1,000
Department of Water Resources, 3.35%,
2,500 2,500 11/29/96 2,500 2,500
Downey Civic Center Project COP, MBIA
500 500 Insured 4.000%, 02/01/97 500 500
East Bay, Municipal Utility District, Water
System Revenue AMBAC Insured, Escrowed To
500 500 Maturity 8.875%, 06/01/97 521 521
Eastern Municipal Water District, COP, Ser B
100 100 VRDN, RB, FGIC Insured (A) (B) 3.250%, 08/07/96 100 100
Escondido Unified School District, Ser A,
1,000 1,000 GO, FGIC Insured 3.400%, 09/01/96 1,000 1,000
Healdsburg Community Redevelopment Agency,
3,760 3,760 VRDN, RB (A) (B) (C) 3.500%, 08/07/96 3,760 3,760
Health Facilities Authority, Enloe Memorial
3,300 3,300 Hospital, 3.00%, 1/1/16 (A) 3,300 3,300
</TABLE>
B-23
<PAGE> 307
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Health Facilities Authority, Memorial Health
6,800 6,800 Services, 3.25%, 10/1/24 (A) 6,800 6,800
Health Finance Authority, Catholic
900 900 Healthcare West, 3.25%, 7/01/09 900 900
Health Finance Authority, Catholic
6,600 6,600 Healthcare West, 3.25%, 7/1/05 (A) 6,600 6,600
Health Finance Authority, Kaiser Permanente
6,900 6,900 Series, 3.25%, 5/1/28 (A) 6,900 6,900
Health Finance Authority, Pooled Program,
1,700 1,700 Series 1990 A, 3.40%, 9/1/20 (A) 1,700 1,700
Health Finance Authority, Pooled Program,
2,400 2,400 Series B, 3.40%, 10/1/10 (A) 2,400 2,400
Health Finance Authority, Santa Barbara
1,200 1,200 Cottage, 3.25%, 9/1/15 (A) 1,200 1,200
Health Finance Authority, Santa Barbara
1,000 1,000 Cottage, Series B, 3.25%, 9/1/05 (A) 1,000 1,000
Huntington Park Redevelopment Agency,
Huntington Park Personal Storage I Project,
1,085 1,085 VRDN, RB (A) (B) (C) 3.900%, 08/07/96 1,085 1,085
Irvine Ranch Water District, Consolidated
Refunding Ser 1995 B, VRDN, RB (A) (B) (C)
2,500 2,500 3.550%, 08/07/96 2,500 2,500
Irvine Ranch Water District, Consolidated
Ser 1989, VRDN, GO (A) (B) (C) 3.550%,
700 700 08/07/96 700 700
Irvine Ranch Water District, Waterworks
Bond, Improvement District # 182, Ser A,
300 300 VRDN, RB (A) (B) (C) 3.550%, 08/07/96 300 300
Kern County Public Facilities, Project
1,200 1,200 Series B, 3.35%, 8/1/06 (A) 1,200 1,200
Lancaster Multi-Family Housing, Westwood
1,700 1,700 Park Apartments, 3.40%, 12/1/07 (A) 1,700 1,700
Los Angeles Community Redevelopment Agency,
Multi-Family Housing Revenue, Skyline at
South Park Phase II RB (A) (C) 3.550%,
800 800 08/07/96 800 800
Los Angeles County Metro Transportation
Authority, Union Station Gateway Project,
6,800 6,800 3.25%, 7/2/25 (A) 6,800 6,800
Los Angeles County Pension Obligation, Ser
2,000 2,000 B, GO (A) (C) 3.400%, 08/07/96 2,000 2,000
Los Angeles County Pension Obligation, Ser
2,000 2,000 C, RB, AMBAC Insured (A) 3.400%, 08/07/96 2,000 2,000
Los Angeles County Transportation
4,700 4,700 Commission, 3.40%, 7/1/12 (A) 4,700 4,700
Los Angeles Department of Water & Power,
2,000 2,000 Electric Plant Revenue, TECP 3.000%, 8/13/96 2,000 2,000
Los Angeles Department of Water & Power,
3,000 3,000 Electric Plant Revenue, TECP 3.450%, 8/16/96 3,000 3,000
Los Angeles Multi-Family Housing, Crescent
700 700 Gardens, 3.40%, 7/1/14 (A) 700 700
Los Angeles Multi-Family Housing, Series K,
3,700 3,700 3.25%, 7/1/10 (A) 3,700 3,700
Los Angeles Multi-Family Housing, Southpark
7,500 7,500 Apartment Project, 3.55%, 12/1/05 (A) 7,500 7,500
Los Angeles Waste Water System, TECP (C)
3,000 3,000 3.500%, 08/29/96 3,000 3,000
Metropolitan Water District of Southern
3,700 3,700 California, 3.25%, 6/1/23 3,700 3,700
Oxnard Housing Authority, Seawood Apartments
2,800 2,800 Project, 3.65%, 12/1/20, AMT (A) 2,800 2,800
</TABLE>
B-24
<PAGE> 308
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Pollution Control Finance Authority, Burney
7,200 7,200 Forest 1988, 3.70%, 9/1/20, AMT (A) 7,200 7,200
Pollution Control Finance Authority, Delano
1,900 1,900 Project 1989, 3.65%, 8/1/19, AMT (A) 1,900 1,900
Pollution Control Finance Authority, Delano
2,310 2,310 Project 1990, 3.65%, 8/1/19, AMT (A) 2,310 2,310
Pollution Control Finance Authority, Delano
3,000 3,000 Project 1991, 3.65%, 8/1/19, AMT (A) 3,000 3,000
Pollution Control Finance Authority, Honey
Lake Power Project, Series 88, 3.65%,
2,600 2,600 9/1/18, AMT 2,600 2,600
Pollution Control Finance Authority, North
County Recycling Center, Series B, 3.40%,
1,700 1,700 7/1/17 (A) 1,700 1,700
Pollution Control Finance Authority, Pacific
500 500 Gas & Electric, Series 88C, 3.35%, 8/15/96 500 500
Pollution Control Finance Authority,
Southern California Edison, Series 85C,
1,550 1,550 3.15%, 8/1/96 1,550 1,550
Pollution Control Finance Authority,
Southern California Edison, Series 85C,
500 500 3.20%, 9/10/96 500 500
Pollution Control Finance Authority,
Southern California Edison, Series 85C,
4,000 4,000 3.35%, 10/1/96 4,000 4,000
Pollution Control Finance Authority,
Southern California Edison, Series 85C,
1,200 1,200 3.45%, 11/14/96 1,200 1,200
Pollution Control Finance Authority,
Southern California Edison, Series 85C,
3,200 3,200 3.55%, 9/24/96 3,200 3,200
Pollution Control Finance Authority,
Southern California Edison, Series 85C,
2,600 2,600 3.55%, 9/6/96 2,600 2,600
Pollution Control Finance Authority,
Southern California Edison, Series 85C,
500 500 3.60%, 1/15/97 500 500
Pollution Control Finance Authority,
Southern California Edison, Series 85D,
1,000 1,000 3.35%, 9/10/96 1,000 1,000
Pollution Control Finance Authority,
Southern California Edison, Series 86A,
1,100 1,100 3.40%, 2/28/08 (A) 1,100 1,100
Pollution Control Finance Authority,
Southern California Edison, Series 86B,
1,400 1,400 3.40%, 2/28/08 (A) 1,400 1,400
Pollution Control Finance Authority,
Southern California Edison, Series 86C,
2,000 2,000 3.40%, 2/28/08 2,000 2,000
Pollution Control Finance Authority,
Southern California Edison, Series 86D,
2,200 2,200 3.40%, 2/28/08 (A) 2,200 2,200
Riverside County Sales Tax Revenue, TECP (C)
1,000 1,000 3.350%, 8/6/96 1,000 1,000
Riverside County Sales Tax Revenue, TECP (C)
500 500 3.650%, 8/8/96 500 500
Sacramento County Multi-Family Housing
Authority, River Oaks Apartments, 3.55%,
2,200 2,200 9/15/07 2,200 2,200
Sacramento County Multi-Family Housing,
Riveroaks Apartments, VRDN, RB (A) (B) (C)
5,000 5,000 3.550%, 08/07/96 5,000 5,000
5,000 5,000 San Benardino County, TRAN, 4.50%, 6/30/97 5,027 5,027
San Bernadino County Housing Authority,
Victoria Terrace, Project A, VRDN, RB (A)
2,450 2,450 (B) (C) 3.350%, 08/07/96 2,450 2,450
San Bernadino Multi-Family Housing, Western
#3 Project, VRDN, RB (A) (B) (C) 3.400%,
2,500 2,500 08/07/96 2,500 2,500
San Bernadino Multi-Family Housing, Western
#4 Project, VRDN, RB (A) (B) (C) 3.400%,
2,500 2,500 08/07/96 2,500 2,500
San Bernadino Transportation Authority,
Sales Tax Revenue, VRDN, RB (A) (B) (C)
3,455 3,455 3.300%, 08/07/96 3,455 3,455
</TABLE>
B-25
<PAGE> 309
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
San Diego County Transportation Commission,
4,100 4,100 Sales Tax Revenue, TECP (C) 3.350%, 09/04/96 4,100 4,100
San Diego County Water Authority, TECP (C)
1,000 1,000 3.250%, 08/02/96 1,000 1,000
San Diego MTDB Authority, RB 4.250%,
1,010 1,010 09/01/96 1,011 1,011
San Diego Multi-Family Housing, University
Town Center Apartments, 1993 Issued, VRDN,
1,500 1,500 RB (A) (B) 3.300%, 08/07/96 1,500 1,500
San Jose Unified School District, County of
2,000 2,000 Santa Clara, TRAN 4.750%, 09/19/96 2,002 2,002
San Jose Unified School District, Santa
2,000 2,000 Clara County, TRAN 4.500%, 08/05/97 2,011 2,011
San Jose, Multi-Family Housing, Somerset
500 500 Park, 3.55%, 11/1/17, AMT (A) 500 500
3,000 3,000 San Mateo County, TRAN 4.500%, 07/01/97 3,015 3,015
San Mateo Union High School District, TRAN
1,000 1,000 4.250%, 07/10/97 1,002 1,002
Santa Clara Transport Authority, VRDN, RB
1,000 1,000 (A) (B) (C) 3.550%, 08/07/96 1,000 1,000
SCAPPA, Revenue, 91 Refunding Series, 3.40%,
2,900 2,900 7/1/19 (A) 2,900 2,900
2,500 2,500 Solano County, TRAN 4.500%, 11/01/96 2,504 2,504
Southern California Metro Water District,
Water Revenue VRDN, Ser 1996-A, RB, AMBAC
1,300 1,300 Insured (A) 3.250%, 08/07/96 1,300 1,300
Southern California Metro Water, TECP (C)
1,000 1,000 3.450%, 08/16/96 1,000 1,000
State of California, Tax Exempt Commercail
3,000 3,000 Paper, 3.10%, 8/7/96 3,000 3,000
State of California, Tax Exempt Commercial
1,000 1,000 Paper, 3.35%, 11/14/96 1,000 1,000
State of California, Tax Exempt Commercial
2,000 2,000 Paper, 3.55%, 9/13/96 2,000 2,000
Statewide Community Development Authority,
6,865 6,865 Series 95A, 3.45%, 5/15/25 (A) 6,866 6,866
Tracy Multi-Family Housing Refunding,
Sycamore Village Apartments, VRDN, RB (A)
2,300 2,300 (B) (C) 3.150%, 08/07/96 2,300 2,300
Turlock Irrigation District Transmission
1,000 1,000 Projects, COP, Ser A (A) (C) 3.300%,
08/07/96 1,000 1,000
Vacaville Mutli-Family Housing, The
900 900 Sycamores Apartments, 3.40%, 4/1/05 (A) 900 900
Vallejo Housing Authority, Multi-Family
Revenue, Crow Western Project Phase II,
5,200 5,200 VRDN, RB (A) (B) (C) 3.600%, 08/07/96 5,200 5,200
Vallejo Housing Authority, Multi-Family
Revenue, Fountain Plaza Hills Apartments,
1992 A, VRDN, RB, FNMA Insured (A) (B)
900 900 3.350%, 08/07/96 900 900
Walnut Creek Multi-Family Housing, Creekside
1,000 1,000 Drive Apartments, 3.40%, 4/1/07 (A) 1,000 1,000
West Covina Redevelopment Agency, Lakes
Public Parking Project, VRDN, RB (A) (B) (C)
2,025 2,025 4.250%, 08/07/96 2,025 2,025
Total California Municipal Bonds 136,978 120,319 257,297
</TABLE>
B-26
<PAGE> 310
<TABLE>
<CAPTION>
Shares Shares Shares
<S> <C> <C> <C> <C> <C>
INVESTMENT COMPANIES (4.3%)
Goldman Sachs California Tax-Exempt Money
5,214 5,214 Market Fund 5,214 5,214
6,312 6,312 Provident California Money Market Fund 6,312 6,312
Total Investment Companies 11,526 - 11,526
Total Investments (Cost $268,823) 148,504 120,319 268,823
</TABLE>
(A) Floating Rate Security - The rate reflected on the Statement of Net
Assets is the rate effective on July 31, 1996.
(B) Put and Demand Feature - The date reported is the lesser of the
maturity or the put date.
(C) Securities are held in conjunction with a letter of credit by
a major commercial bank or financial institution.
AMBAC - American Municipal Bond Assurance Corporation
AMT - Alternative Minimum Tax Paper
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Company
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance
GO - General Obligation
MBIA - Municipal Bond Investors Assurance
RB - Revenue Bond
Ser - Series
TECP - Tax Exempt Commercial Paper
TRAN - Tax and Revenue Anticipation Note
VRDN - Variable Rate Demand Note
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-27
<PAGE> 311
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
CALIFORNIA CALIFORNIA
TAX-FREE TAX-FREE
MONEY MONEY PRO FORMA PRO FORMA
MARKET FUND MARKET FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $148,504 $120,319 $268,823
Repurchase Agreements
----------------------------- --------------
Total Investments 148,504 120,319 268,823
Cash 897 2,437 $ 232 (A) 3,566
Interest & Dividends Receivable 432 613 1,045
Receivable from Brokers 2,500 2,500
Prepaid Expenses and Other Assets 10 11 21
Capital Shares Sold Receivable
----------------------------------------------------------------------
Total Assets 152,343 123,380 232 275,955
LIABILITIES:
Distributions Payable 287 270 557
Payable to Brokers 2,011 2,011
Accrued Expenses and Other Payables 77 112 189
----------------------------------------------------------------------
Total Liabilities 364 2,393 2,757
NET ASSETS:
Capital 152,028 120,988 273,016
Undistributed net investment income 232 (A) 232
Accumulated undistributed net realized gain (loss) on
investment transactions (49) (1) (50)
----------------------------------------------------------------------
NET ASSETS $ 151,979 $ 120,987 $ 232 $ 273,198
======================================================================
</TABLE>
B-28
<PAGE> 312
<TABLE>
<S> <C> <C> <C> <C>
Net Assets:
Fiduciary $ 98,352 $ 37,808 (A)(B) $136,160
Retail 53,627 83,411 137,038
Institutional $37,693 (37,693) (B)
Investment 83,294 (83,294) (B)
---------------------------------------------------------------------
TOTAL $151,979 $120,987 $ 232 $ 273,198
=====================================================================
Shares Outstanding:
Fiduciary 98,389 37,690(B) 136,079
Retail 53,639 83,298(B) 136,937
Institutional 37,690 (37,690)(B)
Investment 83,298 (83,298)(B)
---------------------------------------------------------------------
TOTAL SHARES OUTSTANDING 152,028 120,988 (0) 273,016
=====================================================================
Net Asset Value and Redemption Price Per Share:
Fiduciary $ 1.00 $ 1.00
Retail 1.00 $ 1.00
Institutional $ 1.00
Investment $ 1.00
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments on
the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the reorganization
(differences are due to rounding).
(See Notes to Pro Forma Financial Statements)
B-29
<PAGE> 313
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
CALIFORNIA CALIFORNIA
TAX-FREE TAX-FREE
MONEY MONEY PRO FORMA PRO FORMA
MARKET FUND MARKET FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 5,301 $ 4,028 $ 9,329
Dividend Income
-------------------------------------------------------------------
Total Income 5,301 4,028 - 9,329
EXPENSES:
Investment Adviser Fee 618 350 $(155) (A) 813
Shareholder Services Fees 386 386
Administration Fees 309 152 (81) (C) 42
Custodian/Wire Agent Fee 111 17 (93) (D) 35
Professional Fees 29 21 (23) (D) 27
Registration Fees 5 12 6 (D) 23
Distribution Fee 122 314 436
Trustees Fees 5 2 (2) (D) 5
Printing Costs 23 11 (20) (D) 14
Other 61 (1) (30) (D) 30
-------------------------------------------------------------------
Total Expenses 1,669 878 (235) 2,312
Investment Adviser Fee Waiver (242) (327) (A) (569)
Distribution Fee Waiver (54) (54)
Expenses Voluntarily Reduced (824) 330 (E) (494)
Expense Reimbursements
-------------------------------------------------------------------
Total Net Expenses 845 582 (232) 1,195
Net Investment Income 4,456 3,446 232 8,134
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments
1 1
-------------------------------------------------------------------
Change in net assets resulting from operations $ 4,456 $ 3,447 $ 232 $ 8,135
===================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .30% of the California
Tax-Free Money Market Fund (the "Fund") average daily net assets. The Adviser
has voluntarily agreed to waive fees to the extent necessary in order to limit
total operating expenses. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
B-30
<PAGE> 314
(B) To support the provision of Shareholder Services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. In consideration of services
provided by any service provider, which may include Union Bank of California,
N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective affiliates, the Fund
may pay a fee at the rate of up to .25% of its average daily net assets for the
period to such service provider. The service provider may voluntarily choose to
waive such fees at any time at its sole discretion. Currently such fees are
being waived to the rate of 0.00% of average daily net assets.
(C) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average aggregate
net assets of the Fund for the period.
(D) The adjustment is made to reflect the expense reductions due to the
combining of two portfolios into one.
(E) The Adviser has voluntarily agreed to waive fees to the extent necessary in
order to limit total operating expenses to not more than .55% for the Retail
Class of Shares and .30% for the Fiduciary Class of Shares for the California
Tax-Free Money Market Fund.
(See Notes to Pro Forma Financial Statements)
B-31
<PAGE> 315
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark California Tax-Free Money Market Fund and Stepstone
California Tax-Free Money Market Fund, collectively (the "Funds") as of July 31,
1996. These statements have been derived from the books and records utilized in
calculating daily net assets values at July 31, 1996. The Pro Forma Combining
Statement of Operations reflects the accounts of HighMark California Tax-Free
Money Market Fund and Stepstone California Tax-Free Money Market Fund for the
twelve months ended July 31, 1996, the most recent fiscal year of the
Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone California Tax-Free Money Market Fund in exchange for Retail
and Fiduciary Class of Shares of the HighMark California Tax-Free Money Market
Fund. Under generally accepted accounting principles, the Stepstone California
Tax-Free Money Market Fund will be the surviving entity for accounting purposes
with its historical cost of investment securities and results of operations
being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 37,690
Fiduciary Class and 83,298 Retail Class shares of HighMark California Tax-Free
Money Market Fund in exchange for 37,690 Institutional Class shares and 83,298
Investment Class shares, respectively.
B-32
<PAGE> 316
HIGHMARK BALANCED FUND
STEPSTONE BALANCED FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the Stepstone
Balanced Fund and the HighMark Balanced Fund as of and for the year ended July
31, 1996. These statements have been derived from the Funds' books and records
utilized in calculating daily net asset value at July 31, 1996. The accompanying
Pro Forma Combining Statement of Operations reflects the accounts of Stepstone
Balanced Fund and HighMark Balanced Fund for the year ended July 31, 1996, the
most recent fiscal year end of the Registrant.
HIGHMARK BALANCED FUND
STEPSTONE BALANCED FUND
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
BALANCED BALANCED PRO FORMA BALANCED BALANCED PRO FORMA
FUND FUND COMBINED FUND FUND COMBINED
SHARES SHARES SHARES VALUE VALUE VALUE
(000'S)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS (58.3%)
AEROSPACE & DEFENSE (0.8%)
30,000 30,000 Litton Industries(a) $1,290 $1,290
23,600 23,600 Watkins Johnson 510 510
5,800 5,800 B.F. Goodrich Co. $ 210 210
5,400 5,400 Raytheon Co. 262 262
472 1,800 2,272
AIR TRANSPORTATION (0.4%)
35,000 35,000 KLM Royal Dutch Air(a) 1,103 1,103
1,300 1,300 Federal Express Corp. (a) 101 101
2,200 2,200 Southwest Airlines Co. 55 55
156 1,103 1,259
AIRCRAFT (1.2%)
25,000 25,000 Lockheed Martin 2,072 2,072
20,000 20,000 Textron 1,600 1,600
3,672 3,672
APPAREL/TEXTILES (0.3%)
20,000 20,000 Springs Industries, Cl A 913 913
913 913
AUTOMOTIVE (0.5%)
45,610 45,610 Chrysler 1,294 1,294
5,900 5,900 Ford Motor Co. 192 192
192 1,294 1,486
BANKS (2.3%)
2,970 2,970 Banc One Corp. 103 103
25,000 25,000 Bank of Boston(a) 1,325 1,325
24,000 24,000 Bank of New York 1,236 1,236
</TABLE>
B-33
<PAGE> 317
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
4,800 4,800 BankAmerica Corp. 383 383
3,300 3,300 Chase Manhattan Corp. 229 229
10,000 10,000 First Union 635 635
8,000 8,000 Fleet Financial Group, Inc. 324 324
1,300 13,000 14,300 J.P. Morgan 112 1,118 1,230
3,300 3,300 National City Corp. 114 114
6,000 10,000 16,000 Norwest 213 355 568
2,400 2,400 Wachovia Corp. 106 106
19,000 19,000 Wilmington Trust 589 589
1,584 5,258 6,842
BROADCASTING, NEWSPAPERS &
ADVERTISING (0.5%)
40,000 40,000 Viacom, Cl B(a) 1,400 1,400
1,400 1,400
BUILDING MATERIALS (0.1%)
5,600 5,600 Masco Corp. 156 156
156 156
BUSINESS EQUIPMENT & SERVICES (0.1%)
1,900 1,900 Dun & Bradstreet Corp. 109 109
2,800 2,800 Pitney Bowes, Inc. 136 136
245 245
CHEMICALS (3.6%)
20,000 20,000 Avery Dennison 1,035 1,035
3,000 3,000 Betz Labs, Inc. 136 136
66,000 66,000 Cabot 1,658 1,658
1,400 1,400 Dow Chemical Co. 104 104
1,400 17,500 18,900 E.I. duPont De Nemours 113 1,413 1,526
40,100 40,100 First Mississippi 852 852
33,400 33,400 Georgia Gulf 1,027 1,027
5,000 50,000 55,000 Monsanto 156 1,563 1,719
25,000 25,000 Morton International 900 900
20,000 20,000 W.R. Grace 1,275 1,275
33,400 33,400 Wellman 651 651
509 10,374 10,883
COMMERCIAL GOODS & SERVICES (0.0%)
3,000 3,000 National Services Industries, Inc. 114 114
114 114
COMMUNICATIONS/ELECTRONIC
EQUIPMENT (2.0%)
7,600 7,600 AMP, Inc. 294 294
2,600 2,600 Duracell International, Inc. 117 117
2,500 2,500 Emerson Electric Co. 211 211
7,700 7,700 General Electric Co. 634 634
17,600 17,600 Harris 1,012 1,012
5,600 5,600 Intel Corp. 421 421
15,000 15,000 ITT(a) 851 851
4,800 24,000 28,800 Motorola 259 1,296 1,555
13,100 13,100 Sprint 480 480
4,100 4,100 Texas Instruments, Inc. 177 177
3,300 3,300 Thomas & Betts Corp. 120 120
2,233 3,639 5,872
</TABLE>
B-34
<PAGE> 318
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ENVIRONMENTAL SERVICES (0.0%)
6,000 6,000 Browning-Ferris Industries, Inc. 134 134
134 134
COMPUTERS & SOFTWARE SERVICES (2.8%)
32,500 32,500 Compaq Computer (a) 1,779 1,779
46,125 46,125 Computer Associates International 2,347 2,347
1,900 1,900 Electronic Data Systems Corp. (a) 101 101
36,000 36,000 Hewlett Packard 1,584 1,584
2,000 15,000 17,000 IBM 216 1,618 1,834
1,300 1,300 Microsoft Corp. (a) 153 153
35,000 35,000 Network Equipment Technologies(a) 464 464
2,800 2,800 Seagate Technology, Inc. (a) 136 136
2,400 2,400 Shared Medical Systems Corp. 132 132
738 7,792 8,530
CONCRETE & MINERAL PRODUCTS (0.4%)
85,000 85,000 Hanson PLC, ADR 1,084 1,084
3,700 3,700 Fleetwood Enterprises, Inc. 112 112
112 1,084 1,196
COSMETICS & TOILETRIES (0.1%)
2,900 2,900 Colgate-Palmolive Co. 228 228
International Flavors & Fragrances,
2,600 2,600 Inc. 111 111
339 339
DRUGS (4.1%)
2,600 2,600 Abbott Laboratories 114 114
30,000 30,000 American Home Products 1,703 1,703
30,000 30,000 Astra, Cl A, ADR 1,268 1,268
15,000 15,000 Bristol-Myers Squibb 1,299 1,299
35,000 35,000 Mallinckrodt Group 1,308 1,308
3,800 20,000 23,800 Merck 244 1,285 1,529
3,300 3,300 Pfizer, Inc. 231 231
30,000 30,000 Pharmacia & Upjohn 1,238 1,238
1,800 1,800 Schering-Plough Corp. 99 99
28,000 28,000 SmithKline Beecham 1,505 1,505
4,600 30,000 34,600 Warner Lambert 251 1,635 1,886
939 11,241 12,180
ELECTRICAL UTILITIES (0.9%)
4,600 4,600 FPL Group, Inc. 209 209
15,000 15,000 Nipsco Industries 561 561
49,000 49,000 Ohio Edison 1,029 1,029
9,500 9,500 PacifiCorp 198 198
9,000 9,000 Potomac Electric Power Co. (a) 217 217
6,500 6,500 Public Service Enterprise Group, Inc. 170 170
5,100 5,100 Texas Utilities Co. 214 214
1,008 1,590 2,598
ENTERTAINMENT (0.5%)
25,000 25,000 Walt Disney 1,391 1,391
1,391 1,391
FINANCIAL SERVICES (3.7%)
30,000 30,000 American Express 1,313 1,313
6,600 6,600 American General Corp. 230 230
</TABLE>
B-35
<PAGE> 319
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
53,600 53,600 BRE Properties, Cl A 1,139 1,139
48,900 48,900 CBL and Associates Properties 1,057 1,057
35,000 35,000 Donaldson, Lufkin, & Jenrette 1,037 1,037
7,600 60,000 67,600 FNMA 241 1,905 2,146
25,000 25,000 ITT Hartford Group(a) 1,322 1,322
20,000 20,000 MBNA 558 558
21,900 21,900 Post Properties 758 758
37,099 37,099 Travelers 1,567 1,567
471 10,656 11,127
FOOD, BEVERAGE & TOBACCO (2.9%)
6,200 6,200 Anheuser-Busch Co. 463 463
67,250 67,250 Archer Daniels Midland 1,194 1,194
5,600 5,600 Coca-Cola Co. 263 263
3,700 3,700 General Mills, Inc. 201 201
6,450 6,450 H. J. Heinz Co. 213 213
1,500 1,500 Hershey Foods Corp. 123 123
60,000 60,000 IBP 1,403 1,403
8,200 30,000 38,200 Pepsico 259 949 1,208
2,500 14,400 16,900 Philip Morris 262 1,507 1,769
1,700 1,700 Ralston-Purina Co. 107 107
25,000 25,000 Sara Lee 800 800
26,000 26,000 Universal Foods 777 777
6,200 6,200 UST, Inc. 206 206
2,097 6,630 8,727
FORESTRY & PAPER PRODUCTS (1.8%)
2,700 2,700 Georgia Pacific Corp. 202 202
2,200 2,200 International Paper Co. 83 83
1,500 1,500 Kimberly Clark Corp. 114 114
10,000 Kimberly-Clark 760 760
19,000 Mead 1,040 1,040
25,000 25,000 Rayonier 959 959
20,000 Weyerhaeuser 835 835
4,000 4,000 Weyerhaeuser Co. 167 167
19,000 Willamette Industries 1,116 1,116
566 4,710 5,276
GAS/NATURAL GAS (1.2%)
30,000 30,000 Coastal 1,118 1,118
31,100 31,100 Westcoast Energy 482 482
38,800 38,800 Williams 1,780 1,780
2,600 2,600 Consolidated Natural Gas Co. 131 131
4,100 4,100 Pacific Enterprises 121 121
1,900 1,900 Tenneco, Inc. 94 94
346 3,380 3,726
HEALTH CARE - GENERAL (0.2%)
2,500 2,500 Bristol-Myers Squibb Co. 217 217
5,000 5,000 Johnson & Johnson 239 239
456 456
HOSPITAL SUPPLY & MANAGEMENT (0.1%)
4,100 4,100 Columbia/HCA Healthcare Corp. 210 210
210 210
HOTELS & LODGING (0.3%)
</TABLE>
B-36
<PAGE> 320
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
10,000 10,000 Hilton Hotels 1,020 1,020
1,020 1,020
HOUSEHOLD FURNITURE & FIXTURES (0.3%)
31,200 31,200 Leggett & Platt 811 811
811 811
HOUSEHOLD PRODUCTS (0.3%)
14,100 14,100 Whirlpool 694 694
6,100 6,100 Rubbermaid, Inc. 175 175
175 694 869
INSURANCE (2.6%)
37,500 37,500 AFLAC 1,200 1,200
1,761 25,759 27,520 Allstate(a) 79 1,153 1,232
40,000 40,000 Equifax 1,005 1,005
50,000 50,000 Equitable 1,150 1,150
1,500 1,500 General Re Corp. 220 220
Hartford Steam Boiler Inspection &
2,100 2,100 Insurance Co. 92 92
2,250 2,250 Jefferson Pilot Corp. 118 118
30,000 30,000 Lincoln National 1,279 1,279
3,300 3,300 Marsh & McLennan Cos., Inc. 299 299
1,900 1,900 St. Paul Cos., Inc. 98 98
60,000 60,000 USF&G 953 953
906 6,740 7,646
LEASING & RENTING (0.5%)
42,250 42,250 Comdisco 1,003 1,003
15,000 15,000 Xtra 634 634
1,637 1,637
LUMBER & WOOD PRODUCTS (0.2%)
32,800 32,800 Louisiana-Pacific 668 668
668 668
MACHINERY (3.7%)
40,000 40,000 Applied Materials(a) 955 955
20,000 20,000 Briggs & Stratton 753 753
50,000 50,000 Commercial Intertech 1,275 1,275
25,000 25,000 Cummins Engine 934 934
37,500 37,500 Deere 1,341 1,341
50,000 50,000 Dresser Industries 1,350 1,350
16,600 16,600 General Electric 1,367 1,367
50,000 50,000 Global Industries Technologies(a) 850 850
35,000 35,000 Parker-Hannifin 1,221 1,221
4,300 4,300 Snap-On, Inc. 191 191
25,000 25,000 Toro 759 759
191 10,805 10,996
MANUFACTURING (0.1%)
500 500 Imation Corp. (a) 11 11
2,700 2,700 Ingersoll-Rand Co. 115 115
2,500 2,500 Service Corp. International 138 138
264 264
MEDICAL PRODUCTS & SERVICES (2.1%)
30,000 30,000 Bausch & Lomb 1,065 1,065
5,000 26,200 31,200 Baxter International 208 1,091 1,299
</TABLE>
B-37
<PAGE> 321
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
25,000 25,000 Columbia/HCA Healthcare(a) 1,281 1,281
60,000 60,000 Tenet Healthcare(a) 1,163 1,163
50,000 50,000 Vencor(a) 1,369 1,369
208 5,969 6,177
MOTOR VEHICLE PARTS (0.0%)
2,400 2,400 Genuine Parts Co. 102 102
102 102
MULTIPLE INDUSTRY (0.2%)
10,800 10,800 Corning, Inc. 398 398
5,000 5,000 Minnesota Mining & Manufacturing Co. 325 325
723 723
PETROLEUM & FUEL PRODUCTS (0.7%)
50,000 50,000 Occidental Petroleum 1,119 1,119
38,400 38,400 Union Pacific Resources Group 1,013 1,013
2,132 2,132
PETROLEUM REFINING (4.1%)
4,600 4,600 Amoco Corp. 308 308
29,000 29,000 Ashland 1,062 1,062
1,900 1,900 Atlantic Richfield Co. 220 220
5,600 28,000 33,600 Chevron 324 1,621 1,945
35,000 35,000 Diamond Shamrock R&M 971 971
2,700 2,700 Exxon Corp. 222 222
36,300 36,300 Imperial Oil 1,516 1,516
2,000 15,000 17,000 Mobil 221 1,656 1,877
6,700 6,700 Phillips Petroleum Co. 265 265
9,800 9,800 Royal Dutch Petroleum, ADR 1,479 1,479
2,400 2,400 Texaco, Inc. 204 204
30,000 30,000 Unocal 979 979
62,000 62,000 USX-Marathon Group 1,271 1,271
1,764 10,555 12,319
PETROLEUM SERVICES (0.1%)
9,300 9,300 Baker Hughes, Inc. 273 273
2,000 2,000 Halliburton Co. 104 104
377 377
PHOTOGRAPHIC EQUIPMENT & SUPPLIES
(0.8%)
1,600 15,000 16,600 Eastman Kodak 120 1,119 1,239
24,000 24,000 Xerox 1,209 1,209
120 2,328 2,448
PRECIOUS METALS (0.2%)
23,636 23,636 Barrick Gold 659 659
659 659
PRINTING & PUBLISHING (2.1%)
28,400 28,400 Belo, Cl A 1,143 1,143
3,500 3,500 Gannett Co., Inc. 230 230
25,000 25,000 Houghton Mifflin 1,175 1,175
45,000 45,000 Lafarge 821 821
50,000 50,000 Media General 1,431 1,431
40,000 40,000 Time Warner 1,395 1,395
230 5,965 6,195
RAILROADS (1.4%)
3,100 20,000 23,100 Burlington Northern Santa Fe 245 1,578 1,823
</TABLE>
B-38
<PAGE> 322
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
16,400 16,400 Conrail Holding 1,074 1,074
2,100 15,000 17,100 Union Pacific 144 1,028 1,172
389 3,680 4,069
REAL ESTATE (0.6%)
35,000 35,000 First Industrial Realty Trust 823 823
52,000 52,000 JP Realty 1,099 1,099
1,922 1,922
REPAIR SERVICES (0.7%)
21,000 21,000 PHH 1,118 1,118
92,800 92,800 Rollins Truck Leasing 998 998
2,116 2,116
RESTAURANTS (0.0%)
6,800 6,800 Brinker International, Inc. 89 89
89 89
RETAIL (1.3%)
5,500 5,500 Albany International, Class A 102 102
33,000 33,000 American Stores 1,229 1,229
2,200 2,200 Home Depot, Inc. 111 111
4,400 4,400 J.C. Penney, Inc. 219 219
15,000 15,000 Kroger(a) 566 566
2,800 37,000 39,800 Sears Roebuck 115 1,517 1,632
6,900 6,900 Wal-Mart Stores, Inc. 165 165
712 3,312 4,024
RUBBER & PLASTIC (0.6%)
40,572 40,572 Mark IV Industries 852 852
20,000 20,000 Tupperware 855 855
1,707 1,707
SEMI-CONDUCTORS/INSTRUMENTS (1.3%)
20,000 20,000 AMP 773 773
30,000 30,000 Intel 2,254 2,254
70,000 70,000 National Semiconductor 989 989
4,016 4,016
STEEL & STEEL WORKS (0.4%)
23,900 23,900 Engelhard 490 490
9,600 9,600 Texas Industries 643 643
1,133 1,133
TELEPHONES & TELECOMMUNICATION (2.2%)
11,400 40,000 51,400 Airtouch Communications(a) 313 1,100 1,413
3,800 3,800 Ameritech Corp. 211 211
4,500 17,271 21,771 AT&T 235 900 1,135
20,000 20,000 Bell Atlantic 1,183 1,183
5,000 5,000 BellSouth Corp. 205 205
2,100 2,100 DSC Communications Corp.(a) 63 63
33,400 33,400 Frontier 939 939
5,700 5,700 GTE Corp. 235 235
400 400 Lucent Technologies, Inc. 15 15
3,500 3,500 MCI Telecommunications Corp. 86 86
4,000 4,000 Network Equipment Technologies, Inc. (a) 53 53
20,000 20,000 NYNEX 898 898
6,100 6,100 U.S. West, Inc. 185 185
1,601 5,020 6,621
</TABLE>
B-39
<PAGE> 323
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TOOLS (0.0%)
3,800 3,800 Stanley Works 108 108
108 108
TOYS (0.0%)
4,250 4,250 Mattel, Inc. 105 105
105 105
TRANSPORTATION SERVICES (0.4%)
23,400 23,400 GATX 1,053 1,053
1,053 1,053
WHOLESALE (0.5%)
28,000 28,000 Arrow Electronics(a) 1,183 1,183
10,100 10,100 Hughes Supply 330 330
1,513 1,513
Total Common Stocks 21,141 153,382 174,523
U.S. TREASURY OBLIGATIONS (19.7%)
U.S. TREASURY NOTES (18.9%)
Principal Principal Principal
Amount Amount Amount
206 206
200,000 200,000 8.130%, 02/15/98
1,500,000 1,500,000 6.125%, 03/31/98 1,500 1,500
1,500,000 1,500,000 5.875%, 04/30/98 1,493 1,493
1,300,000 1,300,000 6.000%, 05/31/98 1,295 1,295
1,000,000 1,000,000 8.250%, 07/15/98 1,037 1,037
1,000,000 1,000,000 5.000%, 02/15/99 969 969
1,000,000 1,000,000 7.000%, 04/15/99 1,016 1,016
1,000,000 1,000,000 6.375%, 05/15/99 1,000 1,000
1,000,000 1,000,000 6.375%, 07/15/99 1,000 1,000
1,500,000 1,500,000 7.125%, 09/30/99 1,529 1,529
1,000,000 1,000,000 7.500%, 10/31/99 1,030 1,030
1,000,000 1,000,000 7.750%, 11/30/99 1,039 1,039
1,500,000 1,500,000 7.125%, 02/29/00 1,530 1,530
1,000,000 2,000,000 3,000,000 5.500%, 04/15/00 969 1,936 2,905
1,500,000 1,500,000 6.125%, 09/30/00 1,478 1,478
700,000 700,000 5.750%, 10/31/00 680 680
500,000 500,000 8.500%, 11/15/00 536 536
3,000,000 3,000,000 5.625%, 02/28/01 2,891 2,891
1,000,000 1,000,000 6.250%, 04/30/01 987 987
2,000,000 2,000,000 6.500%, 05/31/01 1,994 1,994
1,000,000 1,000,000 6.625%, 06/30/01 1,002 1,002
6,000,000 6,000,000 7.500%, 11/15/01 6,236 6,236
2,000,000 2,000,000 6.375%, 08/15/02 1,975 1,975
1,000,000 1,000,000 6.250%, 02/15/03 978 978
500,000 500,000 5.880%, 02/15/04 475 475
4,500,000 4,500,000 6.500%, 05/15/05 4,420 4,420
4,500,000 4,500,000 6.500%, 08/15/05 4,416 4,416
3,000,000 3,000,000 5.625%, 02/15/06 2,765 2,765
1,000,000 1,000,000 6.875%, 05/15/06 1,005 1,005
1,000,000 1,000,000 7.000%, 07/15/06 1,014 1,014
7,000,000 7,000,000 6.000%, 02/15/26 6,150 6,150
</TABLE>
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<PAGE> 324
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY BONDS (0.8%)
1,150,000 1,150,000 7.25%, 05/15/16 1,171 1,171
205,000 205,000 8.75%, 08/15/20 244 244
1,125,000 1,125,000 7.13%, 02/15/23 1,130 1,130
2,545 2,545
Total U.S. Treasury Obligations 5,768 53,328 59,096
U.S. GOVERNMENT AGENCY (6.2%)
FNMA
3,020,000 3,020,000 7.500%, 08/01/01 3,045 3,045
991,000 991,000 8.000%, 08/01/24 997 997
4,428,000 4,428,000 8.000%, 05/01/25 4,454 4,454
1,350,000 1,350,000 5.45%, 10/10/03 1,242 1,242
316,003 316,003 6.50%, 3/1/24, Pool #276510 297 297
999,999 999,999 8.00%, 7/1/26 1,006 1,006
GNMA
3,786,000 3,786,000 6.500%, 09/15/08 3,665 3,665
2,440,000 2,440,000 6.000%, 11/15/08 2,311 2,311
95,076 95,076 6.50%, 2/15/24, Pool #388599 88 88
484,019 484,019 7.50%, 5/15/24, Pool #386494 476 476
1,016,375 1,016,375 7.00%, 2/15/26 972 972
Total U.S. Government Agency
Mortgage-Backed Bonds 4,081 14,472 18,553
CORPORATE OBLIGATIONS (10.6%)
2,000,000 2,000,000 American General, 6.75%, 06/15/05 1,918 1,918
2,000,000 2,000,000 American Telephone & Telegraph, 7.50%, 2,033 2,033
06/01/06
2,000,000 2,000.000 Associates of North America, 7.875%, 2,070 2,070
09/30/01
2,000,000 2,000,000 Avco Financial Services, 7.375%, 2,023 2,023
0815/01
215,000 215,000 Bank of America, 6.00%, 7/15/97 214 214
2,000,000 2,000,000 Bankers Trust NY, 7.50%, 11/15/15 1,910 1,910
95,000 95,000 Bass America, Inc., 6.75%, 8/1/99 95 95
175,000 175,000 Bell Atlantic Maryland, 8.00%,10/15/29 184 184
205,000 205,000 Caterpillar Tractor Co., 6.00%, 5/1/07 184 184
1,500,000 1,500,000 Chemical Banking, 6.70%, 08/15/08 1,397 1,397
Chesapeake & Potomac Telephone of
1,500,000 1,500,000 Maryland, 6.00%, 05/01/03 1,416 1,416
100,000 100,000 Citicorp, 6.75%, 8/15/05 96 96
First National Bank of Boston, 8.0%,
2,000,000 2,000,000 09/15/04 2,050 2,050
300,000 300,000 Ford Capital, 9.38%, 1/1/98 312 312
General Motors Acceptance Corp., 8.00%,
305,000 305,000 10/1/99 315 315
Golden West Financial Corp., 6.70%,
100,000 100,000 7/1/02 97 97
100,000 100,000 Hydro-Quebec, 8.05%, 7/7/24 106 106
200,000 200,000 IBM Corp., 8.38%,11/1/19 215 215
100,000 100,000 J.C. Penney, Inc., 6.00%, 5/1/06 90 90
</TABLE>
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<PAGE> 325
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1,500,000 1,500,000 Joseph E. Seagram and Sons, 7.00%, 04/15/08 1,451 1,451
2,000,000 2,000,000 Lehman Brothers Holding, 8.5%, 05/01/07 2,098 2,098
2,000,000 2,000,000 Lockheed Martin, 7.70%, 06/15/08 2,020 2,020
1,000,000 1,000,000 Mobil, 7.25%, 03/15/99 1,014 1,014
New England Telephone & Telegraph Co.,
125,000 125,000 7.88%, 11/15/29 131 131
215,000 215,000 Norske Hydro, 7.75%, 6/15/23 215 215
1,000,000 1,000,000 Panhandle Eastern, 7.875%, 08/15/04 1,024 1,024
Province of British Columbia, 7.00%,
1,500,000 1,500,000 01/15/03 1,498 1,498
2,000,000 2,000,000 Ralston Purina, 7.750%, 10/01/15 1,969 1,969
Royal Bank of Scotland, 6.375%,
1,500,000 1,500.000 02/01/11 1,337 1,337
150,000 150,000 Sears Roebuck Co., 9.25%, 8/1/97 154 154
150,000 150,000 U.S. Bancorp, 6.75%, 10/15/05 143 143
2,000,000 2,000,000 Wal-Mart Stores, 5.875%, 10/15/05 1,820 1,820
200,000 200,000 Wal-Mart Stores, Inc., 6.38%, 3/1/03 193 193
Total Corporate Bonds 2,744 29,048 31,792
ASSET BACKED SECURITIES (2.1%)
American Express 1994-1A
1,500,000 1,500,000 7.150%, 08/15/99 1,520 1,520
Banc One Credit Card Master Trust,
2,000,000 2,000,000 Ser 1994-A, Cl A 7.150%, 12/15/98 2,011 2,011
J.C. Penney's Master Credit Card Trust,
1,000,000 1,000,000 Ser C, C1 A 9,625%, 06/1500 1,096 1,096
Carco Auto Loan Master Trust, Series
205,000 205,000 1994-2, 7.88%, 3/15/98 207 207
Carco Auto Loan Master Trust, Series
190,000 190,000 1991-3, 7.88%, 8/15/97 194 194
Contimortgage Home Equity Loan Trust,
200,000 200,000 8.09%, 9/15/09 203 203
Contimortgage Home EquityLoan Trust,
200,000 200,000 7.44%, 9/15/12 197 197
250,000 250,000 Green Tree Financial Corp., 6.80%, 1/15/26 244 244
400,000 400,000 Standard Credit Card MasterTrust, 4.65%, 3/7/99 395 395
165,324 165,324 UFSB Grantor Trust, 5.08%, 5/15/00 163 163
Total Asset Backed Securities 1,603 4,627 6,230
</TABLE>
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<PAGE> 326
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS
(0.3%)
86,516 86,516 Country Wide Mortgage, 6.75%, 3/25/08 84 84
500,000 500,000 Federal Home Loan Mortgage Corp., 6.25%, 1/15/24 449 449
GE Capital Mortgage Service, Inc., 1994-
250,000 250,000 1, 6.50%, 1/25/24 235 235
Residential Funding Mortgage, 6.75%,
175,000 175,000 11/25/07 168 168
Total Collateralized Mortgage Obligations 936 936
REPURCHASE AGREEMENT (2.8%)
Deutsche Morgan Grenfell/C.J. Lawrence,
Inc. 5.65%, dated 07/31/96, matures
08/01/96, repurchase price $4,649,948
(collateralized by FHLB, par value
$4,750,000, 0.00%, matures 08/05/96:
4,649,000 4,649,000 market value $4,745,811) 4,649 4,649
C.S. First Boston Corp.
5.62%, 8/1/96 (Collateralized by 3,033
U.S. Treasury Bonds, 10.38%, 11/15/12 ,
3,786,776 3,786,776 market value-$3,870 ) 3,787 3,787
Total Repurchase Agreements 3,787 4,649 8,436
Total Investments (99.34%) (Cost $262,511) 40,060 259,506 299,566
</TABLE>
(a) Non-income producing security
ADR -- American Depository Receipt
CL -- Class
FHLB -- Federal Home Loan Bank
GNMA -- Government National Mortgage Association
PLC -- Public Limited Company
SER -- Series
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-43
<PAGE> 327
HIGHMARK BALANCED FUND
STEPSTONE BALANCED FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
BALANCED BALANCED PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $ 36,273 $ 254,857 $ 291,130
Repurchase Agreements 3,787 4,649 8,436
----------------------------------- ---------------
Total Investments 40,060 259,506 299,566
Cash - (36) $ (204)(A) (240)
Interest & Dividends Receivable 278 2,051 2,329
Prepaid Expenses and Other Assets 9 5 14
Capital Shares Sold Receivable 202 202
--------------------------------------------------------------------------------
Total Assets 40,347 261,728 (204) 302,000
LIABILITIES:
Distributions Payable 118 - 118
Payable for Capital Shares Redeemed - 86 86
Accrued Expenses and Other Payables 33 271 304
--------------------------------------------------------------------------------
Total Liabilities 151 357 508
NET ASSETS:
Capital 35,830 217,015 252,845
Net unrealized appreciation
(depreciation) on investments 4,114 32,941 37,055
Undistributed net investment
income 1 407 (204) (A) 333
Accumulated undistributed net
realized gain (loss) on investment
transactions 251 11,008 11,259
--------------------------------------------------------------------------------
NET ASSETS $ 40,196 $ 261,371 $ (204) $ 301,363
================================================================================
Net Assets:
Fiduciary $ 39,502 $ 253,381 (A)(B) $ 292,883
Retail 694 7,785 (A)(B) 8,479
Institutional $ 253,580 (253,580) (B) -
Investment 7,791 (7,791) (B) -
--------------------------------------------------------------------------------
TOTAL $ 40,196 $ 261,371 $ (204) $ 301,363
================================================================================
Shares Outstanding:
Fiduciary 3,392 17,754 (B) 21,146
Retail 60 552 (B) 612
Institutional 18,308 (18,308) (B) -
Investment 563 (563) (B) -
--------------------------------------------------------------------------------
TOTAL SHARES OUTSTANDING 3,452 18,871 565 21,758
================================================================================
Net Asset Value and Redemption Price
Per Share:
Fiduciary $ 11.64 $ 13.85
Retail 11.56 13.85
</TABLE>
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<PAGE> 328
<TABLE>
<S> <C> <C>
Institutional $ 13.85 -
Investment 13.85 -
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments
on the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-45
<PAGE> 329
HIGHMARK BALANCED FUND
STEPSTONE BALANCED FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
BALANCED BALANCED PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 996 $ 6,018 $ 7,014
Dividend Income 549 3,305 3,854
------------------------------- -------------
Total Income 1,545 9,323 10,868
EXPENSES:
Investment Adviser Fee 348 1,431 $ (141) (A) 1,638
Shareholder Services Fees 87 159 (B) 246
Administration Fees 70 311 165 (C) 546
Custodian/Wire Agent Fee 81 25 (71) (D) 35
Professional Fees 6 39 (18) (D) 27
Registration Fees 3 34 (14) (D) 23
Distribution Fee 2 32 34
Trustees Fees 1 7 (3) (D) 5
Printing Costs 6 23 (14) (D) 15
Other 17 38 (23) (D) 32
--------------------------------------------------------------------
Total Expenses 621 1,940 40 2,601
Distribution Fee Waiver (15) (15)
Expenses Voluntarily Reduced (293) 164 (E) (129)
--------------------------------------------------------------------
Total Net Expenses 328 1,925 $ 204 2,457
Net Investment Income 1,217 7,398 (204) 8,411
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on 446 13,467 13,913
Investments
Net Realized Gain/(Loss) on
Option Contracts 51 51
Net change in unrealized
appreciation (depreciation)
on investments 1,716 2,517 4,233
--------------------------------------------------------------------
Net realized/unrealized
gains/(losses) on
investments 2,162 16,035 18,197
--------------------------------------------------------------------
Change in net assets resulting
from operations $ 3,379 $ 23,433 $ (204) $ 26,608
====================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .60% of the Balanced Fund
(the "Fund") average daily net assets.
(B) To support the provision of Shareholder Services to both classes of
Shares, HighMark has adopted a Shareholder Service Plan. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, the Fund may pay a fee at the rate of up to .25% of its average
daily net assets for the period to such service provider. The service provider
may voluntarily choose to waive such fees at any time at its sole discretion.
Currently such fees are being waived to the rate of 0.00% of average daily net
assets.
B-46
<PAGE> 330
(C) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(D) The adjustment is made to reflect the expense reductions due to the
combining of two portfolios into one.
(E) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than 1.15% for the
Retail Class of Shares and .90% for the Fiduciary Class of Shares for the
Balanced Fund.
(See Notes to Pro Forma Financial Statements)
B-47
<PAGE> 331
HIGHMARK BALANCED FUND
STEPSTONE BALANCED FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Balanced Fund and Stepstone Balanced Fund,
collectively (the "Funds") as of July 31, 1996. These statements have been
derived from the books and records utilized in calculating daily net assets
values at July 31, 1996. The Pro Forma Combining Statement of Operations
reflects the accounts of HighMark Balanced Fund and Stepstone Balanced Fund for
the twelve months ended July 31, 1996, the most recent fiscal year of the
Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Balanced Fund in exchange for Retail and Fiduciary Class of
Shares of the HighMark Balanced Fund. Under generally accepted accounting
principles, the Stepstone Balanced Fund will be the surviving entity for
accounting purposes with its historical cost of investment securities and
results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes that the HighMark Balanced Fund
has executed a stock split on July 31, 1996 immediately preceding the
Reorganization, to allow the Net Asset Values of the HighMark Balanced Fund
Fiduciary and Retail shares to match the Net Asset Values of the Stepstone
Balanced Fund Institutional and Investment Class shares, respectively.
Accordingly, this resulted in an adjustment to the number of shares outstanding
in the HighMark Balanced Fund of 554 in the Fiduciary Class and 11 in the
Retail Class shares. If the Reorganization is consummated, the actual
adjustments to the number of shares outstanding in each respective class of the
HighMark Fund may vary from the numbers provided due to changes in the Net
Asset Values between July 31, 1996 and the Reorganization Date.
B-48
<PAGE> 332
HIGHMARK GROWTH FUND
STEPSTONE GROWTH EQUITY FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the HighMark
Growth Fund and the Stepstone Growth Equity Fund as of and for the year ended
July 31, 1996. These statements have been derived from the Funds' books and
records utilized in calculating daily net asset value at July 31, 1996. The
accompanying Pro Forma Combining Statement of Operations reflects the accounts
of HighMark Growth Fund and Stepstone Growth Equity Fund for the year ended
July 31, 1996, the most recent fiscal year end of the Registrant.
HIGHMARK GROWTH FUND
STEPSTONE GROWTH EQUITY FUND
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
STEPSTONE STEPSTONE
HIGHMARK GROWTH HIGHMARK GROWTH
GROWTH EQUITY PRO FORMA GROWTH EQUITY PRO FORMA
FUND FUND COMBINED FUND FUND COMBINED
SHARES SHARES SHARES VALUE VALUE VALUE
(000'S)
<S> <C> <C> <C> <C> <C>
COMMON STOCK (94.2%)
AEROSPACE (0.4%)
24,565 24,565 B.F. Goodrich $890 $890
890 890
AUTOMOTIVE ( 1.2%)
49,788 49,788 Chrysler $1,413 1,413
27,000 27,000 Magna International, Cl A 1,202 1,202
2,615 2,615
BANKS (3.9%)
10,365 10,365 BankAmerica Corp. 827 827
36,300 36,300 Banc One 1,257 1,257
3,280 3,280 Barnett Banks, Inc. 201 201
16,030 16,030 Chase Manhattan 1,114 1,114
16,830 16,000 32,830 Fleet Financial Group 681 648 1,329
90,780 90,780 U.S. Bancorp 3,109 3,109
3,825 3,825 Wells Fargo & Co. 891 891
3,714 5,014 8,728
BUSINESS EQUIPMENT & SERVCES (0.1%)
9,080 9,080 Office Max, Inc.(a) 120 120
120 120
</TABLE>
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<PAGE> 333
<TABLE>
<S> <C> <C> <C> <C> <C>
CAPITAL EQUIPMENT (0.1%)
3,240 3,240 Illinois Tool Works 209 209
209 209
CHEMICALS (3.7%)
8,000 8,000 Eli Lilly 448 448
24,000 24,000 Georgia Gulf 738 738
37,800 37,800 Great Lakes Chemical 2,178 2,178
3,750 3,750 Hercules, Inc. 188 188
60,500 60,500 IMC Fertilizer Group 2,390 2,390
35,000 35,000 Monsanto 1,094 1,094
20,000 20,000 W.R. Grace 1,275 1,275
188 8,123 8,311
COMMUNICATIONS EQUIPMENT (2.2%)
49,000 49,000 ADC Telecommunications(a) 2,070 2,070
55,000 55,000 DSC Communications(a) 1,650 1,650
5,170 20,000 25,170 Motorola, Inc. 279 1,080 1,359
279 4,800 5,079
COMPUTERS & SOFTWARE SERVICES (20.1%)
2,885 2,885 Automatic Dataprocessing, Inc. 114 114
9,610 9,610 Ceridan Corp.(a) 418 418
17,005 106,200 123,205 Cisco Systems(a) 880 5,496 6,376
32,000 32,000 Compaq Computer(a) 1,752 1,752
11,888 54,000 65,888 Computer Associates International, Inc. 605 2,747 3,352
3,355 3,355 Computer Sciences (a) 228 228
48,700 48,700 Compuware(a) 2,051 2,051
161,655 161,655 CUC International(a) 5,618 5,618
5,840 5,840 Digital Equipment (a) 207 207
17,770 17,770 Electronic Data Systems Corp. (a) 940 940
11,588 67,683 79,271 First Data Corp. 899 5,254 6,153
43,500 43,500 Fiserv(a) 1,457 1,457
14,660 75,600 90,260 Hewlett Packard 645 3,326 3,971
4,375 4,375 International Business Machines 472 472
3,705 35,000 38,705 Microsoft Corp. (a) 437 4,126 4,563
32,000 32,000 Netcom On Line Communication Services(a) 600 600
95,000 95,000 Olsten 2,518 2,518
10,045 10,045 Oracle Systems Corp.(b) 393 393
5,350 16,000 21,350 Parametric Technology Corp.(b) 223 666 889
14,390 14,390 Seagate Technology(b) 696 696
4,685 109,200 113,885 Silicon Graphics(a) 110 2,566 2,676
2,140 2,140 Sun Microsystems, Inc.(a) 117 117
7,384 38,177 45,561
CONTAINERS & PACKAGING (0.1%)
18,400 18,400 Bway 317 317
317 317
CONSUMER GOODS & SERVICES (0.3%)
21,715 21,715 Xilinx, Inc. (a) 703 703
703 703
</TABLE>
B-50
<PAGE> 334
<TABLE>
<S> <C> <C> <C> <C> <C>
COSMETICS & TOILETRIES (0.8%)
81%)
4,720 4,720 Avon Products 208 208
5,485 5,485 Colgate-Palmolive Co. 430 430
15,360 15,360 Gillette Co. 977 977
5,110 5,110 Ingersoll-Rand Co. 218 218
1,833 1,833
DRUGS (4.1%)
17,370 53,000 70,370 ALZA Corp. C1A(a) 430 1,312 1,742
4,900 4,900 Astra AB, C1A (a) 207 207
45,700 45,700 Mallinckrodt Group 1,708 1,708
7,240 15,000 22,240 Merck 465 964 1,429
11,240 58,200 113,920 Schering Plough 620 3,208 3,828
4,500 4,500 SmithKline Beecham PLC-ADR (a) 242 242
1,964 7,192 9,156
DURABLE GOODS (0.1%)
15,870 15,870 Coleman, Inc. (a) 282 282
282 282
ELECTRICAL UTILITIES (1.1%)
25,000 25,000 Illinova 644 644
16,000 16,000 Ohio Edison 336 336
56,500 56,500 Pinnacle West Capital 1,596 1,596
2,576 2,576
ELECTRICAL EQUIPMENT (1.3%)
5,480 5,480 AMP, Inc. 212 212
10,640 10,640 Duracell International, Inc. 480 480
11,860 11,860 General Electric Co. 977 977
13,275 13,275 Intel Corp. 997 997
14,810 14,810 National Semiconductor Corp. (a) 209 209
2,875 2,875
ELECTRONIC COMPONENTS (0.0%)
3,245 3,245 Applied Materials, Inc.(a) 77 77
77 77
ELECTRONIC INSTRUMENTS (0.1%)
4,220 4,220 Texas Instruments, Inc. 183 183
183 183
ENTERTAINMENT (1.5%)
56,000 56,000 Ambassador International (a) 686 686
7,080 7,080 Circus Circus Enterprises, Inc. (a) 217 217
6,715 6,715 Harrah's Entertainment (a) 148 148
16,000 16,000 Regal Cinemas (a) 680 680
28,591 28,591 Walt Disney 1,590 1,590
365 2,956 3,321
</TABLE>
B-51
<PAGE> 335
<TABLE>
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES (5.3%)
14,835 14,835 American Express Co. 649 649
5,745 5,745 Federal Home Loan Mortgage Corp. 484 484
30,635 136,800 167,435 FNMA 973 4,343 5,316
1,405 1,405 Household International, Inc. 105 105
162,450 162,450 MBNA 4,528 4,528
10,926 10,926 Mutual Risk Management Ltd. 307 307
15,935 15,935 Travelers Corp. (a) 673 673
3,191 8,871 12,062
FOOD, BEVERAGE & TOBACCO (3.0%)
8,985 8,985 Anheuser-Busch Co. 672 672
19,215 19,215 Coca-Cola Co. 901 901
2,550 2,550 General Mills, Inc. 138 138
2,950 2,950 Hershey Foods 242 242
32,000 32,000 IBP 748 748
26,390 59,600 85,990 PepsiCo 834 1,885 2,719
8,700 8,700 Phillip Morris Cos., Inc. 910 910
5,397 5,397 Ralston-Purina Co. 339 339
3,105 3,105 UST 103 103
4,139 2,633 6,772
FOREST & PAPER PRODUCTS (0.2%)
5,605 5,605 Albany International Corp., C1A 104 104
1,220 1,220 Georgia Pacific Corp. 91 91
2,340 2,340 International Paper Co. 89 89
5,280 5,280 Weyerhaeuser Co. 220 220
504 504
GAS/NATURAL GAS (1.2%)
32,000 32,000 Coastal 1,192 1,192
2,305 2,305 Tenneco, Inc. 114 114
32,000 32,000 Williams 1,468 1,468
114 2,660 2,774
HEALTHCARE-DRUGS (1.1%)
4,962 4,962 Abbott Laboratories 218 218
3,820 3,820 American Home Products Corp. 217 217
8,501 8,501 Amgen, Inc. (a) 464 464
9,090 9,090 Pfizer, Inc. 635 635
15,850 15,850 Pharmacia & Upjohn Co. 654 654
6,270 6,270 Warner-Lambert Co. 342 342
2,530 2,530
HEALTHCARE-GENERAL (0.4%)
18,230 18,230 Johnson & Johnson 870 870
870 870
</TABLE>
B-52
<PAGE> 336
<TABLE>
<S> <C> <C> <C> <C> <C>
HOSPITAL SUPPLY & MANAGEMENT (0.1%)
4,081 4,081 Columbia/HCA Healthcare Corp. 209 209
209 209
HOTEL MANAGEMENT & RELATED SERVICES (0.1%)
7,392 7,392 Promus Hotel Corp. (a) 202 202
202 202
HOUSEHOLD FURNITURE & FIXTURES (0.5%)
40,000 40,000 Leggett & Platt 1,040 1,040
1,040 1,040
HOUSEHOLD PRODUCTS (0.6%)
31,200 31,200 Danaher 1,244 1,244
2,270 2,270 Proctor & Gamble Co. 203 203
203 1,244 1,447
INSURANCE (6.5%)
23,111 23,111 Aetna 1,343 1,343
48,000 48,000 AFLAC 1,536 1,536
2,547 2,547 Allstate Corp. 114 114
5,955 5,955 American International Group, Inc. 560 560
60,200 60,200 AMBAC 2,875 2,875
8,000 8,000 CRA Managed Care (a) 311 311
1,560 1,560 General Re Corp. 229 229
56,000 56,000 Healthcare Compare (a) 2,163 2,163
1,400 1,400 Marsh & McLennan Cos., Inc. 127 127
2,985 26,600 29,585 MBIA, Inc. 226 2,012 2,238
67,000 67,000 Oxford Health Plan (a) 2,312 2,312
17,000 17,000 Progressive of Ohio 859 859
1,256 13,411 14,667
LEISURE PRODUCTS (1.3%)
17,405 17,405 The Walt Disney Co. 968 968
78,125 78,125 Mattel 1,934 1,934
968 1,934 2,902
MACHINERY (2.3%)
32,000 32,000 Applied Materials (a) 764 764
5,275 5,275 Deere & Co. 189 189
35,100 35,100 General Electric 2,891 2,891
28,000 28,000 Varity (a) 1,316 1,316
189 4,971 5,160
MANUFACTURING (0.2%)
8,480 8,480 Service Corp. International 468 468
468 468
</TABLE>
B-53
<PAGE> 337
<TABLE>
<S> <C> <C> <C> <C> <C>
MARINE TRANSPORTATION (1.4%)
121,000 121,000 Carnival, Cl A 3,252 3,252
3,252 3,252
MEDICAL PRODUCTS & SERVICES (2.1%)
6,469 6,469 Chiron Corp. (a) 569 569
99,600 99,600 Nellcor (a) 2,353 2,353
63,225 63,225 Vivra (a) 1,841 1,841
569 4,194 4,763
PAPER & PAPER PRODUCTS (0.5%)
20,000 20,000 Willamette Industries 1,175 1,175
1,175 1,175
PETROLEUM & FUEL PRODUCTS (0.5%)
4,835 4,835 Baker Hughes, Inc. 142 142
3,655 3,655 Dresser Industries Inc. 99 99
4,520 4,520 Halliburton Co. 236 236
1,215 8,000 9,215 Schlumberger Ltd. 97 640 737
574 640 1,214
PETROLEUM REFINING (2.7%)
7,515 16,000 23,515 Amoco Corp. 503 1,070 1,573
12,900 12,900 Ashland 472 472
18,561 18,561 British Petroleum, ADR 2,039 2,039
16,000 16,000 Chevron 926 926
5,305 8,400 13,705 Exxon Corp. 436 691 1,127
939 5,198 6,137
PROFESSIONAL SERVICES (1.2%)
71,800 71,800 Medaphis (a) 2,666 2,666
2,666 2,666
PUBLISHING (0.4%)
13,535 13,535 Gannett Co., Inc. 888 888
888 888
RAILROADS (1.7%)
24,000 24,000 Burlington Northern Santa Fe 1,893 1,893
53,400 53,400 Kansas City Southern Industries 2,069 2,069
3,962 3,962
REAL ESTATE (0.4%)
93,000 93,000 Innkeepers USA Trust 977 977
977 977
</TABLE>
B-54
<PAGE> 338
<TABLE>
<S> <C> <C> <C> <C> <C>
RETAIL (9.9%)
32,000 32,000 Applebee's International 804 804
134,120 134,120 Corporate Express (a) 5,013 5,013
8,190 8,190 Home Depot, Inc. 414 414
76,000 76,000 Kohls (a) 2,385 2,385
51,800 51,800 Landry's Seafood Restaurants (a) 1,153 1,153
23,720 51,600 75,320 McDonald's 1,100 2,393 3,493
49,000 49,000 Orchard Supply Hardware Stores (a) 1,390 1,390
61,500 61,500 Papa John's International (a) 2,644 2,644
80,500 80,500 Pep Boys-Manny, Moe & Jack 2,435 2,435
11,480 11,480 Price/Costco, Inc. (a) 235 235
9,425 9,425 Safeway, Inc. (a) 339 339
10,625 10,625 Sears Roebuck & Co. 436 436
7,215 39,400 46,615 Toys "R" Us (a) 190 1,039 1,229
21,800 21,800 Wal-Mart Stores 523 523
2,714 19,779 22,493
RUBBER & PLASTIC (0.9%)
24,000 24,000 Goodyear Tire & Rubber 1,062 1,062
46,305 46,305 Mark IV Industries 972 972
2,034 2,034
SEMI-CONDUCTORS/INSTRUMENTS (3.9%)
24,000 24,000 Aavid Thermal Technologies (a) 165 165
127,400 127,400 Integrated Device Technology (a) 1,099 1,099
70,200 70,200 Intel 5,274 5,274
33,000 33,000 National Semiconductor (a) 466 466
60,000 60,000 Recoton (a) 1,020 1,020
25,000 25,000 Xilinx 809 809
8,833 8,833
TELEPHONES & TELECOMMUNICATION (3.6%)
12,585 12,585 Airtouch (a) 346 346
3,550 3,550 Ameritech Corp. 197 197
5,260 5,260 AT&T Corp. 274 274
57,000 57,000 Cincinnati Bell 2,772 2,772
4,500 4,500 GTE Corp. 186 186
6,555 6,555 Lucent Technologies, Inc. 243 243
78,800 78,800 MCI Communications 1,940 1,940
5,115 5,115 Network Equipment Technologies (a) 68 68
43,200 43,200 SBC Communications 2,111 2,111
1,314 6,823 8,137
TOYS (0.3%)
25,040 25,040 Mattel, Inc. 620 620
620 620
TRUCKING (0.8%)
98,125 98,125 Wabash National 1,705 1,705
1,705 1,705
Total Common Stock 43,527 169,772 213,299
</TABLE>
B-55
<PAGE> 339
<TABLE>
<S> <C> <C> <C>
PREFERRED STOCKS (0.2%)
INSURANCE (0.2%)
7,707 7,707 Aetna (a) 483 483
Total Preferred Stocks 483 483
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
<S> <C> <C> <C> <C> <C>
REPURCHASE AGREEMENTS (5.6%)
Deutsche Morgan Grenfell/C.J. Lawrence,
Inc. 5.650%, dated 07/31/96, matures
08/01/96, repurchase price $11,847,914
(collateralized by U.S. Treasury Note,
total par value $190,000, 6.000%,
12/31/97: FNMA obligation total par value
$3,000,000, 6.000%, 12/31/97: FHLMC
obligation total par value $9,129,000,
11,846,000 11,846,000 0.000%, 09/12/96: total market value 11,846 11,846
$12,083,953)
C.S. First Boston Corp., 5.62%, 8/1/96
(Collateralized by 825,000 U.S. treasury
899,983 899,983 Bonds, 8.75%, 11/15/08, market value 900 900
$922)
Total Repurchase Agreements 900 11,846 12,746
Total Investments (100.0%) (COST 159,287) $44,427 $182,101 $226,528
</TABLE>
(a) Non-income producing security
ADR American Depositary Receipt
C1 Class
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
PLC Public Limited Company
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-56
<PAGE> 340
HIGHMARK GROWTH FUND
STEPSTONE GROWTH EQUITY FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in Thousands) HIGHMARK STEPSTONE
GROWTH FUND GROWTH EQUITY PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $ 43,527 $ 170,255 $ 213,782
Repurchase Agreements 900 11,846 12,746
----------------------------- --------------
Total Investments 44,427 182,101 226,528
Cash (41) $ (163) (A) (204)
Interest & Dividends Receivable 55 176 231
Receivable from Brokers 216 350 566
Prepaid Expenses and Other Assets 5 4 9
Capital Shares Sold Receivable 125 125
---------------------------------------------------------------------
Total Assets 44,703 182,715 (163) 227,255
LIABILITIES:
Distributions Payable 28 28
Payable for Capital Shares Redeemed 100 100
Payable to Brokers 301 301
Accrued Expenses and Other Payables 36 198 234
---------------------------------------------------------------------
Total Liabilities 365 298 663
NET ASSETS:
Capital 38,047 106,037 144,084
Net unrealized appreciation (depreciation) on
investments 3,917 63,324 67,241
Undistributed net investment income 267 (163) (A) 194
Accumulated undistributed net realized gain (loss) 2,374 12,789 15,163
on investment transactions
---------------------------------------------------------------------
NET ASSETS $ 44,338 $ 182,417 $ (163) $ 226,592
=====================================================================
Net Assets:
Fiduciary $ 41,495 $ 178,927 (A)(B) $ 220,422
Retail 2,843 3,327 (A)(B) 6,170
Institutional $ 179,086 (179,086) (B)
Investment 3,331 (3,331) (B)
---------------------------------------------------------------------
TOTAL $ 44,338 $ 182,417 $ (163) $ 226,592
=====================================================================
Shares Outstanding:
Fiduciary 3,300 8,734 (B) 12,034
Retail 226 111 (B) 337
Institutional 9,777 (9,777) (B)
Investment (B)
182 (182)
---------------------------------------------------------------------
TOTAL SHARES OUTSTANDING 3,526 9,959 1,114 12,371
=====================================================================
</TABLE>
B-57
<PAGE> 341
<TABLE>
<S> <C> <C> <C>
Net Asset Value and Redemption Price Per Share:
Fiduciary $ 12.58 $ 18.32
Retail $ 12.60 $ 18.30
Institutional $ 18.32
Investment $ 18.30
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments
on the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-58
<PAGE> 342
HIGHMARK GROWTH FUND
STEPSTONE GROWTH EQUITY FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE
GROWTH FUND GROWTH EQUITY PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 82 $ 584 $ 666
Dividend Income 607 1,966 2,573
----------------------------- -------------
Total Income 689 2,550 3,239
EXPENSES:
Investment Adviser Fee 362 1,079 $ (146) (A) 1,295
Shareholder Services Fees 90 104 (B) 194
Administration Fees 72 234 126 (C) 432
Custodian/Wire Agent Fee 101 20 (93) (D) 28
Professional Fees 6 31 (25) (D) 12
Registration Fees 4 25 (11) (D) 18
Distribution Fee 5 7 12
Trustees Fees 1 6 (3) (D) 4
Printing Costs 6 19 (14) (D) 11
Other 21 25 (15) (D) 31
---------------------------------------------------------------------
Total Expenses 668 1,446 (77) 2,037
Distribution Fee Waiver (2) (2)
Expenses Voluntarily Reduced (333) 240 (E) (93)
---------------------------------------------------------------------
Total Net Expenses 335 1,444 163 1942
Net Investment Income 354 1,106 (163) 1,297
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments $ 14,655 14,655
Net Realized Gain/(Loss) on
Investment Transactions 3,272 3,272
Net Realized Gain/(Loss) on Option Contracts 308 308
Net change in unrealized
appreciation/(depreciation) on investments 155 3,186 3,341
---------------------------------------------------------------------
Net realized/unrealized gains/(losses)
on investments 3,427 18,149 21,576
---------------------------------------------------------------------
Change in net assets resulting from operations $ 3,781 $ 19,255 $ (163) $ 22,873
=====================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .60% of the Growth Fund
(the "Fund") average daily net assets.
(B) To support the provision of Shareholder Services to both classes of
Shares, HighMark has adopted a Shareholder Service Plan. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, Fund may pay a fee at the rate of up to .25% of its average daily
net assets
B-59
<PAGE> 343
for the period to such service provider. The service provider may voluntarily
choose to waive such fees at any time at its sole discretion. Currently such
fees are being waived to the rate of 0.00% of average daily net assets.
(C) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(D) The adjustment is made to reflect the expense reductions due to the
combining of two portfolios into one.
(E) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than 1.15% for the
Retail Class of Shares and .90% for the Fiduciary Class of Shares for the
Growth Fund.
(See Notes to Pro Forma Financial Statements)
B-60
<PAGE> 344
HIGHMARK GROWTH FUND
STEPSTONE GROWTH EQUITY FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Growth Fund and Stepstone Growth Equity Fund,
collectively (the "Funds") as of July 31, 1996. These statements have been
derived from the books and records utilized in calculating daily net assets
values at July 31, 1996. The Pro Forma Combining Statement of Operations
reflects the accounts of HighMark Growth Fund and Stepstone Growth Equity Fund
for the twelve months ended July 31, 1996, the most recent fiscal year of the
Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Growth Equity Fund in exchange for Retail and Fiduciary
Class of Shares of the HighMark Growth Fund. Under generally accepted
accounting principles, the Stepstone Growth Equity Fund will be the surviving
entity for accounting purposes with its historical cost of investment
securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes that the HighMark Growth Fund
has executed a stock split on July 31, 1996 immediately preceding the
Reorganization, to allow the Net Asset Values of the HighMark Growth Fund
Fiduciary and Retail shares to match the Net Asset Values of the Stepstone
Growth Equity Fund Institutional and Investment Class shares, respectively.
Accordingly, this resulted in an adjustment to the number of shares outstanding
in the HighMark Growth Fund of 1043 in the Fiduciary Class and 71 in the Retail
Class shares. If the Reorganization is consummated, the actual adjustments to
the number of shares outstanding in each respective class of the HighMark Fund
may vary from the numbers provided due to changes in the Net Asset Values
between July 31, 1996 and the Reorganization date.
B-61
<PAGE> 345
HIGHMARK VALUE MOMENTUM FUND
STEPSTONE VALUE MOMENTUM FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the HighMark
Value Momentum Fund and the Stepstone Value Momentum Fund as of and for the
year ended July 31, 1996. These statements have been derived from the Funds'
books and records utilized in calculating daily net asset value at July 31,
1996. The accompanying Pro Forma Combining Statement of Operations reflects the
accounts of HighMark Value Momentum Fund and Stepstone Value Momentum Fund for
the year ended July 31, 1996, the most recent fiscal year end of the
Registrant.
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
VALUE MOMENTUM VALUE MOMENTUM PRO FORMA VALUE MOMENTUM VALUE MOMENTUM PRO FORMA
FUND FUND COMBINED FUND FUND COMBINED
SHARES SHARES SHARES VALUE VALUE VALUE
(000'S)
<C> <C> <S> <C> <C>
COMMON STOCKS (92.9%)
AEROSPACE & DEFENSE (0.6%)
30,000 30,000 Rockwell International 1,575 1,575
1,575 1,575
AIRCRAFT (1.0%)
30,000 30,000 Textron 2,400 2,400
2,400 2,400
APPAREL/TEXTILES (0.4%)
20,000 20,000 Springs Industries, Cl A 913 913
913 913
AUTOMOTIVE (2.1%)
40,000 40,000 Arvin Industries 865 865
50,000 50,000 Fleetwood Enterprises 1,519 1,519
45,000 45,000 Ford Motor 1,463 1,463
14,000 14,000 TRW 1,265 1,265
5,112 5,112
BANKS (4.0%)
30,000 30,000 BankAmerica 2,393 2,393
15,000 15,000 Bankers Trust New York 1,078 1,078
45,000 45,000 First Union 2,858 2,858
25,000 25,000 J.P. Morgan 2,150 2,150
50,000 50,000 Wilmington Trust 1,550 1,550
10,029 10,029
CHEMICALS (6.1%)
52,000 52,000 Avery Dennison 2,691 2,691
</TABLE>
B-62
<PAGE> 346
<TABLE>
<C> <C> <S> <C> <C>
106,000 106,000 Cabot 2,663 2,663
33,000 33,000 Du Pont (E.I.) de Nemours 2,665 2,665
60,000 60,000 Monsanto 1,875 1,875
64,000 64,000 W.R. Grace 4,080 4,080
60,000 60,000 Wellman 1,170 1,170
15,144 15,144
COMMUNICATIONS EQUIPMENT (1.8%)
60,000 60,000 CTS 2,580 2,580
35,000 35,000 Harris 2,013 2,013
COMPUTERS & SERVICES (4.1%)
60,000 60,000 Cisco Systems (a) 3,105 3,105
100,000 100,000 Hewlett Packard 4,400 4,400
24,000 24,000 International Business Machines 2,589 2,589
10,094 10,094
DRUGS (5.3%)
30,000 30,000 American Home Products 1,703 1,703
40,000 40,000 Astra AB-A, ADR 1,690 1,690
13,000 13,000 Bristol Myers Squibb 1,126 1,126
65,000 65,000 Mallinckrodt Group 2,429 2,429
50,000 50,000 Merck 3,213 3,213
57,000 57,000 SmithKline Beecham, ADR 3,064 3,064
13,225 13,225
ELECTRICAL UTILITIES (1.0%)
75,000 75,000 General Public Utilities 2,438 2,438
2,438 2,438
FINANCIAL SERVICES (7.5%)
105,957 105,957 Bear Stearns 2,384 2,384
152,262 152,262 BRE Properties, Cl A 3,236 3,236
75,000 75,000 CBL Associates Properties 1,622 1,622
45,000 45,000 Dean Witter Discover 2,289 2,289
120,000 120,000 FNMA 3,810 3,810
65,000 65,000 Post Properties 2,251 2,251
75,001 75,001 Travelers 3,169 3,169
18,761 18,761
FOOD, BEVERAGE & TOBACCO (5.2%)
20,000 20,000 American Brands 910 910
130,000 130,000 IBP 3,039 3,039
35,000 35,000 Philip Morris 3,662 3,662
70,000 70,000 Sara Lee 2,240 2,240
6,000 6,000 Unilever NV, ADR 854 854
75,000 75,000 Universal Foods 2,241 2,241
</TABLE>
B-63
<PAGE> 347
<TABLE>
<C> <C> <S> <C> <C>
FOOTWEAR (0.1%)
8,800 8,800 Payless Shoesource (a) 285 285
285 285
GAS/NATURAL GAS (4.1%)
45,000 45,000 Coastal 1,676 1,676
75,000 75,000 MCN 1,763 1,763
42,000 42,000 Questar 1,323 1,323
40,000 40,000 Sonat 1,705 1,705
70,000 70,000 Westcoast Energy 1,085 1,085
55,000 55,000 Williams 2,523 2,523
10,075 10,075
GLASS PRODUCTS (0.5%)
27,000 27,000 PPG Industries 1,330 1,330
1,330 1,330
HOTELS & LODGING (0.6%)
15,000 15,000 Hilton Hotels 1,530 1,530
1,530 1,530
HOUSEHOLD FURNITURE & FIXTURES (0.9%)
85,000 85,000 Leggett & Platt 2,210 2,210
2,210 2,210
HOUSEHOLD PRODUCTS (0.5%)
27,000 27,000 Whirlpool 1,330 1,330
INSURANCE (4.4%)
39,467 39,467 Allstate (a) 1,766 1,766
40,000 40,000 Chubb 1,670 1,670
100,000 100,000 Equifax 2,513 2,513
40,000 40,000 Lincoln National 1,705 1,705
50,000 50,000 Providian 1,981 1,981
30,000 30,000 Torchmark 1,279 1,279
10,914 10,914
LEASING & RENTING (2.1%)
135,000 135,000 Comdisco 3,206 3,206
45,000 45,000 Xtra 1,901 1,901
5,107 5,107
MACHINERY (4.2%)
15,000 15,000 Applied Materials (a) 358 358
60,000 60,000 Deere 2,145 2,145
90,000 90,000 Dresser Industries 2,430 2,430
45,000 45,000 General Electric 3,707 3,707
60,000 60,000 Toro 1,823 1,823
10,463 10,463
</TABLE>
B-64
<PAGE> 348
<TABLE>
<C> <C> <S> <C> <C>
MEASURING DEVICES (0.7%)
35,000 35,000 Perkin Elmer 1,829 1,829
1,829 1,829
MEDICAL PRODUCTS & SERVICES (1.4%)
25,000 25,000 Becton, Dickinson 1,866 1,866
50,000 50,000 Novacare (a) 394 394
66,000 66,000 Tenet Healthcare (a) 1,279 1,279
3,539 3,539
MISCELLANEOUS BUSINESS SERVICES (0.4%)
17,000 17,000 Electronic Data Systems 899 899
899 899
MISCELLANEOUS TRANSPORTATION (0.7%)
30,000 30,000 Harsco 1,778 1,778
1,778 1,778
OFFICE FURNITURE & FIXTURES (0.3%)
27,500 27,500 Hon Industries 825 825
825 825
PAPER & PAPER PRODUCTS (3.2%)
58,360 58,360 Kimberly-Clark 4,435 4,435
45,000 45,000 Weyerhaeuser 1,879 1,879
27,000 27,000 Willamette Industries 1,586 1,586
7,900 7,900
PETROLEUM & FUEL PRODUCTS (0.3%)
30,000 30,000 Union Pacific Resources 791 791
791 791
PETROLEUM REFINING (4.9%)
30,000 30,000 Ashland 1,099 1,099
25,000 25,000 Chevron 1,447 1,447
50,000 50,000 Imperial Oil 2,088 2,088
28,000 28,000 Mobil 3,091 3,091
13,000 13,000 Royal Dutch Petroleum, ADR 1,961 1,961
48,000 48,000 Unocal 1,566 1,566
40,000 40,000 Valero Energy 825 825
12,077 12,077
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (1.8%)
35,000 35,000 Eastman Kodak 2,612 2,612
39,000 39,000 Xerox 1,965 1,965
</TABLE>
B-65
<PAGE> 349
<TABLE>
<C> <C> <S> <C> <C>
PRINTING & PUBLISHING (2.8%)
40,000 40,000 Houghton Mifflin 1,880 1,880
100,000 100,000 Lafarge 1,825 1,825
110,000 110,000 Wallace Computer Services 3,218 3,218
6,923 6,923
RAILROADS (2.3%)
22,000 22,000 Burlington Northern Santa Fe 1,735 1,735
25,000 25,000 Florida East Coast Railway 1,953 1,953
30,000 30,000 Union Pacific 2,055 2,055
5,743 5,743
REAL ESTATE (2.1%)
110,000 110,000 First Industrial Realty Trust 2,585 2,585
120,000 120,000 JP Realty 2,535 2,535
5,120 5,120
REPAIR SERVICES (2.1%)
65,000 65,000 PHH 3,461 3,461
160,000 160,000 Rollins Truck Leasing 1,720 1,720
5,181 5,181
RETAIL (2.8%)
54,000 54,000 Dayton-Hudson 1,634 1,634
50,000 50,000 Kroger (a) 1,888 1,888
55,000 55,000 May Department Stores 2,468 2,468
21,000 21,000 Sears Roebuck 861 861
6,851 6,851
SEMI-CONDUCTORS/INSTRUMENTS (2.5%)
70,000 70,000 Intel 5,259 5,259
75,000 75,000 National Semiconductor (a) 1,059 1,059
6,318 6,318
STEEL & STEEL WORKS (1.0%)
20,000 20,000 Aluminum Company of America 1,160 1,160
67,500 67,500 Engelhard 1,384 1,384
2,544 2,544
TELEPHONES & TELECOMMUNICATION (4.7%)
33,449 33,449 AT&T 1,744 1,744
16,000 16,000 Airtouch Communications (a) 440 440
90,000 90,000 Century Telephone Enterprises 2,869 2,869
60,000 60,000 Comsat 1,155 1,155
90,000 90,000 Frontier 2,531 2,531
60,000 60,000 GTE 2,475 2,475
12,000 12,000 Lucent Technologies 446 446
11,660 11,660
</TABLE>
B-66
<PAGE> 350
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
<C> <C> <S> <C> <C>
TRANSPORTATION SERVICES (0.9%)
51,000 51,000 GATX 2,295 2,295
2,295 2,295
WHOLESALE (1.7%)
50,000 50,000 Avnet 2,181 2,181
70,000 70,000 Universal 1,931 1,931
4,112 4,112
Total Common Stocks 231,436 231,436
REPURCHASE AGREEMENT (6.9%)
17,145,000 17,145,000 Deutsche Morgan Grenfell/C.J. Lawrence, Inc. 17,145 17,145
5.650%, dated 07/31/96, matures 08/01/96,
repurchase price $17,147,518 (collateralized
by FHLMC obligations, total par value
$2,489,000, 0.00%, 08/19/96: U.S. Treasury Notes,
total par value $15,194,000, 05/15/98-10/31/00:
total market value $17,488,658
Total Repurchase Agreement 17,145 17,145
Total Investments (100.0%) (Cost $180,343) 248,581 248,581
</TABLE>
(a) Non-income producing security
ADR -- American Depository Receipt
CL -- Class
FHLMC - Federal Home Loan Mortgage
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-67
<PAGE> 351
HIGHMARK VALUE MOMENTUM FUND
STEPSTONE VALUE MOMENTUM FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK VALUE STEPSTONE VALUE
MOMENTUM FUND MOMENTUM FUND PRO FORMA ADJUSTMENTS PRO FORMA COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $ 231,436 $ 231,436
Repurchase Agreements 17,145 17,145
--------------------------------- -------------
Total Investments 248,581 248,581
Cash (64) 25(A) (89)
Interest & Dividends Receivables 353 353
Receivable from Brokers - -
Prepaid Expenses and Other Assets - 4 4
Capital Shares Sold Receivable 643 643
---------------------------------------------------------------------------
Total Assets - 249,517 (25) 249,492
LIABILITIES:
Payable for Capital Shares Redeemed - 20 20
Accrued Expenses and Other Payables - 258 258
---------------------------------------------------------------------------
Total Liabilities - 275 - 278
NET ASSETS:
Capital - 170,701 170,701
Net unrealized appreciation on investments - 68,238 68,238
Undistributed net investment income - 247 (25) (A) 320
Accumulated undistributed net realized gain
(loss) on investment transactions - 10,053 10,053
---------------------------------------------------------------------------
NET ASSETS $ - $ 249,239 (25) $ 249,214
===========================================================================
Net Assets:
Fiduciary $ - 236,651 (A)(B) $ 236,651
Retail - 12,564 (A)(B) 12,566
Institutional 236,674 (236,674)(B) -
Investment 12,565 (12,565)(B) -
---------------------------------------------------------------------------
TOTAL $ - $ 249,239 $ (25) $ 249,214
===========================================================================
Shares Outstanding:
Fiduciary - - 12,877 (B) 12,877
Retail - - 684 (B) 684
Institutional - 12,877 (12,877)(B) -
Investment - 684 (684)(B) -
---------------------------------------------------------------------------
TOTAL SHARES OUTSTANDING - 13,561 0 13,561
===========================================================================
</TABLE>
B-68
<PAGE> 352
Net Asset Value and Redemption Price Per Share:
<TABLE>
<S> <C> <C> <C>
Fiduciary - - $ 18.38
Retail - - 18.38
Institutional - $ 18.38 -
Investment - 18.38
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments on
the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-69
<PAGE> 353
HIGHMARK VALUE MOMENTUM FUND
STEPSTONE VALUE MOMENTUM FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK VALUE STEPSTONE VALUE
MOMENTUM FUND MOMENTUM FUND PRO FORMA ADJUSTMENTS PRO FORMA COMBINED
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ - $ 766 $ 766
Dividend Income - 5,505 5,505
--------------------------------- ------------
Total Income - 6,271 6,271
Expenses:
Investment Adviser Fee - 1,382 (1)(A) 1,381
Administration Fees - 299 161 (B) 460
Custodian/Wire Agent Fee - 24 6 (C) 30
Professional Fees - 35 (12)(C) 23
Registration Fees - 25 (6)(C) 19
Distribution Fee - 48 - 48
Trustees Fees - 7 (3)(C) 4
Printing Costs - 28 (16)(C) 2
Other 43 (12)(C) 31
-----------------------------------------------------------------------
Total Expenses 1,891 118 2,009
Investment Adviser Fee Waiver - -
Distribution Fee Waiver (22) (93) (22)
Expenses Voluntarily Reduced (93)
-----------------------------------------------------------------------
Total Net Expenses 1,869 25 1,894
Net Investment Income 4,402 (25) 4,377
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments - 12,498 12,498
Net change in unrealized appreciation
(depreciation)on foreign currency transactions 17,418 17,418
------------------------------------------------------------------------
Net realized/unrealized gains/(losses) on 29,916 (25) 29,916
investments
------------------------------------------------------------------------
Change in net assets resulting from operations $ - $ 34,318 $ (25) $ 34,293
=======================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .60 % of the Value
Momentum Fund (the "Fund") average daily net assets.
(B) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
B-70
<PAGE> 354
(C) The adjustment is made to reflect the expense reductions resulting from the
lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
(D) The Adviser has voluntarily agreed to waive fees to the extent necessary in
order to limit total operating expenses to not more than 1.06% for the
Retail Class of Shares and .81% for the Fiduciary Class of Shares for the
Value Momentum Fund.
(See Notes to Pro Forma Financial Statements)
B-71
<PAGE> 355
HIGHMARK VALUE MOMENTUM FUND
STEPSTONE VALUE MOMENTUM FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Value Momentum Fund and Stepstone Value Momentum Fund,
collectively (the "Funds") as of July 31, 1996. These statements have been
derived from the books and records utilized in calculating daily net assets
values at July 31, 1996. The Pro Forma Combining Statement of Operations
reflects the accounts of HighMark Value Momentum Fund and Stepstone Value
Momentum Fund for the twelve months ended July 31, 1996, the most recent fiscal
year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Value Momentum Fund in exchange for Retail and Fiduciary
Class of Shares of the HighMark Value Momentum Fund. Under generally accepted
accounting principles, the Stepstone Value Momentum Fund will be the surviving
entity for accounting purposes with its historical cost of investment securities
and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the anticipated
advisory and administration fee arrangements for the surviving entity. Certain
other operating costs have also been adjusted to reflect the anticipated
expenses of the combined entity. Other costs which may change as a result of the
reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 12,877 Fiduciary
Class and 684 Retail Class shares of HighMark Value Momentum Fund in exchange
for 12,877 Institutional Class shares and 684 Investment Class shares Stepstone
Value Momentum Fund, respectively, in the reorganization as of July 31, 1996.
B-72
<PAGE> 356
HIGHMARK BLUE CHIP GROWTH FUND
STEPSTONE BLUE CHIP GROWTH FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the HighMark
Blue Chip Growth Fund and the Stepstone Blue Chip Growth Fund as of and for the
year ended July 31, 1996. These statements have been derived from the Funds'
books and records utilized in calculating daily net asset value at July 31,
1996. The accompanying Pro Forma Combining Statement of Operations reflects the
accounts of HighMark Blue Chip Growth Fund and Stepstone Blue Chip Growth Fund
for the year ended July 31, 1996, the most recent fiscal year end of the
Registrant.
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK BLUE CHIP STEPSTONE BLUE CHIP HIGHMARK STEPSTONE
GROWTH FUND GROWTH FUND PRO FORMA BLUE CHIP BLUE CHIP PRO FORMA
COMBINED GROWTH FUND GROWTH FUND COMBINED
SHARES SHARES SHARES VALUE VALUE VALUE
(000's)
<C> <C> <S> <C> <C> <C>
COMMON STOCKS (97.2%)
AIR TRANSPORTAION (2.7%)
11,000 11,000 AMR (a) $ - $ 868 $ 868
10,000 10,000 Federal Express (a) 778 778
1,646 1,646
AIRCRAFT (0.9%)
6,000 6,000 Boeing 531 531
531 531
APPAREL/TEXTILES (0.4%)
4,500 4,500 Gucci Group ADR 255 255
255 255
AUTOMOTIVE (1.1%)
20,000 20,000 Ford Motor 650 650
650 650
BANKS (7.9%)
14,400 14,400 Bank of Boston (a) 763 763
5,000 5,000 Bankers Trust New York 359 359
10,500 10,500 Citicorp 860 860
15,000 15,000 CoreStates Finance 589 589
12,000 12,000 Fifth Third Bancorp 621 621
11,000 11,000 First Union 699 699
15,000 15,000 Merchantile Bancorp 688 688
5,000 5,000 Republic New York 317 317
4,896 4,896
BEAUTY PRODUCTS (1.0%)
7,000 7,000 Proctor & Gamble 686 686
686 686
</TABLE>
B-73
<PAGE> 357
<TABLE>
<C> <C> <S> <C> <C>
BROADCASTING, NEWSPAPERS & ADVERTISING (0.9%)
17,000 17,000 US West Media Group (a) 293 293
8,000 8,000 Viacom, Cl B (a) 280 280
573 573
CHEMICALS (1.1%)
3,500 3,500 Eastman Chemical 183 183
10,000 10,000 Morton International 360 360
3,000 3,000 PPG Industries 148 148
691 691
COMPUTERS & SERVICES (2.6%)
5,000 5,000 Digital Equipment (a) 177 177
20,000 20,000 Gateway 2000 (a) 803 803
14,000 14,000 Hewlett Packard 616 616
1,596 1,596
DRUGS (6.2%)
13,000 13,000 Amgen (a) 710 710
9,426 9,426 Eli Lilly 528 528
30,000 30,000 Johnson & Johnson 1,424 1,424
9,000 9,000 Merck 578 578
10,000 10,000 Schering Plough 551 551
3,791 3,791
ELECTRICAL UTILITIES (5.5%)
10,000 10,000 American Electric Power 415 415
20,000 20,000 Baltimore Gas & Electric 515 515
20,000 20,000 Dominion Resources 753 753
13,200 13,200 Duke Power 632 632
20,000 20,000 Houston Industries 453 453
15,000 15,000 Texas Utilities 630 630
3,398 3,398
ENTERTAINMENT (1.6%)
9,000 9,000 MGM Grand 336 336
11,500 11,500 Walt Disney 640 640
976 976
ENVIRONMENTAL SERVICES (0.2%)
3,500 3,500 WMX Technologies 104 104
104 104
FINANCIAL SERVICES (4.2%)
5,000 5,000 American Express 219 219
26,250 26,250 Bear Stearns 591 591
20,000 20,000 Franklin Resources 1,120 1,120
5,000 5,000 Green Tree Financial 168 168
2,500 2,500 Household International 186 186
5,000 5,000 Merrill Lynch 302 302
2,586 2,586
FOOD, BEVERAGE & TOBACCO (5.2%)
22,000 22,000 Coca Cola 1,031 1,031
11,500 11,500 Philip Morris 1,203 1,203
15,450 15,450 Tootsie Roll Industries 645 645
8,000 8,000 Wm. Wrigley, Jr. 413 413
3,192 3,192
</TABLE>
B-74
<PAGE> 358
<TABLE>
<C> <C> <S> <C> <C>
GAS/NATURAL GAS (0.3%)
15,000 15,000 Noram Energy 163 163
163 163
HOTELS & LODGING (1.2%)
2,000 2,000 HFS (a) 120 120
5,000 5,000 ITT (a) 284 284
7,000 7,000 Marriott International 360 360
764 764
HOUSEHOLD PRODUCTS (1.6%)
3,750 3,750 Clorox 341 341
10,000 10,000 Gillette 636 636
977 977
INSURANCE (3.9%)
5,000 5,000 American International Group 471 471
15,000 15,000 ITT Hartford Group (a) 793 793
8,000 8,000 Pacificare Health Systems, Cl A (a) 538 538
4,000 4,000 Pacificare Health Systems, Cl B (a) 271 271
5,000 5,000 Sunamerica 304 304
2,377 2,377
LEISURE PRODUCTS (0.6%)
15,000 15,000 Mattel 371 371
371 371
MACHINERY (6.5%)
6,000 6,000 Black & Decker 221 221
12,000 12,000 Case 531 531
12,100 12,100 Caterpillar 797 797
18,000 18,000 Deere 644 644
22,000 22,000 General Electric 1,812 1,812
4,005 4,005
MARINE TRANSPORTATION (0.4%)
10,000 10,000 Royal Caribbean Cruises 245 245
245 245
MEDICAL PRODUCTS & SERVICES (3.8%)
5,000 5,000 Boston Scientific (a) 239 239
10,000 10,000 Columbia HCA Healthcare 513 513
8,330 8,330 Guidant 423 423
13,000 13,000 Medtronic 616 616
9,000 9,000 St. Jude Medical 303 303
6,000 6,000 Varian Associates 269 269
2,363 2,363
MISCELLANEOUS BUSINESS SERVICES (8.0%)
10,000 10,000 3Com (a) 394 394
10,000 10,000 Automatic Data Processing 396 396
8,000 8,000 Cisco Systems (a) 414 414
14,250 14,250 Computer Associates International 725 725
9,000 9,000 CUC International (a) 313 313
9,223 9,223 Electronic Data Systems 488 488
17,500 17,500 Informix (a) 382 382
8,000 8,000 Microsoft (a) 943 943
7,500 7,500 Oracle Systems 293 293
</TABLE>
B-75
<PAGE> 359
<TABLE>
<C> <C> <S> <C> <C>
11,000 11,000 Sun Microsystems (a) 601 601
4,949 4,949
PAPER & PAPER PRODUCTS (0.4%)
5,800 5,800 International Paper 220 220
220 220
PETROLEUM & FUEL PRODUCTS (1.1%)
5,000 5,000 Burlington Resources 214 214
3,000 3,000 Schlumberger 240 240
7,000 7,000 Tidewater 236 236
690 690
PETROLEUM REFINING (7.7%)
10,000 10,000 Amoco 669 669
74 74 British Petroleum ADR 8 8
15,400 15,400 Exxon 1,267 1,267
13,100 13,100 Mobil 1,446 1,446
8,000 8,000 Royal Dutch Petroleum ADR 1,207 1,207
2,000 2,000 Texaco 170 170
4,767 4,767
PROFESSIONAL SERVICES (0.8%)
10,000 10,000 Halliburton 521 521
521 521
RAILROADS (0.6%)
5,000 5,000 Burlington Northern Santa Fe 394 394
394 394
RETAIL (8.3%)
20,000 20,000 Alberto Culver, Cl A 733 733
15,000 15,000 Borders Group (a) 480 480
12,000 12,000 Federated Department Stores (a) 363 363
5,000 5,000 Gap 149 149
8,000 8,000 Home Depot 404 404
15,000 15,000 McDonald's 696 696
13,000 13,000 Pep Boys-Manny, Moe & Jack 393 393
20,000 20,000 PepsiCo 633 633
10,000 10,000 Safeway 360 360
5,000 5,000 Sears Roebuck 205 205
9,000 9,000 TJX 271 271
17,500 17,500 Wal-Mart Stores 420 420
5,107 5,107
RUBBER & PLASTIC (2.0%)
24,000 24,000 Agrium 303 303
7,500 7,500 Dow Chemical 558 558
8,000 8,000 Goodyear Tire & Rubber 354 354
1,215 1,215
SEMI-CONDUCTORS/INSTRUMENTS (1.4%)
10,000 10,000 Intel 751 751
2,500 2,500 Xilinx
832 832
SPECIALTY MACHINERY (0.5%)
15,000 15,000 U.S. Filter (a) 324 324
324 324
</TABLE>
B-76
<PAGE> 360
<TABLE>
<C> <C> <S> <C> <C>
STEEL & STEEL WORKS (0.8%)
8,400 8,400 Aluminum Company of America 487 487
487 487
TELEPHONES & TELECOMMUNICATION (5.3%)
27,000 27,000 AT&T 1,407 1,407
15,200 15,200 Ameritech 844 844
10,000 10,000 BellSouth 410 410
7,500 7,500 Paging Network (a) 144 144
15,000 15,000 US West 456 456
3,261 3,261
COMMUNICATIONS EQUIPMENT (0.5%)
6,000 6,000 Motorola 324 324
324 324
Total Common Stocks 59,867 59,867
CONVERTIBLE BOND (0.4%)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
<S> <C> <C> <C> <C> <C>
Tele Communications International
300,000 300,000 4.500%, 02/15/06 244 244
Total Convertible Bond 244 244
EQUITY OPTIONS (0.0%)
Sun Microsystems August 65 Call* 8/17/96 -- --
Sun Microsystems August 55 Put* 8/17/96 14 14
Total Equity Options 14 14
FINANCIAL OPTION (2.4%)
23,000,000 23,000,000 S&P 500 Depositary Receipt 1,473 1,473
Total Financial Option 1,473 1,473
Total Investments (100.0%) (Cost $59,667) $61,598 $ 61,598
</TABLE>
(a) Non-income producing security
ADR - American Depository Receipt
Cl - Class
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-77
<PAGE> 361
HIGHMARK BLUE CHIP GROWTH FUND
STEPSTONE BLUE CHIP GROWTH FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) HIGHMARK BLUE STEPSTONE BLUE
CHIP GROWTH CHIP
FUND GROWTH FUND PRO FORMA ADJUSTMENTS PRO FORMA COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $ 61,598 $ 61,598
Repurchase Agreements - -
----------------------------- ----------
Total Investments 61,598 61,598
Cash 7,206 $ 9 (A) 7,215
Interest & Dividends Receivable 79 79
Receivable from Brokers 212 212
Prepaid Expenses and Other Assets 9 9
Capital Shares Sold Receivable 70 70
---------------------------------------------------------------------
Total Assets 69,174 9 69,183
LIABILITIES:
Accrued Expenses and Other Payables 103 103
---------------------------------------------------------------------
Total Liabilities 103 - 103
NET ASSETS:
Capital 57,450 57,450
Net unrealized appreciation on investments 9,138 9,138
Undistributed net investment income 19 9 (A) 28
Accumulated undistributed net realized gain (loss) 2,464
on investment transactions 2,464
---------------------------------------------------------------------
NET ASSETS $ 69,071 $ 9 $ 69,080
=====================================================================
Net Assets:
Fiduciary $ 69,080 (A)(B) $ 69,080
Retail
Institutional $ 69,071 (69,071)(B)
Investment
---------------------------------------------------------------------
TOTAL $ 69,071 $ 9 $ 69,080
=====================================================================
Shares Outstanding:
Fiduciary 5,505 (B) 5,505
Retail
Institutional 5,505 (5,505)(B)
Investment
---------------------------------------------------------------------
TOTAL SHARES OUTSTANDING - 5,505 - 5,505
=====================================================================
</TABLE>
B-78
<PAGE> 362
<TABLE>
<CAPTION>
Net Asset Value and Redemption Price Per Share:
<S> <C> <C>
Fiduciary $ 12.55
Retail
Institutional $ 12.55
Investment
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments on
the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-79
<PAGE> 363
HIGHMARK BLUE CHIP GROWTH FUND
STEPSTONE BLUE CHIP GROWTH FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) STEPSTONE BLUE
HIGHMARK BLUE CHIP CHIP
GROWTH FUND GROWTH FUND PRO FORMA ADJUSTMENTS PRO FORMA COMBINED
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 228 $ 228
Dividend Income 1,145 1,145
Less: Foreign taxes witheld, net of reclaims
---------------------------------- ------------
Total Income 1,373 1,373
EXPENSES:
Investment Adviser Fee 366 $ (1)(A) 365
Administration Fees 80 42 (B) 122
Custodian/Wire Agent Fee 8 8
Professional Fees 15 (9)(C) 6
Registration Fees 14 (9)(C) 5
Trustees Fees 1 0 1
Printing Costs 10 (7)(C) 3
Other 14 (9)(C) 5
--------------------------------------------------------------------------
Total Expenses 508 (7) 515
Investment Adviser Fee Waiver (16)(D) (16)
Expenses Voluntarily Reduced
--------------------------------------------------------------------------
Total Net Expenses 508 (9) 499
Net Investment Income 865 9 880
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments 4,816 4,816
Net Realized Gain/(Loss) on Option Contracts 591 591
Net change in unrealized appreciation (303) (303)
(depreciation) on investments
Net realized/unrealized gains/(losses) on 5,104 5,104
investments
--------------------------------------------------------------------------
Change in net assets resulting from operations $ 5,969 $ 9 $ 5,978
==========================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .60 % of the Blue Chip
Growth Fund (the "Fund") average daily net assets.
(B) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(C) The adjustment is made to reflect the expense reductions resulting from the
lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
B-80
<PAGE> 364
(D) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than .82% for the
Fiduciary Class of Shares for the Blue Chip Growth Fund.
(See Notes to Pro Forma Financial Statements)
B-81
<PAGE> 365
HIGHMARK BLUE CHIP GROWTH FUND
STEPSTONE BLUE CHIP GROWTH FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Blue Chip Growth Fund and Stepstone Blue Chip Growth
Fund, collectively (the "Funds") as of July 31, 1996. These statements have
been derived from the books and records utilized in calculating daily net
assets values at July 31, 1996. The Pro Forma Combining Statement of
Operations reflects the accounts of HighMark Blue Chip Growth Fund and
Stepstone Blue Chip Growth Fund for the twelve months ended July 31, 1996, the
most recent fiscal year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Blue Chip Growth Fund in exchange for Retail and Fiduciary
Class of Shares of the HighMark Blue Chip Growth Fund. Under generally
accepted accounting principles, the Stepstone Blue Chip Growth Fund will be the
surviving entity for accounting purposes with its historical cost of investment
securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 5,505 Fiduciary
Class shares of HighMark Blue Chip Growth Fund in exchange for 5,505
Institutional Class shares of Stepstone Blue Chip Growth Fund in the
reorganization as of July 31, 1996.
B-82
<PAGE> 366
HIGHMARK EMERGING GROWTH FUND
STEPSTONE EMERGING GROWTH FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Statement of Assets and Liabilities and Pro Forma
Statement of Operations reflect the accounts of the HighMark Emerging Growth
Fund and the Stepstone Emerging Growth Fund as of and for the year ended July
31, 1996. These statements have been derived from the Funds' books and records
utilized in calculating daily net asset value at July 31, 1996. The
accompanying Pro Forma Combining Statement of Operations reflects the accounts
of HighMark Emerging Growth Fund and Stepstone Emerging Growth Fund for the
year ended July 31, 1996, the most recent fiscal year end of the Registrant.
HIGHMARK EMERGING GROWTH FUND
STEPSTONE EMERGING GROWTH FUND
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
EMERGING EMERGING EMERGING EMERGING
GROWTH GROWTH PRO FORMA GROWTH GROWTH PRO FORMA
FUND FUND COMBINED FUND FUND COMBINED
SHARES SHARES SHARES VALUE VALUE VALUE
(000's)
<S> <C> <C> <C> <C> <C>
COMMON STOCKS (76.8%)
AIR TRANSPORTATION (0.6%)
2,250 2,250 Comair Holdings $ 55 $ 55
10,000 10,000 Mesaba Holdings 104 104
15,000 15,000 Vanguard Airlines (a) 94 94
253 253
APPAREL/TEXTILES (0.7%)
15,000 15,000 Mohawk Industries (a) 266 266
266 266
AUTOMOTIVE (1.3%)
Kaydon 5,000 5,000
BANKS (6.0%)
10,000 10,000 Astoria Financial (a) 268 268
3,000 3,000 Cal Fed Bancorp (a) 68 68
5,000 5,000 Carolina First 81 81
5,000 5,000 Crestar Financial 288 288
7,400 7,400 Cullen/Frost Bankers 202 202
3,500 3,500 Deposit Guaranty 160 160
3,750 3,750 First Security 96 96
12,500 12,500 Hibernia, Cl A 134 134
5,000 5,000 Imperial Bancorp (a) 115 115
5,000 5,000 Merchantile Bancorp 229 229
</TABLE>
B-83
<PAGE> 367
<TABLE>
<S> <C> <C> <C> <C>
3,858 3,858 Old Kent Financial 143 143
10,000 10,000 Roosevelt Financial Group 160 160
3,500 3,500 Summit Bancorp 123 123
8,000 8,000 Union Planters 236 236
2,303 2,303
BROADCASTING, NEWSPAPERS & ADVERTISING (2.3%)
4,000 4,000 CKS Group (a) 107 107
6,250 6,250 Infinity Broadcasting (a) 172 172
6,000 6,000 HBO 368 368
7,500 7,500 TCA Cable Television 196 196
1,000 1,000 Young Broadcasting, Cl A (a) 31 31
874 874
BUILDING & CONSTRUCTION (0.3%)
9,375 9,375 Southern Energy Homes (a) 113 113
113 113
CHEMICALS (1.4%)
7,500 7,500 Cambrex 231 231
10,500 10,500 Cytec Industries (a) 315 315
546 546
COMMERCIAL SERVICES (1.4%)
6,000 6,000 Aames Financial 236 236
7,500 7,500 Isocor (a) 59 59
12,500 12,500 New World Communications, Cl A (a) 269 269
564 564
COMMUNICATIONS EQUIPMENT (4.7%)
2,800 2,800 ADC Telecommunications (a) 118 118
7,500 7,500 Aseco 73 73
5,000 5,000 Dionex 174 174
9,000 9,000 DSP Communications (a) 420 420
9,000 9,000 Network Express (a) 70 70
5,000 5,000 Pairgain Technologies (a) 278 278
7,500 7,500 Tellabs (a) 448 448
6,000 6,000 Teltrend (a) 215 215
1,796 1,796
COMPUTERS & SERVICES (0.3%)
2,500 2,500 Atria Software(a) 96 96
96 96
COMPUTERS & SOFTWARE SERVICES (15.0%)
23,415 23,415 3Com (a) 922 922
3,500 3,500 America Online 107 107
</TABLE>
B-84
<PAGE> 368
<TABLE>
<S> <C> <C> <C> <C>
10,000 10,000 Baan NV (a) 298 298
3,000 3,000 Brooktrout Tech (a) 54 54
12,500 12,500 Cadence Design Systems (a) 381 381
16,000 16,000 Ciber (a) 304 304
20,000 20,000 Cisco Systems (a) 1,035 1,035
32,437 32,437 CUC International (a) 1,127 1,127
5,000 5,000 Infonautics (a)
2,500 2,500 Mentor Graphics (a) 31 31
10,000 10,000 Norrell 278 278
5,000 5,000 Oracle Systems 196 196
15,000 15,000 Physician Computer Networks (a) 152 152
5,000 5,000 Proxim (a) 125 125
5,000 5,000 Sterling Software 344 344
5,000 5,000 Sun Microsystems (a) 273 273
7,100 7,100 Symantec (a) 69 69
2,000 2,000 Sync Research (a) 20 20
5,743 5,743
CONSUMER PRODUCTS (1.1%)
2,000 2,000 USA Detergents (a) 73 73
9,750 9,750 Wolverine World Wide 336 336
409 409
DRUGS (4.3%)
4,000 4,000 Agouron Pharmecutical (a) 124 124
2,500 2,500 Alpha Beta Tech (a) 22 22
3,750 3,750 Alpharma Cl A 68 68
5,000 5,000 Autoimmune (a) 41 41
3,200 3,200 Boston Scientific (a) 153 153
15,000 15,000 Cell Genesys (a) 98 98
2,500 2,500 Centocor (a) 62 62
5,000 5,000 Creative Biomolecules (a) 29 29
12,500 12,500 Cypros Pharmaceutical (a) 56 56
7,500 7,500 Depotech 139 139
10,000 10,000 IDEC Pharmaceuticals Corp (a) 155 155
5,000 5,000 Insite Vision (a) 24 24
12,500 12,500 Interneuron Pharmeceutical (a) 338 338
24,000 24,000 Liposome (a) 290 290
10,000 10,000 Royce Labs (a) 46 46
1,645 1,645
ELECTRICAL UTILITIES (0.4%)
5,000 5,000 Belden 138 138
138 138
</TABLE>
B-85
<PAGE> 369
<TABLE>
<S> <C> <C> <C> <C>
ENTERTAINMENT (1.0%)
5,000 5,000 Carmike Cinemas, Cl A 128 128
11,000 11,000 Mirage Resorts (a) 248 248
376 376
ENVIRONMENTAL SERVICES (0.8%)
25,000 25,000 International Technology (a) 50 50
4,000 4,000 Sanifill (a) 170 170
3,000 3,000 United Waste Systems (a) 78 78
1,000 1,000 USA Waste Services (a) 25 25
323 323
FINANCIAL SERVICES (3.7%)
1,750 1,750 Arbatax International (a) 8 8
12,000 12,000 Credit Acceptance (a) 224 224
10,000 10,000 CWM Mortgage Holdings 173 173
5,000 5,000 Finova Group 248 248
5,000 5,000 First American, Tennessee 208 208
500 500 Mercer International (a) 6 6
7,500 7,500 National Surgery Centers (a) 192 192
10,000 10,000 Waterhouse Investor Services 376 376
1,435 1,435
FOOD, BEVERAGE & TOBACCO (0.3%)
5,000 5,000 Boston Beer (a) 111 111
111 111
GAS/NATURAL GAS (0.3%)
5,300 5,300 Atmos Energy 113 113
113 113
HOTELS & LODGING (1.7%)
10,000 10,000 HFS (a) 600 600
2,000 2,000 Interstate Hotels (a) 46 46
646 646
INSURANCE (2.2%)
2,500 2,500 Healthcare Compare (a) 97 97
6,000 6,000 Penncorp Financial Group 168 168
7,500 7,500 Provident (a) 274 274
7,500 7,500 TIG Holdings 208 208
3,200 3,200 Total Renal Care Holdings (a) 114 114
861 861
</TABLE>
B-86
<PAGE> 370
<TABLE>
<S> <C> <C> <C> <C>
LUMBER & WOOD PRODUCTS (0.7%)
15,000 15,000 Cavalier Homes 255 255
Champion Enterprises 1,400 1,400
283 283
MACHINERY (1.1%)
10,000 10,000 Camco International 324 324
4,000 4,000 Central Sprinkler (a) 83 83
407 407
MEASURING DEVICES (1.7%)
5,000 5,000 Advanced Energy Industries (a) 29 29
3,400 3,400 Epic Design Technology (a) 63 63
8,000 8,000 Input/Output 252 252
23,000 23,000 Laser Technology (a) 109 109
12,500 12,500 Thermoquest 184 184
637 637
MEDICAL PRODUCTS & SERVICES (7.6%)
16,000 16,000 Biochem Pharma (a) 478 478
4,000 4,000 Biofield (a) 39 39
7,500 7,500 Cardiothoracic Systems (a) 83 83
5,000 5,000 Chad Therapeutics (a) 86 86
27,843 27,843 Concord EFS (a) 710 710
5,000 5,000 Endosonics (a) 63 63
2,000 2,000 Heartstream (a) 23 23
7,000 7,000 Nellcor (a) 165 165
24,000 24,000 Renal Treatment Centers (a) 672 672
15,000 15,000 Spectranetics (a) 66 66
7,000 7,000 St. Jude Medical 235 235
8,000 8,000 Staar Surgical (a) 103 103
10,000 10,000 Veterinary Centers of America (a) 176 176
2,899 2,899
MISCELLANEOUS BUSINESS SERVICES (5.6%)
3,000 3,000 Computer Management Sciences (a) 58 58
2,500 2,500 Cybercash (a) 80 80
2,500 2,500 Dendrite International (a) 71 71
17,000 17,000 Digital Solutions (a) 70 70
5,000 5,000 Fiserv (a) 168 168
12,500 12,500 Fore Systems (a) 342 342
2,500 2,500 Geoworks (a) 51 51
5,000 5,000 Harris Computer Systems 76 76
2,500 2,500 Intuit 88 88
3,500 3,500 Logicon 98 98
7,500 7,500 Macromedia (a) 121 121
2,000 2,000 Netscape Communications (a) 79 79
</TABLE>
B-87
<PAGE> 371
<TABLE>
<S> <C> <C> <C> <C>
3,750 3,750 Object Design (a) 25 25
2,000 2,000 Pixar (a) 27 27
15,000 15,000 Saville Systems Ireland ADR 388 388
5,000 5,000 Systemsoft Corp (a) 91 91
7,000 7,000 Vantive 303 303
2,136 2,136
MISCELLANEOUS CONSUMER SERVICES (2.3%)
9,500 9,500 Corestaff (a) 382 382
9,000 9,000 Service International 496 496
878 878
PAPER & PAPER PRODUCTS (0.2%)
5,000 5,000 Gaylord Container 33 33
12,500 12,500 Repap Enterprises (a) 45 45
78 78
PETROLEUM & FUEL PRODUCTS (2.0%)
10,000 10,000 Apache 284 284
5,000 5,000 Benton Oil & Gas 99 99
10,000 10,000 Pride Petroleum Services (a) 124 124
9,000 9,000 Reading & Bates (a) 183 183
4,000 4,000 Seagull Energy 73 73
763 763
PETROLEUM REFINING (0.4%)
7,500 7,500 Valero Energy 155 155
155 155
PRINTING & PUBLISHING (1.6%)
12,000 12,000 Digital Generations Systems (a) 99 99
12,000 12,000 Gartner Group, Cl A (a) 392 392
7,500 7,500 Marvel Entertainment Group 60 60
3,000 3,000 Scientific Games Holdings (a) 61 61
612 612
PROFESSIONAL SERVICES (2.0%)
7,800 7,800 Corrections of America (a) 242 242
5,000 5,000 Medaphis (a) 186 186
7,500 7,500 Paychex 343 343
771 771
</TABLE>
B-88
<PAGE> 372
<TABLE>
<S> <C> <C> <C> <C>
RAILROADS (0.3%)
5,000 5,000 Hub Group (a) 96 96
96 96
RETAIL (11.0%)
4,000 4,000 Alberto Culver, Cl A 147 147
10,500 10,500 Boston Chicken (a) 278 278
5,000 5,000 Corporate Express (a) 187 187
9,000 9,000 Gadzooks (a) 218 218
12,500 12,500 Garden Ridge (a) 155 155
10,000 10,000 Home Shopping Network, (a) 101 101
17,000 17,000 Lone Star Steakhouse & Saloon (a) 531 531
5,000 5,000 Longhorn Steaks (a) 78 78
34,000 34,000 Omnicare 795 795
2,700 2,700 Orchard Supply Hardware Stores (a) 77 77
5,000 5,000 Ross Stores (a) 148 148
7,500 7,500 Sports Authority (a) 151 151
30,000 30,000 Staples 499 499
5,000 5,000 Starbucks 130 130
6,300 6,300 Sunglass Hut International (a) 75 75
22,000 22,000 Viking Office Products (a) 649 649
4,219 4,219
RUBBER & PLASTIC (0.5%)
5,000 5,000 Sealed Air (a) 174 174
174 174
SEMI-CONDUCTORS/INSTRUMENTS (3.6%)
36,500 36,500 Applied Magnetics (a) 424 424
7,500 7,500 Atmel 207 207
13,500 13,500 BMC Industries (a) 370 370
5,000 5,000 Eltron International (a) 141 141
6,500 6,500 Lernout & Hauspie Speech (a) 124 124
5,000 5,000 Transwitch 40 40
2,500 2,500 Xilinx 81 81
1,387 1,387
SPECIALTY MACHINERY (0.8%)
15,000 15,000 U.S. Filter (a) 324 324
324 324
STEEL & STEEL WORKS (0.2%)
7,500 7,500 Align-Rite International (a) 73 73
73 73
</TABLE>
B-89
<PAGE> 373
<TABLE>
<S> <C> <C> <C> <C>
TELEPHONES & TELECOMMUNICATION (4.1%)
8,000 8,000 Cascade Communications (a) 492 492
5,000 5,000 Spectralink Corp (a) 29 29
40,780 40,780 Worldcom (a) 1,055 1,055
1,576 1,576
TESTING LABORATORIES (0.7%)
5,000 5,000 Cellpro (a) 67 67
2,500 2,500 Martek Biosciences (a) 63 63
4,500 4,500 Primark (a) 122 122
252 252
WHOLESALE (4.7%)
6,500 6,500 Barrett Resources (a) 187 187
18,000 18,000 Cardinal Health 1,251 1,251
2,000 2,000 Central Garden and Pet (a) 42 42
4,500 4,500 Chronimed (a) 83 83
7,500 7,500 Ha Lo Industries (a) 169 169
5,000 5,000 Physician Sales and Services 70 70
1,500 1,500 Silicon Storage Technology (a) 11 11
1,813 1,813
Total Common Stocks 38,370 38,370
EQUITY OPTIONS (0.1%)
Atmel November 30 Puts 11/16/96 (a) 37 37
Atmel November 37.50 Calls 11/16/96 (a) (9) (9)
Fore Systems August 35 Calls 8/17/96 (a) (1) (1)
Lone Star Steak August 35 Puts 8/17/96 (a) 18 18
Lone Star Steak August 40 Calls 8/17/96 (a) -- --
Paychex August 50 Calls 8/17/96 (a) (1) (1)
Sun Microsystems August 65 Call 8/17/96 (a) -- --
Sun Microsystems August 55 Put 8/17/96 (a) 5 5
Total Equity Options 49 49
Total Investments (100.0%) (Cost $33,353) $ 38,419 $38,419
</TABLE>
B-90
<PAGE> 374
(a) Non-income producing security
ADR -- American Depository Receipt
CL -- Class
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-91
<PAGE> 375
HIGHMARK EMERGING GROWTH FUND
STEPSTONE EMERGING GROWTH FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
EMERGING GROWTH EMERGING GROWTH PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities - $38,419 $ 38,419
Repurchase Agreements -
-------------------------------- -----------------
Total Investments - 38,419 - 38,419
Cash - 11,446 9 (A) 11,455
Interest & Dividend Receivable - 15 15
Receivable from Brokers - 282 282
Prepaid Expenses and Other Assets - 9 9
Capital Shares Sold Receivable 66 66
-----------------------------------------------------------------------------
Total Assets - 50,237 9 50,246
LIABILITIES:
Payable for Capital Shares Redeemed - 22 22
Payable to Brokers - 212 212
Accrued Expenses and Other Payables: - 68 68
-----------------------------------------------------------------------------
Total Liabilities - 302 - 302
NET ASSETS:
Capital - 41,618 41,618
Net unrealized appreciation
(depreciation) on investments - 5,066 5,066
Undistributed net investment income - (14) 9 (B) (5)
Accumulated undistributed net realized
gain (loss) on investment transactions - 3,265 3,265
-----------------------------------------------------------------------------
Net Assets - $49,935 $ 9 $ 49,944
==============================================================================
Net Assets:
Fiduciary - $ 49,944 (A)(B) $ 49,944
Retail - - -
Institutional $49,935 (49,935) (B) -
Investment - - -
</TABLE>
B-92
<PAGE> 376
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------------------------------------
Total - $ 49,935 $ 9 $ 49,944
=====================================================================
Shares Outstanding:
Fiduciary - 3,995 (B) 3,995
Retail - -
Institutional 3,995 (3,995) (B) -
Investment - - -
---------------------------------------------------------------------
Total Shares Outstanding - 3,995 - 3,995
=====================================================================
Net Asset Value and Redemption Price Per
Share:
Fiduciary $ 12.50
Retail
Institutional $ 12.50 -
Investment
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments
on the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-93
<PAGE> 377
HIGHMARK EMERGING GROWTH FUND
STEPSTONE EMERGING GROWTH FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
EMERGING GROWTH EMERGING GROWTH PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income - $ 311 $ 311
Dividend Income - 130 130
-------------------------------- ---------------
Total Income - 441 441
EXPENSES:
Investment Adviser Fee - 345 (A) 345
Administration Fees - 57 29 (B) 86
Custodian/Wire Agent Fee - 7 (1) (C) 6
Professional Fees - 10 (6) (C) 4
Registration Fees - 8 (4) (C) 4
Trustees Fees - 2 (1) (C) 1
Printing Costs - 8 (6) (C) 2
Other - 17 (4) (C) 13
---------------------------------------------------------------------------
Total Expenses - 454 6 460
Investment Adviser Fee Waiver - -
Expenses Voluntarily Reduced - (15) (D) (15)
---------------------------------------------------------------------------
Total Net Expenses - 454 (9) 445
Net Investment Income - (13) 9 (4)
Realized Gains on Investments:
Net Realized Gain/(Loss) on Investments - 4,024 4,024
Net Realized Gain/(Loss) on Option Contracts 190 190
Net change in unrealized
appreciation/(depreciation)
on investments - (26) (26)
---------------------------------------------------------------------------
Net realized/unrealized gains/(losses) on
investments - 4,188 - 4,188
---------------------------------------------------------------------------
Change in net assets resulting from
operations - $ 4,175 $ 9 $ 4,184
===========================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .80% of the Emerging Growth
Fund (the "Fund") average daily net assets.
(B) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(C) The adjustment is made to reflect the expense reductions resulting from
the lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
(D) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than 1.28% for the
Retail Class of Shares and 1.03% for the Fiduciary Class of Shares for the
Emerging Growth Fund.
(See Notes to Pro Forma Financial Statements)
B-94
<PAGE> 378
HIGHMARK EMERGING GROWTH FUND
STEPSTONE EMERGING GROWTH FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Emerging Growth Fund and Stepstone Emerging Growth
Fund, collectively (the "Funds") as of July 31, 1996. These statements have
been derived from the books and records utilized in calculating daily net
assets values at July 31, 1996. The Pro Forma Combining Statement of
Operations reflects the accounts of HighMark Emerging Growth Fund and Stepstone
Emerging Growth Fund for the twelve months ended July 31, 1996, the most recent
fiscal year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Emerging Growth Fund in exchange for Retail and Fiduciary
Class of Shares of the HighMark Emerging Growth Fund. Under generally accepted
accounting principles, the Stepstone Emerging Growth Fund will be the surviving
entity for accounting purposes with its historical cost of investment
securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 3,995 Fiduciary
Class shares of HighMark Emerging Growth Fund in exchange for 3,995
Institutional Class shares of Stepstone Emerging Growth Fund.
B-95
<PAGE> 379
HIGHMARK INTERNATIONAL EQUITY FUND
STEPSTONE INTERNATIONAL EQUITY FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Statement of Assets and Liabilities and Pro Forma
Statement of Operations reflect the accounts of the HighMark International
Equity Fund and the Stepstone International Equity Fund as of and for the year
ended July 31, 1996. These statements have been derived from the Funds' books
and records utilized in calculating daily net asset value at July 31, 1996.
The accompanying Pro Forma Combining Statement of Operations reflects the
accounts of HighMark International Equity Fund and Stepstone International
Equity Fund for the year ended July 31, 1996, the most recent fiscal year end
of the Registrant.
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA
EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED
SHARES SHARES SHARES VALUE VALUE VALUE
(000'S)
<S> <C> <C> <C> <C>
FOREIGN COMMON STOCKS (97.0)
FINLAND (0.2%)
3,000 3,000 Nokia, Cl A 106 106
106 106
FRANCE (7.9%)
1,802 1,802 Accor 239 239
2,636 2,636 Alcatel Alsthom 216 216
3,854 3,854 Banque Nationale Paris 138 138
675 675 Carrefour 370 370
2,118 2,118 Castorama 414 414
770 770 Chargeurs International 31 31
2,000 2,000 Danone 299 299
2,385 2,385 Elf Aquitaine 170 170
750 750 Essilor International 206 206
5,800 5,800 GAN (a) 151 151
2,927 2,927 Lafarge 175 175
1,800 1,800 LVMH Moet Hennesey 399 399
770 770 Pathe (a) 184 184
1,400 1,400 Peugeot 169 169
5,000 5,000 Schneider 228 228
1,809 1,809 Societe Generale 200 200
3,536 3,536 Valeo 181 181
3,770 3,770
</TABLE>
B-96
<PAGE> 380
<TABLE>
<S> <C> <C> <C> <C>
GERMANY (7.7%)
214 214 Allianz 393 393
650 650 Bankgesellschaft Berlin 137 137
8,000 8,000 BASF 214 214
9,500 9,500 Bayer 319 319
400 400 BMW 224 224
4,000 4,000 Daimler-Benz (a) 212 212
500 500 Degussa 166 166
4,000 4,000 Deutsche Bank 203 203
625 625 Gehe 387 387
550 550 Karstadt 198 198
700 700 Preussag 168 168
7,500 7,500 RWE 268 268
7,000 7,000 Siemens 368 368
8,000 8,000 Veba 408 408
3,665 3,665
HONG KONG (6.0%)
200,000 200,000 Amoy Properties 222 222
85,000 85,000 Cheung Kong Holdings 580 580
150,000 150,000 Hong Kong & China Gas 238 238
170,000 170,000 Hong Kong Telecommunications 280 280
36,341 36,341 HSBC Holdings 580 580
75,000 75,000 Hutchison Whampoa 448 448
60,000 60,000 New World Development 273 273
30,000 30,000 Swire Pacific, Ser A 257 257
2,878 2,878
JAPAN (39.5%)
42,000 42,000 Amada 401 401
30,000 30,000 Amada Metrecs 405 405
39,000 39,000 Asahi Breweries 435 435
51,000 51,000 Asahi Organic Chemical 377 377
33,000 33,000 Best Denki 482 482
16,000 16,000 CSK 459 459
36,000 36,000 Daiwa Securities 435 435
21,000 21,000 Fuji Bank 413 413
15,000 15,000 Fuji Photo Film 448 448
48,000 48,000 Fujisawa Pharmaceutical 459 459
90,000 90,000 Gun-ei Chemicals 412 412
54,000 54,000 Hitachi Cable 449 449
17,000 17,000 Industrial Bank of Japan 368 368
70,000 70,000 Japan Synthetic Rubber 485 485
45,000 45,000 Kamigumi 404 404
16,700 16,700 Kansai Electric Power 382 382
20,000 20,000 Katokichi 472 472
54,000 54,000 Long Term Credit Bank Japan 385 385
46,000 46,000 Maeda 435 435
</TABLE>
B-97
<PAGE> 381
<TABLE>
<S> <C> <C> <C> <C>
30,000 30,000 Makita 464 464
40,000 40,000 Matsushita Electric Works 416 416
63,000 63,000 Mitsubishi Electric 413 413
53,000 53,000 Mitsui Marine & Fire 393 393
38,000 38,000 Mitsui Trust & Banking 413 413
41,000 41,000 NGK Insulators 453 453
21,000 21,000 Nomura Securities 368 368
44,000 44,000 Olympus Optical 429 429
44,000 44,000 Organo 466 466
78,000 78,000 Ryobi Limited 378 378
61,000 61,000 Sanden 455 455
79,000 79,000 Sanyo Electric 437 437
48,000 48,000 Shinmaywa Industries 448 448
37,000 37,000 Shizuoka Bank 440 440
23,000 23,000 Sumitomo Bank 422 422
34,000 34,000 Sumitomo Trust & Banking 446 446
43,000 43,000 Takara Standard 471 471
34,000 34,000 Tokio Marine & Fire 424 424
112,000 112,000 Tokyo Gas 399 399
25,000 25,000 Tokyo Style 422 422
120,000 120,000 Tomen 430 430
31,000 31,000 Toppan Printing 427 427
65,000 65,000 Toshiba 428 428
78,000 78,000 Toyo Ink 429 429
39,000 39,000 Yamato Transportation 457 457
18,834 18,834
MALAYSIA (3.3%)
20,000 20,000 AMMB Holdings 242 242
20,000 20,000 Edaran Otomobil 193 193
12,000 12,000 Malayan Banking 102 102
60,000 60,000 Petronas Gas 234 234
20,000 20,000 Rothmans of Pall Mall 196 196
60,000 60,000 Sime Darby 174 174
20,000 20,000 Telekom Malaysia 162 162
20,000 20,000 United Engineers 135 135
30,000 30,000 YTL 139 139
1,577 1,577
NETHERLANDS (5.9%)
5,052 5,052 Aegon 232 232
5,254 5,254 Ahold 267 267
3,000 3,000 Akzo 337 337
15,000 15,000 Elsevier NV 228 228
10,000 10,000 IHC Caland 490 490
5,000 5,000 Phillips Electronics 166 166
1,500 1,500 Royal Dutch Petroleum 226 226
2,000 2,000 Unilever 285 285
</TABLE>
B-98
<PAGE> 382
<TABLE>
<S> <C> <C> <C> <C>
15,000 15,000 VNU 248 248
3,000 3,000 Wolters Kluwer 349 349
2,828 2,828
PHILIPPINES (0.9%)
25,000 25,000 Ayala, Ser B 40 40
52,000 52,000 Ayala Land, Ser B 90 90
127,000 127,000 JG Summit Holdings 44 44
9,000 9,000 Manila Electric, Cl B 66 66
3,750 3,750 Metro Bank & Trust 80 80
112,000 112,000 Petron 45 45
185,000 185,000 SM Prime Holdings 46 46
411 411
SINGAPORE (5.7%)
20,000 20,000 Cerebos Pacific 160 160
150,000 150,000 DBS Land 474 474
45,000 45,000 Development Bank of Singapore 510 510
30,000 30,000 Keppel 227 227
50,000 50,000 Singapore Airlines 503 503
100,000 100,000 Singapore Tech Industrial 232 232
100,000 100,000 Singapore Telecommunications 245 245
42,000 42,000 United Overseas Bank 369 369
2,720 2,720
SWEDEN (0.6%)
2,500 2,500 Astra, Ser A 105 105
5,000 5,000 Ericsson, Ser B 100 100
2,000 2,000 Pharmacia 82 82
287 287
SWITZERLAND (5.6%)
300 300 ABB AG 355 355
250 250 Alusuisse Lonza 192 192
300 300 Ciba Geigy 356 356
3,000 3,000 CS Holdings 317 317
300 300 Nestle 343 343
50 50 Roche Holdings 369 369
400 400 SMH PC 260 260
250 250 Union Bank of Switzerland 242 242
950 950 Zurich Insurance 248 248
2,682 2,682
</TABLE>
B-99
<PAGE> 383
<TABLE>
<S> <C> <C> <C> <C>
THAILAND (0.9%)
4,700 4,700 Advanced Info Service 57 57
8,700 8,700 Bangkok Bank 103 103
26,000 26,000 Electric Generating 82 82
5,200 5,200 PTT Exploration 65 65
8,200 8,200 Siam Commercial Bank 103 103
410 410
UNITED KINGDOM (11.0%)
50,000 50,000 Assocociated British Ports 211 211
50,000 50,000 British Airport Authority 357 357
75,000 75,000 BTR 287 287
60,000 60,000 Cable & Wireless 380 380
40,000 40,000 General Accident 391 391
35,000 35,000 Glaxo Wellcome 487 487
75,000 75,000 Hanson 187 187
40,000 40,000 Hardy Oil & Gas 161 161
50,000 50,000 Hays PLC 334 334
30,000 30,000 Johnson Matthey 271 271
60,000 60,000 Marks & Spencer 451 451
33,000 33,000 National Grid Group 90 90
51,212 51,212 Prudential 345 345
50,000 50,000 Rexam 283 283
20,000 20,000 RTZ 289 289
30,000 30,000 Southern Electric 307 307
20,000 20,000 Zeneca Group 433 433
5,264 5,264
UNITED STATES (1.6%)
55,000 55,000 Latin America Equity Fund 770 770
770 770
Total Foreign Common Stocks 46,202 46,202
FOREIGN PREFERRED STOCK (0.2%)
GERMANY (0.2%)
700 700 Jungheinrich 93 93
Total Foreign Preferred Stock 93 93
</TABLE>
B-100
<PAGE> 384
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT (2.8%)
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
<S> <C> <C> <C> <C>
1,345,000 1,345,000 J.P. Morgan Securities, 5.50%, dated 1,345 1,345
07/31/96, matures 08/01/96, repurchase
price $1,345,006 (collateralized by U.S.
Treasury Note, par value 1,395,000,
5.00%, matures 2/15/99: market value
$1,381,370)
Total Repurchase Agreement 1,345 1,345
Total Investments (100.0%) (Cost $45,054) $47,640 $47,640
</TABLE>
(a) Non-income producing security
Cl -- Class
Ser -- Series
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-101
<PAGE> 385
HIGHMARK INTERNATIONAL EQUITY FUND
STEPSTONE INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
INTERNATIONAL INTERNATIONAL
EQUITY EQUITY FUND PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C>
ASSETS:
Investments in securities $ 46,295 $ 46,295
Repurchase Agreements $ 1,345 $ 1,345
-----------------------------------------------------------------------
Total Investments 47,640 - 47,640
Cash (11) $ (56) (A) (67)
Interest & Dividends Receivable 47 47
Income/Reclaim Receivable 121 121
Prepaid Expenses and Other Assets 16 16
Capital Shares Sold Receivable 7 7
-----------------------------------------------------------------------
Total Assets 47,820 (56) (A) 47,764
LIABILITIES:
Accrued Expenses and Other Payables 64 64
-----------------------------------------------------------------------
Total Liabilities 64 64
NET ASSETS:
Capital 42,488 42,488
Net unrealized appreciation
on investments 2,586 2,586
Undistributed net investment income
304 (56) (A) 248
Accumulated undistributed net
realized gain (loss) on
investment transactions 1,771 1,771
Accumulated net realized gain
(loss) on foreign currency
transactions 606 606
Net unrealized appreciation on
foreign currency and translation
of other assets and liabilities
in foreign currency 1 1
-----------------------------------------------------------------------
NET ASSETS $ 47,756 $ (56) $ 47,700
=======================================================================
Net Assets:
Fiduciary $ 47,700 (A)(B) $ 47,700
Retail
Institutional $ 47,756 (47,756) (B)
Investment
-----------------------------------------------------------------------
TOTAL $ 47,756 (56) $ 47,700
=======================================================================
Shares Outstanding:
Fiduciary 1,255 1,255 (B)
Retail
Institutional 1,255 (1,255) (B)
Investment
-----------------------------------------------------------------------
TOTAL SHARES OUTSTANDING 1,255 1,255
=======================================================================
</TABLE>
B-102
<PAGE> 386
<TABLE>
<S> <C> <C>
Net Asset Value and Redemption Price Per Share:
Fiduciary $ 38.06
Retail
Institutional $ 38.06
Investment
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments on
the Statements of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
B-103
<PAGE> 387
HIGHMARK INTERNATIONAL EQUITY FUND
STEPSTONE INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in Thousands) HIGHMARK STEPSTONE
INTERNATIONAL INTERNATIONAL PRO FORMA PRO FORMA
EQUITY FUND EQUITY FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 138 $ 138
Dividend Income 873 873
Less: Foreign taxes witheld, net of
reclaims (85) (85)
-----------------------------------------------------------------------------------
Total Income 926 926
EXPENSES:
Shareholder Services Fees $ 33 (B) 33
Administration Fees 58 32 (C) 90
Investment Adviser Fee 425 1 (A) 426
Custodian/Wire Agent Fee 44 6 (C) 50
Professional Fees 8 (4) (C) 4
Registration Fees 12 (8) (C) 4
Distribution Fee
Trustees Fees 2 (1) (C) 1
Printing Costs 4 (2) (C) 2
Other 22 (6) (C) 16
-----------------------------------------------------------------------------------
Total Expenses 575 51 626
Investment Adviser Fee Waiver (66) 66 (E)
Expenses Voluntarily Reduced (61) (D) (61)
-----------------------------------------------------------------------------------
Total Net Expenses 509 56 565
Net Investment Income 417 (56) 361
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments 1,859 1,859
Net Realized Gain/(Loss) on Foreign 659 659
Currency Transactions
Net change in unrealized
appreciation/(depreciation)
on investments (968) (968)
Net change in unrealized
appreciation/(depreciation)
on foreign currency transactions (2) (2)
-----------------------------------------------------------------------------------
Net realized/unrealized gains/(losses)
on investments 1,548 1,548
-----------------------------------------------------------------------------------
Change in net assets resulting from
operations $1,965 (56) $ 1,909
===================================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .95% of the International
Equity Fund (the "Fund") average daily net assets.
(B) To support the provision of Shareholder Services to both classes of
Shares, HighMark has adopted a Shareholder Service Plan. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to .25% of its average
daily net
B-104
<PAGE> 388
assets for the period to such service provider. The service provider may
voluntarily choose to waive such fees at any time at its sole discretion.
Currently such fees are being waived to the rate of 0.00% of average daily net
assets.
(C) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(D) The adjustment is made to reflect the expense reductions resulting from
the lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
(E) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than 1.26% for the
Fiduciary Class of Shares for the International Equity Fund.
B-105
<PAGE> 389
HIGHMARK INTERNATIONAL EQUITY FUND
STEPSTONE INTERNATIONAL EQUITY FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Portfolio of Investments and
Statement of Assets and Liabilities reflect the accounts of HighMark
International Equity Fund and Stepstone International Equity Fund, collectively
(the "Funds") as of July 31, 1996. These statements have been derived from the
books and records utilized in calculating daily net assets values at July 31,
1996. The Pro Forma Combining Statement of Operations reflects the accounts of
HighMark International Equity Fund and Stepstone International Equity Fund for
the twelve months ended July 31, 1996, the most recent fiscal year of the
Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone International Equity Fund in exchange for Retail and
Fiduciary Class of Shares of the HighMark International Equity Fund. Under
generally accepted accounting principles, the Stepstone International Equity
Fund will be the surviving entity for accounting purposes with its historical
cost of investment securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 1,255 Fiduciary
Class of HighMark International Equity Fund in exchange for 1,255 Institutional
Class shares, as of July 31, 1996.
B-106
<PAGE> 390
HIGHMARK INTERMEDIATE-TERM BOND FUND
STEPSTONE INTERMEDIATE-TERM BOND FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Statement of Assets and Liabilities and Pro Forma
Statement of Operations reflect the accounts of the HighMark Intermediate-Term
Bond Fund and the Stepstone Intermediate-Term Bond Fund as of and for the year
ended July 31, 1996. These statements have been derived from the Funds' books
and records utilized in calculating daily net asset value at July 31, 1996.
The accompanying Pro Forma Combining Statement of Operations reflects the
accounts of HighMark Intermediate-Term Bond Fund and Stepstone
Intermediate-Term Bond Fund for the year ended July 31, 1996, the most recent
fiscal year end of the Registrant.
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
INTERMEDIATE- INTERMEDIATE INTERMEDIATE- INTERMEDIATE-
TERM BOND TERM BOND PRO FORMA TERM BOND TERM BOND PRO FORMA
FUND FUND COMBINED FUND FUND COMBINED
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT VALUE VALUE VALUE
(000'S) (000'S)
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS (40.2%)
Arkansas Electric Cooperative
$ 2,492 $ 2,492 7.330%, 06/30/08 $ 2,461 $ 2,461
Avco Financial Services
3,500 3,500 7.375%, 08/15/01 3,539 3,539
Bankers Trust, NY
3,500 3,500 7.250%, 01/15/03 3,478 3,478
1,500 1,500 7.500%, 11/15/15 1,433 1,433
Banponce
2,000 2,000 6.750%, 12/15/05 1,870 1,870
British Petroleum
3,500 3,500 9.000%, 06/01/19 3,644 3,644
Ford Motor Credit
4,000 4,000 8.200%, 02/15/02 4,185 4,185
Hydro-Quebec
2,500 2,500 7.500%, 04/01/16 2,409 2,409
Lehman Brothers Holdings
3,000 3,000 8.800%, 03/01/15 3,293 3,293
</TABLE>
B-107
<PAGE> 391
<TABLE>
<S> <C> <C> <C> <C>
Lockheed Martin
3,500 3,500 7.450%, 06/15/04 3,518 3,518
Pacific Gas & Electric
780 780 8.750%, 01/01/01 829 829
2,000 2,000 6.250%, 08/01/03 1,888 1,888
Panhandle Eastern
3,000 3,000 7.875%, 08/15/04 3,071 3,071
Pepsico
3,500 3,500 5.875%, 06/01/00 3,386 3,386
Province of British Columbia
5,000 5,000 6.500%, 01/15/26 4,450 4,450
Province of Manitoba
3,000 3,000 6.125%, 01/19/04 2,828 2,828
Province of Ontario
4,000 4,000 7.375%, 01/27/03 4,065 4,065
Salomon Brothers
2,000 2,000 7.750%, 05/15/00 2,033 2,033
2,000 2,000 6.750%, 02/15/03 1,905 1,905
Travellers/Aetna
2,000 2,000 6.750%, 04/15/01 1,976 1,976
Total Corporate Obligations 56,261 56,261
U.S. TREASURY OBLIGATIONS (39.1%)
United States Treasury Notes
7,000 7,000 6.125%, 03/31/98 6,999 6,999
3,000 3,000 6.375%, 05/15/99 2,999 2,999
1,000 1,000 6.375%, 07/15/99 1,000 1,000
7,000 7,000 6.250%, 05/31/00 6,938 6,938
13,100 13,100 6.125%, 07/31/00 12,916 12,916
9,000 9,000 6.125%, 09/30/00 8,865 8,865
6,500 6,500 5.875%, 02/15/04 6,179 6,179
3,500 3,500 7.250%, 08/15/04 3,609 3,609
5,000 5,000 7.250%, 08/15/22 5,097 5,097
Total U.S. Treasury Obligations 54,602 54,602
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATION (9.0%)
FNMA
12,453 12,453 8.000%, 08/01/24 12,524 12,524
</TABLE>
B-108
<PAGE> 392
<TABLE>
<S> <C> <C> <C> <C>
Total U.S. Government Agency
Mortgage-Backed Obligation 12,524 12,524
ASSET BACKED SECURITIES (4.8%)
American Express Master Trust
4,000 4,000 7.150%, 08/15/99 4,054 4,054
J.C. Penney Master Credit Card Trust
2,500 2,500 9.625%, 06/15/00 2,741 2,741
Total Asset Backed Securities 6,795 6,795
REPURCHASE AGREEMENT (6.9%)
Deutsche Morgan Grenfell/C.J. Lawrence,
Inc., 5.65%, dated 07/31/96, matures
08/01/96, repurchase price $9,622,093
(collateralized by various U.S. Treasury
Notes, total par value $1,118,000,
6.00%-7.875%, 12/31/97- 11/15/04: U.S.
9,621 9,621 Treasury Bill, total par value$8,8879, 9,621 9,621
01/16/97: total market value $9,813,115)
Total Repurchase Agreement 9,621 9,621
Total Investments (100.0%) (Cost
$141,199) $ 139,803 $ 139,803
</TABLE>
FNMA - Federal National Mortgage Association
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-109
<PAGE> 393
<TABLE>
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES (4.8%)
American Express Master Trust
4,000 4,000 7.150%, 08/15/99 4,054 4,054
J.C. Penney Master Credit Card Trust
2,500 2,500 9.625%, 06/15/00 2,741 2,741
Total Asset Backed Securities 6,795 6,795
REPURCHASE AGREEMENT (6.9%)
Deutsche Morgan Grenfell/C.J. Lawrence,
Inc., 5.65%, dated 07/31/96, matures
08/01/96, repurchase price $9,622,093
(collateralized by various U.S. Treasury
Notes, total par value $1,118,000,
6.00%-7.875%, 12/31/97- 11/15/04: U.S.
9,621 9,621 Treasury Bill, total par value$8,8879, 9,621 9,621
01/16/97: total market value $9,813,115)
Total Repurchase Agreement 9,621 9,621
Total Investments (100.0%) (Cost
$141,199) $ 139,803 $ 139,803
</TABLE>
FNMA - Federal National Mortgage Association
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-110
<PAGE> 394
HIGHMARK INTERMEDIATE-TERM BOND FUND
STEPSTONE INTERMEDIATE-TERM BOND FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
INTERMEDIATE- INTERMEDIATE-
TERM BOND TERM BOND PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C>
ASSETS:
Investments in securities $ 130,182 $ 130,182
Repurchase Agreements 9,621 9,621
--------------------------------- --------------
Total Investments 139,803 139,803
Cash (37) $ (95) (A) (132)
Interest & Dividend Receivable 2,090 2,090
Prepaid Expenses and Other Assets 3 3
Capital Shares Sold Receivable 73 73
--------------------------------------------------------------------------
Total Assets 141,932 (95) 141,837
LIABILITIES:
Payable for Capital Shares Redeemed 9 9
Accrued Expenses and Other Payables: 124 124
--------------------------------------------------------------------------
Total Liabilities 133 133
NET ASSETS:
Capital 146,060 146,060
Net unrealized appreciation
(depreciation) on investments (1,396) (1,396)
Undistributed net investment income 171 (95) (A) 76
Accumulated undistributed net realized
gain (loss) on investment transactions (3,036) (3,036)
--------------------------------------------------------------------------
Net Assets $ 141,799 $ (95) $ 141,704
==========================================================================
Net Assets:
Fiduciary $ 136,159 (A)(B) $ 136,159
Retail 5,545 (A)(B) 5,545
Institutional 136,250 (136,250) (B)
Investment 5,549 (5,549) (B)
--------------------------------------------------------------------------
Total $ 141,799 $ (95) $ 141,704
==========================================================================
Shares Outstanding:
Fiduciary 13,582 (B) 13,582
Retail 554 (B) 554
Institutional 13,582 (13,582) (B)
Investment 554 (554) (B)
--------------------------------------------------------------------------
Total Shares Outstanding 14,136 14,136
==========================================================================
Net Asset Value and Redemption Price Per
Share:
Fiduciary $ 10.03
Retail 10.02
</TABLE>
B-111
<PAGE> 395
<TABLE>
<S> <C>
Institutional $ 10.03
Investment 10.02
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments
on the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-112
<PAGE> 396
HIGHMARK INTERMEDIATE-TERM BOND FUND
STEPSTONE INTERMEDIATE-TERM BOND FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
INTERMEDIATE- INTERMEDIATE- PRO FORMA PRO FORMA
TERM BOND FUND TERM BOND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 8,887 $ 8,887
Dividend Income
--------------------------- ------------
Total Income 8,887 8,887
EXPENSES:
Investment Adviser Fee 687 (1) (A) 686
Shareholder Services Fees 41 (B) 41
Administration Fees 179 96 (C) 275
Custodian/Wire Agent Fee 13 5 (D) 18
Professional Fees 23 (9) (D) 14
Registration Fees 11 1 (D) 12
Distribution Fee 25 25
Trustees Fees 3 3
Printing Costs 9 (2) (D) 7
Other 10 19 (D) 29
---------------------------------------------------------------------
Total Expenses 960 149 1,109
Investment Adviser Fee Waiver
Distribution Fee Waiver (25) (25)
Expenses Voluntarily Reduced (54) (E) (54)
---------------------------------------------------------------------
Total Net Expenses 935 95 1,030
Net Investment Income 7,952 (95) 7,857
REALIZED GAINS ON INVESTMENTS:
Net Realized Gain/(Loss) on Investments (128) (128)
Net change in unrealized appreciation
(depreciation) on investments (1,710) (1,710)
---------------------------------------------------------------------
Net realized/unrealized gains/(losses) on
investments (1,838) - (1,838)
---------------------------------------------------------------------
Change in net assets resulting from operations $ 6,114 $ (95) $ 6,019
=====================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .50% of the Bond Fund (the
"Fund") average daily net assets.
(B) To support the provision of Shareholder Services to both classes of
Shares, HighMark has adopted a Shareholder Service Plan. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to .25% of its average
daily net assets for the period to such service provider. The service provider
may voluntarily choose to waive such fees at any time at its sole discretion.
Currently such fees are being waived to the rate of 0.00% of average daily net
assets.
B-113
<PAGE> 397
(C) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(D) The adjustment is made to reflect the expense reductions resulting from
the lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
(E) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than .75% for both the
Retail Class of Shares and the Fiduciary Class of Shares for the Bond Fund.
(See Notes to Pro Forma Financial Statements)
B-114
<PAGE> 398
HIGHMARK INTERMEDIATE-TERM BOND FUND
STEPSTONE INTERMEDIATE-TERM BOND FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Intermediate-Term Bond Fund and Stepstone
Intermediate-Term Bond Fund, collectively (the "Funds") as of July 31, 1996.
These statements have been derived from the books and records utilized in
calculating daily net assets values at July 31, 1996. The Pro Forma Combining
Statement of Operations reflects the accounts of HighMark Intermediate-Term
Bond Fund and Stepstone Intermediate-Term Bond Fund for the twelve months ended
July 31, 1996, the most recent fiscal year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Intermediate-Term Bond Fund in exchange for Retail and
Fiduciary Class of Shares of the HighMark Intermediate-Term Bond Fund. Under
generally accepted accounting principles, the Stepstone Intermediate-Term Bond
Fund will be the surviving entity for accounting purposes with its historical
cost of investment securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 13,582
Fiduciary Class and 554 Retail Class shares of HighMark Intermediate-Term Bond
Fund in exchange for 13,582 Institutional Class shares and 554 Investment Class
shares, respectively, of the Stepstone Intermediate-Term Bond Fund. These
numbers are based on the net assets of each class of the Stepstone
Intermediate-Term Bond Fund, and the net asset values of each respective class
of HighMark Intermediate-Term Bond Fund, as of July 31, 1996. If the
Reorganization is consummated, the actual exchange ratio may vary from this
ratio due to changes in the market value of the portfolio securities of both
the Acquiring Fund and the Acquired Fund between July 31, 1996 and the Closing
Date, and changes in the amounts of undistributed net investment income and
accrued liabilities of the Acquiring Fund and the Acquired Fund during that
period.
B-115
<PAGE> 399
HIGHMARK CONVERTIBLE SECURITIES FUND
STEPSTONE CONVERTIBLE SECURITIES FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the HighMark
Convertible Securities Fund and the Stepstone Convertible Securities Fund as of
and for the year ended July 31, 1996. These statements have been derived from
the Funds' books and records utilized in calculating daily net asset value at
July 31, 1996. The accompanying Pro Forma Combining Statement of Operations
reflects the accounts of HighMark Convertible Securities Fund and Stepstone
Convertible Securities Fund for the year ended July 31, 1996, the most recent
fiscal year end of the Registrant.
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
CONVERTIBLE CONVERTIBLE PRO CONVERTIBLE CONVERTIBLE
SECURITIES SECURITIES FORMA SECURITIES SECURITIES PRO FORMA
FUND FUND COMBINED FUND FUND COMBINED
SHARES SHARES SHARES VALUE VALUE VALUE
(000'S)
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS (69.8%)
3Com
200 200 10.250%, 11/01/01 $ 280 $ 280
Airborne Freight
150 150 6.750%, 08/15/01 147 147
Alza
500 500 5.000%, 05/01/06 460 460
Bay Networks
350 350 5.250%, 05/15/03 310 310
Cetus
225 225 5.250%, 05/21/02 214 214
Chubb Capital
200 200 6.000%, 05/15/98 213 213
Columbia HCA Healthcare
150 150 6.750%, 10/01/06 155 155
Conner Peripherals
300 300 6.750%, 03/01/01 306 306
Consolidated Natural Gas
250 250 7.250%, 12/15/15 269 269
Cooper Industries
113 113 7.050%, 01/01/15 118 118
Federated Department Stores
400 400 5.000%, 10/01/03 419 419
First Data
225 225 5.000%, 12/15/99 413 413
General Instruments
111 111 5.000%, 06/15/00 128 128
</TABLE>
B-116
<PAGE> 400
<TABLE>
<S> <C> <C> <C> <C>
Healthsource
400 400 5.000%, 03/01/03 297 297
Hexcel
350 350 7.000%, 08/01/03 408 408
HFS
375 375 4.750%, 03/01/03 419 419
Hilton Hotels
450 450 5.000%, 05/15/06 459 459
IMC Fertilizer Group
325 325 6.250%, 12/01/01 414 414
Inco Limited
150 150 7.750%, 03/15/16 156 156
Integrated Health Services
300 300 5.750%, 01/01/01 282 282
Liberty Property Trust
300 300 8.000%, 07/01/01 300 300
Magna International
400 400 5.000%, 10/15/02 415 415
Motorola
475 475 0.000%, 09/27/13 349 349
Nine West Group
450 450 5.500%, 07/15/03 435 435
Noble Affiliates
175 175 4.250%, 11/01/03 195 195
Pioneer Financial Services
375 375 6.500%, 04/01/03 372 372
Quantum Health
475 475 4.750%, 10/01/00 431 431
Softkey International
425 425 5.500%, 11/01/00 332 332
Solectron
375 375 6.000%, 03/01/06 319 319
Staples
425 425 4.500%, 10/01/00 423 423
Tele Communications International
400 400 4.500%, 02/15/06 325 325
Tenet Healthcare
325 325 6.000%, 12/01/05 316 316
Thermo Electron
375 375 4.250%, 01/01/03 421 421
Time Warner
500 500 0.000%, 06/22/13 209 209
U.S. Cellular
675 675 0.000%, 06/15/15 225 225
U.S. Filter
275 275 6.000%, 09/15/05 335 335
Veterinary Centers
450 450 5.250%, 05/01/06 365 365
WMX Technologies
300 300 2.000%, 01/24/05 258 258
</TABLE>
B-117
<PAGE> 401
<TABLE>
<S> <C> <C> <C> <C>
Worldcom
200 200 5.000%, 08/15/03 273 273
Total Convertible Bonds (Cost $12,253) 12,165 12,165
COMMON STOCKS (17.6%)
AIR TRANSPORTATION (1.7%)
3,797 3,797 AMR (a) 299 299
299 299
AUTOMOTIVE (3.2%)
20,000 20,000 Chrysler 564 564
564 564
BANKS (4.7%)
4,430 4,430 Barnett Banks of Florida 272 272
3,000 3,000 Citicorp 246 246
5,893 5,893 Fifth Third Bancorp 305 305
823 823
COMMUNICATIONS EQUIPMENT (0.7%)
4,799 4,799 General Instrument (a) 121 121
121 121
COMPUTERS & SERVICES (1.0%)
3,529 3,529 Seagate Technology 171 171
171 171
FINANCIAL SERVICES (0.6%)
3,875 3,875 Legg Mason 110 110
110 110
MISCELLANEOUS BUSINESS SERVICES (5.6%)
13,000 13,000 Electronic Data Systems 687 687
10,775 10,775 Olsten 286 286
973 973
Total Common Stocks (Cost $2,676) 3,061 3,061
PREFERRED STOCKS (12.7%)
BANKS (1.8%)
3,000 3,000 Banc One $3.50 200 200
3,000 3,000 Union Planters 112 112
312 312
FINANCIAL SERVICES (4.4%)
6,500 6,500 Conseco * 7.00% 494 494
3,000 3,000 SCI Finance LLC 270 270
764 764
</TABLE>
B-118
<PAGE> 402
<TABLE>
<S> <C> <C> <C> <C>
PAPER & PAPER PRODUCTS (1.7%)
6,500 6,500 International Paper (a) 291 291
291 291
REAL ESTATE (1.5%)
10,000 10,000 Merry Land & Investment $2.15, Ser C 266 266
266 266
RETAIL (1.3%)
5,000 5,000 Ann Taylor 220 220
220 220
WHOLESALE (2.0%)
4,250 4,250 Alco Standard 353 353
353 353
Total Preferred Stocks (Cost $2,127) 2,206 2,206
Total Investments (100.0%) (Cost $17,432) $ 17,432 $ 17,432
</TABLE>
(a) - Non-income producing security
Ser - Series
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-119
<PAGE> 403
HIGHMARK CONVERTIBLE SECURITIES FUND
STEPSTONE CONVERTIBLE SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK
CONVERTIBLE STEPSTONE
SECURITIES CONVERTIBLE PRO FORMA PRO FORMA
FUND SECURITIES ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities $ 17,432 $ 17,432
Repurchase Agreements
----------------------------------------------------------------------
Total Investments - 17,432 - 17,432
Cash - 1,015 1,015
Interest & Dividend Receivable - 170 170
Receivable from Brokers - - -
Prepaid Expenses and Other Assets - 11 11
Capital Shares Sold Receivable - - -
----------------------------------------------------------------------
Total Assets - 18,628 - 18,628
LIABILITIES:
Accrued Expenses and Other Payables: - 15 15
Total Liabilities - 15 - 15
NET ASSETS:
Capital - 17,788 17,788
Net unrealized appreciation
(depreciation) on investments - 376 376
Undistributed net investment income - 20 20
Accumulated undistributed net realized
gain (loss) on investment transactions - 429 429
----------------------------------------------------------------------
NET ASSETS - 18,613 - 18,613
======================================================================
Net Assets:
Fiduciary - - 18,613 (A)(B) 18,613
Retail - - - -
Institutional 18,613 (18,613) (A)(B) -
</TABLE>
B-120
<PAGE> 404
<TABLE>
<S> <C> <C> <C> <C>
Investment - - -
---------------------------------------------------------------------
TOTAL - $ 18,613 - $ 18,613
=====================================================================
Shares Outstanding:
Fiduciary - 1,800 (B) 1,800
Retail - - -
Institutional 1,800 (1,800) (B) -
Investment - - -
---------------------------------------------------------------------
TOTAL SHARES OUSTANDING - 1,800 - 1,800
=====================================================================
Net Asset Value and Redemption Price Per
Share:
Fiduciary 10.34
Retail
Institutional 10.34
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments on
the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
B-121
<PAGE> 405
HIGHMARK CONVERTIBLE SECURITIES FUND
STEPSTONE CONVERTIBLE SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF
OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
CONVERTIBLE CONVERTIBLE PRO FORMA PRO FORMA
SECURITIES SECURITIES ADJUSTMENTS COMBINED
FUND
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $545 $545
Dividend Income - 193 193
Less: Foreign taxes witheld, net of
reclaims - -
-----------------------------------------------------------------------
Total Income - 738 - 738
EXPENSES:
Administration Fees - 21 11 (B) 32
Investment Adviser Fee - 98 (A) 98
Custodian/Wire Agent Fee - 3 (1) (C) 2
Professional Fees - 2 (C) 2
Registration Fees - 3 (2) (C) 1
Distribution Fee - - - (C) -
Trustees Fees - 1 (1) (C) 0
Printing Costs - 2 (1) (C) 1
Other - 9 3 (C) 12
-----------------------------------------------------------------------
Total Expenses - 139 10 149
Investment Adviser Fee Waiver - -
Distribution Fee Waiver - -
Expenses Voluntarily Reduced - (10) (D) (10)
Expense Reimbursements - -
-----------------------------------------------------------------------
Total Net Expenses - 139 0 139
Net Investment Income - 599 (0) 599
REALIZED GAINS ON INVESTMENTS:
</TABLE>
B-122
<PAGE> 406
<TABLE>
<S> <C> <C> <C> <C>
Net Realized Gain/(Loss) on Investments - 357 357
Net Realized Gain/(Loss) on Investment
Transactions - -
Net Realized Gain/(Loss) on Option
Contracts 1 1
Net change in unrealized
appreciation/(depreciation)
on investments - (187) (187)
-----------------------------------------------------------------------
Net realized/unrealized gains/(losses) on
investments - 171 - 171
-----------------------------------------------------------------------
Change in net assets resulting from
operations - $770 - $770
=======================================================================
</TABLE>
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .60% of the Convertible
Securities Fund (the "Fund") average daily net assets.
(B) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(C) The adjustment is made to reflect the expense reductions resulting from
the lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
(D) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than.85% for the
Fiduciary Class of Shares for the Convertible Securities Fund.
B-123
<PAGE> 407
HIGHMARK CONVERTIBLE SECURITIES FUND
STEPSTONE CONVERTIBLE SECURITIES FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Convertible Securities Fund and Stepstone Convertible
Securities Fund, collectively (the "Funds") as of July 31, 1996. These
statements have been derived from the books and records utilized in calculating
daily net assets values at July 31, 1996. The Pro Forma Combining Statement of
Operations reflects the accounts of HighMark Convertible Securities Fund and
Stepstone Convertible Securities Fund for the twelve months ended July 31,
1996, the most recent fiscal year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Convertible Securities Fund in exchange for Retail and
Fiduciary Class of Shares of the HighMark Convertible Securities Fund. Under
generally accepted accounting principles, the Stepstone Convertible Securities
Fund will be the surviving entity for accounting purposes with its historical
cost of investment securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 1,800 Fiduciary
Class in exchange for 1,800 Institutional Class shares, in the reorganization
as of July 31, 1996.
B-124
<PAGE> 408
HIGHMARK GOVERNMENT SECURITIES FUND
STEPSTONE GOVERNMENT SECURITIES FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Combining Statement of Assets and Liabilities and Pro
Forma Combining Statement of Operations reflect the accounts of the HighMark
Government Securities Fund and the Stepstone Government Securities Fund as of
and for the year ended July 31, 1996. These statements have been derived from
the Funds' books and records utilized in calculating daily net asset value at
July 31, 1996. The accompanying Pro Forma Combining Statement of Operations
reflects the accounts of HighMark Government Securities Fund and Stepstone
Government Securities Fund for the year ended July 31, 1996, the most recent
fiscal year end of the Registrant.
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK STEPSTONE HIGHMARK STEPSTONE
GOVERNMENT GOVERNMENT PRO FORMA GOVERNMENT GOVERNMENT PRO FORMA
SECURITIES SECURITIES COMBINED SECURITIES SECURITIES COMBINED
FUND FUND FUND FUND
PRINCIPAL PRINCIPAL PRINCIPAL VALUE VALUE VALUE
(000'S) (000'S)
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS (67.0%)
U.S. Treasury Notes
$ 1,750 $ 1,750 5.625%, 06/30/97 $ 1,746 $ 1,746
2,000 2,000 7.375%, 11/15/97 2,032 2,032
750 750 6.000%, 11/30/97 750 750
2,500 2,500 5.250%, 12/31/97 2,473 2,473
1,000 1,000 5.125%, 02/28/98 985 985
2,500 2,500 6.000%, 05/31/98 2,491 2,491
7,250 7,250 5.500%, 11/15/98 7,130 7,130
1,000 1,000 5.000%, 02/15/99 969 969
1,000 1,000 5.500%, 12/31/00 960 960
1,500 1,500 7.750%, 01/31/00 1,559 1,559
2,000 2,000 6.375%, 08/15/02 1,975 1,975
1,000 1,000 6.875%, 05/15/06 1,005 1,005
8,550 8,550 6.000%, 02/15/26 7,512 7,512
Total U.S. Treasury Obligations 31,587 31,587
U.S. GOVERNMENT AGENCY
OBLIGATIONS (20.9%)
Aid-Israel
2,000 2,000 7.125%, 08/15/99 2,023 2,023
FHLB
1,000 1,000 7.060%, 08/14/01 1,002 1,002
</TABLE>
B-125
<PAGE> 409
<TABLE>
<S> <C> <C> <C>
FNMA
1,000 1,000 5.900%, 07/06/00 974 974
1,000 1,000 5.875%, 02/02/06 918 918
GNMA
1,854 1,854 7.500%, 08/15/25 1,830 1,830
2,262 2,262 7.000%, 01/15/24 2,173 2,173
Tennessee Valley Authority
1,000 1,000 6.375%, 06/15/05 951 951
Total U.S. Government Agency Obligations 9,871 9,871
CORPORATE OBLIGATIONS (12.1%)
Fletcher Challenge
1,000 1,000 7.750%, 06/20/06 1,008 1,008
GMAC
1,000 1,000 7.125%, 05/01/03 989 989
Lehman Brothers
1,500 1,500 7.125%, 09/15/03 1,462 1,462
Lockheed Martin
1,000 1,000 6.850%, 05/15/01 991 991
Meditrust
1,250 1,250 7.250%, 08/16/99 1,253 1,253
Total Corporate Obligations 5,703 5,703
Total Investments (100.0%) (Cost $48,986) $47,161 $47,161
</TABLE>
FHLB - Federal Home Loan Bank
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-126
<PAGE> 410
HIGHMARK GOVERNMENT SECURITIES FUND
STEPSTONE GOVERNMENT SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
GOVERNMENT GOVERNMENT PRO FORMA PRO FORMA
SECURITIES SECURITIES ADJUSTMENTS COMBINED
FUND FUND
<S> <C> <C> <C>
ASSETS:
Investments in securities $ 47,161 $ 47,161
Repurchase Agreements -
--------------------------- --------------
Total Investments 47,161 47,161
Cash 759 $ 1 (A) 760
Interest & Dividends Receivable 806 806
Receivable from Brokers 949 949
Prepaid Expenses and Other Assets 37 37
Capital Shares Sold Receivable 11 11
-----------------------------------------------------------------
Total Assets 49,723 1 49,724
LIABILITIES:
Payable for Capital Shares Redeemed 14 14
Payable to Brokers 1,000 1,000
Accrued Expenses and Other Payables 82 82
-----------------------------------------------------------------
Total Liabilities 1,096 1,096
NET ASSETS:
Capital 50,635 50,635
Net unrealized appreciation on
investments (1,066) (1,066)
Undistributed net investment income 89 1 90
Accumulated undistributed net realized
gain (loss) on investment transactions (1,031) (1,031)
-----------------------------------------------------------------
Net Assets $ 48,627 $ 1 $ 48,628
=================================================================
Net Assets:
Fiduciary $ 48,628 (A)(B) $ 48,628
Retail
Institutional $ 48,627 (48,627) (B)
Investment
-----------------------------------------------------------------
Total $ 48,627 $ 1 $ 48,628
=================================================================
Shares Outstanding:
Fiduciary 5,203 (B) 5,203
</TABLE>
B-127
<PAGE> 411
<TABLE>
<S> <C> <C> <C>
Retail
Institutional 5,203 (5,203) (B)
Investment
----------------------------------------------------------------
Total Shares Outstanding 5,203 5,203
================================================================
Net Asset Value and Redemption Price Per
Share:
Fiduciary $ 9.35
Retail
Institutional $ 9.35
Investment
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments
on the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-128
<PAGE> 412
HIGHMARK GOVERNMENT SECURITIES FUND
STEPSTONE GOVERNMENT SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
GOVERNMENT GOVERNMENT PRO FORMA PRO FORMA
SECURITIES SECURITIES ADJUSTMENTS COMBINED
FUND FUND
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $ 2,723 $ 2,723
Dividend Income
------------------------------ ---------------
Total Income 2,723 2,723
EXPENSES:
Investment Adviser Fee 216 $ (1) (A) 215
Administration Fees 57 29 (B) 86
Custodian/Wire Agent Fee 4 2 (C) 6
Professional Fees 10 (6) (C) 4
Registration Fees 12 (8) (C) 4
Distribution Fee 12 (C) 12
Trustees Fees 1 1
Printing Costs 9 (7) (C) 2
Other 15 (2) (C) 13
--------------------------------------------------------------------
Total Expenses 324 7 331
Investment Adviser Fee Waiver
Expenses Voluntarily Reduced (8) (D) (8)
--------------------------------------------------------------------
Total Net Expenses 324 (1) 323
Net Investment Income 2,399 1 2,400
Realized Gains on Investments:
Net Realized Gain/(Loss) on Investments 845 845
Net change in unrealized
appreciation/(depreciation)
on investments (1,995) (1,995)
--------------------------------------------------------------------
Net realized/unrealized gains/(losses)
on investments (1,150) (1,150)
--------------------------------------------------------------------
Change in net assets resulting from
operations $ 1,249 $ 1 $ 1,250
=====================================================================
</TABLE>
(See Legend on following page)
(See Notes to Pro Forma Financial Statements)
B-129
<PAGE> 413
HIGHMARK GOVERNMENT SECURITIES FUND
STEPSTONE GOVERNMENT SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .50% of the Government
Securities Fund (the "Fund") average daily net assets.
(B) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(C) The adjustment is made to reflect the expense reductions resulting from
the lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
(D) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than .75% for the
Fiduciary Class of Shares for the Government Securities Fund.
B-130
<PAGE> 414
HIGHMARK GOVERNMENT SECURITIES FUND
STEPSTONE GOVERNMENT SECURITIES FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Schedule of Portfolio of
Investments and Pro Forma Combining Statement of Assets and Liabilities reflect
the accounts of HighMark Government Securities Fund and Stepstone Government
Securities Fund, collectively (the "Funds") as of July 31, 1996. These
statements have been derived from the books and records utilized in calculating
daily net assets values at July 31, 1996. The Pro Forma Combining Statement of
Operations reflects the accounts of HighMark Government Securities Fund and
Stepstone Government Securities Fund for the twelve months ended July 31, 1996,
the most recent fiscal year of the Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone Government Securities Fund in exchange for Retail and
Fiduciary Class of Shares of the HighMark Government Securities Fund. Under
generally accepted accounting principles, the Stepstone Government Securities
Fund will be the surviving entity for accounting purposes with its historical
cost of investment securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 5,203 Fiduciary
Class shares of HighMark Government Securities Fund in exchange for 5,203
Institutional Class shares in the reorganization as of July 31, 1996.
B-131
<PAGE> 415
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PRO FORMA FINANCIAL STATEMENTS
JULY 31, 1996
The accompanying unaudited Pro Forma Combining Schedule of Portfolio
Investments, Pro Forma Statement of Assets and Liabilities and Pro Forma
Statement of Operations reflect the accounts of the HighMark California
Intermediate Tax-Free Bond Fund and the Stepstone California Intermediate
Tax-Free Bond Fund as of and for the year ended July 31, 1996. These
statements have been derived from the Funds' books and records utilized in
calculating daily net asset value at July 31, 1996. The accompanying Pro Forma
Combining Statement of Operations reflects the accounts of HighMark California
Intermediate Tax-Free Bond Fund and Stepstone California Intermediate Tax-Free
Bond Fund for the year ended July 31, 1996, the most recent fiscal year end of
the Registrant.
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
HIGHMARK HIGHMARK
CALIFORNIA STEPSTONE CALIFORNIA STEPSTONE
INTERMEDIATE CALIFORNIA PRO FORMA INTERMEDIATE CALIFORNIA PRO FORMA
TAX-FREE INTERMEDIATE COMBINED TAX-FREE INTERMEDIATE COMBINED
BOND FUND TAX-FREE BOND FUND TAX-FREE
BOND FUND BOND FUND
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT VALUE VALUE VALUE
(000'S) (000'S)
<S> <C> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (93.7%)
$ 500 $ 500 Alameda County, Santa Rita Jail Project, $ 508 $ 508
COP, MBIA Insured 5.250%, 12/01/04
250 250 Anaheim Public Financing Authority, 248 248
Electric Utililty Projects, RB, Callable
04/01/05 @ 100, MBIA Insured 5.500%,
10/01/10
500 500 Antioch Public Finance Authority, Police 490 490
Facilities Project, Lease RB, MBIA Insured
4.550%, 01/01/03
345 345 Berkeley Unified School District, GO, Ser 423 423
D, FGIC Insured 8.250%, 08/01/05
500 400 California Educational Facilities, 515 515
Pepperdine University, RB, Callable
01/15/97 @ 102 6.750%, 01/15/06
200 200 California Pollution Control Finance 200 200
Authority, Shell Oil, VRDN, RB (A) (B) (C)
3.500%, 08/01/96
</TABLE>
B-132
<PAGE> 416
<TABLE>
<S> <C> <C> <C> <C>
250 250 California State, GO 4.200%, 09/01/02 238 238
250 250 Contra Costa Transportation Authority, 264 264
Sales Tax RB, Ser A, Escrowed to Maturity
6.300%, 03/01/00
500 500 Cupertino, COP, Callable 01/01/03 @ 102 505 505
5.500%, 01/01/05
250 250 East Bay Municipal Utility District Water 264 264
System, RB, FGIC Insured 6.000%, 06/01/01
235 235 Gilroy Unified School District, COP, 243 243
Measure J Capital Projects, FSA Insured
5.750%, 09/01/05
500 500 Los Angeles Department of Airports, RB, 549 549
Ser B, FGIC Insured 6.500%, 05/15/04
300 300 Los Angeles, GO, FGIC Insured Callable 305 305
09/01/03 @ 101 5.400%, 09/01/06
300 300 Los Angeles, Wastewater System RB, Ser B, 299 299
Callable 06/01/03 @ 102, MBIA Insured
5.400%, 06/01/08
250 250 Midpeninsula Regional Open Space District 251 251
Finance Authority, RB, AMBAC Insured
4.900%, 09/01/02
300 300 Moulton-Niguel Water District, COP, 294 294
Callable 09/01/03 @ 102, AMBAC Insured
4.750%, 09/01/04
230 230 M-S-R Public Power Agency, San Juan 240 240
Project, RB, Ser F, AMBAC Insured,
Callable 07/01/03 @ 102, Callable 07/01/05
@ 100 6.000%, 07/01/08
550 550 Sacramento Municipal Utility District, 562 562
Electric Revenue, Ser C, FGIC Insured
5.750%, 11/15/08
480 480 San Diego County Water Authority, COP, Ser 513 513
A, Callable 05/01/03 @ 100, Callable
05/01/01 @ 102 6.250%, 05/01/04
300 300 San Francisco Building Authority, 296 296
Department General Services, Lease RB, Ser
A 4.500%, 10/01/00
350 350 San Francisco City & County, GO, Utility 368 368
Public Safety Improvement Project, Ser F,
FGIC Insured 6.500%, 06/15/08
</TABLE>
B-133
<PAGE> 417
<TABLE>
<S> <C> <C> <C> <C>
150 150 San Jose Redevelopment Agency, Tax 148 148
Allocation, Merged Area Redevelopment
Project, RB, MBIA Insured 4.800%, 08/01/04
400 400 Santa Clara, COP, AMBAC Insured 6.000%, 405 405
05/15/12
500 500 Santa Cruz County, Public Facilities 501 501
Financing Authority, Tax Allocation,
Callable 09/01/03 @ 102, MBIA Insured
5.100%, 09/01/05
200 200 Tulare County Capital Improvement Program, 201 201
COP, Ser A, MBIA Insured 4.700%, 02/15/00
200 200 United Water Conservation District, Water 192 192
Systems Project, RB, FSA Insured 4.300%,
03/01/03
Total California Municipal Bonds (Cost 9,022 9,022
$9,019)
Total Investments (98.8%) (Cost $9,512) $ 9,022 9,022
</TABLE>
(A) Floating Rate security -- The rate reflected on the Statement of
Net Assets is the rate in effect on July 31, 1996.
(B) Put and Demand Feature -- The data reported is the lesser of
maturity date or the put date.
(C) Securities are held in conjunction with a letter of credit by a
major commercial bank or financial institution.
AMBAC -- American Municipal Bond Insurance Corporation
COP -- Certificates of Participation
FGIC -- Financial Guaranty Insurance Corporation
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance
RB -- Revenue Bonds
Ser -- Series
VRON -- Variable Rate Demand Note
(See Notes to Pro Forma Financial Statements which are an integral part of the
Financial Statements)
B-134
<PAGE> 418
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK CALIFORNIA STEPSTONE CALIFORNIA
INTERMEDIATE TAX INTERMEDIATE TAX PRO FORMA PRO FORMA
FREE BOND FUND FREE BOND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C>
ASSETS:
Investments in securities $ 9,022 $ 9,022
Repurchase Agreements
---------------------------------------------------------------------------------
Total Investments 9,022 9,022
Cash 493 (2) (A) 491
Interest & Dividends Receivable 120 120
Receivable from Brokers
Prepaid Expenses and Other Assets 4 4
Capital Shares Sold Receivable
---------------------------------------------------------------------------------
Total Assets 9,639 (2) 9,637
LIABILITIES:
Distributions Payable
Payable for Capital Shares Redeemed
Payable to Brokers
Accrued Expenses and Other Payables 6 6
---------------------------------------------------------------------------------
Total Liabilities 6 6
NET ASSETS:
Capital 10,924 10,924
Net unrealized appreciation on
investments 3 3
Undistributed net investment income 14 (2) (A) 12
Accumulated undistributed net realized
gain (loss) on investment transactions (1,308) (1,308)
Accumulated net realized gain (loss) on
foreign currency transactions
Net unrealized appreciation on foreign
currency and translation of other
assets and liabilities in foreign currency
---------------------------------------------------------------------------------
NET ASSETS $ 9,633 $ (2) $ 9,631
=================================================================================
Net Assets:
Fiduciary $ 5,158 (A)(B) $ 5,158
Retail 4,473 (A)(B) 4,473
Institutional $ 5,159 (5,159) (B)
Investment 4,474 (4,474) (B)
---------------------------------------------------------------------------------
TOTAL $ 9,633 $ (2) $ 9,631
=================================================================================
</TABLE>
B-135
<PAGE> 419
<TABLE>
<S> <C> <C> <C> <C>
Shares Outstanding:
Fiduciary 536 (B) 536
Retail 466 (B) 466
Institutional 536 (536) (B)
Investment 466 (466) (B)
-----------------------------------------------------------------------------
TOTAL SHARES OUTSTANDING 1,002 1,002
=============================================================================
Net Asset Value and Redemption Price Per
Share:
Fiduciary $9.63
Retail 9.60
Institutional $9.63
Investment 9.60
</TABLE>
(A) Adjustment to reflect the cumulative effect of the pro forma adjustments
on the Statement of Operations.
(B) Adjustment to reflect class share balances as a result of the
reorganization.
(See Notes to Pro Forma Financial Statements)
B-136
<PAGE> 420
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands) HIGHMARK STEPSTONE
CALIFORNIA CALIFORNIA
INTERMEDIATE TAX INTERMEDIATE TAX PRO FORMA PRO FORMA
FREE BOND FUND FREE BOND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $472 $ 472
Dividend Income
-----------------------------------------------------------------------
Total Income 472 472
EXPENSES:
Administration Fees 12 $ 1 (B) 13
Investment Adviser Fee 47 (A) 47
Custodian/Wire Agent Fee 2 (1) (C) 1
Professional Fees 1 (C) 1
Registration Fees (1) 2 (C) 1
Distribution Fee 18 (C) 18
Trustees Fees 1 (1) (C) 0
Printing Costs 1 (C) 1
Other 3 23 (C) 26
-----------------------------------------------------------------------
Total Expenses 84 24 108
Investment Adviser Fee Waiver (47) 47 (A) -
Distribution Fee Waiver (18) (18)
Expenses Voluntarily Reduced (69) (D) (69)
Expense Reimbursements
-----------------------------------------------------------------------
Total Net Expenses 19 2 21
Net Investment Income 453 (2) 451
REALIZED GAINS ON INVESTMENTS: (39) (39)
Net change in unrealized
appreciation/(depreciation)
on investments 248 248
Net change in unrealized
appreciation/(depreciation)
on foreign currency transactions
Net realized/unrealized gains/(losses) on
investments 209 209
-----------------------------------------------------------------------
Change in net assets resulting from operations $ 662 $ (2) $ 660
=======================================================================
</TABLE>
(See Legend on following page)
(See Notes to Pro Forma Financial Statements)
B-137
<PAGE> 421
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1996
(A) Pacific Alliance Capital Management (the "Adviser") receives for its
services an annual investment advisory fee equal to .50% of the California
Intermediate Tax-Free Bond Fund (the "Fund") average daily net assets. The
Adviser has voluntarily agreed to waive fees to the extent necessary in order
to limit total operating expenses. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
(B) SEI Financial Services Company provides the Fund with certain
administrative services. The SEI fee is based on the level of average
aggregate net assets of the Fund for the period.
(C) The adjustment is made to reflect the expense reductions resulting from
the lower expected costs allocated to the fund due to combining of the HighMark
and Stepstone portfolios.
(D) The Adviser has voluntarily agreed to waive fees to the extent necessary
in order to limit total operating expenses to not more than .22% for the Retail
Class of Shares and the Fiduciary Class of Shares for the California
Intermediate Tax-Free Bond Fund.
B-138
<PAGE> 422
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The accompanying unaudited Pro Forma Combining Portfolio of Investments and
Statement of Assets and Liabilities reflect the accounts of HighMark California
Intermediate Tax-Free Bond Fund and Stepstone California Intermediate Tax-Free
Bond Fund, collectively (the "Funds") as of July 31, 1996. These statements
have been derived from the books and records utilized in calculating daily net
assets values at July 31, 1996. The Pro Forma Combining Statement of
Operations reflects the accounts of HighMark California Intermediate Tax-Free
Bond Fund and Stepstone California Intermediate Tax-Free Bond Fund for the
twelve months ended July 31, 1996, the most recent fiscal year of the
Registrant.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Funds. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements of each fund.
The Pro Forma Financial Statements give effect to the proposed transfer of the
assets of Stepstone California Intermediate Tax-Free Bond Fund in exchange for
Retail and Fiduciary Class of Shares of the HighMark California Intermediate
Tax-Free Bond Fund. Under generally accepted accounting principles, the
Stepstone California Intermediate Tax-Free Bond Fund will be the surviving
entity for accounting purposes with its historical cost of investment
securities and results of operations being carried forward.
The Pro Forma Financial Statements have been adjusted to reflect the
anticipated advisory and administration fee arrangements for the surviving
entity. Certain other operating costs have also been adjusted to reflect the
anticipated expenses of the combined entity. Other costs which may change as a
result of the reorganization are currently indeterminable.
2. SHARES OF BENEFICIAL INTEREST
The Pro Forma net asset value per share assumes the issuance of 536 Fiduciary
Class and 466 Retail Class shares of HighMark California Intermediate Tax-Free
Bond Fund in exchange for 536 Institutional Class shares and 466 Investment
Class shares, respectively. These numbers are based on the net assets of each
class of the Stepstone California Intermediate Tax-Free Bond Fund, and the net
asset values of each respective class of HighMark California Intermediate
Tax-Free Bond Fund, as of July 31, 1996. If the Reorganization is consummated,
the actual exchange ratio may vary from this ratio due to changes in the market
value of the portfolio securities of both the Acquiring Fund and the Acquired
Fund between July 31, 1996 and the Closing Date, and changes in the amounts of
undistributed net investment income and accrued liabilities of the Acquiring
Fund and the Acquired Fund during that period.
B-139
<PAGE> 423
HIGHMARK FUNDS
REGISTRATION STATEMENT ON FORM N-14
PART C. OTHER INFORMATION
Item 15. Indemnification
The information required by this item is incorporated by reference to
the Item 27 of Post-Effective Amendment No. 19 (filed December 13, 1996) to
Registrant's Registration Statement on Form N-1A (File No. 33-12608) under the
Securities Act of 1933 and the Investment Company Act of 1940 (File No.
811-5059).
Item 16. Exhibits
(1) (a) Declaration of Trust, dated March 10, 1987, is
incorporated by reference to Exhibit (1)(a) of
Pre-Effective Amendment No. 1 (filed May 15, 1987) to
Registrant's Registration Statement on Form N-1A.
(1) (b) Amendment to Declaration of Trust, dated April 13,
1987, is incorporated by reference to Exhibit (1)(b)
of Pre-Effective Amendment No. 1 (filed May 15, 1987)
to Registrant's Registration Statement on Form N-1A.
(1) (c) Amendment to Declaration of Trust, dated July 13,
1987, is incorporated by reference to Exhibit (1)(c)
of Pre-Effective Amendment No. 2 (filed July 24,
1987) to Registrant's Registration Statement on Form
N-1A.
(1) (d) Amendment to Declaration of Trust, dated July 30,
1987, is incorporated by reference to Exhibit (1)(d)
of Pre-Effective Amendment No. 3 (filed July 31,
1987) to Registrant's Registration Statement on Form
N-1A.
(1) (e) Amendment to Declaration of Trust, dated October 18,
1996, is incorporated by reference to Exhibit (1)(e)
of Post-Effective Amendment No. 18 (filed November 8,
1996) to Registrant's Registration Statement on Form
N-1A.
(1) (f) Amendment to Declaration of Trust, dated December 4,
1996, is incorporated by reference to Exhibit (1)(f)
of Post-Effective Amendment
<PAGE> 424
No. 19 (filed December 13, 1996) to Registrant's
Registration Statement on Form N-1A.
(2) (a) Amended and Restated Code of Regulations, dated June
5, 1991, is incorporated by reference to Exhibit 2 of
Post-Effective Amendment No. 7 (filed September 30,
1991) to Registrant's Registration Statement on Form
N-1A.
(2) (b) Amendment to Amended and Restated Code of
Regulations, dated December 4, 1991, is incorporated
by reference to Exhibit 2(b) of Post-Effective
Amendment No. 8 (filed September 30, 1992) to
Registrant's Registration Statement on Form N-1A.
(3) Not applicable.
(4) Form of Agreement and Plan of Reorganization is filed
herewith.
(5) (a) Article IV, Article V, Sections 5.1, 5.5, 5.6, 5.7
and 5.8, Article IX, Sections 9.4 and 9.5, and
Article X, Sections 10.3, 10.4 and 10.8 of the
Declaration of Trust, dated March 10, 1987, are
incorporated by reference to Exhibit (1)(a) of
Pre-Effective Amendment No. 1 (filed May 15, 1987) to
Registrant's Registration Statement on Form N-1A.
(5) (b) Amendment to Declaration of Trust, dated July 30,
1987, is incorporated by reference to Exhibit (1)(d)
of Pre-Effective Amendment No. 3 (filed July 31,
1987) to Registrant's Registration Statement on Form
N-1A.
(5) (c) Article I, Article III, Article V, and Article VI,
Sections 6.1 and 6.4 of the Amended and Restated Code
of Regulations, dated June 5, 1991, are incorporated
by reference to Post-Effective Amendment No. 7 (filed
September 30, 1991) to Registrant's Registration
Statement on Form N-1A.
(6) (a) Investment Advisory Agreement between Registrant and
Union Bank of California, N.A., dated as of April 1,
1996 (the "Investment Advisory Agreement"), is
incorporated by reference to Exhibit 5 of
Post-Effective Amendment No. 18 (filed November 8,
1996) to Registrant's Registration Statement on Form
N-1A.
(6) (b) Form of Amended and Restated Schedule A to the
Investment Advisory Agreement between Registrant
Union Bank of California, N.A., is incorporated by
reference to Exhibit (5)(b) of Post-Effective
Amendment
C-2
<PAGE> 425
No. 19 (filed December 13, 1996) to Registrant's
Registration Statement on Form N-1A.
(6) (c) Form of Investment Sub-Advisory Agreement between
Union Bank of California, N.A., and Bank of
Tokyo-Mitsubishi Trust Company is filed herewith.
(6) (d) Form of Investment Sub-Advisory Agreement between
Union Bank of California, N.A. and Tokyo-Mitsubishi
Asset Management (UK) Ltd. is filed herewith.
(7) (a) Distribution Agreement, dated August 1, 1995, between
Registrant and The Winsbury Company (the
"Distribution Agreement") is incorporated by
reference to Exhibit 6 of Post-Effective Amendment
No. 16 (filed December 1, 1995) to Registrant's
Registration Statement on Form N-1A.
(7) (b) Form of Distribution Agreement between the Registrant
and SEI Financial Services Company is incorporated by
reference to Exhibit (6)(b) of Post-Effective
Amendment No. 19 (filed December 13, 1996) to
Registrant's Registration Statement on Form N-1A.
(8) Not applicable.
(9) (a) Custodian Agreement between Registrant and The Bank
of California, N.A., dated as of December 23, 1991,
as amended as of September 15, 1992 (the "Custodian
Agreement"), is incorporated by reference to Exhibit
8 of Post-Effective Amendment No. 8 (filed September
30, 1992) to Registrant's Registration Statement on
Form N-1A.
(b) Form of amended and restated Schedule A to the
Custodian Agreement is incorporated by reference to
Exhibit (8)(b) of Post-Effective Amendment No. 19
(filed December 13, 1996) to Registrant's
Registration Statement on Form N-1A.
(10) (a) Registrant's Distribution and Shareholder Services
Plan relating to the Money Market Funds is
incorporated by reference to Exhibit 15(a) of
Post-Effective Amendment No. 6 (filed September 27,
1990) to Registrant's Registration Statement on Form
N-1A.
(10) (b) Form of Servicing Agreement With Respect to
Distribution Assistance and Shareholder Services used
in connection with Registrant's Distribution and
Shareholder Services Plan relating to the Money
Market
C-3
<PAGE> 426
Funds is incorporated by reference to Exhibit 15(b)
of Post-Effective Amendment No. 6 (filed September
27, 1990) to Registrant's Registration Statement on
Form N-1A.
(10) (c) Form of Servicing Agreement With Respect to
Shareholder Services used in connection with
Registrant's Distribution and Shareholder Services
Plan relating to the Money Market Funds, is
incorporated by reference to Exhibit 15(c) of Post-
Effective Amendment No. 8 (filed September 30, 1992)
to Registrant's Registration Statement on Form N-1A.
(10) (d) Registrant's Distribution and Shareholder Services
Plan relating to the Income Funds, the Equity Funds
and the Municipal Funds is incorporated by reference
to Exhibit 15(d) of Post-Effective Amendment No. 13
(filed April 11, 1994) to the Registrant's
Registration Statement on Form N-1A.
(10) (e) Form of amended and restated Schedule A to the
Distribution and Shareholder Services Plan relating
to the Income Funds, the Equity Funds and the
Municipal Funds is incorporated by reference to
Exhibit 15(c) of Post-Effective Amendment No. 14
(filed June 17, 1994) to Registrant's Registration
Statement on Form N-1A.
(10) (f) Multiple Class Plan for HighMark Funds adopted by the
Board of Trustees on March 20, 1996 is incorporated
by reference to Exhibit 18 of Post-Effective
Amendment No. 17 (filed March 29, 1996) to
Registrant's Registration Statement on Form N-1A.
(11) Opinion of Ropes & Gray, including consent, is
incorporated by reference to Form 24f-2 Notice for
the fiscal year ended July 31, 1996, filed September
27, 1996.
(12) Not Applicable.
(13) (a) Management and Administration Agreement between
Registrant and The Winsbury Company, dated as of
August 1, 1995 (the "Management and Administration
Agreement") is incorporated by reference to Exhibit
(9)(a) of Post-Effective Amendment No. 16 (filed
December 1, 1995) to Registrant's Registration
Statement on Form N-1A.
(13) (b) Amendment made as of June 19, 1996 to the Management
and Administration Agreement between Registrant and
the Winsbury Company dated as of August 1, 1995 is
incorporated by reference to
C-4
<PAGE> 427
Exhibit (9)(b) of Post-Effective Amendment No. 18
(filed November 8, 1996) to Registrant's Registration
Statement on Form N-1A.
(13) (c) Form of Administration Agreement between Registrant
and SEI Fund Resources is incorporated by reference
to Exhibit (9)(c) of Post-Effective Amendment No. 19
(filed December 13, 1996) to Registrant's
Registration Statement on Form N-1A.
(13) (d) Sub-Administration Agreement between The Winsbury
Company Limited Partnership and The Bank of
California, N.A., dated December 23, 1991 (the
"Sub-Administration Agreement") is incorporated by
reference to Exhibit (9)(d) of Post-Effective
Amendment No. 19 (filed December 13, 1996) to
Registrant's Registration Statement on Form N-1A.
(13) (e) Form of Sub-Administration Agreement between SEI Fund
Resources and Union Bank of California, N.A. is
incorporated by reference to Exhibit (9)(e) of
Post-Effective Amendment No. 19 (filed December 13,
1996) to Registrant's Registration Statement on Form
N-1A.
(13) (f) Transfer Agency and Shareholder Services Agreement
between Registrant and The Winsbury Service
Corporation, dated August 1, 1995 (the "Transfer
Agency Agreement") is incorporated by reference to
Exhibit (9)(b) of Post-Effective Amendment No. 16
(filed December 1, 1995) to Registrant's Registration
Statement on Form N-1A.
(13) (g) Form of Transfer Agency and Service Agreement between
the Registrant and State Street Bank and Trust
Company is incorporated by reference to Exhibit
(9)(g) of Post-Effective Amendment No. 19 (filed
December 13, 1996) to Registrant's Registration
Statement on Form N-1A.
(13) (h) Sub-Transfer Agency Agreement between The Winsbury
Service Corporation and The Bank of California, N.A.,
dated February 22, 1989, as amended as of September
15, 1992 (the "Sub-Transfer Agency Agreement"), is
incorporated by reference to Exhibit 9(d) of
Post-Effective Amendment No. 8 (filed September 30,
1992) to Registrant's Registration Statement on Form
N-1A.
(13) (i) Fund Accounting Agreement between Registrant and The
Winsbury Service Corporation, dated as of August 1,
1995 (the "Fund Accounting Agreement") is
incorporated by reference to Exhibit (9)(d) of Post-
Effective Amendment No. 16 (filed December 1, 1995)
to Registrant's Registration Statement on Form N-1A.
C-5
<PAGE> 428
(13) (j) Amendment made as of June 19, 1996 to the Fund
Accounting Agreement between Registrant and BISYS
Fund Services Ohio, Inc. dated as of August 1, 1995,
is incorporated by reference to Exhibit (9)(f) of
Post-Effective Amendment No. 18 (filed November 8,
1996) to Registrant's Registration Statement on Form
N-1A.
(13) (k) Sub-Accounting Agreement between The Winsbury Service
Corporation and The Bank of California, N.A., dated
December 23, 1991 (the "Sub-Accounting Agreement")
is incorporated by reference to Exhibit (9)(k) of
Post-Effective Amendment No. 19 (filed December 13,
1996) to Registrant's Registration Statement on Form
N-1A.
(13) (l) Form of amended and restated Schedules A and D to the
Sub-Transfer Agency Agreement is incorporated by
reference to Exhibit 9(g) of Post-Effective Amendment
No. 14 (filed June 17, 1994) to Registrant's
Registration Statement on Form N-1A.
(13) (m) Form of Shareholder Services Agreement ("Shareholder
Services Agreement") between Registrant and The
Winsbury Company dated December 1, 1993 is
incorporated by reference to Exhibit 9(m) of
Post-Effective Amendment No. 12 (filed October 1,
1993) to Registrant's Registration Statement on Form
N-1A.
(13) (n) Form of Shareholder Service Provider Agreement for
the Registrant is incorporated by reference to
Exhibit (9)(n) of Post-Effective Amendment No. 19
(filed December 13, 1996) to Registrant's
Registration Statement on Form N-1A.
(13) (o) Form of amended and restated Appendix A to the
Shareholder Services Agreement is incorporated by
reference to Exhibit 9(j) of Post-Effective Amendment
No. 14 (filed June 17, 1994) to Registrant's
Registration Statement on Form N-1A.
(13) (p) Shareholder Services Plan is incorporated by
reference to Exhibit 9(n) of Post-Effective
Amendment No. 12 (filed October 1, 1993) to the
Registrant's Registration Statement on Form N-1A.
C-6
<PAGE> 429
(13) (q) Form of Shareholder Service Plan for the Registrant
is incorporated by reference to Exhibit (9)(q) of
Post-Effective Amendment No. 19 (filed December 13,
1996) to Registrant's Registration Statement on Form
N- 1A.
(14) (a) Consent of Deloitte & Touche LLP, is filed herewith.
(14) (b) Consent of Coopers & Lybrand L.L.P., is filed
herewith.
(14) (c) Consent of Ropes & Gray, is filed herewith.
(15) Not applicable.
(16) Executed Powers of Attorney are filed herewith.
(17) (a) Declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 for the Registrant
dated September 27, 1996 is filed herewith.
(17) (b) Prospectuses and Statement of Additional Information
for HighMark Funds.
(17) (c) Prospectuses and Statement of Additional Information
for Stepstone Funds dated May 26, 1996.
Item 17. Undertakings
(1) The registrant agrees that prior to any public
reoffering of the securities registered through the
use of a prospectus which is a 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, the reoffering
prospectus will contain the information called for by
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 registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a
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.
C-7
<PAGE> 430
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has been
signed on behalf of the Registrant in the City of Washington, District of
Columbia, on the 30th day of January, 1997.
HighMark Funds
Registrant
/s/ Stephen G. Mintos
-------------------------------
*Stephen G. Mintos
President and Trustee
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
*/s/ Stephen G. Mintos Chairman of the Board, January 30, 1997
- -------------------------- Trustee and President
Stephen G. Mintos (Principal Executive Officer)
*/s/ Michael Sakala Assistant Treasurer January 30, 1997
- --------------------------
Michael Sakala
*/s/ Thomas L. Braje Trustee January 30, 1997
- --------------------------
Thomas L. Braje
*/s/ David A. Goldfarb Trustee January 30, 1997
- --------------------------
David A. Goldfarb
*/s/ Joseph C. Jaeger Trustee January 30, 1997
- --------------------------
Joseph C. Jaeger
*/s/ Frederick J. Long Trustee January 30, 1997
- --------------------------
Frederick J. Long
* By: /s/ Martin E. Lybecker
- ----------------------------
Attorney-in-Fact
</TABLE>
C-8
<PAGE> 431
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
(4) Form of Agreement and Plan of Reorganization.
(6) (c) Form of Investment Sub-Advisory Agreement between Union Bank of California, NA.,
and Bank of Tokyo-Mitsubishi Trust Company.
(6) (d) Form of Investment Sub-Advisory Agreement between Union Bank of California, NA.,
and Tokyo-Mitsubishi Asset Management (UK) Ltd.
(14) (a) Consent of Deloitte & Touche LLP.
(14) (b) Consent of Coopers & Lybrand L.L.P.
(14) (c) Consent of Ropes & Gray.
(16) Executed Powers of Attorney.
(17) (a) Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940 for the
Registrant dated September 27, 1996.
(17) (b) Prospectuses and Statement of Additional Information for HighMark Funds.
(17) (c) Prospectuses and Statement of Additional Information for Stepstone Funds dated May
26, 1996.
</TABLE>
<PAGE> 1
EXHIBIT (4)
Form of Agreement and Plan of Reorganization
<PAGE> 2
DRAFT
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as
of [_______________] by and between HighMark Funds, a Massachusetts business
trust, ("HighMark") and the Stepstone Funds, a Massachusetts business trust
("Stepstone"). The capitalized terms used herein shall have the meaning ascribed
to them in this Agreement.
PLAN OF REORGANIZATION
(a) Stepstone will sell, assign, convey, transfer and deliver to
HighMark, and HighMark will acquire, on the Exchange Date, all of the properties
and assets existing at the Valuation Time in the following funds:
Stepstone Money Market Fund ("Stepstone Money Market")
Stepstone Treasury Money Market Fund ("Stepstone Treasury Money
Market")
Stepstone California Tax-Free Money Market Fund ("Stepstone California
Tax-Free Money Market")
Stepstone Balanced Fund ("Stepstone Balanced")
Stepstone Growth Equity Fund ("Stepstone Growth Equity")
Stepstone Value Momentum Fund ("Stepstone Value Momentum")
Stepstone Blue Chip Growth Fund ("Stepstone Blue Chip Growth")
Stepstone Emerging Growth Fund ("Stepstone Emerging Growth")
Stepstone International Equity Fund ("Stepstone International Equity")
Stepstone Intermediate-Term Bond Fund ("Stepstone Intermediate-Term
Bond")
Stepstone Convertible Securities Fund ("Stepstone Convertible
Securities")
Stepstone Government Securities Fund ("Stepstone Government
Securities")
Stepstone California Intermediate Tax-Free Bond Fund ("Stepstone
California Intermediate Tax-Free Bond")
(such funds each are a "Stepstone Fund" and are collectively the
"Stepstone Funds").
Such acquisition is to be made by the following funds:
HighMark Diversified Money Market Fund ("HighMark Diversified Money
Market")
HighMark 100% U.S. Treasury Money Market Fund ("HighMark 100% U.S.
Treasury Money Market")
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<PAGE> 3
HighMark California Tax-Free Money Market Fund ("HighMark California
Tax-Free Money Market")
HighMark Balanced Fund ("HighMark Balanced")
HighMark Growth Fund ("HighMark Growth")
HighMark Value Momentum Fund ("HighMark Value Momentum")
HighMark Blue Chip Growth Fund ("HighMark Blue Chip Growth")
HighMark Emerging Growth Fund ("HighMark Emerging Growth")
HighMark International Equity Fund ("HighMark International Equity")
HighMark Intermediate-Term Bond Fund ("HighMark Intermediate-Term
Bond")
HighMark Convertible Securities Fund ("HighMark Convertible
Securities")
HighMark Government Securities Fund ("HighMark Government Securities")
HighMark California Intermediate Tax-Free Bond Fund ("HighMark
California Intermediate Tax-Free Bond")
(such funds each are a "HighMark Fund" and are collectively the
"HighMark Funds").
For purposes of this Agreement the respective Stepstone Funds correspond to the
HighMark Funds as follows:
<TABLE>
<S> <C>
Stepstone Money Market Fund HighMark Diversified Money Market Fund
Stepstone Treasury Money Market Fund HighMark 100% U.S. Treasury Money
Market Fund
Stepstone California Tax-Free Money HighMark California Tax-Free Money
Market Fund Market Fund
Stepstone Balanced Fund HighMark Balanced Fund
Stepstone Growth Equity Fund HighMark Growth Fund
Stepstone Value Momentum Fund HighMark Value Momentum Fund
Stepstone Blue Chip Growth Fund HighMark Blue Chip Growth Fund
Stepstone Emerging Growth Fund HighMark Emerging Growth Fund
Stepstone International Equity Fund HighMark International Equity Fund
Stepstone Intermediate-Term Bond Fund HighMark Intermediate-Term Bond Fund
Stepstone Convertible Securities Fund HighMark Convertible Securities Fund
Stepstone Government Securities Fund HighMark Government Securities Fund
Stepstone California Intermediate Tax-Free HighMark California Intermediate Tax-Free
Bond Fund Bond Fund
</TABLE>
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<PAGE> 4
In consideration therefor, each HighMark Fund shall, on the Exchange Date,
assume all of the liabilities of the corresponding Stepstone Fund and transfer
to the corresponding Stepstone Fund a number of full and fractional HighMark
Investor or Fiduciary Class shares of the corresponding HighMark Fund
(collectively, "Shares") having an aggregate net asset value equal to the value
of all of the assets of each Stepstone Fund transferred to the corresponding
HighMark Fund on such date less the value of all of the liabilities of each
Stepstone Fund assumed by the corresponding HighMark Fund on that date. It is
intended that each reorganization described in this Agreement shall be a
tax-free reorganization under the Internal Revenue Code of 1986, as amended (the
"Code").
(b) Upon consummation of the transactions described in paragraph (a) of
this Agreement, each Stepstone Fund shall distribute in complete liquidation to
its respective shareholders of record as of the Exchange Date the Shares
received by it, each shareholder being entitled to receive that number of Shares
equal to the proportion which the number of shares of beneficial interest of the
Stepstone Fund held by such shareholder bears to the number of such shares of
the Stepstone Fund outstanding on such date. If the Stepstone Fund shareholder
of record has Institutional Class shares, that shareholder will receive HighMark
Fiduciary shares. All other Stepstone shareholders will receive HighMark Retail
shares.
AGREEMENT
HighMark and Stepstone represent, warrant and agree as follows:
1. Representations and Warranties of Stepstone. Each of Stepstone and each
Stepstone Fund represent and warrant to and agree with HighMark and each
HighMark Fund that:
(a) Stepstone is a business trust duly established and validly existing
under the laws of the Commonwealth of Massachusetts and has power to own all of
its properties and assets and to carry out its obligations under this Agreement.
Stepstone and each Stepstone Fund is not required to qualify as a foreign
association in any jurisdiction. Stepstone and each Stepstone Fund has all
necessary federal, state and local authorizations to carry on its business as
now being conducted and to fulfill the terms of this Agreement, except as set
forth in Section 1(l).
(b) Stepstone is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company, and such
registration has not been revoked or rescinded and is in full force and effect.
Each Stepstone Fund has elected to qualify and has qualified as a regulated
investment company under Part I of Subchapter M of the Code, as of and since its
first taxable year, and qualifies and intends to continue to qualify as a
regulated investment company for its taxable year ending upon its
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<PAGE> 5
liquidation. Each Stepstone Fund has been a regulated investment company under
such sections of the Code at all times since its inception.
(c) The statements of assets and liabilities, statements of operations,
statements of changes in net assets and schedules of portfolio investments
(indicating their market values) for each Stepstone Fund at and for the year
ended January 31, 1996, such statements and schedules having been audited by
Arthur Anderson LLP, independent accountants to Stepstone, have been furnished
to HighMark. Unaudited statements of assets and liabilities, statements of
operations, statements of changes in net assets and schedules of portfolio
investments (indicating their market values) for each Stepstone Fund as of July
31, 1996 have also been furnished to HighMark. Such statements of assets and
liabilities and schedule fairly present the financial position of each Stepstone
Fund as of their respective dates and said statements of operations and changes
in net assets fairly reflect the results of operations and changes in net assets
for the periods covered thereby in conformity with generally accepted accounting
principles.
(d) The prospectuses of the Stepstone Funds dated May 28, 1996 (the
"Stepstone Prospectuses") and the Statement of Additional Information for the
Stepstone Funds dated May 28, 1996 and on file with the Securities and Exchange
Commission, which have been previously furnished to HighMark, did not as of
their dates and do not as of the date hereof contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Stepstone or any Stepstone Fund, threatened
against Stepstone or any Stepstone Fund which assert liability on the part of
Stepstone or any Stepstone Fund.
(f) There are no material contracts outstanding to which Stepstone or any
Stepstone Fund is a party, other than as disclosed in the Stepstone Prospectuses
and the corresponding Statement of Additional Information or in the Registration
Statement and the Proxy Statement.
(g) Neither Stepstone nor any Stepstone Fund has any known liabilities of a
material nature, contingent or otherwise, other than those shown as belonging to
it on its statement of assets and liabilities as of July 31, 1996 and those
incurred in the ordinary course of Stepstone's business as an investment company
since that date. Prior to the Exchange Date, Stepstone will advise HighMark of
all known material liabilities, contingent or otherwise, incurred by it and each
Stepstone Fund subsequent to July 31, 1996, whether or not incurred in the
ordinary course of business.
(h) As used in this Agreement, the term "Investments" shall mean each
Stepstone Fund's investments shown on the schedule of its portfolio investments
as of July 31, 1996 referred to in Section 1(c) hereof, as supplemented with
such changes as Stepstone or each Stepstone Fund shall make after July 31, 1996
and prior to the date of this Agreement, which
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<PAGE> 6
changes have been disclosed to HighMark, and changes made on and after the date
of this Agreement after advising HighMark of such proposed changes, and changes
resulting from stock dividends, stock split-ups, mergers and similar corporate
actions.
(i) Each Stepstone Fund has filed or will file all federal and state tax
returns which, to the knowledge of Stepstone's officers, are required to be
filed by each Stepstone Fund and has paid or will pay all federal and state
taxes shown to be due on said returns or on any assessments received by each
Stepstone Fund. All tax liabilities of each Stepstone Fund have been adequately
provided for on its books, and no tax deficiency or liability of any Stepstone
Fund has been asserted, and no question with respect thereto has been raised, by
the Internal Revenue Service or by any state or local tax authority for taxes in
excess of those already paid.
(j) As of both the Valuation Time and the Exchange Date and except for
shareholder approval and otherwise as described in Section 1(l), Stepstone on
behalf of each Stepstone Fund will have full right, power and authority to sell,
assign, transfer and deliver the Investments and any other assets and
liabilities of each Stepstone Fund to be transferred to the corresponding
HighMark Fund pursuant to this Agreement. At the Exchange Date, subject only to
the delivery of the Investments and any such other assets and liabilities as
contemplated by this Agreement, HighMark will, on behalf of each HighMark Fund,
acquire the Investments and any such other assets subject to no encumbrances,
liens or security interests in favor of any third party creditor of Stepstone or
a Stepstone Fund and, except as described in Section 1(k), without any
restrictions upon the transfer thereof.
(k) No registration under the Securities Act of 1933, as amended (the "1933
Act"), of any of the Investments would be required if they were, as of the time
of such transfer, the subject of a public distribution by either of Stepstone or
HighMark, except as previously disclosed to HighMark by Stepstone.
(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Stepstone or any
Stepstone Fund of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act, state securities or blue sky laws (which
term as used herein shall include the laws of the District of Columbia and of
Puerto Rico) or the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"H-S-R Act").
(m) The registration statement (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") by HighMark on Form
N-14 relating to the Shares issuable hereunder, and the proxy statement of
Stepstone included therein (the "Proxy Statement"), on the effective date of the
Registration Statement and insofar as they relate to Stepstone and the Stepstone
Funds, (i) will comply in all material respects with the provisions of the 1933
Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and
(ii) will not contain any untrue statement of a material fact or omit to state a
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<PAGE> 7
material fact required to be stated therein or necessary to make the statements
therein not misleading; and at the time of the shareholders' meeting referred to
in Section 8(a) below and on the Exchange Date, the prospectus contained in the
Registration Statement of which the Proxy Statement is a part (the "Prospectus")
,as amended or supplemented by any amendments or supplements filed with the
Commission by HighMark, insofar as it relates to Stepstone and the Stepstone
Funds, will not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the representations
and warranties in this subsection shall apply only to statements of fact
relating to Stepstone and any Stepstone Fund contained in the Registration
Statement, he Prospectus or the Proxy Statement, or omissions to state in any
thereof a material fact relating to Stepstone or any Stepstone Fund, as such
Registration Statement, Prospectus and Proxy Statement shall be furnished to
Stepstone in definitive form as soon as practicable following effectiveness of
the Registration Statement and before any public distribution of the Prospectus
or Proxy Statement.
(n) All of the issued and outstanding shares of beneficial interest of each
Stepstone Fund have been offered for sale and sold in conformity with all
applicable federal and state securities laws.
(o) Each of the Stepstone Funds is qualified, and will at all times through
the Exchange Date qualify for taxation as a "regulated investment company" under
Sections 851 and 852 of the Code.
(p) At the Exchange Date, each of the Stepstone Funds will have sold such
of its assets, if any, as necessary to assure that, after giving effect to the
acquisition of the assets pursuant to this Agreement, each of the HighMark Funds
will remain a "diversified company" within the meaning of Section 5(b)(1) of the
1940 Act and in compliance with such other mandatory investment restrictions as
are set forth in the HighMark Prospectuses previously furnished to Stepstone.
2. REPRESENTATIONS AND WARRANTIES OF HIGHMARK. HighMark and each HighMark
Fund jointly and severally represent and warrant to and agree with Stepstone and
each Stepstone Fund that:
(a) HighMark is a business trust duly established and validly existing
under the laws of The Commonwealth of Massachusetts and has power to carry on
its business as it is now being conducted and to carry out this Agreement.
HighMark and each HighMark Fund is not required to qualify as a foreign
association in any jurisdiction. HighMark and each HighMark Fund has all
necessary federal, state and local authorizations to own all of its properties
and assets and to carry on its business as now being conducted and to fulfill
the terms of this Agreement, except as set forth in Section 2(i).
(b) HighMark is registered under the 1940 Act as an open-end management
investment company, and such registration has not been revoked or rescinded and
is in full
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<PAGE> 8
force and effect. Each HighMark Fund that has had active operations prior to the
Exchange Date, has elected to qualify and has qualified as a regulated
investment company under Part I of Subchapter M of the Code, as of and since its
first taxable year, and qualifies and intends to continue to qualify as a
regulated investment company for its taxable year ending upon its liquidation.
Each HighMark Fund that has had actual operations prior to the Exchange Date has
been a regulated investment company under such sections of the Code at all times
since its inception. HighMark Value Momentum, HighMark Blue Chip Growth,
HighMark Emerging Growth, HighMark International Equity, HighMark
Intermediate-Term Bond, HighMark Convertible Securities, HighMark Government
Securities, and HighMark California Intermediate Tax-Free Bond, which have not
had active operations prior to the Exchange Date, intend to qualify as regulated
investment companies under Part I of Subchapter M of the Code.
(c) The statements of assets and liabilities, statements of operations,
statements of changes in net assets and schedules of investments (indicating
their market values) for each HighMark Fund for the year ended July 31, 1996,
such statements and schedules having been audited by Deloitte & Touche LLP,
independent accountants to HighMark, have been furnished to Stepstone. Such
statements of assets and liabilities and schedules fairly present the financial
position of the HighMark Funds as of their respective dates, and said statements
of operations and changes in net assets fairly reflect the results of its
operations and changes in financial position for the periods covered thereby in
conformity with generally accepted accounting principles.
(d) The prospectuses of each HighMark Fund dated February 26, 1997,
(collectively, the "HighMark Prospectuses"), and the Statement of Additional
Information for the HighMark Funds, dated February 26, 1997 and on file with the
Securities and Exchange Commission, which have been previously furnished to
Stepstone, did not as of their dates and do not as of the date hereof contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of HighMark or any HighMark Fund, threatened
against HighMark or any HighMark Fund which assert liability on the part of
HighMark or any HighMark Fund.
(f) There are no material contracts outstanding to which HighMark or any
HighMark Fund is a party, other than as disclosed in the HighMark Prospectuses
and the corresponding Statement of Additional Information or in the Registration
Statement.
(g) Neither HighMark nor any HighMark Fund has any known liabilities of a
material nature, contingent or otherwise, other than those shown on its
statement of assets and liabilities as of July 31, 1996 referred to above and
those incurred in the ordinary course of the business of HighMark as an
investment company or any HighMark Fund since such date. Prior to the Exchange
Date, HighMark will advise Stepstone of all known material liabilities,
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<PAGE> 9
contingent or otherwise, incurred by it and each HighMark Fund subsequent to
July 31, 1996, whether or not incurred in the ordinary course of business.
(h) Each HighMark Fund has filed or will file all federal and state tax
returns which, to the knowledge of HighMark's officers, are required to be filed
by each HighMark Fund and has paid or will pay all federal and state taxes shown
to be due on said returns or on any assessments received by each HighMark Fund.
All tax liabilities of each HighMark Fund have been adequately provided for on
its books, and no tax deficiency or liability of any HighMark Fund has been
asserted, and no question with respect thereto has been raised, by the Internal
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid.
(i) No consent, approval, authorization or order of any governmental
authority is required for the consummation by HighMark or any HighMark Fund of
the transactions contemplated by this Agreement, except such as may be required
under the 1933 Act, the 1934 Act, the 1940 Act, state securities or Blue Sky
laws or the H-S-R Act.
(j) As of both the Valuation Time and the Exchange Date and otherwise as
described in Section 2(i), HighMark on behalf of each HighMark Fund will have
full right, power and authority to purchase the Investments and any other assets
and assume the liabilities of each Stepstone Fund to be transferred to the
corresponding HighMark Fund pursuant to this Agreement.
(k) The Registration Statement, the Prospectus and the Proxy Statement, on
the effective date of the Registration Statement and insofar as they relate to
HighMark and the HighMark Funds: (i) will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder and (ii) will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and at the time of the
shareholders' meeting referred to in Section 8(a) and at the Exchange Date, the
Prospectus, as amended or supplemented by any amendments or supplements filed
with the Commission by HighMark or any HighMark Fund, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that none of the representations and warranties in this
subsection shall apply to statements in or omissions from the Registration
Statement, the Prospectus or the Proxy Statement made in reliance upon and in
conformity with information furnished by Stepstone or any Stepstone Fund for use
in the Registration Statement, the Prospectus or the Proxy Statement.
(l) Shares to be issued to each Stepstone Fund have been duly authorized
and, when issued and delivered pursuant to this Agreement and the Prospectus,
will be legally and validly issued and will be fully paid and nonassessable by
HighMark and no shareholder of HighMark will have any preemptive right of
subscription or purchase in respect thereof.
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<PAGE> 10
(m) The issuance of Shares pursuant to this Agreement will be in compliance
with all applicable federal and state securities laws.
(n) Each of HighMark Diversified Money Market, HighMark 100% U.S. Treasury
Money Market, HighMark California Tax-Free Money Market, HighMark Balanced, and
HighMark Growth is qualified and will at all times through the Exchange Date
qualify for taxation as a "regulated investment company" under Sections 851 and
852 of the Code. HighMark Value Momentum, HighMark Blue Chip Growth, HighMark
Emerging Growth, HighMark International Equity, HighMark Intermediate-Term Bond,
HighMark Convertible Securities, HighMark Government Securities, and HighMark
California Intermediate Tax- Free Bond, upon filing of their first income tax
returns at the completion of their first taxable year will elect to be regulated
investment companies and until such time will take all steps necessary to ensure
qualification as regulated investment companies under Sections 851 and 852 of
the Code.
(o) HighMark through its administrator, transfer agent, custodian or
otherwise, will cooperate fully and in a timely manner with Stepstone and each
Stepstone Fund in completing each of the actions required of it and its agents
and necessary for consummation of the transactions described in Sections 3 (a)
and (b) of this Agreement, and in connection therewith has and will from time to
time thereafter provide to Stepstone in writing reasonably detailed descriptions
of each such action, a reasonable time projection for the accomplishment
thereof, and the HighMark person primarily responsible therefor. Upon
presentation to Stepstone of the above-described time projections, Stepstone may
promptly notify HighMark in writing that the time projections are not
reasonable. HighMark and Stepstone shall then in good faith attempt to establish
mutually acceptable time projections.
3. REORGANIZATION. (a) Subject to the requisite approval of the
shareholders of each Stepstone Fund and to the other terms and conditions
contained herein (including each Stepstone Fund's obligation to distribute to
its respective shareholders all of its investment company taxable income and net
capital gain as described in Section 9(k) hereof), Stepstone and each Stepstone
Fund agree to sell, assign, convey, transfer and deliver to the corresponding
HighMark Fund, and HighMark and each HighMark Fund agree to acquire from the
corresponding Stepstone Fund, on the Exchange Date all of the Investments and
all of the cash and other assets of each Stepstone Fund in exchange for that
number of Shares of the corresponding HighMark Fund provided for in Section 4
and the assumption by the corresponding HighMark Fund of all of the liabilities
of the Stepstone Fund. Pursuant to this Agreement, such Stepstone Fund will, as
soon as practicable after the Exchange Date, distribute in liquidation all of
the Shares received by it to its shareholders in exchange for their shares of
beneficial interest of such Stepstone Fund.
(b) Stepstone, on behalf of each Stepstone Fund, will pay or cause to be
paid to the corresponding HighMark Fund any interest and cash dividends received
by it on or after the Exchange Date with respect to the Investments transferred
to the HighMark Funds hereunder. Stepstone, on behalf of each Stepstone Fund,
will transfer to the corresponding HighMark
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<PAGE> 11
Fund any rights, stock dividends or other securities received by Stepstone or
any Stepstone Fund after the Exchange Date as stock dividends or other
distributions on or with respect to the Investments transferred, which rights,
stock dividends and other securities shall be deemed included in the assets
transferred to each HighMark Fund at the Exchange Date and shall not be
separately valued, in which case any such distribution that remains unpaid as of
the Exchange Date shall be included in the determination of the value of the
assets of the Stepstone Fund acquired by the corresponding HighMark Fund.
4. EXCHANGE DATE; VALUATION TIME. On the Exchange Date, HighMark will
deliver to Stepstone a number of Shares having an aggregate net asset value
equal to the value of the assets of the corresponding Stepstone Fund acquired by
each HighMark Fund, less the value of the liabilities of such Stepstone Fund
assumed, determined as hereafter provided in this Section 4.
(a) Subject to Section 4(d) hereof, the value of each Stepstone Fund's net
assets will be computed as of the Valuation Time using the valuation procedures
for the particular Stepstone Fund set forth in the Stepstone Prospectus.
(b) Subject to Section 4(d) hereof, the net asset value of a share of each
HighMark Fund will be determined to the nearest full cent as of the Valuation
Time, using the valuation procedures set forth in the HighMark Prospectus for
the particular HighMark Fund.
(c) Subject to Section 4(d), the Valuation Time shall be [_______] Eastern
Standard time on [___________] for the following Funds: [______________], and
[______________] Eastern time on [___________] for the following Funds:
[_________], or such earlier or later days as may be mutually agreed upon in
writing by the parties hereto (the "Valuation Time").
(d) No formula will be used to adjust the net asset value of any Stepstone
Fund or HighMark Fund to take into account differences in realized and
unrealized gains and losses.
(e) Each HighMark Fund shall issue its Shares to the corresponding
Stepstone Fund on one share deposit receipt registered in the name of the
corresponding Stepstone Fund. Each Stepstone Fund shall distribute in
liquidation the Shares received by it hereunder pro rata to its shareholders by
redelivering such share deposit receipt to HighMark's transfer agent which will
as soon as practicable set up open accounts for each Stepstone Fund shareholder
in accordance with written instructions furnished by Stepstone.
(f) Each HighMark Fund shall assume all liabilities of the corresponding
Stepstone Fund, whether accrued or contingent, in connection with the
acquisition of assets and subsequent dissolution of the corresponding Stepstone
Fund or otherwise, except that recourse for assumed liabilities relating to a
particular Stepstone Fund will be limited to the corresponding HighMark Fund.
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<PAGE> 12
5. EXPENSES, FEES, ETC. (a) Subject to subsections 5(b) through 5(e), all
fees and expenses, including accounting expenses, portfolio transfer taxes (if
any) or other similar expenses incurred directly in connection with the
consummation by HighMark and Stepstone of the transactions contemplated by this
Agreement will be borne by Union Bank of California, N.A., including the costs
of proxy materials, proxy solicitation, and legal expenses; provided, however,
that such expenses will in any event be paid by the party directly incurring
such expenses if and to the extent that the payment by the other party of such
expenses would result in the disqualification of any HighMark Fund or any
Stepstone Fund, as the case may be, as a "regulated investment company" within
the meaning of Section 851 of the Code. Fees and expenses not incurred directly
in connection with the consummation of the Transaction will be borne by the
party incurring such fees and expenses.
(b) In the event the transactions contemplated by this Agreement are not
consummated by reason of Stepstone being either unwilling or unable to go
forward (other than by reason of the nonfulfillment or failure of any condition
to Stepstone's obligations referred to in Section 8(a) or Section 10), Stepstone
shall pay directly all reasonable fees and expenses incurred by HighMark in
connection with such transactions, including, without limitation, legal,
accounting and filing fees.
(c) In the event the transactions contemplated by this Agreement are not
consummated by reason of HighMark being either unwilling or unable to go forward
(other than by reason of the nonfulfillment or failure of any condition to
HighMark's obligations referred to in Section 8(a) or Section 9), HighMark shall
pay directly all reasonable fees and expenses incurred by Stepstone in
connection with such transactions, including without limitation legal,
accounting and filing fees.
(d) In the event the transactions contemplated by this Agreement are not
consummated for any reason other than (i) HighMark or Stepstone being either
unwilling or unable to go forward or (ii) the nonfulfillment or failure of any
condition to Stepstone or HighMark's obligations referred to in Section 8(a),
Section 9 or Section 10 of this Agreement, then each of Stepstone and HighMark
shall bear the expenses it has actually incurred in connection with such
transactions.
(e) Notwithstanding any other provisions of this Agreement, if for any
reason the transactions contemplated by this Agreement are not consummated, no
party shall be liable to the other party for any damages resulting therefrom,
including without limitation consequential damages, except as specifically set
forth above.
6. PERMITTED ASSETS. HighMark agrees to advise Stepstone promptly if at any
time prior to the Exchange Date the assets of any Stepstone Fund include any
assets that the corresponding HighMark Fund is not permitted, or reasonably
believes to be unsuitable for it, to acquire, including without limitation any
security that, prior to its acquisition by any Stepstone Fund, HighMark has
informed Stepstone is unsuitable for the corresponding HighMark Fund to acquire.
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<PAGE> 13
7. EXCHANGE DATE. Delivery of the assets of the Stepstone Funds to be
transferred, assumption of the liabilities of the Stepstone Funds to be assumed,
and the delivery of Shares to be issued shall be made at the offices of SEI Fund
Resources, Oaks, PA 19456 at [time] on April 18, 1997 for the following Funds:
Stepstone Money Market, Stepstone Treasury Money Market, Stepstone California
Tax-Free Money Market, Stepstone Balanced and Stepstone Growth Equity and
[____time_______] on April 25, 1997 for the following Funds: Stepstone Value
Momentum, Stepstone Blue Chip Growth, Stepstone Emerging Growth, Stepstone
International Equity, Stepstone Intermediate-Term Bond, Stepstone Convertible
Securities, Stepstone Government Securities, and Stepstone California
Intermediate Tax-Free Bond or at such other times and dates agreed to by
Stepstone and HighMark, the date and time upon which such delivery is to take
place being referred to herein as the "Exchange Date."
8. SPECIAL MEETING OF SHAREHOLDERS; DISSOLUTION. (a) Stepstone agrees to
call a special meeting of the shareholders of each Stepstone Fund as soon as is
practicable after the effective date of the Registration Statement for the
purpose of considering the sale of all of the assets of each Stepstone Fund to
and the assumption of all of the liabilities of each Stepstone Fund by the
corresponding HighMark Fund as herein provided, adopting this Agreement, and
authorizing the liquidation and dissolution of each Stepstone Fund, and, except
as set forth in Section 13, it shall be a condition to the obligations of each
of the parties hereto that the holders of the shares of beneficial interest of
each Stepstone Fund shall have approved this Agreement and the transactions
contemplated herein in the manner required by law and Stepstone's Declaration of
Trust at such a meeting on or before the Valuation Time.
(b) Stepstone and each Stepstone Fund agree that the liquidation and
dissolution of each Stepstone Fund will be effected in the manner provided in
Stepstone's Declaration of Trust in accordance with applicable law, that it will
not make any distributions of any Shares to the shareholders of a Stepstone Fund
without first paying or adequately providing for the payment of all of such
Stepstone Fund's known debts, obligations and liabilities.
(c) Each of HighMark and Stepstone will cooperate with the other, and each
will furnish to the other the information relating to itself required by the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder
to be set forth in the Registration Statement, including the Prospectus and the
Proxy Statement.
9. CONDITIONS TO HIGHMARK'S OBLIGATIONS. The obligations of HighMark and
each HighMark Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby, including the liquidation and dissolution of the Stepstone
Funds, shall have been approved by the shareholders of each Stepstone Fund in
the manner required by law.
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<PAGE> 14
(b) Stepstone shall have furnished to HighMark a statement of each
Stepstone Fund's assets and liabilities, with values determined as provided in
Section 4 of this Agreement, together with a list of Investments with their
respective tax costs, all as of the Valuation Time, certified on Stepstone's
behalf by its President (or any Vice President) and Treasurer, and a certificate
of both such officers, dated the Exchange Date, to the effect that as of the
Valuation Time and as of the Exchange Date there has been no material adverse
change in the financial position of any Stepstone Fund since July 31, 1996,
other than changes in the Investments since that date or changes in the market
value of the Investments, or changes due to net redemptions of shares of the
Stepstone Funds, dividends paid or losses from operations.
(c) As of the Valuation Time and as of the Exchange Date, all
representations and warranties of Stepstone and each Stepstone Fund made in this
Agreement are true and correct in all material respects as if made at and as of
such dates, Stepstone and each Stepstone Fund has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to each of such dates, and Stepstone shall have furnished
to HighMark a statement, dated the Exchange Date, signed by Stepstone's
President (or any Vice President) and Treasurer certifying those facts as of
such dates.
(d) Stepstone shall have delivered to HighMark a letter from Arthur
Anderson LLP dated the Exchange Date stating that such firm reviewed the federal
and state income tax returns of each Stepstone Fund for the year ended January
31, 1996 and that, in the course of such review, nothing came to their attention
which caused them to believe that such returns did not properly reflect, in all
material respects, the federal and state income taxes of each Stepstone Fund for
the periods covered thereby, or that each Stepstone Fund would not qualify as a
regulated investment company for federal income tax purposes.
(e) There shall not be any material litigation pending with respect to the
matters contemplated by this Agreement.
(f) HighMark shall have received an opinion of Morgan, Lewis & Bockius LLP,
in form reasonably satisfactory to HighMark and dated the Exchange Date, to the
effect that (i) Stepstone is a business trust duly established and validly
existing under the laws of the Commonwealth of Massachusetts, and neither
Stepstone nor any Stepstone Fund is, to the knowledge of such counsel, required
to qualify to do business as a foreign association in any jurisdiction, (ii)
this Agreement has been duly authorized, executed, and delivered by Stepstone
and, assuming that the Registration Statement, the Prospectus and the Proxy
Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and assuming
due authorization, execution and delivery of this Agreement by HighMark, is a
valid and binding obligation of Stepstone, (iii) Stepstone and each Stepstone
Fund has power to sell, assign, convey, transfer and deliver the Investments and
other assets contemplated hereby and, upon consummation of the transactions
contemplated hereby in accordance with the terms of this Agreement, Stepstone
and each Stepstone Fund will have duly sold, assigned, conveyed, transferred and
delivered such Investments and other assets to HighMark,(iv) the execution
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<PAGE> 15
and delivery of this Agreement did not, and the consummation of the transactions
contemplated hereby will not, violate Stepstone's Declaration of Trust, or
Bylaws, as amended, or any provision of any agreement known to such counsel to
which Stepstone or any Stepstone Fund is a party or by which it is bound, it
being understood that with respect to investment restrictions as contained in
Stepstone's Declaration of Trust, or Bylaws, or then-current prospectus or
statement of additional information, such counsel may rely upon a certificate of
an officer of Stepstone whose responsibility it is to advise Stepstone with
respect to such matters and (v) no consent, approval, authorization or order of
any court or governmental authority is required for the consummation by
Stepstone or any Stepstone Fund of the transactions contemplated hereby, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and
such as may be required under state securities or blue sky laws and the H-S-R
Act, and it being understood that such opinion shall not be deemed to apply to
HighMark's compliance obligations under the 1933 Act, 1934 Act, 1940 Act, state
securities or blue sky laws and H-S-R Act. For purposes of analysis regarding
the 1940 Act, Morgan, Lewis & Bockius LLP may assume, as fact solely for
purposes of this plan that the Stepstone Funds and the HighMark Funds may be
considered affiliated persons or affiliated persons of an affiliated person
solely by reason of having a common investment adviser.
(g) HighMark shall have received an opinion of Ropes & Gray, counsel to
HighMark addressed to HighMark and each HighMark Fund, in form reasonably
satisfactory to HighMark and dated the Exchange Date (which opinion would be
based upon certain factual representations and subject to certain
qualifications), to the effect that, on the basis of the existing provisions of
the Code, current administrative rules and court decisions, for Federal income
tax purposes: (i) no gain or loss will be recognized by any Stepstone Fund or
its Shareholders upon the transfer of the assets to the corresponding HighMark
Fund in exchange for Shares and the assumption by such HighMark Fund of the
liabilities of the Stepstone Fund or upon the distribution of Shares by the
Stepstone Fund to its shareholders in liquidation pursuant to this Agreement;
(ii) the basis of the Shares a Stepstone shareholder receives in connection with
the transaction will be the same as the basis of his or her Stepstone Fund
shares exchanged therefor; (iii) a Stepstone shareholder's holding period with
respect to his or her Shares will be determined by including the period for
which he or she held the Stepstone Fund shares exchanged therefor, provided that
he or she held such Stepstone Fund shares as capital assets; (iv) no gain or
loss will be recognized by any HighMark Fund upon the receipt of the assets of
the corresponding Stepstone Fund in exchange for Shares and the assumption by
the HighMark Fund of the liabilities of the corresponding Stepstone Fund; (v)
the basis in the hands of the HighMark Fund of the assets of the corresponding
Stepstone Fund transferred to the HighMark Fund will be the same as the basis of
the assets in the hands of the corresponding Stepstone Fund immediately prior to
the transfer; and (vi) each HighMark Fund's holding periods with respect to the
assets of the corresponding Stepstone Fund will include the periods for which
such assets were held by the corresponding Stepstone Fund.
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<PAGE> 16
(h) The assets of each Stepstone Fund to be acquired by the corresponding
HighMark Fund will include no assets which the corresponding HighMark Fund, by
reason of limitations contained in its Declaration of Trust or of investment
restrictions disclosed in the HighMark Prospectuses in effect on the Exchange
Date, may not properly acquire. HighMark shall not change the HighMark
Declaration of Trust and the HighMark Prospectuses so as to restrict permitted
investments for each HighMark Fund except as required by the Commission or any
state regulatory authority.
(i) The Registration Statement shall have become effective under the 1933
Act and applicable Blue Sky provisions, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of HighMark
contemplated by the Commission and or any state regulatory authority.
(j) All proceedings taken by Stepstone in connection with the transactions
contemplated by this Agreement and all documents incidental thereto reasonably
shall be satisfactory in form and substance to HighMark and Ropes & Gray.
(k) Prior to the Exchange Date, each Stepstone Fund shall have declared a
dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to its shareholders all of the excess of (i) the
Stepstone Fund's investment income excludable from gross income under Section
103(a) of the Code (if any) over (ii) its deductions disallowed under Sections
265 and 171(a)(2) of the Code, all of the Stepstone Fund's investment company
taxable income (computed without regard to any deduction for dividends paid),
and all of the Stepstone Fund's net realized capital gain (after reduction for
any capital loss carryover) in each case for both the taxable year ended January
31, 1996 and the short taxable period beginning on February 1, 1996 and ending
on the Exchange Date.
(l) Stepstone shall have furnished to HighMark a certificate, signed by the
President (or any Vice President) and the Treasurer of Stepstone, as to the tax
cost to HighMark of the securities delivered to HighMark pursuant to this
Agreement, together with any such other evidence as to such tax cost as HighMark
may reasonably request.
(m) Stepstone Funds' custodian shall have delivered to HighMark a
certificate identifying all of the assets of each Stepstone Fund held by such
custodian as of the Valuation Time.
(n) Stepstone Funds' transfer agent shall have provided to HighMark (i) the
originals or true copies of all of the records of each Stepstone Fund in the
possession of such transfer agent as of the Exchange Date, (ii) a certificate
setting forth the number of shares of each Stepstone Fund outstanding as of the
Valuation Time and (iii) the name and address of each holder of record of any
such shares of each Stepstone Fund and the number of shares held of record by
each such shareholder.
(o) All of the issued and outstanding shares of beneficial interest of each
Stepstone Fund shall have been offered for sale and sold in conformity with all
applicable federal or
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<PAGE> 17
state securities or blue sky laws and, to the extent that any audit of the
records of Stepstone or any Stepstone Fund or its transfer agent by HighMark or
its agents shall have revealed otherwise, either (i) Stepstone and each
Stepstone Fund shall have taken all actions that in the reasonable opinion of
HighMark or Ropes & Gray are necessary to remedy any prior failure on the part
of Stepstone to have offered for sale and sold such shares in conformity with
such laws or (ii) Stepstone shall have furnished (or caused to be furnished)
surety, or deposited (or caused to be deposited) assets in escrow, for the
benefit of HighMark in amounts sufficient and upon terms satisfactory, in the
opinion of HighMark or its counsel, to indemnify HighMark against any expense,
loss, claim, damage or liability whatsoever that may be asserted or threatened
by reason of such failure on the part of Stepstone to have offered and sold such
shares in conformity with such laws.
(p) HighMark shall have received from Deloitte & Touche LLP a letter
addressed to HighMark dated as of the Exchange Date reasonably satisfactory in
form and substance to HighMark and Stepstone to the effect that, on the basis of
limited procedures agreed upon by HighMark and Stepstone and described in such
letter (but not an examination in accordance with generally accepted auditing
standards), as of the Valuation Time the value of the assets of each Stepstone
Fund to be exchanged for the Shares have been determined in accordance with the
provisions of Stepstone's Declaration of Trust, pursuant to the procedures
customarily utilized by each Stepstone Fund in valuing its assets and issuing
its shares.
(q) Stepstone shall have duly executed and delivered to HighMark bills of
sale, assignments, certificates and other instruments of transfer ("Transfer
Documents") as HighMark may deem necessary or desirable to transfer all of
Stepstone's and each Stepstone Fund's entire right, title and interest in and to
the Investments and all other assets of each Stepstone Fund.
10. CONDITIONS TO STEPSTONE'S OBLIGATIONS. The obligations of Stepstone and
each Stepstone Fund hereunder shall be subject to the following conditions:
(a) This Agreement shall have been adopted and the transactions
contemplated hereby, including the liquidation and dissolution of the Stepstone
Funds, shall have been approved by the shareholders of each Stepstone Fund in
the manner required by law.
(b) HighMark shall have furnished to Stepstone a statement of each HighMark
Fund's net assets, together with a list of portfolio holdings with values
determined as provided in Section 4, all as of the Valuation Time, certified on
HighMark's behalf by its President (or any Vice President) and Treasurer (or any
Assistant Treasurer), and a certificate of both such officers, dated the
Exchange Date, to the effect that as of the Valuation Time and as of the
Exchange Date there has been no material adverse change in the financial
position of any HighMark Fund since July 31, 1996, other than changes in its
portfolio securities since that date, changes in the market value of its
portfolio securities, changes due to net redemptions, dividends paid or losses
from operations.
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<PAGE> 18
(c) HighMark shall have executed and delivered to Stepstone an Assumption
of Liabilities dated as of the Exchange Date pursuant to which each HighMark
Fund will assume all of the liabilities of the corresponding Stepstone Fund
existing at the Valuation Time in connection with the transactions contemplated
by this Agreement.
(d) As of the Valuation Time and as of the Exchange Date, all
representations and warranties of HighMark and each HighMark Fund made in this
Agreement are true and correct in all material respects as if made at and as of
such dates, HighMark and each HighMark Fund has complied with all of the
agreements and satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates, and HighMark shall have furnished
to Stepstone a statement, dated the Exchange Date, signed by HighMark's
President (or any Vice President) and Treasurer certifying those facts as of
such dates.
(e) There shall not be any material litigation pending with respect to the
matters contemplated by this Agreement.
(f) Stepstone shall have received an opinion of Ropes & Gray, in form
reasonably satisfactory to Stepstone and dated the Exchange Date, to the effect
that (i) HighMark is a business trust and validly existing in conformity with
the laws of The Commonwealth of Massachusetts, and, to the knowledge of such
counsel, neither HighMark nor any HighMark Fund is required to qualify to do
business as a foreign association in any jurisdiction, (ii) the Shares to be
delivered to Stepstone as provided for by this Agreement are duly authorized and
upon such delivery will be validly issued and will be fully paid and
nonassessable by HighMark and no shareholder of HighMark has any preemptive
right to subscription or purchase in respect thereof, (iii) this Agreement has
been duly authorized, executed and delivered by HighMark and, assuming that the
Prospectus, the Registration Statement and the Proxy Statement comply with the
1933 Act, the 1934 Act and the 1940 Act and assuming due authorization,
execution and delivery of this Agreement by Stepstone, is a valid and binding
obligation of HighMark, (iv) the execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated hereby will not,
violate HighMark's Declaration of Trust, as amended, or Code of Regulations, or
any provision of any agreement known to such counsel to which HighMark or any
HighMark Fund is a party or by which it is bound, it being understood that with
respect to investment restrictions as contained in HighMark's Declaration of
Trust, as amended, Code of Regulations or then-current prospectus or statement
of additional information of each HighMark Fund, such counsel may rely upon a
certificate of an officer of HighMark whose responsibility it is to advise
HighMark with respect to such matters, (v) no consent, approval, authorization
or order of any court or governmental authority is required for the consummation
by HighMark or any HighMark Fund of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and
such as may be required under state securities or blue sky laws and the H-S-R
Act and it being understood that such opinion shall not be deemed to apply to
Stepstone's compliance obligations under the 1933 Act, 1934 Act, 1940 Act, state
securities or blue sky laws and the H-S-R Act; and (vi) the Registration
Statement has become effective under the 1933 Act, and to the best of the
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<PAGE> 19
knowledge of such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the 1933 Act.
(g) Stepstone shall have received an opinion of Ropes & Gray addressed to
Stepstone and each Stepstone Fund in a form reasonably satisfactory to Stepstone
and dated the Exchange Date (which opinion would be based upon certain factual
representations and subject to certain qualifications), with respect to the
matters specified in Section 9(g) of this Agreement.
(h) All proceedings taken by HighMark in connection with the transactions
contemplated by this Agreement and all documents incidental thereto reasonably
shall be satisfactory in form and substance to Stepstone and Morgan, Lewis &
Bockius LLP.
(i) The Registration Statement shall have become effective under the 1933
Act and applicable Blue Sky provisions, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of Stepstone,
contemplated by the Commission or any state regulatory authority.
11. INDEMNIFICATION. (a) The Stepstone Funds will indemnify and hold
harmless HighMark, its trustees and its officers (for purposes of this
subsection, the "Indemnified Parties") against any and all expenses, losses,
claims, damages and liabilities at any time imposed upon or reasonably incurred
by any one or more of the Indemnified Parties in connection with, arising out
of, or resulting from any claim, action, suit or proceeding in which any one or
more of the Indemnified Parties may be involved or with which any one or more of
the Indemnified Parties may be threatened by reason of any untrue statement or
alleged untrue statement of a material fact relating to Stepstone or any
Stepstone Fund contained in the Registration Statement, the Prospectus or the
Proxy Statement or any amendment or supplement to any of the foregoing, or
arising out of or based upon the omission or alleged omission to state in any of
the foregoing a material fact relating to Stepstone or any Stepstone Fund
required to be stated therein or necessary to make the statements relating to
Stepstone or any Stepstone Fund therein not misleading, including, without
limitation, any amounts paid by any one or more of the Indemnified Parties in a
reasonable compromise or settlement of any such claim, action, suit or
proceeding, or threatened claim, action, suit or proceeding made with the prior
consent of Stepstone. The Indemnified Parties will notify Stepstone in writing
within ten days after the receipt by any one or more of the Indemnified Parties
of any notice of legal process or any suit brought against or claim made against
such Indemnified Party as to any matters covered by this Section 11(a).
Stepstone shall be entitled to participate at its own expense in the defense of
any claim, action, suit or proceeding covered by this Section 11(a), or, if it
so elects, to assume at its expense by counsel satisfactory to the Indemnified
Parties the defense of any such claim, action, suit or proceeding, and if
Stepstone elects to assume such defense, the Indemnified Parties shall be
entitled to participate in the defense of any such claim, action, suit or
proceeding at their expense. The Stepstone Funds' obligation under this Section
11(a)
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<PAGE> 20
to indemnify and hold harmless the Indemnified Parties shall constitute a
guarantee of payment so that the Stepstone Funds will pay in the first instance
any expenses, losses, claims, damages and liabilities required to be paid by
them under this Section 11(a) without the necessity of the Indemnified Parties'
first paying the same.
(b) The HighMark Funds will indemnify and hold harmless Stepstone, its
trustees and its officers (for purposes of this subparagraph, the "Indemnified
Parties") against any and all expenses, losses, claims, damages and liabilities
at any time imposed upon or reasonably incurred by any one or more of the
Indemnified Parties in connection with, arising out of, or resulting from any
claim, action, suit or proceeding in which any one or more of the Indemnified
Parties may be involved or with which any one or more of the Indemnified Parties
may be threatened by reason of any untrue statement or alleged untrue statement
of a material fact relating to HighMark or any HighMark Fund contained in the
Registration Statement, the Prospectus or the Proxy Statement, or any amendment
or supplement to any of the foregoing, or arising out of or based upon the
omission or alleged omission to state in any of the foregoing a material fact
relating to HighMark or any HighMark Fund required to be stated therein or
necessary to make the statements relating to HighMark or any HighMark Fund
therein not misleading, including, without limitation, any amounts paid by any
one or more of the Indemnified Parties in a reasonable compromise or settlement
of any such claim, action, suit or proceeding, or threatened claim, action, suit
or proceeding made with the prior consent of HighMark. The Indemnified Parties
will notify HighMark in writing within ten days after the receipt by any one or
more of the Indemnified Parties of any notice of legal process or any suit
brought against or claim made against such Indemnified Party as to any matters
covered by this Section 11(b). HighMark shall be entitled to participate at its
own expense in the defense of any claim, action, suit or proceeding covered by
this Section 11(b), or, if it so elects, to assume at its expense by counsel
satisfactory to the Indemnified Parties the defense of any such claim, action,
suit or proceeding, and, if HighMark elects to assume such defense, the
Indemnified Parties shall be entitled to participate in the defense of any such
claim, action, suit or proceeding at their own expense. The HighMark Funds'
obligation under this Section 11(b) to indemnify and hold harmless the
Indemnified Parties shall constitute a guarantee of payment so that the HighMark
Funds will pay in the first instance any expenses, losses, claims, damages and
liabilities required to be paid by them under this Section 11(b) without the
necessity of the Indemnified Parties' first paying the same.
12. NO BROKER, ETC. Each of HighMark and Stepstone represents that there is
no person who has dealt with it who by reason of such dealings is entitled to
any broker's or finder's or other similar fee or commission arising out of the
transactions contemplated by this Agreement.
13. TERMINATION. HighMark and Stepstone may, by mutual consent of their
respective trustees, terminate this Agreement, and HighMark or Stepstone, after
consultation with counsel and by consent of their respective trustees or an
officer authorized by such trustees, may waive any condition to their respective
obligations hereunder. If the
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<PAGE> 21
transactions contemplated by this Agreement have not been substantially
completed by [date], this Agreement shall automatically terminate on that date
unless a later date is agreed to by HighMark and Stepstone.
Notwithstanding any other provision in this Agreement, in the event
shareholder approval of this Agreement and the transactions contemplated by this
Agreement is obtained with respect to only one or more Stepstone Funds but not
all of the Stepstone Funds, HighMark and Stepstone agree to consummate those
transactions with respect to those Stepstone Funds that have approved this
Agreement and those transactions.
14. RULE 145. Pursuant to Rule 145 under the 1933 Act, HighMark will, in
connection with the issuance of any Shares to any person who at the time of the
transaction contemplated hereby is deemed to be an affiliate of a party to the
transaction pursuant to Rule 145(c), cause to be affixed upon the certificates
issued to such person (if any) a legend as follows:
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT
TO HighMark Funds OR ITS PRINCIPAL UNDERWRITER UNLESS (i) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (ii) IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO HighMark Funds SUCH REGISTRATION IS NOT
REQUIRED."
and, further, HighMark will issue stop transfer instructions to HighMark's
transfer agent with respect to such shares. Stepstone will provide HighMark on
the Exchange Date with the name of any shareholder of the Stepstone Funds who is
to the knowledge of Stepstone an affiliate of Stepstone on such date.
15. COVENANTS, ETC. DEEMED MATERIAL. All covenants, agreements,
representations and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any investigation made by
them or on their behalf.
16. SOLE AGREEMENT; AMENDMENTS. This Agreement supersedes all previous
correspondence and oral communications between the parties regarding the subject
matter hereof, constitutes the only understanding with respect to such subject
matter, may not be changed except by a letter of agreement signed by each party
hereto, and shall be construed in accordance with and governed by the laws of
The Commonwealth of Massachusetts.
17. AGREEMENT AND DECLARATION OF TRUST. The Stepstone Funds is a business
trust organized under Massachusetts law and under a Declaration of Trust, to
which reference is hereby made and a copy of which is on file at the office of
the Secretary of The
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<PAGE> 22
Commonwealth of Massachusetts and elsewhere as required by law, and to any and
all amendments thereto so filed or hereafter filed. The obligations of the
"Stepstone Funds" entered into in the name or on behalf thereof by any of the
Trustees, officers, employees or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, officers, employees,
agents or shareholders of Stepstone personally, but bind only the assets of
Stepstone, and all persons dealing with any of the series or funds of Stepstone,
such as the Stepstone Funds, must look solely to the assets of Stepstone
belonging to such series or funds for the enforcement of any claims against
Stepstone.
The names "HighMark Funds" and "Trustees of HighMark Funds" refer
respectively to HighMark and the Trustees, as trustees but not individually or
personally, acting from time to time under a Declaration of Trust dated March
10, 1987, as amended on July 13, 1987 and July 30, 1987, to which reference is
hereby made and a copy of which is on file at the office of the Secretary of The
Commonwealth of Massachusetts and elsewhere as required by law, and to any and
all amendments thereto so filed or hereafter filed. The obligations of "HighMark
Funds" entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, Shareholders or representatives of
HighMark personally, but bind only the assets of HighMark and all persons
dealing with any series of shares of HighMark such as the HighMark Funds, must
look solely to the assets of HighMark belonging to such series for the
enforcement of any claims against HighMark.
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<PAGE> 23
This Agreement may be executed in any number of counter-parts, each of
which, when executed and delivered, shall be deemed to be an original.
STEPSTONE FUNDS
By:
---------------------------
HIGHMARK FUNDS
By:
----------------------------
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<PAGE> 1
EXHIBIT (6)(c)
Form of Investment Sub-Advisory Agreement between Union Bank of California, NA.,
and Bank of Tokyo-Mitsubishi Trust Company
<PAGE> 2
INVESTMENT SUBADVISORY AGREEMENT
AGREEMENT executed as of April , 1997 by and between UNION BANK of CALIFORNIA,
N.A. (the "Advisor"), and BANK OF TOKYO-MITSUBISHI TRUST COMPANY (the
"SubAdvisor"), a subsidiary of The Bank of Tokyo-Mitsubishi, Ltd., a New York
state chartered bank.
WHEREAS, Advisor is the investment manager for the The HighMark Group (the
"Trust"), an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, Advisor desires to retain SubAdvisor as its agent to furnish investment
advisory services for certain of the Trust's diversified investment portfolios
which are listed on Schedule A attached hereto and made a part hereof (the
"Funds").
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. Appointment. Advisor hereby appoints SubAdvisor to provide certain
sub-investment advisory services to the Funds for the period and on the terms
set forth in this Agreement. SubAdvisor accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
2. Delivery of Documents. Advisor has furnished or will furnish SubAdvisor with
copies properly certified or authenticated of each of the following:
(a) the Trust's Agreement and Declaration of Trust, as filed with
the Secretary of State of the Commonwealth of Massachusetts on March
10, 1987, and all amendments thereto or restatements thereof (such
Declaration, as presently in effect and as it shall from time to
time be amended or restated, is herein called the "Declaration of
Trust");
(b) the Trust's By-Laws and amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing the
appointment of SubAdvisor and approving this Agreement;
(d) the Trust's Notification of Registration of Form N-8A under the
Investment Company Act of 1940 (the "1940 Act") as filed with the
Securities and Exchange Commission (the "SEC") on [ ] and all
amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act") (File No. 33-12608)
and under the 1940 Act as filed with the SEC and all amendments
thereto insofar as
1
<PAGE> 3
such Registration Statement and such amendments relate to the Funds;
(f) the Trust's most recent prospectuses and Statement of Additional
Information for the Funds (such prospectuses and Statement of
Additional Information, as presently in effect, and all amendments
and supplements thereto are herein collectively called the
"Prospectus"); and
(g) such other materials and documents as SubAdvisor shall
reasonably request.
Advisor will furnish SubAdvisor from time to time with copies of all amendments
of or supplements to the foregoing.
3. Management. Subject always to the supervision of the Trust's Board of
Trustees and Advisor, SubAdvisor will furnish an investment program in respect
of, and make investment decisions for, all assets of the Funds and place all
orders for the purchase and sale of securities, all on behalf of the Funds. In
the performance of its duties, SubAdvisor will satisfy its fiduciary duties to
the Funds (as set forth in Section 8 below), and will monitor the Funds
investments, and will comply with the provisions of the Trust's Declaration of
Trust and By-Laws, as amended from time to time, and the stated investment
objectives, policies and restrictions of the Funds. SubAdvisor and Advisor will
each make its officers and employees available to the other from time to time at
reasonable times to review investment policies of the Funds and to consult with
each other regarding the investment affairs of the Funds. SubAdvisor shall also
make itself reasonably available to the Board of Trustees at such times as the
Board of Trustees shall request.
SubAdvisor represents and warrants that it is in compliance with all applicable
Rules and Regulations of the SEC pertaining to its investment advisory
activities and agrees that it:
(a) will use the same skill and care in providing such services as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) will conform with all applicable Rules and Regulations of the
SEC pertaining to its investment advisory activities;
(c) will place orders pursuant to its investment determinations for
the Funds either directly with the issuer or with any broker or
dealer. In providing the Funds with investment supervision, the
SubAdvisor will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of
this policy, the SubAdvisor may consider the financial
responsibility research and investment information
2
<PAGE> 4
and other services provided by brokers or dealers who may effect or
be a party to any such transaction or other transactions to which
the SubAdvisor's other clients may be a party. It is understood that
it is desirable for the Funds that the SubAdvisor have access to
supplemental investment and market research and security and
economic analysis provided by brokers who may execute brokerage
transactions at a higher cost to the Funds than may result when
allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the
SubAdvisor is authorized to place orders for the purchase and sale
of securities for the Funds with such brokers, subject to such
guidelines as shall be established by the Advisor and reviewed by
the Trust's Board of Trustees from time to time with respect to the
extent and continuation of this practice. It is understood that the
services provided by such brokers may be useful to the SubAdvisor in
connection with the SubAdvisor's services to other clients.
On occasions when the SubAdvisor deems the purchase or sale of a security to be
in the best interest of the Funds as well as other clients of the SubAdvisor,
the SubAdvisor, to the extent permitted by applicable laws and regulations, may,
but shall be under no obligation to, aggregate the securities to be so purchased
or sold in order to obtain the most favorable price or lower brokerage
commissions and 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 SubAdvisor in the manner it considers to be the most equitable
and consistent with its fiduciary obligations to the Funds and to such other
clients. In no instance will portfolio securities be purchased from or sold to
Advisor, SubAdvisor, SEI Financial Services Company or any affiliated person of
either the Trust, Advisor, SEI Financial services Company or SubAdvisor that
Advisor has identified to the SubAdvisor in writing, except as may be permitted
under the 1940 Act;
(d) will report regularly to Advisor and will make appropriate
persons available for the purpose of reviewing at reasonable times
with representatives of Advisor and the Board of Trustees the
management of the Funds, including, without limitation, review of
the general investment strategy of the Funds, the performance of the
Funds in relation to standard industry indices and general
conditions affecting the marketplace and will provide various other
reports from time to time as reasonably requested by Advisor;
(e) will maintain books and records with respect to the Trust's
securities transactions required by subparagraphs (b)(5), (6), (7),
(9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940
Act and will furnish Advisor and the Trust's Board of Trustees such
periodic and special reports as the Board of Trustees may request;
(f) will act upon instructions form Advisor not inconsistent with
the fiduciary duties hereunder; and
3
<PAGE> 5
(g) will treat confidentially and as proprietary information of the
Trust all such records and other information relative to the Trust
maintained by the SubAdvisor, and will not use such records and
information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be withheld where
SubAdvisor may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Trust.
SubAdvisor shall have the right to execute and deliver, or cause its nominee to
execute and deliver, all proxies and notices of meetings and other notices
affecting or relating to the securities of the Funds.
4. Books and Records. In compliance with the requirements of Rule 31a-3 under
the 1940 Act, SubAdvisor hereby agrees that all records which it maintains for
the Trust are the property of the Trust and further agrees to surrender promptly
to the Trust any of such records upon the Trust's request. SubAdvisor further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
the records required to be maintained by subparagraphs (b)(5), (6), (7), (9),
(10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act. SubAdvisor may
delegate its responsibilities under this Section to affiliates that perform
custody and/or fund accounting services for the Funds, which delegation shall
not, however, relieve the SubAdvisor of its responsibilities under this
paragraph 4.
5. Expenses. During the terms of this Agreement, SubAdvisor will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for the Trust.
6. Compensation. For the services provided and the expenses assumed pursuant to
this Agreement, Advisor will pay the SubAdvisor, and the SubAdvisor agrees to
accept as full compensation therefor, a sub-advisory fee, accrued daily and
payable monthly, in accordance with Schedule B hereto. From time to time,
SubAdvisor may agree to waive or reduce some or all of the compensation to which
it is entitled under this Agreement.
7. Services to Others. Advisor understands, and has advised the Trust's Board of
Trustees, that SubAdvisor now acts, and may in the future act, as an investment
adviser to fiduciary and other managed accounts, and as investment advisor,
sub-investment adviser, and/or administrator to other investment companies.
Advisor has no objection to SubAdvisor's acts in such capacities, as long as
such services do not impair the services rendered to Advisor or the Trust.
Advisor recognizes, and has advised the Trust's Board of Trustees, that in some
4
<PAGE> 6
cases this procedure may adversely affect the size of the position that the
Funds may obtain in a particular security. In addition, Advisor understands, and
has advised the Trust's Board of Trustees, that the persons employed by
SubAdvisor to assist in SubAdvisor's duties under this Agreement will not devote
their full time to such service and nothing contained in this Agreement will be
deemed to limit or restrict the right of SubAdvisor or any of its affiliates to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
8. Limitation of Liability. The SubAdvisor shall not be liable for any error or
judgment or for any loss suffered by the Funds or Advisor in connection with
performance of its obligations under this Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages shall be limited to the period and
the amount set forth in Section 36(b)(3) of the 1940 Act), or a loss resulting
from willful misfeasance, bad faith or gross negligence on the SubAdvisor's part
in the performance of its duties or from reckless disregard of its obligations
and duties under this Agreement, except as may otherwise be provided under
provisions or applicable state law which cannot be waived or modified hereby.
9. Indemnification. Advisor and SubAdvisor each agree to indemnify the other
against any claim against, loss or liability to such other party (including
reasonable attorneys' fees) arising out of any action on the part of the
indemnifying party which constitutes willful misfeasance, bad faith or gross
negligence.
10. Duration and Termination. This Agreement will become effective as of the
date hereof, provided that it has been approved by vote of a majority of the
outstanding voting securities of the Funds in accordance with the requirements
under the 1940 Act, and, unless sooner terminated as provided herein, will
continue in effect for one year.
Thereafter, if not terminated, this Agreement will continue in effect for the
Funds for successive periods of 12 months, each ending on the day preceding the
anniversary of the Agreement's effective date of each year, provided that such
continuation is specifically approved at least annually (a) by the vote of a
majority of those members of the Trust's Board of Trustees who are not
interested persons of the Trust, SubAdvisor, or Advisor, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by the vote
of a majority of the Trust's Board of Trustees or by the vote of majority of all
votes attributable to the outstanding Shares of the Funds. Notwithstanding the
foregoing, this Agreement may be terminated as to the Funds at any time, without
the payment of any penalty, on sixty (60) day's written notice by Advisor or by
SubAdvisor. This Agreement will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of the outstanding
voting securities", "interested persons" and "assignment" have the same meaning
of such terms in
5
<PAGE> 7
the 1940 Act.)
11. Amendment of this Agreement. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
12. SubAdvisor Information. During the terms of this Agreement, Advisor agrees
to furnish the SubAdvisor at SubAdvisor's principal office all prospectuses,
proxy statements, reports to stockholders, sales literature or other materials
prepared for distribution to stockholders of the Funds, the Trust or the public
that refer to the SubAdvisor or its clients in any way prior to use thereof and
not to use material if the SubAdvisor reasonably objects in writing within five
business days (or such other period as may be mutually agreed) after receipt
thereof. The SubAdvisor's right to object to such materials is limited to the
portions of such materials that expressly relate to the SubAdvisor, its services
and its clients. The Advisor agrees to use its reasonable best efforts to ensure
that materials prepared by its employees or agents or its affiliates that refer
to the SubAdvisor or its clients in any way are consistent with those materials
previously approved by the SubAdvisor as referenced in the first sentence of
this paragraph. Sales literature may be furnished to the SubAdvisor by
first-class or overnight mail, facsimile transmission equipment or hand
delivery.
13. Severability. Should any part of this Agreement be held invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
14. Notices. Any notice, advice or report to be given pursuant to this Agreement
shall be delivered or mailed:
To Advisor at:
Union Bank of California, N.A.
530 "B" Street
San Diego, CA 92101
Attention: Clark Gates, Senior Vice President
To the SubAdvisor at:
The Bank of Tokyo-MitsubishiTrust Company
100 Broadway
New York, NY 10005
6
<PAGE> 8
Attention: Harold C. Elliot, CIO
To the Trust or the Funds at:
The HighMark Group
1 Freedom Valley Road
Oaks, Pennsylvania 19456
Attention: Legal Department
15. Change of Law. Where the effect of a requirement of the 1940 Act reflected
in any provision of this Agreement is altered by a rule, regulation or order of
the Commission, whether of special or general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
16. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement is held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement will not be affected thereby. This
Agreement will be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and will be governed by the laws of the
Commonwealth of Massachusetts.
7
<PAGE> 9
The name "The HighMark Group" and "Trustees of the The HighMark Group" refer
respectively to the Trust created by, and the Trustees, as trustees but not
individually or personally, acting from time to time under, the Declaration of
the Trust, to which reference is hereby made and copy of which is on file at the
office of the Secretary of State of the Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of "The HighMark Group" entered in the name or
on behalf thereof by any of the Trustees, representatives or agents are made not
individually but only in such capacities and are not binding upon any of the
Trustees, Shareholders or representatives of the Trust personally, but bind only
the assets of the Trust, and persons dealing with the Funds must look solely to
the assets of the Trust belonging to such Funds for the enforcement of any
claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officer designated below as of the day and year first above
written.
UNION BANK OF CALIFORNIA, N.A.
By:_________________________________
Name:_______________________________
Title:________________________________
THE BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By:_________________________________
Name:_______________________________
Title:________________________________
8
<PAGE> 10
SCHEDULE A
THE HIGHMARK GROUP
Blue Chip Growth Fund
Convertible Securities Fund
Emerging Growth Fund
Government Securities Fund
9
<PAGE> 11
SCHEDULE B
SUB ADVISOR COMPENSATION
1. Government Securities Fund
Advisory Fee: 50 b.p.
Subadvisory Fee: 20 b.p.
2. Convertible Securities Fund
Advisory Fee: 60 b.p.
Subadvisory Fee: 30 b.p.
3. Blue Chip Growth Fund
Advisory Fee: 60 b.p.
Subadvisory Fee: 30 b.p.
4. Emerging Growth Fund
Advisory Fee: 80 b.p.
Subadvisory Fee: 50 b.p.
10
<PAGE> 1
EXHIBIT (6)(d)
Form of Investment Sub-Advisory Agreement between Union Bank of California, NA.,
and Tokyo-Mitsubishi Asset Management (UK) Ltd.
<PAGE> 2
EXHIBIT 6(d)
INVESTMENT SUBADVISORY AGREEMENT
AGREEMENT executed as of April , 1997 by and between UNION BANK OF CALIFORNIA,
N.A. (the "Advisor"), and TOKYO-MITSUBISHI ASSET MANAGEMENT (UK), LTD. (the
"SubAdvisor"), a subsidiary of Bank of Tokyo, Ltd.
WHEREAS, Advisor is the investment manager for The HighMark Group (the "Trust"),
an open-end management investment company registered under the Investment
Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, Advisor desires to retain SubAdvisor as its agent to furnish investment
advisory services for the Trust's International Equity investment portfolio (the
"Fund").
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. Appointment. Advisor hereby appoints SubAdvisor to provide certain
sub-investment advisory services to the Fund for the period and on the terms set
forth in this Agreement. SubAdvisor accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
2. Delivery of Documents. Advisor has furnished or will furnish SubAdvisor with
copies properly certified or authenticated of each of the following:
(a) the Trust's Agreement and Declaration of Trust, as filed with the
Secretary of State of the Commonwealth of Massachusetts on March 10,
1987, and all amendments thereto or restatements thereof (such
Declaration, as presently in effect and as it shall from time to time
be amended or restated, is herein called the "Declaration of Trust");
(b) the Trust's By-Laws and amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing the
appointment of SubAdvisor and approving this Agreement;
(d) the Trust's Notification of Registration of Form N-8A under the
Investment Company Act of 1940 (the "1940 Act") as filed with the
Securities and Exchange Commission (the "SEC") on [ ] and all
amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act") (File No. 33-12608) and
under the 1940 Act as filed with the SEC and all amendments thereto
insofar as such Registration Statement and such amendments relate to
<PAGE> 3
the Funds;
(f) the Trust's most recent prospectuses and Statement of Additional
Information for the Funds (such prospectuses and Statement of
Additional Information, as presently in effect, and all amendments and
supplements thereto are herein collectively called the "Prospectus");
and
(g) such other materials and documents as SubAdvisor shall reasonably
request.
Advisor will furnish SubAdvisor from time to time with copies of all amendments
of or supplements to the foregoing.
3. Management. Subject always to the supervision of the Trust's Board of
Trustees and Advisor, SubAdvisor will furnish an investment program in respect
of, and make investment decisions for the assets of the Fund entrusted to it
hereunder and place all orders for the purchase and sale of securities, all on
behalf of the Fund. In the performance of its duties, SubAdvisor will satisfy
its fiduciary duties to the Fund (as set forth in Section 8 below), and will
monitor the Fund investments, and will comply with the provisions of the Trust's
Declaration of Trust and By-Laws, as amended from time to time, and the stated
investment objectives, policies and restrictions of the Fund. SubAdvisor and
Advisor will each make its officers and employees available to the other from
time to time at reasonable times to review investment policies of the Fund and
to consult with each other regarding the investment affairs of the Fund.
SubAdvisor shall also make itself reasonably available to the Board of Trustees
at such times as the Board of Trustees shall request.
SubAdvisor represents and warrants that it is in compliance with all applicable
Rules and Regulations of the SEC pertaining to its investment advisory
activities and agrees that it:
(a) will use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) will maintain registration with the SEC as an investment adviser
under the Investment Advisers Act of 1940 and will conform with all
applicable Rules and Regulations of the SEC pertaining to its
investment advisory activities;
(c) will place orders pursuant to its investment determinations for the
Fund either directly with the issuer or with any broker or dealer. In
providing the Funds with investment supervision, the SubAdvisor will
give primary consideration to securing the most favorable price and
efficient execution. Within the framework of this policy, the
SubAdvisor may consider the financial responsibility, research and
investment information and other services provided by brokers or
dealers who may effect or be a party to any such transaction or other
transactions to which the SubAdvisor's other clients may be a party. it
is understood that it is desirable for the Fund that the SubAdvisor
have access to supplemental investment and market research and security
and economic analysis provided by brokers who may execute brokerage
transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking the most
favorable price and efficient
2
<PAGE> 4
execution. Therefore, the SubAdvisor is authorized to place orders for
the purchase and sale of securities for the Fund with such brokers,
subject to such guidelines as shall be established by the Advisor and
reviewed by the Trust's Board of Trustees from time to time with
respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers may be useful to
the SubAdvisor in connection with the SubAdvisor's services to other
clients.
On occasions when the SubAdvisor deems the purchase or sale of
a security to be in the best interest of the Fund as well as other clients of
the SubAdvisor, the SubAdvisor, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be so purchased or sold in order to obtain the most favorable price or lower
brokerage commissions and 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 SubAdvisor in the manner it considers to be the
most equitable and consistent with its fiduciary obligations to the Fund and to
such other clients. In no instance will portfolio securities be purchased from
or sold to Advisor, SubAdvisor, SEI Financial Services Company or any affiliated
person of either the Trust, Advisor, SEI Financial Services Company or
SubAdvisor that Advisor has identified to the SubAdvisor in writing, except as
may be permitted under the 1940 Act;
(d) will report regularly to Advisor and will make appropriate persons
available for the purpose of reviewing at reasonable times with
representatives of Advisor and the Board of Trustees the management of
the Fund, including, without limitation, review of the general
investment strategy of the Fund, the performance of the Fund in
relation to standard industry indices and general conditions affecting
the marketplace and will provide various other reports from time to
time as reasonably requested by Advisor;
(e) will maintain books and records with respect to the Trust's
securities transactions required by subparagraphs (b)(5), (6), (7),
(9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act
and will furnish Advisor and the Trust's Board of Trustees such
periodic and
3
<PAGE> 5
special reports as the Board of Trustees may request;
(f) will act upon instructions form Advisor not inconsistent with the
fiduciary duties hereunder; and
(g) will treat confidentially and as proprietary information of the
Trust all such records and other information relative to the Trust
maintained by the SubAdvisor, and will not use such records and
information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification
to and approval in writing by the Trust, which approval shall not be
unreasonably withheld and may not be withheld where SubAdvisor may be
exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
SubAdvisor shall have the right to execute and deliver, or cause its nominee to
execute and deliver, all proxies and notices of meetings and other notices
affecting or relating to the securities of the Fund.
4. Books and Records. In compliance with the requirements of Rule 31a-3 under
the 1940 Act, SubAdvisor hereby agrees that all records which it maintains for
the Trust are the property of the Trust and further agrees to surrender promptly
to the Trust any of such records upon the Trust's request. SubAdvisor further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
the records required to be maintained by subparagraphs (b)(5), (6), (7), (9),
(10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act. SubAdvisor may
delegate its responsibilities under this Section to affiliates that perform
custody and/or fund accounting services for the Fund, which delegation shall
not, however, relieve the SubAdvisor of its responsibilities under this
paragraph 4.
5. Expenses. During the terms of this Agreement, SubAdvisor will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for the Trust.
6. Compensation. For the services provided and the expenses assumed pursuant to
this Agreement, Advisor will pay the SubAdvisor, and the SubAdvisor agrees to
accept as full compensation therefor, a sub-advisory fee, accrued daily and
payable monthly, in accordance with Schedule A hereto. The fee will be
calculated based on the average monthly market value of the assets under the
Sub-Advisor's management and will be paid to the Sub-Advisor monthly. From time
to time, SubAdvisor may agree to waive or reduce some or all of the compensation
to which it is entitled under this Agreement.
4
<PAGE> 6
7. Services to Others. Advisor understands, and has advised the Trust's Board of
Trustees, that SubAdvisor now acts, and may in the future act, as an investment
adviser to fiduciary and other managed accounts, and as investment advisor,
sub-investment adviser, and/or administrator to other investment companies.
Advisor has no objection to SubAdvisor's acts in such capacities, as long as
such services do not impair the services rendered to Advisor or the Trust.
Advisor recognizes, and has advised the Trust's Board of Trustees, that in some
cases this procedure may adversely affect the size of the position that the Fund
may obtain in a particular security. In addition, Advisor understands, and has
advised the Trust's Board of Trustees, that the persons employed by SubAdvisor
to assist in SubAdvisor's duties under this Agreement will not devote their full
time to such service and nothing contained in this Agreement will be deemed to
limit or restrict the right of SubAdvisor or any of its affiliates to engage in
and devote time and attention to other businesses or to render services of
whatever kind or nature.
8. Limitation of Liability. The SubAdvisor shall not be liable for any error or
judgment or for any loss suffered by the Fund or Advisor in connection with
performance of its obligations under this Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages shall be limited to the period and
the amount set forth in Section 36(b) (3) of the 1940 Act), or a loss resulting
from willful misfeasance, bad faith or gross negligence on the SubAdvisor's part
in the performance of its duties or from reckless disregard of its obligations
and duties under this Agreement, except as may otherwise be provided under
provisions or applicable state law which cannot be waived or modified hereby.
9. Indemnification. Advisor and SubAdvisor each agree to indemnify the other
against any claim against, loss or liability to such other party (including
reasonable attorneys' fees) arising out of any action on the part of the
indemnifying party which constitutes willful misfeasance, bad faith or gross
negligence.
10. Duration of Termination. This Agreement will become effective as of the date
hereof, provided that it has been approved by vote of a majority of the
outstanding voting securities of the Fund in accordance with the requirements
under the 1940 Act, and, unless sooner terminated as provided herein, will
continue in effect for one year.
Thereafter, if not terminated, this Agreement will continue in effect for the
Funds for successive periods of 12 months, each ending on the day preceding the
anniversary of the Agreement's effective date of each year, provided that such
continuation is specifically approved at least annually (a) by the vote of a
majority of those members of the Trust's Board of Trustees who are not
interested persons of the Trust, SubAdvisor, or Advisor, cast in person at a
meeting called for the
5
<PAGE> 7
purpose of voting on such approval, and (b) by the vote of a majority of the
Trust's Board of Trustees or by the vote of majority of all votes attributable
to the outstanding Shares of the Fund. Notwithstanding the foregoing, this
Agreement may be terminated as to the Funds at any time, without the payment of
any penalty, on sixty (60) day's written notice by Advisor or by SubAdvisor.
This Agreement will immediately terminate in the event of its assignment. (As
used in this Agreement, the terms "majority of the outstanding voting
securities", "interested persons" and "assignment" have the same meaning of such
terms in the 1940 Act.)
11. Amendment of this Agreement. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
12. SubAdvisor Information. During the terms of this Agreement, Advisor agrees
to furnish the SubAdvisor at SubAdvisor's principal office all prospectuses,
proxy statements, reports to stockholders, sales literature or other materials
prepared for distribution to stockholders of the Fund, the Trust or the public
that refer to the SubAdvisor or its clients in any way prior to use thereof and
not to use material if the SubAdvisor reasonably objects in writing within five
business days (or such other period as may be mutually agreed) after receipt
thereof. The SubAdvisor's right to object to such materials is limited to the
portions of such materials that expressly relate to the SubAdvisor, its services
and its clients. The Advisor agrees to use its reasonable best efforts to ensure
that materials prepared by its employees or agents or its affiliates that refer
to the SubAdvisor or its clients in any way are consistent with those materials
previously approved by the SubAdvisor as referenced in the first sentence of
this paragraph. Sales literature may be furnished to the SubAdvisor by
first-class or overnight mail, facsimile transmission equipment or hand
delivery.
13. Severability. Should any part of this Agreement be held invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
14. Notices. Any notice, advice or report to be given pursuant to this Agreement
shall be delivered or mailed:
To Advisor at:
Union Bank of California, N.A.
530 "B" Street
San Diego, CA 92101
Attention: Clark Gates, Senior Vice President
6
<PAGE> 8
To the SubAdvisor at:
Tokyo-Mitsubishi Asset Management (UK), Ltd.
12-15 Finsbury Circus
London, EC2M 7BT
England
Attention: James Wignall, Company Secretary
To the Trust or the Fund at:
The HighMark Group
1 Freedom Valley Road
Oaks, Pennsylvania 19456
Attention: Legal Department
15. Change of Law. Where the effect of a requirement of the 1940 Act reflected
in any provision of this Agreement is altered by a rule, regulation or order of
the Commission, whether of special or general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
16. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. if any provision of this
Agreement is held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement will not be affected thereby. This
Agreement will be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and will be governed by the laws of the
Commonwealth of Massachusetts.
7
<PAGE> 9
The name "The HighMark Group" and "Trustees of the The HighMark Group" refer
respectively to the Trust created by, and the Trustees, as trustees but not
individually or personally, acting from time to time under, the Declaration of
the Trust, to which reference is hereby made and copy of which is on file at the
office of the Secretary of State of the Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of "The HighMark Group" entered in the name or
on behalf thereof by any of the Trustees, representatives or agents are made not
individually but only in such capacities and are not binding upon any of the
Trustees, Shareholders or representatives of the Trust personally, but bind only
the assets of the Trust, and persons dealing with the Funds must look solely to
the assets of the Trust belonging to such Funds for the enforcement of any
claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officer designated below as of the day and year first above
written.
UNION BANK OF CALIFORNIA, N.A.
By:_________________________________
Name:_______________________________
Title:________________________________
TOKYO-MITSUBISHI ASSET MANAGEMENT (UK),
LTD.
By:_________________________________
Name:_______________________________
Title:________________________________
8
<PAGE> 10
SCHEDULE A
HIGHMARK INTERNATIONAL EQUITY FUND
Advisory Fee: 95 b.p. (will waive 20 b.p.)
Subadvisory Fee: 30 b.p.
9
<PAGE> 11
SCHEDULE B
SUBADVISOR PERFORMANCE STANDARDS
1. Outperform the Morgan Stanley Capital International (MSCI)
European Index.
10
<PAGE> 1
EXHIBIT (14)(a)
Consent of Deloitte & Touche LLP
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement under the Securities Act
of 1933, filed under Registration Statement No. 033-12608 of our report dated
September 13, 1996, relating to The HighMark Group, including Diversified
Obligations Fund, U.S. Government Obligations Fund, 100% U.S. Treasury
Obligations Fund, California Tax-Free Fund, Bond Fund, Income Equity Fund,
Balanced Fund and Growth Fund, incorporated by reference in the Statement of
Additional Information and to the reference to us under the caption "Financial
Statements", in such Registration Statement.
DELOITTE & TOUCHE LLP
Dayton, Ohio
January 24, 1997
<PAGE> 1
EXHIBIT (14)(b)
Consent of Coopers & Lybrand L.L.P.
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our Firm under the caption "Financial
Highlights" in the Prospectuses for Retail Shares and in the Prospectuses
for Fiduciary Shares of the Diversified Money Market Fund, U.S. Government
Obligations Money Market Fund, 100% U.S. Treasury Obligations Money Market
Fund, California Tax-Free Money Market Fund, Bond Fund, Income Equity Fund,
Balanced Fund, and Growth Fund included in the Registration Statement on Form
N-14 of The Highmark Group (File No. 33-12608). We also consent to the
reference to our Firm under the caption "Financial Statements" in the
Prospectus/Proxy Statement in the Registration Statement on Form N-14 (File
No. 33-12608).
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
January 24, 1997
<PAGE> 1
EXHIBIT (14)(c)
Consent of Ropes & Gray
<PAGE> 2
CONSENT OF COUNSEL
We hereby consent to the use of our name and the references to our
firm included in or made a part of the Registration Statement of HighMark Funds
on Form N-14 under the Securities Act of 1933, as amended.
/s/ Ropes & Gray
Ropes & Gray
Washington, D.C.
January 27, 1997
<PAGE> 1
EXHIBIT (16)
Executed Powers of Attorney
<PAGE> 2
POWER OF ATTORNEY
The undersigned, being an Officer of The HighMark Group (the "Fund"), does
hereby constitute and appoint Stephen G. Mintos, Cynthia L. Lindsey, Martin E.
Lybecker and Francoise M. Haan, each individually, his true and lawful attorneys
and agents, with power of substitution or resubstitution, to do any and all acts
and things and to execute any and all instruments that said attorneys and
agents, each individually, may deem necessary or advisable or which may be
required to enable the Fund to comply with the Investment Company Act of 1940,
as amended, and the Securities Act of 1933, as amended ("Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, and in connection with the filing and effectiveness of any registration
statement or statement of the Fund pursuant to said Acts and any and all
amendments thereto (including post-effective amendments), including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as an officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, any Notification of Registration under the
Investment Company Act of 1940 and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
thereof.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Michael S. Sakala Assistant Treasurer November 7, 1996
- ---------------------
Michael Sakala
</TABLE>
<PAGE> 3
POWER OF ATTORNEY
The undersigned, each being a Trustee and, in certain cases, an Officer of
The HighMark Group (the "Fund"), does hereby constitute and appoint Stephen G.
Mintos, Cynthia L. Lindsey, Martin E. Lybecker and John M. Loder, each
individually, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments that said attorneys and agents, each individually, may
deem necessary or advisable or which may be required to enable the Fund to
comply with the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended ("Acts"), and any rules, regulations or requirements of
the Securities and Exchange Commission in respect thereof, and in connection
with the filing and effectiveness of any registration statement or statement of
the Fund pursuant to said Acts and any and all amendments thereto (including
post-effective amendments), including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned as a Trustee and/or officer of the Fund any and all
such amendments filed with the Securities and Exchange Commission under said
Acts, any Notification of Registration under the Investment Company Act of 1940
and any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Stephen G. Mintos Chairman of the November 22, 1994
- -------------------------- Board, Trustee and
Stephen G. Mintos
</TABLE>
-1-
<PAGE> 4
<TABLE>
<S> <C> <C>
/s/ Cynthia L. Lindsey President November 22, 1994
- ---------------------- Vice President and
Cynthia L. Lindsey and Treasurer
/s/ Kenneth B. Quintenz Trustee November 22, 1994
- -----------------------
Kenneth B. Quintenz
/s/ Thomas L. Braje Trustee November 22, 1994
- -------------------
Thomas L. Braje
/s/ David A. Goldfarb Trustee November 22, 1994
- ---------------------
David A. Goldfarb
/s/ Joseph C. Jaeger Trustee November 22, 1994
- --------------------
Joseph C. Jaeger
/s/ Frederick J. Long Trustee November 22, 1994
- ---------------------
Frederick J. Long
</TABLE>
-2-
<PAGE> 1
EXHIBIT (17)(a)
Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940
for the Registrant dated September 27, 1996
<PAGE> 2
As filed with the Securities and Exchange Commission
on December 13, 1996
Registration Nos. 33-12608 and 811-5059
---------------------------------------
----------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 19 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT [X]
COMPANY ACT OF 1940
Amendment No. 22 [X]
HIGHMARK FUNDS
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
---------------------------------------
(Address of principal executive offices)
(800) 433-6884
--------------
(Registrant's telephone number, including area code)
Name and address of agent for service:
--------------------------------------
Martin E. Lybecker, Esq.
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b), or
[ ] on November 15, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on [date] pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on [date] pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
post-effective amendment No. ____ filed on _______________________ .
Pursuant to Rule 24f-2(a) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its shares of
beneficial interest under the Securities Act of 1933. The Registrant filed a
Rule 24f-2 Notice with respect to the Registrant's fiscal year ended July 31,
1996 on September 27, 1996.
<PAGE> 1
EXHIBIT (17)(b)
Prospectuses and Statement of Additional Information for HighMark Funds
<PAGE> 2
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
HIGHMARK EQUITY FUNDS
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities How to Purchase Shares; Exchange
Privileges; Redemption of Shares;
Dividends; Federal Taxation; Service
Arrangements--Administrator; Distributor;
The Distribution Plan; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
7. Purchase of Securities Being Offered How to Purchase Shares; Exchange
Privileges; Service Arrangements--
Administrator; Distributor; The
Distribution Plan
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
-2-
<PAGE> 4
HIGHMARK FUNDS
EQUITY FUNDS
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's:
- Income Equity Fund
- Value Momentum Fund
- Growth Fund
- Emerging Growth Fund
RETAIL SHARES
HighMark's Retail Shares are offered to investors who are not fiduciary clients
of Union Bank of California, N.A., and who are not otherwise eligible for
HighMark's Fiduciary Shares.
This Prospectus sets forth concisely the information about HighMark and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-800-734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference. This Prospectus relates only to the Retail Shares of the Equity
Funds. Interested persons who wish to obtain a prospectus for the other Funds of
HighMark may contact the Distributor at the above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
- --------------------------------------------------------------------------------
[_______________, 1997]
Retail Shares
<PAGE> 5
SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Retail Shares of the Income Equity, Value Momentum, Growth, and Emerging Growth
Funds (each a "Fund" and sometimes referred to in this prospectus as the "Equity
Funds.") This summary is qualified in its entirety by reference to the more
detailed information provided elsewhere in the Prospectus and in the Statement
of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE INCOME EQUITY FUND seeks
investments in equity securities that provide current income through the regular
payment of dividends, with the goal that the Fund will have a high current yield
and a low level of price volatility; opportunity for long-term growth of asset
value is a secondary consideration. THE VALUE MOMENTUM FUND seeks long-term
capital growth with a secondary objective of income. THE GROWTH FUND seeks
long-term capital appreciation through investments in equity securities; the
production of current income is an incidental objective. THE EMERGING GROWTH
FUND seeks long-term growth of capital by investing in a diversified portfolio
of equity securities of small capitalization, emerging growth companies. (See
"INVESTMENT OBJECTIVES.")
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? Each of the Funds primarily invests,
consistent with its investment objective, in equity securities including common
stocks and securities convertible into common stocks. Each Fund may also invest
consistent with its investment objective and investment policies in certain
other instruments. (See "INVESTMENT POLICIES.")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. Each of the Funds may purchase common stocks and other
equity securities that are volatile and which may fluctuate in value more than
other types of investments. Values of fixed income securities and,
correspondingly, share prices of Funds invested in such securities, tend to vary
inversely with interest rates, and may be affected by other market and economic
factors as well. In addition, the securities of the emerging growth companies in
which the Emerging Growth Fund may invest may be less liquid, and subject to
more abrupt or erratic market movements, than securities of larger, more
established growth companies. ( See "Risk Factors.")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The
Advisor.")
-2-
<PAGE> 6
WHO IS THE SUB-ADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
Sub-Advisor to the Emerging Growth Fund. (See "The Sub-Advisor.")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator.")
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian.")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor.")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective (plus any applicable sales charge). Redemption orders must be placed
prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day
for the order to be effective that day. (See "HOW TO PURCHASE SHARES" and
"REDEMPTION OF SHARES.")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Funds is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS.")
-3-
<PAGE> 7
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
SUMMARY...........................................................................................................2
EQUITY FUNDS FEE TABLE............................................................................................6
FINANCIAL HIGHLIGHTS..............................................................................................8
FUND DESCRIPTION.................................................................................................13
INVESTMENT OBJECTIVES............................................................................................13
INVESTMENT POLICIES..............................................................................................14
Income Equity Fund..........................................................................................14
Value Momentum Fund.........................................................................................14
Emerging Growth Fund........................................................................................15
GENERAL..........................................................................................................15
Money Market Instruments....................................................................................15
Illiquid and Restricted Securities..........................................................................16
Lending of Portfolio Securities.............................................................................16
Other Investments...........................................................................................16
Risk Factors................................................................................................17
INVESTMENT LIMITATIONS...........................................................................................18
Portfolio Turnover..........................................................................................19
HOW TO PURCHASE SHARES...........................................................................................19
How to Purchase By Mail.....................................................................................20
How to Purchase By Wire.....................................................................................20
How to Purchase through an Automatic Investment Plan ("AIP")................................................20
How to Purchase Through Financial Institutions..............................................................21
Sales Charges...............................................................................................21
Letter of Intent............................................................................................22
Rights of Accumulation......................................................................................22
Sales Charge Waivers........................................................................................23
Reductions for Qualified Groups ............................................................................24
EXCHANGE PRIVILEGES..............................................................................................25
</TABLE>
-4-
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C>
REDEMPTION OF SHARES.............................................................................................26
By Mail.....................................................................................................26
Telephone Transactions......................................................................................26
Systematic Withdrawal Plan ("SWP")..........................................................................27
Other Information Regarding Redemptions.....................................................................27
DIVIDENDS........................................................................................................28
FEDERAL TAXATION.................................................................................................28
SERVICE ARRANGEMENTS.............................................................................................29
Investment Advisor..........................................................................................29
Administrator...............................................................................................31
The Transfer Agent..........................................................................................32
Distributor.................................................................................................32
The Distribution Plan.......................................................................................32
Banking Laws................................................................................................33
Custodian...................................................................................................34
GENERAL INFORMATION..............................................................................................34
Description of HighMark & Its Shares........................................................................34
Performance Information.....................................................................................34
Miscellaneous...............................................................................................35
DESCRIPTION OF PERMITTED INVESTMENTS.............................................................................36
</TABLE>
-5-
<PAGE> 9
<TABLE>
<CAPTION>
EQUITY FUNDS FEE TABLE
Income Equity Value Momentum Growth Emerging
Fund Fund Fund Growth Fund
---- ---- ---- -----------
Retail Retail Retail Retail
Shares Shares Shares Shares
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 4.50% 4.50% 4.50% 4.50%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0% 0% 0% 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0% 0% 0% 0%
percentage of original purchase
price or redemption proceeds, as
applicable)(b)
Redemption Fees (as a percentage 0% 0% 0% 0%
of amount redeemed, if
applicable)(c)
Exchange Fee(a) $ 0 $ 0 $ 0 $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60% 0.60% 0.60% 0.80%
12b-1 Fees 0.25% 0.25% 0.25% 0.25%
Other Expenses (after voluntary 0.31% 0.21% 0.30% 0.23%
reduction)(d)
Total Fund Operating 1.16 % 1.06% 1.15 % 1.28%
====== ===== ====== =====
Expenses(e)
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-6-
<PAGE> 10
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Income Equity Fund
Retail Shares $56 $80 $106 $180
Value Momentum Fund
Retail Shares $55 $77 $101 $169
Growth Fund
Retail Shares $56 $80 $105 $178
Emerging Growth Fund
Retail Shares $57 $84 $112 $193
</TABLE>
The purpose of the tables above is to assist an investor in the Equity
Funds in understanding the various costs and expenses that a Shareholder will
bear directly or indirectly. For a more complete discussion of each Fund's
annual operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Equity Funds on behalf of their
customers may charge customers fees for services provided in connection
with the investment in, redemption of, and exchange of Shares. (See HOW
TO PURCHASE SHARES, EXCHANGE PRIVILEGES, REDEMPTION OF SHARES, and
SERVICE ARRANGEMENTS below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against
the proceeds of any redemption request relating to Retail Shares of the
Funds that were purchased without a sales charge in reliance upon the
waiver accorded to purchases in the amount of $1 million or more, but
only where such redemption request is made within one year of the date
the Shares were purchased.
(c) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES below.)
(d) OTHER EXPENSES for the Value Momentum and Emerging Growth Funds are
based on each Fund's estimated expenses for the current fiscal year.
Absent voluntary fee waivers, OTHER EXPENSES would be: 0.48% for the
Retail Shares of the Income Equity Fund, the Value Momentum Fund, and
the Growth Fund, and 0.50% for the Retail Shares of the Emerging Growth
Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.33% for the Retail Shares of the Income Equity Fund, the Value
Momentum Fund, and the Growth Fund, and 1.55% for the Retail Shares of
the Emerging Growth Fund.
-7-
<PAGE> 11
FINANCIAL HIGHLIGHTS
The tables below set forth certain financial information with respect
to the Retail Shares of the Income Equity Fund and the Growth Fund. Financial
highlights for the Income Equity Fund and the Growth Fund for the period ended
July 31, 1996 have been derived from financial statements audited by Deloitte &
Touche LLP, independent auditors for HighMark, whose report thereon is included
in the Statement of Additional Information. Prior to the fiscal year ended July
31, 1996, Coopers & Lybrand L.L.P. served as independent accountants for
HighMark. Financial highlights for the Income Equity Fund for the periods
indicated have been derived from financial statements audited by Coopers &
Lybrand L.L.P. Financial highlights for the Income Equity Fund for the years
ended December 31, 1987, 1986, 1985, and for the period ended December 31, 1984
have been derived from financial statements examined by other auditors whose
report thereon is on file with the Securities and Exchange Commission. Financial
highlights for the Income Equity Fund for the period from January 1, 1988
through June 22, 1988 are derived from unaudited financial statements prepared
by HighMark.
The Value Momentum Fund and the Emerging Growth Fund had not commenced
operations in HighMark as of July 31, 1996.
Prior to June 20, 1994, the Income Equity Fund and the Growth Fund offered a
single class of Shares (now designated Fiduciary Shares) throughout the periods
shown.
-8-
<PAGE> 12
<TABLE>
<CAPTION>
INCOME EQUITY FUND
FINANCIAL HIGHLIGHTS
--------------------
YEAR ENDED JULY 31, JUNE 20, 1994
------------------- TO JULY 31, JUNE 23,
1996 1995 1994(a)(b) YEAR ENDED JULY 31, 1988 TO
---- ---- ---------- ------------------ JULY 31,
RETAIL RETAIL RETAIL 1993 1992 1991 1990 1989 1988(e)
------ ------ ------ ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of $ 13.03 $ 11.92 $ 11.85 $ 11.42 $ 10.22 $ 10.46 $ 12.12 $ 10.00 $ 10.00
------- ------- ------- -------- -------- ------- ------- ------- --------
Period
Investment Activities
Net investment income 0.42 0.42 0.04 0.38 0.40 0.46 0.54 0.49 0.03
Net realized and unrealized 1.92 1.55 0.08 0.71 1.20 0.61 (0.62) 2.22 --
------- ------- ------- -------- -------- ------- ------- ------- --------
gains (losses) on investments
Total from investment 2.34 1.97 0.12 1.09 1.60 1.07 (0.08) 2.71 0.03
------- ------- ------- -------- -------- ------- ------- ------- --------
Activities
Distributions
Net investment income (0.42) (0.44) (0.05) (0.38) (0.40) (0.46) (0.54) (0.49) (0.03)
Net realized gains (0.66) (0.42) -- -- -- (0.85) (1.04) (0.10) --
------- ------- ------- -------- -------- ------- ------- ------- --------
Total Distributions (1.08) (0.86) (0.05) (0.38) (0.40) (1.31) (1.58) (0.59) (0.03)
------- ------- ------- -------- -------- ------- ------- ------- --------
Net Asset Value, End of Period $ 14.29 $ 13.03 $ 11.92 $ 12.13 $ 11.42 $ 10.22 $ 10.46 $ 12.12 $ 10.00
======= ======= ======= ======== ======== ======= ======= ======= ========
Total Return 18.21% 17.52% 4.23%(c) 9.75% 16.04% 12.60% (0.84)% 28.16% 1.31%(f)
Ratios/Supplementary Data:
Net Assets at end of period (000) $10,143 $ 3,881 $ 24 $104,840 $ 74,478 $49,047 $41,280 $40,027 $ 30,495
Ratio of expenses to average net 1.03% 1.06% 1.10%(d) 1.15% 1.16% 1.17% 1.15% 1.19% 0.99%(d)
assets
Ratio of net investment income 2.89% 3.06% 0.93%(d) 3.27% 3.76% 4.81% 4.82% 4.61% 2.56%(d)
to average net assets
Ratio of expenses to average 1.51% 1.55% 1.33%(d) 1.21% 1.29% 1.40% 1.41% 1.41% 1.41%(d)
net assets*
Ratio of net investment income 2.41% 2.57% 0.71%(d) 3.22% 3.64% 4.58% 4.56% 4.39% 2.14%(d)
to average net assets*
Portfolio turnover 41.51% 36.64% 33.82% 29.58% 23.05% 33.10% 37.11% 28.83% 3.12%
<FN>
(a) Period from commencement of operations.
(b) On June 20, 1994, the Income Equity Fund commenced offering Investor
Shares (now called "Retail Shares") and designated existing Shares as
Fiduciary Shares.
(c) Represents total return for the Fiduciary Shares for the period from
August 1, 1993 to June 19, 1994 plus the total return for the Retail
Shares for the period from June 20, 1994 to July 31, 1994.
(d) Annualized.
(e) The Income Equity Fund commenced operations on June 23, 1988 as a
result of the reorganization involving the Income Equity Portfolio of
the IRA collective Investment Fund described under GENERAL
INFORMATION--Reorganization of The IRA Fund & HighMark.
(f) Not annualized.
* During the period the investment advisory and administration fees were
voluntarily reduced. If such voluntary fee reductions had not occurred,
the ratios would have been as indicated.
</TABLE>
-9-
<PAGE> 13
<TABLE>
<CAPTION>
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS)
THE IRA COLLECTIVE INVESTMENT FUND INCOME EQUITY PORTFOLIO
PERIOD FROM
JAN. 1,
1988
THROUGH YEAR ENDED YEAR ENDED
JUNE 22, DEC. 31, DEC. 31,
1988 1987 1986
(UNAUDITED) (AUDITED) (AUDITED)
----------- --------- ---------
<S> <C> <C> <C>
Investment income $ 0.440 $ 0.927 $ 0.944
Operating expenses 0.102 0.185(g) 0.154(g)
Net investment income 0.338 0.742 0.790
Dividends from net investment income (0.338) (0.742) (0.790)
Net realized and unrealized gain
(loss) on investments 1.884 (0.564) 1.934
--------- --------- ---------
Increase (decrease) in net asset value 1.884 (0.564) 1.934
Net Asset Value:
Beginning of period 14.059 14.623 12.689
--------- --------- ---------
End of period $ 15.943 $ 14.059 $ 14.623
========= ========= =========
Ratio of expenses to average net assets(c)(d) 1.41% 1.12% 0.97%
Ratio of net investment income
to average net assets(c) 5.45% 4.50% 4.96%
Portfolio turnover 5.83% 20.88% 12.07%
Number of Shares/units
outstanding at end of period 1,940,573 1,978,920 1,416,327
<FN>
(g) The expenses shown are not representative of expenses actually incurred
by the Income Equity Portfolio through May 31, 1987. During mid-May
1985, The Bank of California, N.A., investment adviser to the Income
Equity Portfolio, commenced charging its management fee, and commencing
June 1, 1987, operating expenses were charged to the Income Equity
Portfolio. Had the maximum allowable operating expenses and management
fees been paid by the Income Equity Portfolio for the entire period
pursuant to the Management Agreement between the Income Equity
Portfolio and The Bank of California, N.A., the per unit expenses and
net investment income would have been as follows:
</TABLE>
-10-
<PAGE> 14
<TABLE>
<CAPTION>
PERIOD FROM
JAN. 1,
1988
THROUGH YEAR ENDED YEAR ENDED
JUNE 22, DEC. 31, DEC. 31,
1988 1987 1986
(UNAUDITED) (AUDITED) (AUDITED)
----------- --------- ---------
<S> <C> <C> <C>
Expenses $ 0.257 $ 0.260 $ 0.248
Net investment income 0.183 0.612 0.557
Net asset value, end of year 15.943 14.059 14.623
Expenses as a percentage of
average net assets 2.00%(h) 1.67% 2.00%
<FN>
(h) Annualized based on the period for which assets were held.
</TABLE>
-11-
<PAGE> 15
<TABLE>
<CAPTION>
GROWTH FUND FINANCIAL HIGHLIGHTS
--------------------------------
JUNE 20,
1994 TO
YEAR ENDED JULY 31, JULY 31,
1996 1995 1994(a)
---- ---- -------
RETAIL RETAIL RETAIL
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.87 $ 9.77 $ 9.74
------- ------ -------
Investment Activities
Net investment income 0.11 0.15 --
Net realized and unrealized gains (losses)
on investments 1.38 2.25 0.04
---- ---- -------
Total from Investment Activities 1.49 2.40 0.04
---- ------ -------
Distributions
Net investment income (0.12) (0.15) (0.01)
Net realized gains (0.64) (0.15) --
------- ------ -----
Total Distributions (0.76) (0.30) (0.01)
------- ------ -------
Net Asset Value, End of Period $ 12.60 $11.87 $ 9.77
======= ====== =======
Total Return 12.88% 25.10% (1.77)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $2,843 $1,218 --
-----
Ratio of expenses to average net assets 0.93% 0.84% --
Ratio of net investment income
to average net assets 0.96% 1.17% --
Ratio of expenses to average net assets* 1.91% 2.11% --
Ratio of net investment (loss)
to average net assets* (0.02)% (0.10)% --
Portfolio turnover 78.58% 67.91% 123.26%
<FN>
(a) Period from commencement of operations.
(b) Represents total return for the Fiduciary Shares from commencement of
operations to June 19, 1994, plus the total return for the Investor Shares
(now called "Retail Shares") for the period from June 20, 1994 to July 31,
1994.
* During the period, certain fees were voluntarily reduced. In addition,
certain expenses were reimbursed. If such voluntary fee reductions and
expense reimbursements had not occurred, the ratios would have been as
indicated.
</TABLE>
-12-
<PAGE> 16
FUND DESCRIPTION
The HighMark Group (the "Group") is an open-end, diversified, registered
investment company that offers units of beneficial interest ("Shares") in
sixteen separate investment portfolios ("Funds"). All of the Funds are advised
by Pacific Alliance Capital Management (the "Advisor"), a division of Union Bank
of California, N.A. Shareholders may purchase Shares of selected Funds through
two separate classes (the "Retail" and "Fiduciary" classes). These classes may
have different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Retail
Shares, sales charges and the operation of HighMark's Distribution Plan, see HOW
TO PURCHASE SHARES and SERVICE ARRANGEMENTS--Administrator & Distributor--The
Distribution Plan below. (Retail Shares may be hereinafter referred to as
"Shares.")
INVESTMENT OBJECTIVES
The investment objectives of the Funds are as follows:
The Income Equity Fund seeks investments in equity securities that provide
current income through the regular payment of dividends, with the goal that the
Income Equity Fund will have a high current yield and a low level of price
volatility. Opportunity for long-term growth of asset value is a secondary
consideration.
The Value Momentum Fund seeks long-term capital growth with a secondary
objective of income.
The Growth Fund seeks long-term capital appreciation through investments in
equity securities. The production of current income is an incidental objective.
The Emerging Growth Fund seeks long-term growth of capital by investing in a
diversified portfolio of equity securities of small capitalization, emerging
growth companies.
The investment objectives and certain of the investment limitations of the Funds
may not be changed without a vote of the holders of a majority of the
outstanding Shares of the respective Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that a Fund will
achieve its investment objective.
-13-
<PAGE> 17
INVESTMENT POLICIES
INCOME EQUITY FUND
Under normal market conditions, the Income Equity Fund will invest at least 65%
of its total assets in equity securities, including common stocks, warrants to
purchase common stocks, American Depositary Receipts ("ADRs"), preferred stocks
and securities (including debt securities) convertible into or exercisable for
common stocks. The Income Equity Fund's investments primarily consist of the
common stocks of U.S. corporations that regularly pay dividends, although there
can be no assurance that a corporation will continue to pay dividends.
Investments will be made in an attempt to keep the Income Equity Fund's yield
above the S&P 500's yield by approximately one-third to one-half the difference
between the S&P 500's yield and the yield on long-term U.S. Government bonds.
The Income Equity Fund generally invests in stocks with favorable, long-term
fundamental characteristics when their current relative yields are at the upper
end of their historical yield ranges. Frequently, these stocks are out of favor
in the financial community and in which investors see little opportunity for
price appreciation. The Fund may also invest in major U.S. corporations in a
mature stage of development or operating in slower areas of the economy. While
it is anticipated that a significant part of the total growth in asset value
experienced by the Income Equity Fund will result from companies' improving
prospects (although there can be no assurance that this will in fact occur),
dividends will provide a substantial portion of the Fund's total return. When
yields on stocks held by the Income Equity Fund drop to the lower end of their
historical ranges, the Fund may begin to reduce its holdings. Similarly, if
there is a significant fundamental change that impairs a company's ability to
pay dividends, or if the yield on a stock dips below the yield of the general
market, the Income Equity Fund may eliminate its holdings in these stocks.
VALUE MOMENTUM FUND
Under normal market conditions, the Value Momentum Fund will invest at least 65%
of its total assets in equity securities, including common stocks, warrants to
purchase common stocks, ADRs, preferred stocks and securities (including debt
securities) convertible into or exercisable for common stocks. The Value
Momentum Fund will be invested primarily in securities which the Advisor
believes to be undervalued relative to the market and to the security's historic
valuation. Stocks are then screened for positive price or earnings momentum.
Securities purchased will generally have a medium to high market capitalization.
A majority of the securities in which the Value Momentum Fund invests will be
dividend paying.
GROWTH FUND
Under normal market conditions, the Growth Fund will invest at least 65% of its
total assets in equity securities, including common stocks, warrants to purchase
common stocks, ADRs, preferred stocks and securities (including debt securities)
convertible into or exercisable for common stocks, of growth-oriented companies.
The Growth Fund emphasizes a well diversified portfolio of medium to large
capitalization growth companies (capitalization in
-14-
<PAGE> 18
excess of $500 million) with a record of above average growth in earnings. The
Fund focuses on companies that the Advisor believes to have enduring quality and
above average earnings growth. Among the criteria the Fund uses to screen for
stock selection are earnings growth, return on capital, brand identity,
recurring revenues, price and quality of management team.
EMERGING GROWTH FUND
Under normal market conditions, the Emerging Growth Fund will invest at least
65% of its total assets in equity securities, including common stocks, warrants
to purchase common stocks, ADRs, preferred stocks and securities (including debt
securities) convertible into or exercisable for common stocks of small and
medium capitalization companies. Small and medium capitalization companies are
those with capitalization between $50 million and $1 billion and the potential
for growth or those which, in the Advisor's opinion, have potential for
above-average long-term capital appreciation. An emerging growth company is one
which, in the Advisor's judgment, is in the developing stages of its life cycle
and has demonstrated or is expected to achieve rapid growth in earnings and/or
revenues. Emerging growth companies are characterized by opportunities for rapid
growth rates and/or dynamic business changes. Emerging growth companies,
regardless of size, tend to offer the potential for accelerated earnings or
revenue growth because of new products or technologies, new channels of
distribution, revitalized management or industry conditions, or similar
opportunities. A company may or may not yet be profitable at the time the
Emerging Growth Fund invests in its securities. Current income will not be a
criterion of investment selection, and any such income should be considered
incidental. Many of the securities in which the Fund invests will not pay
dividends.
The Emerging Growth Fund may also invest in equity securities of companies in
"special equity situations," meaning companies experiencing unusual and possibly
non-repetitive developments, such as mergers; acquisitions; spin-offs;
liquidations; reorganizations; and new products, technology or management. Since
a special equity situation may involve a significant change from a company's
past experiences, the uncertainties in the appraisal of the future value of the
company's equity securities and the risk of a possible decline in the value of
the Emerging Growth Fund's investments are significant.
GENERAL
MONEY MARKET INSTRUMENTS
Under normal market conditions, each Equity Fund may invest up to 35% of its
total assets in money market instruments. When market conditions indicate a
temporary "defensive" investment strategy as determined by the Advisor, a Fund
may invest more than 35% of its total assets in money market instruments. A Fund
will not be pursuing its investment objective to the extent that a substantial
portion of its assets are invested in money market instruments.
-15-
<PAGE> 19
ILLIQUID AND RESTRICTED SECURITIES
Each Fund shall limit investment in illiquid securities to 15% or less of its
net assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. Each Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, a Fund may lend its portfolio securities
to broker-dealers, banks or other institutions. A Fund may lend portfolio
securities in an amount representing up to 33 1/3% of the value of the Fund's
total assets.
OTHER INVESTMENTS
The Funds may enter into repurchase agreements and reverse repurchase
agreements.
The Equity Funds may enter into forward commitments or purchase securities on a
"when-issued" basis. Each Equity Fund expects that commitments by a Fund to
enter into forward commitments or purchase when-issued securities will not
exceed 25% of the value of the Fund's total assets under normal market
conditions. The Equity Funds do not intend to purchase when-issued securities or
forward commitments for speculative or leveraging purposes but only for the
purpose of acquiring portfolio securities.
The Funds may also invest in money market instruments, money market funds, and
in cash, and may invest in other registered investment companies with similar
investment objectives.
A Fund may invest up to 5% of its total assets in the shares of any one
registered investment company, but may not own more than 3% of the securities of
any one registered investment company or invest more than 10% of its assets in
the securities of other registered investment companies. In accordance with an
exemptive order issued to HighMark by the SEC, such other registered investment
company securities may include shares of a money market fund of HighMark, and
may include registered investment companies for which the Advisor or Sub-
Advisor to a Fund of HighMark, or an affiliate of such Advisor or Sub-Advisor,
serves as investment advisor, administrator or distributor. Because other
registered investment companies employ an investment advisor, such investment by
a Fund may cause Shareholders to bear duplicative fees. The Advisor will waive
its fees attributable to the assets of the investing Fund invested in a money
market fund of HighMark, and, to the extent required by applicable law, the
Advisor will waive its fees attributable to the assets of the Fund invested in
-16-
<PAGE> 20
any investment company. Some Funds are subject to additional restrictions on
investment in other investment companies. See "INVESTMENT RESTRICTIONS" in the
Statement of Additional Information.
Each Fund may write covered calls on its equity securities and enter into
closing transactions with respect to covered call options.
A Fund's assets may be invested in options, futures contracts and options on
futures, Standard & Poor's Depositary Receipts ("SPDRs"), and investment grade
bonds. The aggregate value of options on securities (long puts and calls) will
not exceed 10% of a Fund's net assets at the time such options are purchased by
the Fund.
A Fund may enter into futures and options on futures only to the extent that
obligations under such contracts or transactions, together with options on
securities, represent not more than 25% of the Fund's assets.
Each Fund may purchase options in stock indices to invest cash on an interim
basis. The aggregate premium paid on all options on stock indices cannot exceed
20% of the Fund's total assets.
All of the common stocks in which the Funds invest (including foreign securities
in the form of ADRs but not including Rule 144A Securities) are traded on
registered exchanges or in the over-the-counter market.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
Since the Equity Funds invest in equity securities, each Fund's Shares will
fluctuate in value, and thus may be more suitable for long-term investors who
can bear the risk of short-term fluctuations. In addition, the market value of
the fixed-income securities bears an inverse relationship to changes in market
interest rates, which may affect the net asset value of Shares. The longer the
remaining maturity of a security, the greater is the effect of interest rate
changes on its market value. Changes in the value of a Fund's fixed-income
securities will not affect cash income received from ownership of such
securities, but will affect a Fund's net asset value.
An Equity Fund may invest in convertible securities, which include corporate
bonds, notes or preferred stocks that can be converted into common stocks or
other equity securities. Convertible securities also include other securities,
such as warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into common stock, their values will
normally vary in some proportion with those of the underlying common stock.
Convertible securities usually provide a higher yield than the underlying common
stock, however, so that the price decline of a convertible security may
sometimes be less substantial than that of the underlying common stock. The
value of convertible securities that pay dividends or interest, like the value
of all fixed-income securities, generally fluctuates inversely with changes in
interest rates. Warrants have no
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<PAGE> 21
voting rights, pay no dividends and have no rights with respect to the assets of
the corporation issuing them. They do not represent ownership of the securities
for which they are exercisable, but only the right to buy such securities at a
particular price. The Equity Funds will not purchase any convertible debt
security or convertible preferred stock unless it has been rated as investment
grade at the time of acquisition by a NRSRO or that is not rated but is
determined to be of comparable quality by the Advisor.
Given the uncertainty of the future value of emerging growth companies and
companies in special equity situations, the risk of possible decline in value of
the Emerging Growth Fund's net assets are significant. Companies in which the
Emerging Growth Fund invests may offer greater opportunities for capital
appreciation than larger more established companies, but investment in such
companies may involve certain special risks. These risks may be due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and frequent lack of depth in management. The securities of
such companies are often traded in the over-the-counter market and may not be
traded in volumes typical on a national securities exchange. Thus, the
securities of emerging growth companies may be less liquid, and subject to more
abrupt or erratic market movements than securities of larger, more established
growth companies. Since a "special equity situation" may involve a significant
change from a company's past experiences, the uncertainties in the appraisal of
the future value of the company's equity securities and the risk of a possible
decline in the value of the Fund's investments are significant.
INVESTMENT LIMITATIONS
Each Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of such Fund's total
assets would be invested in the issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the issuer's
outstanding voting securities (except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations).
2) Purchase any securities that would cause more than 25% of such
Fund's total assets at the time of purchase to be invested in securities of one
or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
and (c) utilities will be divided according to their services (for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry);
-18-
<PAGE> 22
3) Make loans, except that a Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements in
accordance with its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the respective Fund. Additional fundamental and
non-fundamental investment limitations are set forth in the Statement of
Additional Information.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. Each of
the Equity Funds' portfolio turnover rate may vary greatly from year to year as
well as within a particular year. High portfolio turnover rates generally will
result in correspondingly higher brokerage and other transactions costs to the
Equity Funds and could involve the realization of capital gains that would be
taxable when distributed to Shareholders of the relevant Equity Fund. See
FEDERAL TAXATION.
HOW TO PURCHASE SHARES
As noted above, each Fund is divided into two classes of Shares, Retail and
Fiduciary. Retail Shares may be purchased at net asset value plus a sales
charge. For a description of investors who qualify to purchase Fiduciary Shares,
see the Fiduciary Shares prospectus of the Equity Funds. HighMark's Retail
Shares are offered to investors who are not fiduciary clients of Union Bank of
California, N.A., and who are not otherwise eligible for HighMark's Fiduciary
Shares.
Retail Shares are sold on a continuous basis by HighMark's Distributor, SEI
Financial Services Company. The principal office of the Distributor is 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658. If you wish to purchase Shares,
you may contact your investment professional or telephone HighMark at
1-800-734-2922.
The minimum initial investment is generally $1,000 for each Fund and the minimum
subsequent investment is generally only $100. For present and retired directors,
officers, and employees (and their spouses and children under the age of 21) of
Union Bank of California, SEI Financial Services Company and their affiliates,
the minimum initial investment is $250 and the minimum subsequent investment is
$50. A Fund's initial and subsequent minimum purchase amounts may be waived if
purchases are made in connection with Individual Retirement Accounts, Keoghs,
payroll deduction plans, or 401(k) or similar plans. Purchases and redemption of
Shares of the Funds may be made on days on which both the New York Stock
Exchange and the Federal Reserve wire system are open for business ("Business
Days").
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<PAGE> 23
Purchase orders for Shares will be executed at a per Share price equal to the
net asset value next determined after the receipt of the purchase order by the
Distributor (plus any applicable sales charge). The net asset value per Share of
a Fund is determined by dividing the total market value of the Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of the Fund. Net asset value per Share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m. Eastern time), on any Business Day.
Purchases will be made in full and fractional Shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor determines that it is not in the best interest of HighMark
and/or its Shareholders to accept such order.
The securities in each Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method that HighMark's
Board of Trustees believes accurately reflects fair value. For further
information about valuation of investments in the Equity Funds, see the
Statement of Additional Information.
Shares of the Funds are offered only to residents of states in which the Shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase Shares of the Funds by completing and signing an Account
Application form and mailing it, along with a check (or other negotiable bank
instrument or money order) payable to "HighMark Funds (Fund Name)," to the
transfer agent at P.O. Box 8416, Boston, Massachusetts 02266-8416. All purchases
made by check should be in U.S. dollars and made payable to "HighMark Funds
(Fund Name)." Third party checks, credit card checks or cash will not be
accepted. You may purchase more Shares at any time by mailing payment also to
the transfer agent at the above address. Orders placed by mail will be executed
on receipt of your payment. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred.
You may obtain Account Application Forms for the Funds by calling the
Distributor at 1-800-734-2922.
HOW TO PURCHASE BY WIRE
You may purchase Shares of the Funds by wiring Federal funds, provided that your
Account Application has been previously received. You must wire funds to the
transfer agent and the wire instructions must include your account number. You
must call the transfer agent at 1- 800-734-2922 before wiring any funds. An
order to purchase Shares by Federal funds wire will be deemed to have been
received by a Fund on the Business Day of the wire; provided that the
Shareholder wires funds to the transfer agent prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) . If the transfer agent does not receive the wire by
1:00 p.m., Pacific time (4:00 p.m. Eastern time), the order will be executed on
the next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC INVESTMENT PLAN ("AIP")
-20-
<PAGE> 24
You may arrange for periodic additional investments in the Funds through
automatic deductions by Automated Clearing House ("ACH") from a checking account
by completing this section in the Account Application form. The minimum
pre-authorized investment amount is $100 per month. The AIP is available only
for additional investments to an existing account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
Shares of the Funds may be purchased through financial institutions, including
the Advisor, that provide distribution assistance or Shareholder services.
Shares purchased by persons ("Customers") through financial institutions may be
held of record by the financial institution. Financial institutions may impose
an earlier cut-off time for receipt of purchase orders directed through them to
allow for processing and transmittal of these orders to the transfer agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to HighMark.
Customers who desire to transfer the registration of Shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
SALES CHARGES
The following table shows the regular sales charge on Retail Shares to a "single
purchaser" (defined below) together with the dealer discount paid to dealers and
the agency commission paid to brokers (collectively the "commission"):
<TABLE>
<CAPTION>
SALES CHARGE AS
SALES CHARGE AS A APPROPRIATE COMMISSION AS
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
<S> <C> <C> <C>
0-$49,999 4.51% 4.71% 4.05%
$ 50,000-$99,000 4.00% 4.17% 3.60%
$100,000-$249,000 3.50% 3.63% 3.15%
$250,000-$499,999 2.50% 2.56% 2.25%
$500,000-$999,999 1.50% 1.52% 1.35%
$1,000,000 and Over* 0.00% 0.00% 0.00%
<FN>
* A contingent deferred sales charge of 1.00% will be assessed against any
proceeds of any redemption of such Retail Shares prior to one year from date of
purchase.
</TABLE>
The commissions shown in the table apply to sales through authorized dealers and
brokers. Under certain circumstances, the Distributor may use its own funds to
compensate financial institutions and intermediaries in amounts that are
additional to the commissions shown above.
-21-
<PAGE> 25
In addition, the Distributor may, from time to time and at its own expense,
provide promotional incentives in the form of cash or other compensation to
certain financial institutions and intermediaries whose registered
representatives have sold or are expected to sell significant amounts of the
Retail Shares of a Fund. Such other compensation may take the form of payments
for travel expenses, including lodging, incurred in connection with trips taken
by qualifying registered representatives to places within or without the United
States. Under certain circumstances, commissions up to the amount of the entire
sales charge may be reallowed to dealers or brokers, who might then be deemed to
be "underwriters" under the Securities Act of 1933. Commission rates may vary
among the Funds.
In calculating the sales charge rates applicable to current purchases of a
Fund's Shares, a "single purchaser" is entitled to cumulate current purchases
with the net purchase of previously purchased Shares of a Fund and other of
HighMark's funds (the "Eligible Funds") which are sold subject to a comparable
sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing Shares of a Fund for their own account or for trust or
custodial accounts for their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account including employee benefit plans
created under Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), including related plans of the same employer. To be
entitled to a reduced sales charge based upon Shares already owned, the investor
must ask the Distributor for such entitlement at the time of purchase and
provide the account number(s) of the investor, the investor and spouse, and
their minor children, and give the age of such children. A Fund may amend or
terminate this right of accumulation at any time as to subsequent purchases.
LETTER OF INTENT
By initially investing at least $1,000 and submitting a Letter of Intent (the
"Letter") to the Distributor, a "single purchaser" may purchase Shares of a Fund
and the other Eligible Funds during a 13-month period at the reduced sales
charge rates applicable to the aggregate amount of the intended purchases stated
in the Letter. The Letter may apply to purchases made up to 90 days before the
date of the Letter. To receive credit for such prior purchases and later
purchases benefitting from the Letter, the Shareholder must notify the transfer
agent at the time the Letter is submitted that there are prior purchases that
may apply, and, at the time of later purchases, notify the transfer agent that
such purchases are applicable under the Letter.
RIGHTS OF ACCUMULATION
In calculating the sales charge rates applicable to current purchases of Retail
Shares, a "single purchaser" is entitled to cumulate current purchases with the
current market value of previously purchased Retail Shares of the Funds sold
subject to a comparable sales charge.
To exercise your right of accumulation based upon Shares you already own, you
must ask the Distributor for this reduced sales charge at the time of your
additional purchase and provide the account number(s) of the investor, as
applicable, the investor and spouse, and their minor
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children. The Funds may amend or terminate this right of accumulation at any
time as to subsequent purchases.
SALES CHARGE WAIVERS
The following categories of investors may purchase Retail Shares of the Funds
with no sales charge in the manner described below (which may be changed or
eliminated at any time by the Distributor):
(1) Existing holders of Retail Shares of a Fund upon the reinvestment of
dividend and capital gain distributions on those Shares;
(2) Investment companies advised by Pacific Alliance Capital Management or
distributed by SEI Financial Services Company or its affiliates placing
orders on each entity's behalf;
(3) State and local governments;
(4) Individuals who have received distributions from employee benefit trust
accounts administered by Union Bank of California who are rolling over
such distributions into an individual retirement account for which the
Bank serves as trustee or custodian;
(5) Individuals who purchase Shares with proceeds from a required minimum
distribution at age 70 1/2 from their employee benefit qualified plan
or an individual retirement account administered by Union Bank of
California;
(6) Individuals who purchase Shares with proceeds received in connection
with a distribution paid from a Union Bank of California trust or
agency account;
(7) Investment advisors or financial planners regulated by a federal or
state governmental authority who are purchasing Shares for their own
account or for an account for which they are authorized to make
investment decisions (i.e., a discretionary account) and who charge a
management, consulting or other fee for their services; and clients of
such investment advisors or financial planners who place trades for
their own accounts if the accounts are linked to the master account of
such investment advisor or financial planner on the books and records
of a broker or agent;
(8) Investors purchasing Shares with proceeds from a redemption of Shares
of another open-end investment company (other than The HighMark Group)
on which a sales charge was paid if such redemption occurred within
thirty (30) days prior to the date of the purchase order. Satisfactory
evidence of the purchaser's eligibility must be provided at the time of
purchase (e.g., a confirmation of the redemption);
(9) Brokers, dealers and agents who are purchasing for their own account
and who have a sales agreement with the Distributor, and their
employees (and their spouses and children under the age of 21);
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(10) Investors purchasing Shares on behalf of a qualified prototype
retirement plan (other than an IRA, SEP-IRA or Keogh) sponsored by
Union Bank of California;
(11) Purchasers of Retail Shares of the Growth Fund that are sponsors of
other investment companies that are unit investment trusts for deposit
by such sponsors into such unit investment trusts, and to purchasers of
Retail Shares of the Growth Fund that are holders of such unit
investment trusts that invest distributions from such investment trusts
in Retail Shares of the Growth Fund;
(12) Present and retired directors, officers, and employees (and their
spouses and children under the age of 21) of Union Bank of California,
SEI Financial Services Company or their affiliated companies; and
(13) Investors receiving Shares issued in plans of reorganization, such as
mergers, asset acquisitions, and exchange offers, to which HighMark is
a party.
The Distributor may also periodically waive the sales charge for all investors
with respect to a Fund.
With regard to categories 2 through 12 above, the Distributor must be notified
that the purchase qualifies for a sales charge waiver at the time of purchase.
REDUCTIONS FOR QUALIFIED GROUPS
Reductions in sales charges also apply to purchases by individual members of a
"qualified group." The reductions are based on the aggregate dollar amount of
Shares purchased by all members of the qualified group. For purposes of this
paragraph, a qualified group consists of a "company," as defined in the 1940
Act, which has been in existence for more than six months and which has a
primary purpose other than acquiring Shares of a Fund at a reduced sales charge,
and the "related parties" of such company. For purposes of this paragraph, a
"related party" of a company is (i) any individual or other company who directly
or indirectly owns, controls or has the power to vote five percent or more of
the outstanding voting securities of such company; (ii) any other company of
which such company directly or indirectly owns, controls or has the power to
vote five percent or more of its outstanding voting securities; (iii) any other
company under common control with such company; (iv) any executive officer,
director or partner of such company or of a related party; and (v) any
partnership of which such company is a partner. Investors seeking to rely on
their membership in a qualified group to purchase Shares at a reduced sales load
must provide evidence satisfactory to the Transfer Agent of the existence of a
bona fide qualified group and their membership therein.
All orders from a qualified group will have to be placed through a single source
and identified at the time of purchase as originating from the same qualified
group, although such orders may be placed into more than one discrete account
that identifies HighMark.
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EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Retail Shares for Retail Shares of a Fund with the same or
lower sales charge on the basis of the relative net asset value of the Retail
Shares exchanged. Shareholders may exchange their Retail Shares for Retail
Shares of a Fund with a higher sales charge by paying the difference between the
two sales charges. Shareholders may also exchange Retail Shares of a Money
Market Fund for which no sales load was paid for Retail Shares of an Equity
Fund. Under such circumstances, the cost of the acquired Retail Shares will be
the net asset value per share plus the appropriate sales load. If Retail Shares
of the Money Market Fund were acquired in a previous exchange involving Shares
of a non-money market HighMark Fund, then such Shares of the Money Market Fund
may be exchanged for Shares of an Equity Fund without payment of any additional
sales load within a twelve month period. In order to receive a reduced sales
charge when exchanging into a Fund, the Shareholder must notify HighMark that a
sales charge was originally paid and provide sufficient information to permit
confirmation of qualification.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including Participating Organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in an Equity Fund may do so by
contacting the transfer agent at 1-800-734-2922. Exchanges will be effected on
any Business Day at the net asset value of the Funds involved in the exchange
next determined after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark
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may materially amend or terminate the exchange privileges described herein upon
sixty days' notice.
REDEMPTION OF SHARES
You may redeem your Shares of the Funds without charge on any Business Day.
There is presently a $15 charge for wiring redemption proceeds to a
Shareholder's designated account. Shares may be redeemed by mail, by telephone
or through a pre-arranged systematic withdrawal plan. Investors who own Shares
held by a financial institution should contact that institution for information
on how to redeem Shares.
BY MAIL
A written request for redemption of Shares of the Funds must be received by the
transfer agent, P.O. Box 8416, Boston, Massachusetts 02266-8416 in order to
constitute a valid redemption request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the transfer
agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker dealer, credit union, securities exchange or association, clearing agency
or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
Shares, (2) the redemption check is payable to the shareholder(s) of record, and
(3) the redemption check is mailed to the shareholder(s) at his or her address
of record.
TELEPHONE TRANSACTIONS
You may redeem your Shares of the Growth, Value Momentum, Emerging Growth and
Income Equity Funds by calling the transfer agent at 1-800-734-2922. Under most
circumstances, payments will be transmitted on the next Business Day following
receipt of a valid request for redemption. You may have the proceeds mailed to
your address or wired to a commercial bank account previously designated on your
Account Application. There is no charge for having redemption proceeds mailed to
you, but there is a $15 charge for wiring redemption proceeds.
You may request a wire redemption for redemptions of Shares of the Growth, Value
Momentum, Emerging Growth and Income Equity Funds in excess of $500 by calling
the Transfer Agent at 1-800-734-2922 who will deduct a wire charge of $15 from
the amount of the wire redemption. Shares cannot be redeemed by Federal Reserve
wire on Federal holidays restricting wire transfers.
Neither the transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. HighMark and transfer agent will each
employ reasonable procedures to confirm that
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instructions, communicated by telephone are genuine. Such procedures may include
taping of telephone conversations.
If market conditions are extraordinarily active or other extraordinary
circumstances exist, and you experience difficulties placing redemption orders
by telephone, you may consider placing your order by mail.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Funds offer a Systematic Withdrawal Plan ("SWP"), which you may use to
receive regular distributions from your account. Upon commencement of the SWP,
your account must have a current net asset value of $5,000 or more. You may
elect to receive automatic payments via check or ACH of $100 or more on a
monthly, quarterly, semi-annual or annual basis. You may arrange to receive
regular distributions from your account via check or ACH by completing this
section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per Share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the transfer agent. The transfer agent may require that the signature
on the written notice be guaranteed.
It is generally not in your best interest to be participating in the SWP at the
same time that you are purchasing additional Shares if you have to pay a sales
load in connection with such purchases.
OTHER INFORMATION REGARDING REDEMPTIONS
Shareholders who desire to redeem Shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Funds reserve the right to make payment on
redemptions in securities rather than cash.
Payment to the Shareholders for Shares redeemed will be made within seven days
after the transfer agent receives the valid redemption request. At various
times, however, a Fund may be requested to redeem Shares for which it has not
yet received good payment; collection of payment may take ten or more days. In
such circumstances, the redemption request will be rejected by the Fund. Once a
Fund has received good payment for the Shares a Shareholder may submit another
request for redemption.
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Due to the relatively high costs of handling small investments, each Fund
reserves the right to redeem your Shares at net asset value if your account in
any Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase Shares of any Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any Shares.
Before any Fund exercises its right to redeem such Shares you will be given
notice that the value of the Shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in such Fund
in an amount which will increase the value of the account to at least the
minimum amount.
DIVIDENDS
The net income of each of the Equity Funds is declared and paid monthly as a
dividend to Shareholders of record at the close of business on the day of
declaration. Net realized capital gains are distributed at least annually to
Shareholders of record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of a Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
FEDERAL TAXATION
Each Equity Fund intends to qualify for treatment as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
to distribute substantially all of its net investment income and net realized
capital gains so that each Fund is not required to pay federal taxes on these
amounts.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. The 70 percent dividends received deduction for
corporations generally will apply to these distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction when received by a Fund if a Fund were a regular corporation, and to
the extent designated by a Fund as so qualifying. Distributions by the Fund of
the excess of net long-term capital gain over net short-term capital loss is
taxable to Shareholders as long-term capital gain in the year with respect to
which it is received, regardless of how long the Shareholder has held Shares of
the Fund. Such distributions are not eligible for the dividends received
deduction. If a Shareholder disposes of Shares in a Fund at a loss before
holding such Shares for longer than six months, such loss will be treated as a
long-term capital loss to the extent the Shareholder has received long-term
capital gain dividends on the Shares.
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Prior to purchasing Shares of the Equity Funds, the impact of dividends or
capital gain distributions that are expected to be declared or have been
declared, but not paid, should be carefully considered. Dividends or capital
gain distributions received after a purchase of Shares are subject to federal
income taxes, although in some circumstances, the dividends or distributions may
be, as an economic matter, a return of capital to the Shareholder. A Shareholder
should consult his or her advisor for specific advice about the tax consequences
to the Shareholder of investing in a Fund.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting each Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A., serves as the Equity Funds' investment advisor. Subject to the general
supervision of HighMark's Board of Trustees, the Advisor manages each Fund in
accordance with its investment objective and policies, makes decisions with
respect to and places orders for all purchases and sales of the Fund's
investment securities, and maintains the Fund's records relating to such
purchases and sales.
For the expenses assumed and services provided by the Advisor as each Fund's
investment advisor, Union Bank of California receives a fee from the Growth
Fund, Value Momentum Fund and the Income Equity Fund, computed daily and paid
monthly, at the annual rate of sixty one-hundredths of one percent (.60%) of the
Fund's average daily net assets, and from the Emerging Growth Fund, at the
annual rate of eighty one-hundredths of one percent (.80%) of the Fund's average
daily net assets. This fee may be higher than the advisory fee paid by most
mutual funds, although the Board of Trustees believes it will be comparable to
advisory fees paid by many funds having similar objectives and policies. Union
Bank of California may from time to time agree to voluntarily reduce its
advisory fee, however, it is not currently doing so. While there can be no
assurance that Union Bank of California will choose to make such an agreement,
any voluntary reductions in Union Bank of California's advisory fee will lower
the Fund's expenses, and thus increase the Fund's yield and total return, during
the period such voluntary reductions are in effect. During HighMark's fiscal
year ended July 31, 1996, Union Bank of California received investment advisory
fees from the Growth Fund aggregating 0.50% of the Fund's average daily net
assets, and from the Income Equity Fund aggregating 0.66% of the Fund's average
daily net assets. As of the date of this prospectus,
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the Value Momentum Fund and the Emerging Growth Fund had not yet commenced
operations in the HighMark Group.
On April 1, 1996, the Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group which, as of June 30,
1996, had approximately $13.4 billion of assets under management. The Advisor,
with a team of approximately 45 stock and bond research analysts, portfolio
managers and traders, has been providing investment management services to
individuals, institutions and large corporations since 1917.
All investment decisions for the Equity Funds are made by a team of investment
professionals, all of whom take an active part in the decision making process.
The team leaders for each Fund are as follows:
Growth Fund -- The team leader for the Growth Fund is Scott Chapman.
Mr. Chapman has been Growth Fund team leader for the Advisor since
1993. He began working for the Advisor as an equity security analyst in
1991.
Value Momentum Fund -- The team leader for the Value Momentum Fund is
Richard Earnest. Mr. Earnest, a Senior Vice President of the Advisor,
has served as team leader of the Stepstone Value Momentum Fund since
its inception, and has been with the Advisor and its predecessor, Union
Bank, since 1964.
Income Equity Fund -- The team leader for the Income Equity Fund is
Thomas Arrington. Mr. Arrington began working for the Advisor as a
Business Administration Manager in 1990. From 1991 to 1994 Mr.
Arrington was a Securities Research Analyst. In 1994 Mr. Arrington
became team leader for the Income Equity Fund.
SUB-ADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "Sub-Advisor") have
entered into an investment subadvisory agreement relating to the Emerging Growth
Fund (the "Investment Sub-Advisory Agreement"). Under the Investment
Sub-Advisory Agreement, the Sub-Advisor will make the day-to-day investment
decisions for the assets of the Emerging Growth Fund, subject to the supervision
of, and policies established by, the Advisor and the Trustees of HighMark.
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Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, operates as a wholly-owned subsidiary of The
Bank of Tokyo- Mitsubishi, Ltd. The Sub-Advisor was formed by the combination on
April 1, 1996, of Bank of Tokyo Trust Company, a wholly-owned subsidiary of The
Bank of Tokyo, Ltd., and Mitsubishi Bank Trust Company of New York, a
wholly-owned subsidiary of The Mitsubishi Bank, Limited. Bank of Tokyo Trust
Company was the surviving entity, and changed its name to Bank of
Tokyo-Mitsubishi Trust Company. Prior to the combination, subadvisory services
were provided by Bank of Tokyo Trust Company. Bank of Tokyo Trust Company was
established in 1955, and has provided trust services since that time and
management services since 1965.
The Sub-Advisor serves as portfolio manger to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of June 30, 1996, the Sub-Advisor managed
$700 million in individual portfolios and collective funds. In addition, the
Sub-Advisor will also serve as Sub-Advisor to HighMark's Government Securities,
Convertible Securities and Blue Chip Growth Funds.
The Sub-Advisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .50% of the average daily net
assets of the Emerging Growth Fund. As of the date of this prospectus, the
Emerging Growth Fund had not yet commenced operations in the HighMark Group.
Seth E. Shalov will serve as portfolio manager to the Emerging Growth Fund. Mr.
Shalov has been a Senior Portfolio Manager with the Sub-Advisor and its
predecessor, Bank of Tokyo Trust Company, since October, 1987.
ADMINISTRATOR
SEI Fund Resources (the "Administrator"), and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Retail Shares. Any
such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of each Fund,
for which it receives a fee paid by the Administrator at the annual rate of up
to 0.05% of the average daily net assets of the Funds. Union Bank of California
has voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
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THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Retail Shares of
HighMark, for which services it receives a fee.
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.10% of average
daily net assets for the Retail Shares of the Income Equity Fund, 0.09% for the
Retail Shares of the Growth Fund, and 0.00% for the Retail Shares of the Value
Momentum and the Emerging Growth Funds.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor.
THE DISTRIBUTION PLAN
Pursuant to HighMark's Distribution Plan, each Equity Fund pays the Distributor
as compensation for its services in connection with the Distribution Plan a
distribution fee, computed daily and paid monthly, equal to twenty-five
one-hundredths of one percent (0.25%) of the average daily net assets
attributable to that Fund's Retail Shares.
The Distributor may use the distribution fee applicable to a Fund's Retail
Shares to provide distribution assistance with respect to the sale of the Fund's
Retail Shares or to provide Shareholder services to the holders of the Fund's
Retail Shares. The Distributor may also use the distribution fee (i) to pay
financial institutions and intermediaries (such as insurance companies and
investment counselors but not including banks and savings and loan
associations), broker-dealers, and the Distributor's affiliates and subsidiaries
compensation for services or reimbursement of expenses incurred in connection
with the distribution of a Fund's Retail Shares to their customers or (ii) to
pay banks, savings and loan associations, other financial institutions and
intermediaries, broker-dealers, and the Distributor's affiliates and
subsidiaries compensation for services or reimbursement of expenses incurred in
connection with the provision of Shareholder services to their customers owning
a Fund's Retail Shares.
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All payments by the Distributor for distribution assistance or Shareholder
services under the Distribution Plan will be made pursuant to an agreement
between the Distributor and such bank, savings and loan association, other
financial institution or intermediary, broker-dealer, or affiliate or subsidiary
of the Distributor (a "Servicing Agreement"; banks, savings and loan
associations, other financial institutions and intermediaries, broker-dealers,
and the Distributor's affiliates and subsidiaries that may enter into a
Servicing Agreement are hereinafter referred to individually as a "Participating
Organization"). A Participating Organization may include Union Bank of
California, its subsidiaries and its affiliates.
Participating Organizations may charge customers fees in connection with
investments in an Equity Fund on their customers' behalf. Such fees would be in
addition to any amounts the Participating Organization may receive pursuant to
its Servicing Agreement. Under the terms of the Servicing Agreements,
Participating Organizations are required to provide their customers with a
schedule of fees charged directly to such customers in connection with
investments in a Fund. Customers of Participating Organizations should read this
Prospectus in light of the terms governing their accounts with the Participating
Organization.
The distribution fee under the Distribution Plan will be payable without regard
to whether the amount of the fee is more or less than the actual expenses
incurred in a particular year by the Distributor in connection with distribution
assistance or Shareholder services rendered by the Distributor itself or
incurred by the Distributor pursuant to the Servicing Agreements entered into
under the Distribution Plan. The Distributor may from time to time voluntarily
reduce its distribution fee with respect to an Equity Fund in significant
amounts for substantial periods of time pursuant to an agreement with HighMark.
While there can be no assurance that the Distributor will choose to make such an
agreement, any voluntary reduction in the Distributor's distribution fee will
lower such Equity Fund's expenses, and thus increase such Fund's yield and total
returns, during the period such voluntary reductions are in effect.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Funds
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of each
Fund, for which it receives compensation from SEI Fund Resources without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Funds.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
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CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Equity Funds. The Custodian holds cash securities and
other assets of HighMark as required by the 1940 Act.
Services performed by Union Bank of California, as the Funds' shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax- Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund, and the California Intermediate Tax-Free Bond Fund had been
offered for sale in the HighMark Group. Shares of each Fund are freely
transferable, are entitled to distributions from the assets of the Fund as
declared by the Board of Trustees, and, if HighMark were liquidated, would
receive a pro rata share of the net assets attributable to that Fund. Shares are
without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Fiduciary Shares of the Equity Funds, interested persons may
contact the Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996, there was no person who owned of
record or beneficially more than 25% of the Retail Shares of the Growth Fund or
the Income Equity Fund. As of November 22, 1996, the Value Momentum and Emerging
Growth Funds had not yet commenced operations in HighMark.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Retail
Shares of each Equity Fund.
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Performance information is computed separately for a Fund's Retail and Fiduciary
Shares in accordance with the formulas described below.
The aggregate total return and average annual total return of the Equity Funds
may be quoted for the life of each Fund and for ten-year, five-year, three-year,
and one-year periods, in each case through the most recent calendar quarter (in
the case of the Income Equity Fund, utilizing, when appropriate, the aggregate
total return and average annual total return of the IRA Fund Income Equity
Portfolio prior to June 23, 1988). Aggregate total return is determined by
calculating the change in the value of a hypothetical $1,000 investment in a
Fund over the applicable period that would equate the initial amount invested to
the ending redeemable value of the investment. The ending redeemable value
includes dividends and capital gain distributions reinvested at net asset value.
Average annual total return is calculated by annualizing a Fund's aggregate
total return over the relevant number of years. The resulting percentage
indicates the average positive or negative investment results that an investor
in a Fund would have experienced on an annual basis from changes in Share price
and reinvestment of dividends and capital gain distributions.
The yield of a Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of a Fund is determined by dividing the income and capital
gains distributions, or where indicated the income distributions alone, on a
Share of the Fund over a twelve-month period by the per Share public offering
price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
All performance information presented for a Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the
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Shareholders of a particular series or particular class, and (ii) only Retail
Shares will be entitled to vote on matters submitted to a Shareholder vote
relating to the Distribution Plan. HighMark is not required to hold regular
annual meetings of Shareholders, but may hold special meetings from time to
time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
The Equity Funds invest in only the instruments permitted by their individual
investment objectives and policies.
AMERICAN DEPOSITARY RECEIPTS (ADRs) -- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. The purchase of non-mortgage asset-backed securities raises
risk considerations peculiar to the financing of the instruments underlying such
securities. Asset- backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial
prepayment risk, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary as much in response
to changes in interest rates and the short-term nature of the underlying car
loans or other receivables tend to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying sales contracts or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with their investment objectives and policies, the
Fixed Income Funds may invest in other asset-backed securities that may be
developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
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CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are
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greater than those that would have been involved if the Fund had purchased a
direct obligation (such as commercial paper) of such borrower because it may be
necessary under the terms of the loan participation, for the Fund to assert its
rights against the borrower through the intermediary bank. Moreover, under the
terms of a loan participation, the purchasing Fund may be regarded as a creditor
of the intermediary bank (rather than of the underlying corporate borrower), so
that a Fund may also be subject to the risk that the issuing bank may become
insolvent. Further, in the event of the bankruptcy or insolvency of the
corporate borrower, a loan participation may be subject to certain defenses that
can be asserted by such borrower as a result of improper conduct by the issuing
bank. The secondary market, if any, for these loan participations is limited,
and any such participation purchased by a Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TRs, TIGRs and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations issued by a bank in the United States
with assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose obligations the Fund may invest; (viii) money market funds
and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate
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collection of principal. Securities issued or guaranteed by FNMA and FHLMC are
not backed by the full faith and credit of the United States. There can be no
assurance that the U.S. government would provide financial support to FNMA or
FHLMC if necessary in the future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such
securities is not secured and may fluctuate significantly because of changes in
interest rates and changes in prepayment levels. Thus, for example, if a Fund
purchases a mortgage-related security at a premium, that portion may be lost if
there is a decline in the market value of the security whether due to changes
in interest rates or prepayments of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of mortgage-related securities
are inversely affected by changes in interest rates. However, although the
value of a mortgage-related security may decline when interest rates rise, the
converse is not necessarily true because in periods of declining interest rates
the mortgages underlying the securities are prone to prepayment which results
in amounts being available for reinvestment which are likely to be invested at
a lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining
interest rates may lead to prepayment of underlying mortgages, automobile sales
contracts or credit card receivables, the prices of mortgage-related and
asset-backed securities may not rise with a decline in interest rates.
Mortgage-backed and asset-backed securities and CMOs are extremely sensitive to
the rate of principal prepayment. Similarly, callable corporate bonds also
present risk of prepayment. During periods of falling interest rates, securities
that can be called or prepaid may decline in value relative to similar
securities that are not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to
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be illiquid investments. The Fund will maintain liquid, high-grade securities in
a segregated account in an amount at least equal to the purchase price of the
municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, certain Funds may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of participations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
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RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
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RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of HighMark has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, HighMark's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
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TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an
-43-
<PAGE> 47
obligation is purchased subsequent to its original issue, a holder such as the
Income Funds may elect to include market discount in income currently on a
ratable accrual method or a constant interest rate method. Market discount is
the difference between the obligation's "adjusted issue price" (the original
issue price plus original issue discount accrued to date) and the holder's
purchase price. If no such election is made, gain on the disposition of a market
discount obligation is treated as ordinary income (rather than capital gain) to
the extent it does not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
-44-
<PAGE> 48
HIGHMARK EQUITY FUNDS
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
SUB-ADVISOR
Bank of Tokyo-Mitsubishi Trust Company
1251 Avenue of the Americas
New York, New York 10116
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources and
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
-45-
<PAGE> 49
Dayton, OH 45402
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
-46-
<PAGE> 50
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
-47-
<PAGE> 51
CROSS REFERENCE SHEET
HIGHMARK EQUITY FUNDS
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities Purchase and Redemption of Shares;
Exchange Privileges; Dividends; Federal
Taxation; Service Arrangements--
Administrator; Distributor; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
</TABLE>
<PAGE> 52
<TABLE>
<S> <C>
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Exchange Privileges; Service
Arrangements-- Administrator; Distributor
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
-2-
<PAGE> 53
HIGHMARK FUNDS
EQUITY FUNDS
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's:
o Income Equity Fund
o Value Momentum Fund
o Blue Chip Growth Fund
o Growth Fund
o Emerging Growth Fund
FIDUCIARY SHARES
HighMark's Fiduciary Shares are offered to the following investors: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Income Funds prior to June 20, 1994, which have remained continuously
open thereafter and which are not considered to be fiduciary accounts; (iii)
Shareholders who currently own Shares of HighMark's Equity or Income Funds that
were purchased prior to June 20, 1994 within an account registered in their name
with the Funds; and (iv) present and retired directors, officers and employees
(and their spouses and children under the age of 21) of Union Bank of
California, N.A., HighMark's current or former distributors or their respective
affiliated companies who currently own Shares of HighMark Funds which were
purchased before April 30, 1997.
This Prospectus sets forth concisely the information about HighMark and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-800-734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference. This Prospectus relates only to the Fiduciary Shares of the Equity
Funds. Interested persons who wish to obtain a prospectus for the other Funds of
HighMark may contact the Distributor at the above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN HIGHMARK INVOLVES
RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
[_______________, 1997]
Fiduciary Shares
<PAGE> 54
SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Fiduciary Shares of the Income Equity, Value Momentum, Blue Chip Growth, Growth,
and Emerging Growth Funds (each a "Fund" and sometimes referred to in this
prospectus as the "Equity Funds.") This summary is qualified in its entirety by
reference to the more detailed information provided elsewhere in the Prospectus
and in the Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE INCOME EQUITY FUND seeks
investments in equity securities that provide current income through the regular
payment of dividends, with the goal that the Fund will have a high current yield
and a low level of price volatility; opportunity for long-term growth of asset
value is a secondary consideration. THE VALUE MOMENTUM FUND seeks long-term
capital growth with a secondary objective of income. THE BLUE CHIP GROWTH FUND
seeks long-term capital growth by investing in a diversified portfolio of common
stocks and other equity securities of seasoned, large capitalization companies.
THE GROWTH FUND seeks long-term capital appreciation through investments in
equity securities; the production of current income is an incidental objective.
THE EMERGING GROWTH FUND seeks long-term growth of capital by investing in a
diversified portfolio of equity securities of small capitalization, emerging
growth companies. (See "INVESTMENT OBJECTIVES.")
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? Each of the Funds primarily invests,
consistent with its investment objective, in equity securities including common
stocks and securities convertible into common stocks. Each Fund may also invest
consistent with its investment objective and investment policies in certain
other instruments. (See "INVESTMENT POLICIES.")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. Each of the Funds may purchase common stocks and other
equity securities that are volatile and which may fluctuate in value more than
other types of investments. Values of fixed income securities and,
correspondingly, share prices of Funds invested in such securities, tend to vary
inversely with interest rates, and may be affected by other market and economic
factors as well. In addition, the securities of the emerging growth companies in
which the Emerging Growth Fund may invest may be less liquid, and subject to
more abrupt or erratic market movements, than securities of larger, more
established growth companies. (See "Risk Factors.")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of that Fund.
-2-
<PAGE> 55
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The
Advisor.")
WHO IS THE SUB-ADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
Sub-Advisor to the Emerging Growth and Blue Chip Growth Funds. (See "The
Sub-Advisor.")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator.")
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian.")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor.")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective. Redemption orders must be placed prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) on any Business Day for the order to be effective that
day. (See "PURCHASE AND REDEMPTION OF SHARES.")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Funds is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. ( See "DIVIDENDS.")
-3-
<PAGE> 56
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY..................................................................2
EQUITY FUNDS FEE TABLE...................................................6
FINANCIAL HIGHLIGHTS.....................................................8
GROWTH FUND FINANCIAL HIGHLIGHTS........................................11
FUND DESCRIPTION........................................................12
INVESTMENT OBJECTIVES...................................................12
INVESTMENT POLICIES.....................................................13
Income Equity Fund.................................................13
Value Momentum Fund................................................13
Blue Chip Growth Fund..............................................13
Growth Fund........................................................14
GENERAL.................................................................15
Money Market Instruments...........................................15
Illiquid and Restricted Securities.................................15
Lending of Portfolio Securities....................................15
Other Investments..................................................15
Risk Factors.......................................................16
INVESTMENT LIMITATIONS..................................................17
Portfolio Turnover.................................................18
PURCHASE AND REDEMPTION OF SHARES.......................................18
EXCHANGE PRIVILEGES.....................................................20
DIVIDENDS...............................................................21
FEDERAL TAXATION........................................................21
</TABLE>
-4-
<PAGE> 57
<TABLE>
<S> <C>
SERVICE ARRANGEMENTS....................................................22
Investment Advisor.................................................22
Sub-Advisor........................................................23
Administrator......................................................24
The Transfer Agent.................................................25
Distributor........................................................25
Banking Laws.......................................................25
Custodian..........................................................26
GENERAL INFORMATION.....................................................26
Description of HighMark & Its Shares...............................26
Performance Information............................................27
Miscellaneous......................................................28
DESCRIPTION OF PERMITTED INVESTMENTS....................................28
</TABLE>
-5-
<PAGE> 58
EQUITY FUNDS FEE TABLE
<TABLE>
<CAPTION>
Income Value Blue Chip Emerging
Equity Momentum Growth Growth Growth
Fund Fund Fund Fund Fund
--------- --------- --------- --------- ---------
Fiduciary Fiduciary Fiduciary Fiduciary Fiduciary
Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0% 0% 0% 0% 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0% 0% 0% 0% 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0% 0% 0% 0% 0%
percentage of original purchase
price or redemption proceeds, as
applicable)
Redemption Fees (as a percentage 0% 0% 0% 0% 0%
of amount redeemed, if
applicable)(b)
Exchange Fee(a) $ 0 $ 0 $ 0 $ 0 $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60% 0.60% 0.60% 0.60% 0.80%
12b-1 Fees 0% 0% 0% 0% 0%
Other Expenses (after voluntary 0.31% 0.21% 0.22% 0.30% 0.23%
reduction)(c)
Total Fund Operating 0.91% 0.81% 0.82% 0.90% 1.03%
Expenses(d) ===== ===== ===== ===== =====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-6-
<PAGE> 59
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Income Equity Fund
Fiduciary Shares $9 $29 $50 $112
Value Momentum Fund
Fiduciary Shares $8 $26 $45 $100
Blue Chip Growth Fund
Fiduciary Shares $8 $26 $46 $101
Growth Fund
Fiduciary Shares $9 $29 $50 $111
Emerging Growth Fund
Fiduciary Shares $11 $33 $57 $126
</TABLE>
The purpose of the tables above is to assist an investor in the Equity
Funds in understanding the various costs and expenses that a Shareholder will
bear directly or indirectly. For a more complete discussion of each Fund's
annual operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Equity Funds on behalf of their
customers may charge customers fees for services provided in connection
with the investment in, redemption of, and exchange of Shares. (See
PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES, and SERVICE
ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
Redemption of Shares below.)
(c) OTHER EXPENSES for the Value Momentum, Emerging Growth and Blue Chip
Growth Funds are based on each Fund's estimated expenses for the
current fiscal year. Absent voluntary fee waivers, OTHER EXPENSES would
be 0.48% for the Fiduciary Shares of the Income Equity, Value Momentum
and Growth Funds, 0.49% for the Fiduciary Shares of the Blue Chip
Growth Fund and 0.50% for the Fiduciary Shares of the Emerging Growth
Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.08% for the Fiduciary Shares of the Income Equity, Value Momemtum and
Growth Funds, 1.09% for the Fiduciary Shares of the Blue Chip Growth
Fund, and 1.30% for the Fiduciary Shares of the Emerging Growth Fund.
-7-
<PAGE> 60
FINANCIAL HIGHLIGHTS
The tables below set forth certain financial information with respect
to the Fiduciary Shares of the Income Equity Fund and the Growth Fund. Financial
highlights for the Income Equity Fund and the Growth Fund for the period ended
July 31, 1996 have been derived from financial statements audited by Deloitte &
Touche LLP, independent auditors for HighMark, whose report thereon is included
in the Statement of Additional Information. Prior to the fiscal year ended July
31, 1996, Coopers & Lybrand L.L.P. served as independent accountants for
HighMark. Financial highlights for the Income Equity Fund for the periods
indicated have been derived from financial statements audited by Coopers &
Lybrand L.L.P. Financial highlights for the Income Equity Fund for the years
ended December 31, 1987, 1986, 1985, and for the period ended December 31, 1984
have been derived from financial statements examined by other auditors whose
report thereon is on file with the Securities and Exchange Commission. Financial
highlights for the Income Equity Fund for the period from January 1, 1988
through June 22, 1988 are derived from unaudited financial statements prepared
by HighMark.
The Value Momentum Fund, the Blue Chip Growth Fund and the Emerging Growth Fund
had not commenced operations in HighMark as of July 31, 1996.
Prior to June 20, 1994, the Income Equity Fund and the Growth Fund
offered a single class of Shares (now designated Fiduciary Shares) throughout
the periods shown.
-8-
<PAGE> 61
INCOME EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------- YEAR ENDED
1996 1995 JULY 31, YEAR ENDED JULY 31,
---- ---- 1994(a) -------------------
FIDUCIARY FIDUCIARY FIDUCIARY 1993 1992
--------- --------- --------- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of $13.00 $11.92 $12.13 $11.42 $10.22
Period ----------- ----------- ----------- ----------- ----------
Investment Activities
Net investment income 0.42 0.44 0.39 0.38 0.40
Net realized and unrealized 1.93 1.50 0.12 0.71 1.20
gains (losses) on investments ----------- ----------- ----------- ----------- ----------
Total from investment 2.35 1.94 0.51 1.09 1.60
Activities ----------- ----------- ----------- ----------- ----------
Distributions
Net investment income (0.42) (0.44) (0.39) (0.38) (0.40)
Net realized gains (0.66) (0.42) (0.33)
----------- ----------- ----------- ----------- ----------
Total Distributions (1.08) (0.86) (0.72) (0.38) (0.40)
----------- ----------- ----------- ----------- ----------
Net Asset Value, End of Period $14.27 $13.00 $11.92 $12.13 $11.42
=========== =========== =========== =========== ==========
Total Return 18.25% 17.26% 4.23% 9.75% 16.04%
Ratios/Supplementary Data:
Net Assets at end of period (000) $262,660 $221,325 $213,328 $104,840 $74,478
Ratio of expenses to average net 1.03% 1.06% 1.06% 1.15% 1.16%
assets
Ratio of net investment income 2.95% 3.59% 3.29% 3.27% 3.76%
to average net assets
Ratio of expenses to average 1.27% 1.30% 1.10% 1.21% 1.29%
net assets*
Ratio of net investment income 2.71% 3.34% 3.24% 3.22% 3.64%
to average net assets*
Portfolio turnover 41.51% 36.64% 33.82% 29.58% 23.05%
<CAPTION>
JUNE 23,
YEAR ENDED JULY 31, 1988 TO
---------------------------------- JULY 31,
1991 1990 1989 1988(c)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of $10.46 $12.12 $10.00 $10.00
Period ---------- ---------- ---------- ----------
Investment Activities
Net investment income 0.46 0.54 0.49 0.03
Net realized and unrealized 0.61 (0.62) 2.22
gains (losses) on investments ---------- ---------- ---------- ----------
Total from investment 1.07 (0.08) 2.71 0.03
Activities ---------- ---------- ---------- ----------
Distributions
Net investment income (0.46) (0.54) (0.49) (0.03)
Net realized gains (0.85) (1.04) (0.10)
---------- ---------- ---------- ----------
Total Distributions (1.31) (1.58) (0.59) (0.03)
---------- ---------- ---------- ----------
Net Asset Value, End of Period $10.22 $10.46 $12.12 $10.00
========== ========== ========== ==========
Total Return 12.60% (0.84)% 28.16% 1.31%(d)
Ratios/Supplementary Data:
Net Assets at end of period (000) $49,047 $41,280 $40,027 $30,495
Ratio of expenses to average net 1.17% 1.15% 1.19% 0.99%(b)
assets
Ratio of net investment income 4.81% 4.82% 4.61% 2.56%(b)
to average net assets
Ratio of expenses to average 1.40% 1.41% 1.41% 1.41%(b)
net assets*
Ratio of net investment income 4.58% 4.56% 4.39% 2.14%(b)
to average net assets*
Portfolio turnover 33.10% 37.11% 28.83% 3.12%
<FN>
(a) On June 20, 1994, the Income Equity Fund commenced offering Investor Shares
(now called "Retail Shares") and designated existing Shares as Fiduciary
Shares.
(b) Annualized.
(c) The Income Equity Fund commenced operations on June 23, 1988 as a result of
the reorganization involving the Income Equity Portfolio of the IRA
collective Investment Fund described under GENERAL
INFORMATION--Reorganization of The IRA Fund & HighMark.
(d) Not annualized.
* During the period the investment advisory and administration fees were
voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
</TABLE>
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<PAGE> 62
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS)
THE IRA COLLECTIVE INVESTMENT FUND INCOME EQUITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
JAN. 1,
1988
THROUGH YEAR ENDED YEAR ENDED
JUNE 22, DEC. 31, DEC. 31,
1988 1987 1986
(UNAUDITED) (AUDITED) (AUDITED)
----------- --------- ---------
<S> <C> <C> <C>
Investment income $ 0.440 $ 0.927 $ 0.944
Operating expenses 0.102 0.185(g) 0.154(g)
Net investment income 0.338 0.742 0.790
Dividends from net investment income (0.338) (0.742) (0.790)
Net realized and unrealized gain
(loss) on investments 1.884 (0.564) 1.934
--------- --------- ---------
Increase (decrease) in net asset value 1.884 (0.564) 1.934
Net Asset Value:
Beginning of period 14.059 14.623 12.689
--------- --------- ---------
End of period $ 15.943 $ 14.059 $ 14.623
========= ========= =========
Ratio of expenses to average net assets(c)(d) 1.41% 1.12% 0.97%
Ratio of net investment income
to average net assets(c) 5.45% 4.50% 4.96%
Portfolio turnover 5.83% 20.88% 12.07%
Number of Shares/units
outstanding at end of period 1,940,573 1,978,920 1,416,327
<FN>
(g) The expenses shown are not representative of expenses actually incurred
by the Income Equity Portfolio through May 31, 1987. During mid-May
1985, The Bank of California, N.A., investment adviser to the Income
Equity Portfolio, commenced charging its management fee, and commencing
June 1, 1987, operating expenses were charged to the Income Equity
Portfolio. Had the maximum allowable operating expenses and management
fees been paid by the Income Equity Portfolio for the entire period
pursuant to the Management Agreement between the Income Equity
Portfolio and The Bank of California, N.A., the per unit expenses and
net investment income would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JAN. 1,
1988
THROUGH YEAR ENDED YEAR ENDED
JUNE 22, DEC. 31, DEC. 31,
1988 1987 1986
(UNAUDITED) (AUDITED) (AUDITED)
----------- --------- ---------
<S> <C> <C> <C>
Expenses $ 0.257 $ 0.260 $ 0.248
Net investment income 0.183 0.612 0.557
Net asset value, end of year 15.943 14.059 14.623
Expenses as a percentage of
average net assets 2.00%(h) 1.67% 2.00%
<FN>
(h) Annualized based on the period for which assets were held.
</TABLE>
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<PAGE> 63
GROWTH FUND FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended July 31,
------------------- Nov. 18, 1993 to
1996 1995 July 31, 1994(a)
---- ---- ----------------
Fiduciary Fiduciary Fiduciary
--------- --------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $11.87 $ 9.76 $10.00
------ ------- -------
Investment Activities
Net investment income 0.12 0.15 0.05
Net realized and unrealized gains (losses) on investments 1.35 2.26 (0.24)
------ ------- -------
Total from Investment Activities 1.47 2.41 (0.19)
------ ------- -------
Distributions
Net investment income (0.12) (0.15) (0.05)
Net realized gains (0.64) (0.15) --
------ ------- -------
Total Distributions (0.76) (0.30) (0.05)
------ ------- -------
Net Asset Value, End of Period $12.58 $ 11.87 $ 9.76
====== ======= =======
Total Return 12.72% 25.23% (1.87)%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) $41,495 $25,096 $15,254
Ratio of expenses to average net assets 0.93% 0.79% 0.77%(b)
Ratio of net investment income to average net assets 0.98% 1.40% 0.86%(b)
Ratio of expenses to average net assets* 1.67% 1.92% 2.61%(b)
Ratio of net investment income loss to average net assets* 0.23% 0.26% (0.98)%(b)
Portfolio turnover 78.58% 67.91% 123.26%
<FN>
(a) Period from commencement of operations. On June 20, 1994, the Growth Fund
commenced offering Investor Shares (now called "Retail Shares") and
designated existing shares as Fiduciary Shares.
(b) Annualized.
(c) Not annualized.
* During the period, certain fees were voluntarily reduced. In addition,
certain expenses were reimbursed. If such voluntary fee reductions and
expense reimbursements had not occurred, the ratios would have been as
indicated.
</TABLE>
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FUND DESCRIPTION
The HighMark Group (the "Group") is an open-end, diversified, registered
investment company that offers units of beneficial interest ("Shares") in
sixteen separate investment portfolios ("Funds"). All of the Funds are advised
by Pacific Alliance Capital Management (the "Advisor"), a division of Union Bank
of California, N.A. Shareholders may purchase Shares of selected Funds through
two separate classes (the "Retail" and "Fiduciary" classes). These classes may
have different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Fiduciary
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Fiduciary Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVES
The investment objectives of the Funds are as follows:
The Income Equity Fund seeks investments in equity securities that provide
current income through the regular payment of dividends, with the goal that the
Income Equity Fund will have a high current yield and a low level of price
volatility. Opportunity for long-term growth of asset value is a secondary
consideration.
The Value Momentum Fund seeks long-term capital growth with a secondary
objective of income.
The Blue Chip Growth Fund seeks long-term capital growth by investing in a
diversified portfolio of common stocks and other equity securities of seasoned,
large capitalization companies.
The Growth Fund seeks long-term capital appreciation through investments in
equity securities. The production of current income is an incidental objective.
The Emerging Growth Fund seeks long-term growth of capital by investing in a
diversified portfolio of equity securities of small capitalization, emerging
growth companies.
The investment objectives and certain of the investment limitations of the Funds
may not be changed without a vote of the holders of a majority of the
outstanding Shares of the respective Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that a Fund will
achieve its investment objective.
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INVESTMENT POLICIES
INCOME EQUITY FUND
Under normal market conditions, the Income Equity Fund will invest at least 65%
of its total assets in equity securities, including common stocks, warrants to
purchase common stocks, American Depositary Receipts ("ADRs"), preferred stocks
and securities (including debt securities) convertible into or exercisable for
common stocks. The Income Equity Fund's investments primarily consist of the
common stocks of U.S. corporations that regularly pay dividends, although there
can be no assurance that a corporation will continue to pay dividends.
Investments will be made in an attempt to keep the Income Equity Fund's yield
above the S&P 500's yield by approximately one-third to one-half the difference
between the S&P 500's yield and the yield on long-term U.S. Government bonds.
The Income Equity Fund generally invests in stocks with favorable, long-term
fundamental characteristics when their current relative yields are at the upper
end of their historical yield ranges. Frequently, these stocks are out of favor
in the financial community and investors see little opportunity for price
appreciation. The Fund may also invest in major U.S. corporations in a mature
stage of development or operating in slower areas of the economy. While it is
anticipated that a significant part of the total growth in asset value
experienced by the Income Equity Fund will result from companies' improving
prospects (although there can be no assurance that this will in fact occur),
dividends will provide a substantial portion of the Fund's total return. When
yields on stocks held by the Income Equity Fund drop to the lower end of their
historical ranges, the Fund may begin to reduce its holdings. Similarly, if
there is a significant fundamental change that impairs a company's ability to
pay dividends, or if the yield on a stock dips below the yield of the general
market, the Income Equity Fund may eliminate its holdings in these stocks.
VALUE MOMENTUM FUND
Under normal market conditions, the Value Momentum Fund will invest at least 65%
of its total assets in equity securities, including common stocks, warrants to
purchase common stocks, ADRs, preferred stocks and securities (including debt
securities) convertible into or exercisable for common stocks. The Value
Momentum Fund will be invested primarily in securities which the Advisor
believes to be undervalued relative to the market and to the security's historic
valuation. Stocks are then screened for positive price or earnings momentum.
Securities purchased will generally have a medium to high market capitalization.
A majority of the securities in which the Value Momentum Fund invests will be
dividend paying.
BLUE CHIP GROWTH FUND
Under normal market conditions, the Blue Chip Growth Fund will invest at least
65% of its total assets in equity securities, including common stocks, warrants
to purchase common stocks, ADRs, preferred stocks and securities (including debt
securities) convertible into or exercisable for common stocks. The Fund
primarily invests in equity securities of seasoned,
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large capitalization companies. A seasoned company is generally a company with
an operating history of 3 years or more. A large capitalization company is
generally a company with capitalization in excess of $1.0 billion. A majority of
the Fund's equity investments ordinarily will consist of dividend-paying
securities.
GROWTH FUND
Under normal market conditions, the Growth Fund will invest at least 65% of its
total assets in equity securities, including common stocks, warrants to purchase
common stocks, ADRs, preferred stocks and securities (including debt securities)
convertible into or exercisable for common stocks, of growth-oriented companies.
The Growth Fund emphasizes a well-diversified portfolio of medium to large
capitalization growth companies (capitalization in excess of $500 million) with
a record of above average growth in earnings. The Fund focuses on companies that
the Advisor believes to have enduring quality and above average earnings growth.
Among the criteria the Fund uses to screen for stock selection are earnings
growth, return on capital, brand identity, recurring revenues, price and quality
of management team.
EMERGING GROWTH FUND
Under normal market conditions, the Emerging Growth Fund will invest at least
65% of its total assets in equity securities, including common stocks, warrants
to purchase common stocks, ADRs, preferred stocks and securities (including debt
securities) convertible into or exercisable for common stocks of small and
medium capitalization companies. Small and medium capitalization companies are
those with capitalization between $50 million and $1 billion and the potential
for growth or those which, in the Advisor's opinion, have potential for
above-average long-term capital appreciation. An emerging growth company is one
which, in the Advisor's judgment, is in the developing stages of its life cycle
and has demonstrated or is expected to achieve rapid growth in earnings and/or
revenues. Emerging growth companies are characterized by opportunities for rapid
growth rates and/or dynamic business changes. Emerging growth companies,
regardless of size, tend to offer the potential for accelerated earnings or
revenue growth because of new products or technologies, new channels of
distribution, revitalized management or industry conditions, or similar
opportunities. A company may or may not yet be profitable at the time the
Emerging Growth Fund invests in its securities. Current income will not be a
criterion of investment selection, and any such income should be considered
incidental. Many of the securities in which the Fund invests will not pay
dividends.
The Emerging Growth Fund may also invest in equity securities of companies in
"special equity situations," meaning companies experiencing unusual and possibly
non-repetitive developments, such as mergers; acquisitions; spin-offs;
liquidations; reorganizations; and new products, technology or management. Since
a special equity situation may involve a significant change from a company's
past experiences, the uncertainties in the appraisal of the future value of the
company's equity securities and the risk of a possible decline in the value of
the Emerging Growth Fund's investments are significant.
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GENERAL
MONEY MARKET INSTRUMENTS
Under normal market conditions, each Equity Fund may invest up to 35% of its
total assets in money market instruments. When market conditions indicate a
temporary "defensive" investment strategy as determined by the Advisor, a Fund
may invest more than 35% of its total assets in money market instruments. A Fund
will not be pursuing its investment objective to the extent that a substantial
portion of its assets are invested in money market instruments.
ILLIQUID AND RESTRICTED SECURITIES
Each Fund shall limit investment in illiquid securities to 15% or less of its
net assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of the illiquid
securities. Each Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, a Fund may lend its portfolio securities
to broker-dealers, banks or other institutions. A Fund may lend portfolio
securities in an amount representing up to 33 1/3% of the value of the Fund's
total assets.
OTHER INVESTMENTS
The Funds may enter into repurchase agreements and reverse repurchase
agreements.
The Equity Funds may enter into forward commitments or purchase securities on a
"when-issued" basis. Each Equity Fund expects that commitments by a Fund to
enter into forward commitments or purchase when-issued securities will not
exceed 25% of the value of the Fund's total assets under normal market
conditions. The Equity Funds do not intend to purchase when-issued securities or
forward commitments for speculative or leveraging purposes but only for the
purpose of acquiring portfolio securities.
The Funds may also invest in money market instruments, money market funds, and
in cash, and may invest in other registered investment companies with similar
investment objectives.
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A Fund may invest up to 5% of its total assets in the shares of any one
registered investment company, but may not own more than 3% of the securities of
any one registered investment company or invest more than 10% of its assets in
the securities of other registered investment companies. In accordance with an
exemptive order issued to HighMark by the SEC, such other registered investment
company securities may include shares of a money market fund of HighMark, and
may include registered investment companies for which the Advisor or Sub-Advisor
to a Fund of HighMark, or an affiliate of such Advisor or Sub-Advisor, serves as
investment advisor, administrator or distributor. Because other registered
investment companies employ an investment advisor, such investment by a Fund may
cause Shareholders to bear duplicative fees. The Advisor will waive its fees
attributable to the assets of the investing Fund invested in a money market fund
of HighMark, and, to the extent required by applicable law, the Advisor will
waive its fees attributable to the assets of the Fund invested in any investment
company. Some Funds are subject to additional restrictions on investments in
other investment companies. See "INVESTMENT RESTRICTIONS" in the Statement of
Additional Information.
Each Fund may write covered calls on its equity securities and enter into
closing transactions with respect to covered call options.
A Fund's assets may be invested in options, futures contracts and options on
futures, Standard & Poor's Depositary Receipts ("SPDRs"), and investment grade
bonds. The aggregate value of options on securities (long puts and calls) will
not exceed 10% of a Fund's net assets at the time such options are purchased by
the Fund.
A Fund may enter into futures and options on futures only to the extent that
obligations under such contracts or transactions, together with options on
securities, represent not more than 25% of the Fund's assets.
Each Fund may purchase options in stock indices to invest cash on an interim
basis. The aggregate premium paid on all options on stock indices cannot exceed
20% of the Fund's total assets.
All of the common stocks in which the Funds invest (including foreign securities
in the form of ADRs, but not including Rule 144A Securities) are traded on
registered exchanges or in the over-the-counter market.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
Since the Equity Funds invest in equity securities, each Fund's Shares will
fluctuate in value, and thus may be more suitable for long-term investors who
can bear the risk of short-term fluctuations. In addition, the market value of
the fixed-income securities bears an inverse relationship to changes in market
interest rates, which may affect the net asset value of Shares. The longer the
remaining maturity of a security, the greater is the effect of interest rate
changes on its market value. Changes in the value of a Fund's fixed-income
securities will not
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affect cash income received from ownership of such securities, but will affect a
Fund's net asset value.
An Equity Fund may invest in convertible securities, which include corporate
bonds, notes or preferred stocks that can be converted into common stocks or
other equity securities. Convertible securities also include other securities,
such as warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into common stock, their values will
normally vary in some proportion with those of the underlying common stock.
Convertible securities usually provide a higher yield than the underlying common
stock, however, so that the price decline of a convertible security may
sometimes be less substantial than that of the underlying common stock. The
value of convertible securities that pay dividends or interest, like the value
of all fixed-income securities, generally fluctuates inversely with changes in
interest rates. Warrants have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. They do not
represent ownership of the securities for which they are exercisable, but only
the right to buy such securities at a particular price. The Equity Funds will
not purchase any convertible debt security or convertible preferred stock unless
it has been rated as investment grade at the time of acquisition by a NRSRO or
that is not rated but is determined to be of comparable quality by the Advisor.
Given the uncertainty of the future value of emerging growth companies and
companies in special equity situations, the risk of possible decline in value of
the Emerging Growth Fund's net assets are significant. Companies in which the
Emerging Growth Fund invests may offer greater opportunities for capital
appreciation than larger more established companies, but investment in such
companies may involve certain special risks. These risks may be due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and frequent lack of depth in management. The securities of
such companies are often traded in the over-the-counter market and may not be
traded in volumes typical on a national securities exchange. Thus, the
securities of emerging growth companies may be less liquid, and subject to more
abrupt or erratic market movements than securities of larger, more established
growth companies. Since a "special equity situation" may involve a significant
change from a company's past experiences, the uncertainties in the appraisal of
the future value of the company's equity securities and the risk of a possible
decline in the value of the Fund's investments are significant.
INVESTMENT LIMITATIONS
Each Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of such Fund's total
assets would be invested in the issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the issuer's
outstanding voting securities (except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations).
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2) Purchase any securities that would cause more than 25% of such
Fund's total assets at the time of purchase to be invested in securities of one
or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
and (c) utilities will be divided according to their services (for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry);
3) Make loans, except that a Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements in
accordance with its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the respective Fund. Additional fundamental and
non-fundamental investment limitations are set forth in the Statement of
Additional Information.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. Each of
the Equity Funds' portfolio turnover rate may vary greatly from year to year as
well as within a particular year. High portfolio turnover rates generally will
result in correspondingly higher brokerage and other transactions costs to the
Equity Funds and could involve the realization of capital gains that would be
taxable when distributed to Shareholders of the relevant Equity Fund. See
FEDERAL TAXATION.
PURCHASE AND REDEMPTION OF SHARES
As noted above, each Fund (except the Blue Chip Growth Fund, which is offered
only in Fiduciary Shares) is divided into two classes of Shares, Retail and
Fiduciary. Fiduciary Shares may be purchased at net asset value. Only the
following investors qualify to purchase an Equity Fund's Fiduciary Shares: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Income Funds prior to June 20, 1994, which have remained continuously
open thereafter and which are not considered to be fiduciary accounts; (iii)
Shareholders who currently own Shares of HighMark's Equity or Income Funds that
were purchased prior to June 20, 1994 within an account registered in their name
with the Funds; and (iv) present and retired directors, officers and employees
(and their spouses and children under the age of 21)
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of Union Bank of California, N.A., HighMark's current or former distributors or
their respective affiliated companies who currently own Shares of HighMark Funds
which were purchased before April 30, 1997. For a description of investors who
qualify to purchase Retail Shares, see the Retail Shares prospectus of the
Equity Funds.
Purchases and redemptions of Shares of the Funds may be made on days on which
both the New York Stock Exchange and Federal Reserve wire system are open for
business ("Business Days"). The minimum initial investment is generally $1,000
for each Fund and the minimum subsequent investment is generally only $100. For
present and retired directors, officers, and employees (and their spouses and
children under the age of 21) of Union Bank of California, SEI Financial
Services Company and their affiliates, the minimum initial investment is $250
and the minimum subsequent investment is $50. A Fund's initial and subsequent
minimum purchase amounts may be waived if purchases are made in connection with
Individual Retirement Accounts, Keoghs, payroll deduction plans, or 401(k) or
similar plans. However, the minimum investment may be waived in the
Distributor's discretion. Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
1:00 p.m., Pacific time (4:00 p.m., Eastern time) and the custodian receives
Federal funds before the close of business on the next Business Day. The
purchase price of Shares of a Fund is the net asset value next determined after
a purchase order is received and accepted by HighMark. The net asset value per
Share of a Fund is determined by dividing the total market value of a Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of a Fund. Net asset value per share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day.
Purchases will be made in full and fractional Shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor determines that it is not in the best interest of HighMark
and/or its Shareholders to accept such order.
Shares of the Funds are offered only to residents of states in which the Shares
are eligible for purchase.
Shareholders who desire to redeem shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Funds reserve the right to make payment for
redemptions in securities rather than cash.
Neither HighMark's transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. HighMark and its
transfer agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures may include taping of telephone
conversations. If market conditions are extraordinarily active
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or other extraordinary circumstances exist, and you experience difficulties
placing redemption orders by telephone, you may wish to consider placing your
order by other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Fiduciary Shares for Fiduciary Shares of another Fund on the
basis of the relative net asset value of the Fiduciary Shares exchanged.
Shareholders may also exchange Fiduciary Shares of a Fund for Retail Shares of
another Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per share plus the appropriate sales load.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including participating organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in an Equity Fund may do so by
contacting the transfer agent at 1-800-734-2922. Exchanges will be effected on
any Business Day at the net asset value of the Funds involved in the exchange
next determined after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
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DIVIDENDS
The net income of each of the Equity Funds is declared and paid monthly as a
dividend to Shareholders of record at the close of business on the day of
declaration. Net realized capital gains are distributed at least annually to
Shareholders of record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of a Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
FEDERAL TAXATION
Each Equity Fund intends to qualify for treatment as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
to distribute substantially all of its net investment income and net realized
capital gains so that each Fund is not required to pay federal taxes on these
amounts.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. The 70 percent dividends received deduction for
corporations generally will apply to these distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction when received by a Fund if a Fund were a regular corporation, and to
the extent designated by a Fund as so qualifying. Distributions by the Fund of
the excess of net long-term capital gain over net short-term capital loss is
taxable to Shareholders as long-term capital gain in the year with respect to
which it is received, regardless of how long the Shareholder has held Shares of
the Fund. Such distributions are not eligible for the dividends received
deduction. If a Shareholder disposes of Shares in a Fund at a loss before
holding such Shares for longer than six months, such loss will be treated as a
long-term capital loss to the extent the Shareholder has received long-term
capital gain dividends on the Shares.
Prior to purchasing Shares of the Equity Funds, the impact of dividends or
capital gain distributions that are expected to be declared or have been
declared, but not paid, should be carefully considered. Dividends or capital
gain distributions received after a purchase of Shares are subject to federal
income taxes, although in some circumstances, the dividends or distributions may
be, as an economic matter, a return of capital to the Shareholder. A Shareholder
should consult his or her advisor for specific advice about the tax consequences
to the Shareholder of investing in a Fund.
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Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting each Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A. serves as the Equity Funds' investment advisor. Subject to the general
supervision of HighMark's Board of Trustees, the Advisor manages each Fund in
accordance with its investment objective and policies, makes decisions with
respect to and places orders for all purchases and sales of the Fund's
investment securities, and maintains the Fund's records relating to such
purchases and sales.
For the expenses assumed and services provided by the Advisor as each Fund's
investment advisor, Union Bank of California receives a fee from the Growth
Fund, Value Momentum Fund, Income Equity Fund and Blue Chip Growth Fund,
computed daily and paid monthly, at the annual rate of sixty one-hundredths of
one percent (.60%) of the Fund's average daily net assets, and from the Emerging
Growth Fund, at the annual rate of eighty one-hundredths of one percent (.80%)
of the Fund's average daily net assets. This fee may be higher than the advisory
fee paid by most mutual funds, although the Board of Trustees believes it will
be comparable to advisory fees paid by many funds having similar objectives and
policies. Union Bank of California may from time to time agree to voluntarily
reduce its advisory fee, however, it is not currently doing so. While there can
be no assurance that Union Bank of California will choose to make such an
agreement, any voluntary reductions in Union Bank of California's advisory fee
will lower the Fund's expenses, and thus increase the Fund's yield and total
return, during the period such voluntary reductions are in effect. During
HighMark's fiscal year ended July 31, 1996, Union Bank of California received
investment advisory fees from the Growth Fund aggregating 0.50% of the Fund's
average daily net assets, and from the Income Equity Fund aggregating 0.66% of
the Fund's average daily net assets. As of the date of this prospectus, the
Value Momentum Fund, the Emerging Growth Fund, and the Blue Chip Equity Fund had
not yet commenced operations in the HighMark Group.
On April 1, 1996, the Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor
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banks) has been in banking since the early 1900's and, historically, each has
had significant investment functions within its trust and investment division.
UnionBanCal Corporation, the parent of Union Bank of California, N.A., is a
publicly held corporation, but is principally held by The Bank of
Tokyo-Mitsubishi, Ltd. As of September 30, 1996, Union Bank of California and
its subsidiaries had approximately $28.7 billion in commercial assets. Pacific
Alliance Capital Management is a division of Union Bank of California's Trust
and Investment Management Group which, as of June 30, 1996, had approximately
$13.4 billion of assets under management. The Advisor, with a team of
approximately 45 stock and bond research analysts, portfolio managers and
traders, has been providing investment management services to individuals,
institutions and large corporations since 1917.
All investment decisions for the Equity Funds are made by a team of investment
professionals, all of whom take an active part in the decision making process.
The team leaders for each Fund are as follows:
Growth Fund -- The team leader for the Growth Fund is Scott Chapman.
Mr. Chapman has been Growth Fund team leader for the Advisor since
1993. He began working for the Advisor as an equity security analyst in
1991.
Value Momentum Fund -- The team leader for the Value Momentum Fund is
Richard Earnest. Mr. Earnest, a Senior Vice President of the Advisor,
has served as team leader of the Stepstone Value Momentum Fund since
its inception, and has been with the Advisor and its predecessor, Union
Bank, since 1964.
Income Equity Fund -- The team leader for the Income Equity Fund is
Thomas Arrington. Mr. Arrington began working for the Advisor as a
Business Administration Manager in 1990. From 1991 to 1994 Mr.
Arrington was a Securities Research Analyst. In 1994 Mr. Arrington
became team leader for the Income Equity Fund.
SUB-ADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "Sub-Advisor") have
entered into an investment subadvisory agreement relating to the Emerging Growth
and Blue Chip Growth Funds (the "Investment Sub-Advisory Agreement"). Under the
Investment Sub-Advisory Agreement, the Sub-Advisor will make the day-to-day
investment decisions for the assets of the Emerging Growth and Blue Chip Growth
Funds, subject to the supervision of, and policies established by, the Advisor
and the Trustees of HighMark.
Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, operates as a wholly-owned subsidiary of The
Bank of Tokyo-Mitsubishi, Ltd. The Sub-Advisor was formed by the combination on
April 1, 1996, of Bank of Tokyo Trust Company, a wholly-owned subsidiary of The
Bank of Tokyo, Ltd., and Mitsubishi Bank Trust Company of New York, a
wholly-owned subsidiary of The Mitsubishi Bank, Limited. Bank of Tokyo Trust
Company was the surviving entity, and changed its name to Bank of
Tokyo-Mitsubishi Trust Company. Prior to the combination, subadvisory services
were provided by Bank of Tokyo Trust Company. Bank of Tokyo Trust Company
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was established in 1955, and has provided trust services since that time and
management services since 1965.
The Sub-Advisor serves as portfolio manger to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of June 30, 1996, the Sub-Advisor managed
$700 million in individual portfolios and collective funds. In addition, the
Sub-Advisor will also serve as Sub-Advisor to HighMark's Government Securities
and Convertible Securities Funds.
The Sub-Advisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .50% of the average daily net
assets of the Emerging Growth Fund and .30% of the average daily net assets of
the Blue Chip Growth Fund. As of the date of this prospectus, the Emerging
Growth Fund and the Blue Chip Growth Fund had not yet commenced operations in
the HighMark Group.
Seth E. Shalov will serve as portfolio manager to the Emerging Growth Fund. Mr.
Shalov has been a Senior Portfolio Manager with the Sub-Advisor and its
predecessor, Bank of Tokyo Trust Company, since October, 1987.
The day-to-day management of the Blue Chip Growth Fund's investments is the
responsibility of a team of investment professionals.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Fiduciary Shares.
Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of each Fund,
for which it receives a fee paid by the Administrator at the annual rate of up
to 0.05% of the average daily net assets of the Funds. Union Bank of California
has voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
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THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Fiduciary Shares
of HighMark for which services it receives a fee.
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.10% of average
daily net assets for the Fiduciary Shares of the Income Equity Fund, 0.09% for
the Fiduciary Shares of the Growth Fund and 0.00% for the Fiduciary Shares of
the Value Momentum, Blue Chip Growth and Emerging Growth Funds.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and HighMark are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
or by a majority vote of the outstanding securities of HighMark upon not more
than 60 days written notice by either party, or upon assignment by the
Distributor. Fiduciary Shares are not subject to HighMark's Distribution Plan or
a distribution fee.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Funds
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of each
Fund, for which it receives compensation from SEI Fund Resources without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Funds.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
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CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Equity Funds. The Custodian holds cash securities and
other assets of HighMark as required by the 1940 Act.
Services performed by Union Bank of California, as the Funds' shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund, and the California Intermediate Tax-Free Bond Fund had been
offered for sale in the HighMark Group. Shares of each Fund are freely
transferable, are entitled to distributions from the assets of the Fund as
declared by the Board of Trustees, and, if HighMark were liquidated, would
receive a pro rata share of the net assets attributable to that Fund. Shares are
without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Retail Shares of the Equity Funds, interested persons may contact
the Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996, Union Bank of California (475
Sansome Street, Post Office Box 45000, San Francisco, CA 94104) was the
Shareholder of record of 85.57% of the Fiduciary Shares of the Growth Fund and
73.24% of the Fiduciary Shares of the Income Equity Fund. As of November 22,
1996, the Value Momentum, Emerging Growth and Blue Chip Growth Funds had not yet
commenced operations in HighMark.
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PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Fiduciary
Shares of each Equity Fund. Performance information is computed separately for a
Fund's Retail and Fiduciary Shares in accordance with the formulas described
below.
The aggregate total return and average annual total return of the Equity Funds
may be quoted for the life of each Fund and for ten-year, five-year, three-year,
and one-year periods, in each case through the most recent calendar quarter (in
the case of the Income Equity Fund, utilizing, when appropriate, the aggregate
total return and average annual total return of the IRA Fund Income Equity
Portfolio prior to June 23, 1988). Aggregate total return is determined by
calculating the change in the value of a hypothetical $1,000 investment in a
Fund over the applicable period that would equate the initial amount invested to
the ending redeemable value of the investment. The ending redeemable value
includes dividends and capital gain distributions reinvested at net asset value.
Average annual total return is calculated by annualizing a Fund's aggregate
total return over the relevant number of years. The resulting percentage
indicates the average positive or negative investment results that an investor
in a Fund would have experienced on an annual basis from changes in Share price
and reinvestment of dividends and capital gain distributions.
The yield of a Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of a Fund is determined by dividing the income and capital
gains distributions, or where indicated the income distributions alone, on a
Share of the Fund over a twelve-month period by the per Share public offering
price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical);
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
All performance information presented for a Fund is based on past performance
and does not predict future performance.
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MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
The Equity Funds invest in only the instruments permitted by their individual
investment objectives and policies.
AMERICAN DEPOSITARY RECEIPTS (ADRs) -- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. The purchase of non-mortgage asset-backed securities raises
risk considerations peculiar to the financing of the instruments underlying such
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial
prepayment risk, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary as much in response
to changes in interest rates and the short-term nature of the underlying car
loans or other receivables tend to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying sales contracts or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with their investment objectives and policies, the
Fixed Income Funds may invest in other asset-backed securities that may be
developed in the future.
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BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
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INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TRs, TIGRs and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations issued by a bank in the United States
with assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose
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obligations the Fund may invest; (viii) money market funds and (ix) foreign
commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although the payments on certain mortgage-related securities may be guaranteed
by a third party or otherwise similarly secured, the market value of such
securities is not secured and may fluctuate significantly because of changes in
interest rates and changes in prepayment levels. Thus, for example, if a Fund
purchases a mortgage-related security at a premium, that portion may be lost if
there is a decline in the market value of the security whether due to changes
in interest rates or prepayments of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of mortgage-related securities
are inversely affected by changes in interest rates. However, although the
value of a mortgage-related security may decline when interest rates rise, the
converse is not necessarily true because in periods of declining interest rates
the mortgages underlying the securities are prone to prepayment which results
in amounts being available for reinvestment which are likely to be invested at
a lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgaged-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable
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rate mortgages that are guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government or are directly guaranteed as
to payment of principal and interest by the issuer, which guarantee is
collateralized by U.S. government securities or is collateralized by privately
issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining
interest rates may lead to prepayment of underlying mortgages, automobile sales
contracts or credit card receivables, the prices of mortgage-related and
asset-backed securities may not rise with a decline in interest rates.
Mortgage-backed and asset-backed securities and CMOs are extremely sensitive to
the rate of principal prepayment. Similarly, callable corporate bonds also
present risk of prepayment. During periods of falling interest rates,
securities that can be called or prepaid may decline in value relative to
similar securities that are not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, certain Funds may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract
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previously written on any particular security. When the security is sold, a Fund
effects a closing purchase transaction so as to close out any existing option on
that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
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<PAGE> 86
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial
prepayment risk, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary as much in response
to changes in interest rates and the short-term nature of the underlying car
loans or other receivables tend to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying sales contracts or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with their investment objectives and policies, the
Fixed Income Funds may invest in other asset-backed securities that may be
developed in the future.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of HighMark has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, HighMark's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into
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<PAGE> 87
bankruptcy, a Fund will receive 100% collateral in the form of cash or U.S.
Government securities. This collateral will be valued daily by the lending
agent, with oversight by the Advisor, and, should the market value of the loaned
securities increase, the borrower will be required to furnish additional
collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally
lower than the yields available from otherwise comparable corporate
fixed-income securities. Like other fixed-income securities, however, the
values of U.S. Government Securities change as interest rates fluctuate.
Fluctuations in the value of portfolio securities will in many cases not affect
interest income on existing portfolio securities, but will be reflected in the
Fund's net asset value. Because the magnitude of these fluctuations will
generally be greater at times when a Fund's average maturity is longer, under
certain market conditions the Fund may invest in short-term investments
yielding lower current income rather than investing in higher yielding
longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
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<PAGE> 88
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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<PAGE> 89
HIGHMARK EQUITY FUNDS
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
SUB-ADVISOR
Bank of Tokyo-Mitsubishi Trust Company
1251 Avenue of the Americas
New York, New York 10116
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources and
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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<PAGE> 90
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
-38-
<PAGE> 91
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 92
CROSS REFERENCE SHEET
HIGHMARK BALANCED FUND
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities How to Purchase Shares; Exchange
Privileges; Redemption of Shares;
Dividends; Federal Taxation; Service
Arrangements--Administrator; Distributor;
The Distribution Plan; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
<PAGE> 93
7. Purchase of Securities Being Offered How to Purchase Shares; Exchange
Privileges; Service Arrangements--
Administrator; Distributor; The
Distribution Plan
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Inapplicable
-2-
<PAGE> 94
HIGHMARK FUNDS
BALANCED FUND
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's Balanced Fund.
RETAIL SHARES
HighMark's Retail Shares are offered to investors who are not fiduciary clients
of Union Bank of California, N.A., and who are not otherwise eligible for
HighMark's Fiduciary Shares.
This Prospectus sets forth concisely the information about HighMark and the
Balanced Fund that a prospective investor should know before investing.
Investors are advised to read this Prospectus and retain it for future
reference. A Statement of Additional Information dated the same date as this
Prospectus has been filed with the Securities and Exchange Commission and is
available without charge by writing the Distributor, SEI Financial Services
Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling
1-800-734-2922. The Statement of Additional Information is incorporated into
this Prospectus by reference. This Prospectus relates only to the Retail Shares
of the Balanced Fund. Interested persons who wish to obtain a prospectus for the
other Funds of HighMark may contact the Distributor at the above address and
telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
[_______________, 1997]
Retail Shares
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<PAGE> 95
SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Retail Shares of HighMark Balanced Fund (the "Balanced Fund" or the "Fund").
This summary is qualified in its entirety by reference to the more detailed
information provided elsewhere in the Prospectus and in the Statement of
Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Balanced Fund seeks capital
appreciation and income, with a secondary investment objective of conservation
of capital. (See "INVESTMENT OBJECTIVE").
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund primarily invests,
consistent with its investment objective, in equity securities including common
stocks and securities convertible into common stocks. The Fund may also invest
consistent with its investment objective and investment policies in fixed-income
securities. (See "INVESTMENT POLICIES").
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE BALANCED FUND? The
investment policies of the Fund entail certain risks and considerations of which
an investor should be aware. The Fund may purchase common stocks and other
equity securities that are volatile and which may fluctuate in value more than
other types of investments. Values of fixed income securities and,
correspondingly, share prices of Funds invested in such securities, tend to vary
inversely with interest rates, and may be affected by other market and economic
factors as well. (See "Risk Factors").
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which the Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of the Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The
Advisor").
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator").
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian").
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<PAGE> 96
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor").
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective (plus any applicable sales charge). Redemption orders must be placed
prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day
for the order to be effective that day. (See "HOW TO PURCHASE SHARES" and
"REDEMPTION OF SHARES").
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS").
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<PAGE> 97
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY ...........................................................................4
BALANCED FUND FEE TABLE.............................................................8
FINANCIAL HIGHLIGHTS...............................................................10
BALANCED FUND FINANCIAL HIGHLIGHTS.................................................11
FUND DESCRIPTION...................................................................12
INVESTMENT OBJECTIVE...............................................................12
INVESTMENT POLICIES................................................................12
Money Market Instruments .13
Lending of Portfolio Securities .14
Other Investments .14
Risk Factors .15
INVESTMENT LIMITATIONS.............................................................17
Portfolio Turnover .18
HOW TO PURCHASE SHARES.............................................................18
How to Purchase By Mail ..................................................19
How to Purchase By Wire ..................................................20
How to Purchase through an Automatic Investment Plan ("AIP") .............20
How to Purchase Through Financial Institutions ...........................20
Sales Charges ............................................................20
Letter of Intent .........................................................22
Rights of Accumulation ...................................................22
Sales Charge Waivers .....................................................22
Reductions for Qualified Groups ..........................................24
EXCHANGE PRIVILEGES................................................................24
</TABLE>
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<PAGE> 98
<TABLE>
<S> <C>
REDEMPTION OF SHARES....................................................25
By Mail .......................................................26
Telephone Transactions ........................................26
Systematic Withdrawal Plan ("SWP") ............................27
Other Information Regarding Redemptions .......................27
DIVIDENDS...............................................................28
FEDERAL TAXATION........................................................28
SERVICE ARRANGEMENTS....................................................29
Investment Advisor ............................................29
Administrator .................................................30
The Transfer Agent ............................................31
Distributor ...................................................31
The Distribution Plan .........................................32
Banking Laws ..................................................33
Custodian .....................................................33
GENERAL INFORMATION.....................................................33
Description of HighMark & Its Shares ..........................33
Performance Information........................................34
Miscellaneous .................................................35
DESCRIPTION OF PERMITTED INVESTMENTS....................................35
</TABLE>
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<PAGE> 99
BALANCED FUND FEE TABLE
<TABLE>
<CAPTION>
Balanced Fund
Retail Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 4.50%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as
applicable)(b)
Redemption Fees (as a percentage 0%
of amount redeemed, if
applicable)(c)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0.25%
Other Expenses (after voluntary
reduction)(d) 0.30%
Total Fund Operating 1.15%
Expenses(e) ====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
-8-
<PAGE> 100
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced Fund
Retail Shares $56 $80 $105 $178
</TABLE>
The purpose of the table above is to assist an investor in the Balanced
Fund in understanding the various costs and expenses that a Shareholder will
bear directly or indirectly. For a more complete discussion of the Fund's annual
operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the Balanced Fund on behalf of their customers may
charge customers fees for services provided in connection with the
investment in, redemption of, and exchange of Shares. (See HOW TO PURCHASE
SHARES, EXCHANGE PRIVILEGES, REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS
below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Retail Shares of the Fund
that were purchased without a sales charge in reliance upon the waiver
accorded to purchases in the amount of $1 million or more, but only where
such redemption request is made within one year of the date the Shares were
purchased.
(c) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder. (See REDEMPTION OF SHARES
below.)
(d) Absent voluntary fee waivers, OTHER EXPENSES would be .48% for the Retail
Shares of the Balanced Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be 1.33%
for the Retail Shares of the Balanced Fund.
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<PAGE> 101
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect
to the Retail Shares of the Balanced Fund. Financial highlights for the Fund for
the period ended July 31, 1996 have been derived from financial statements
audited by Deloitte & Touche LLP, independent auditors for HighMark, whose
report thereon is included in the Statement of Additional Information. Prior to
the fiscal year ended July 31, 1996, Coopers & Lybrand L.L.P. served as
independent accountants for HighMark.
Prior to June 20, 1994, the Balanced Fund offered a single class of
Shares (now designated Fiduciary Shares) throughout the periods shown.
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<PAGE> 102
BALANCED FUND FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended July 31, June 20, 1994 to
-------------------
1996 1995 July 31, 1994(a)
---- ---- ----------------
Retail Retail Retail
------ ------ ------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.79 $ 9.71 $9.71
------ ------- -----
Investment Activities
Net investment income 0.40 0.43
Net realized and unrealized gains (losses) on investments 0.77 1.04 0.06
---- ------- -------
Total from Investment Activities 1.17 1.47 0.06
---- ------- -------
Distributions
Net investment income (0.40) (0.39) (0.06)
---- ------- -------
Net Asset Value, End of Period $11.56 $ 10.79 $ 9.71
====== ======= =======
Total Return 10.94% 15.60% 0.25%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $694 $467 ---
Ratio of expenses to average net assets 0.94% 0.90% ---
Ratio of net investment income to average net assets 3.48% 3.78% ---
Ratio of expenses to average net assets* 2.03% 2.05% ---
Ratio of net investment income to average net assets* 2.39% 2.63% ---
Portfolio turnover (c) 12.84% 20.70% 44.14%
<FN>
(a) Period from commencement of operations. On June 20, 1994, the Balanced Fund
commenced offering Investor Shares (now called "Retail Shares") and
designated existing shares as Fiduciary Shares.
(b) Represents total return for the Fiduciary Shares from commencement of
operations to June 19, 1994 plus the total return for the Retail Shares for
the period from June 20, 1994 to July 31, 1994.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
</TABLE>
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<PAGE> 103
FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1- 800-734-2922.
For information concerning those investors who qualify to purchase Retail
Shares, sales charges and the operation of HighMark's Distribution Plan, see HOW
TO PURCHASE Shares and SERVICE ARRANGEMENTS below. (Retail Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The Balanced Fund seeks capital appreciation and income. Conservation of capital
is a secondary consideration.
The investment objective and certain of the investment limitations of the
Balanced Fund may not be changed without a vote of the holders of a majority of
the outstanding Shares of the Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES
The Balanced Fund may invest in any type or class of security. Under normal
market conditions, the Balanced Fund will invest between 50% and 70% of its
total assets in equity securities. Senior fixed-income securities will normally
constitute at least 25% of the Balanced Fund's net assets.
Equity securities include common stocks, warrants to purchase common stocks,
American Depositary Receipts ("ADRs"), preferred stocks, securities (including
debt securities) convertible into or exercisable for common stocks and Standard
& Poor's Depositary Receipts ("SPDRs"). The Balanced Fund's fixed-income
investments consist of bonds, debentures, notes, zero-coupon securities, all
forms of mortgage-related securities (including collateralized mortgage
obligations), and obligations issued or guaranteed by the U.S. or foreign
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Governments or their agencies or instrumentalities. Privately issued
mortgage-backed securities must be rated in one of the top two categories by at
least one NRSRO as defined below. In addition to mortgage-backed securities, the
Balanced Fund may invest in other asset-backed securities including, but not
limited to, those backed by company receivables, truck and auto loans, leases,
and credit card or other receivables.
The Balanced Fund may invest in bonds, notes and debentures of any maturity
issued by U.S. and foreign corporate and governmental issuers. The Balanced Fund
will invest only in corporate fixed-income securities that are rated at the time
of purchase as investment grade by a nationally recognized statistical rating
organization ("NRSRO") (e.g., at least Baa from Moody's Investors Service, Inc.
("Moody's") or BBB from Standard & Poor's Corporation ("S&P")) or, if unrated,
which the Advisor deems to be attractive opportunities and of comparable
quality. For a description of the rating symbols of the NRSROs utilized by the
Advisor, see the Appendix to the Statement of Additional Information.
In the event that a security owned by the Fund is downgraded below the stated
rating categories, the Advisor will take appropriate action with regard to that
security.
The portions of the Balanced Fund's assets invested in equity securities and
fixed-income securities will vary from time to time within the stated ranges,
depending upon the Advisor's assessment of business, economic and market
conditions. The Advisor considers a combination of risk, capital appreciation,
income, and protection of capital value.
GENERAL
MONEY MARKET INSTRUMENTS
Under normal market conditions, the Balanced Fund may invest up to 35% of its
total assets in money market instruments. When market conditions indicate a
temporary "defensive" investment strategy as determined by the Advisor, the Fund
may invest more than 35% of its total assets in money market instruments. The
Fund will not be pursuing its investment objective to the extent that a
substantial portion of its assets are invested in money market instruments.
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ILLIQUID AND RESTRICTED SECURITIES
The Balanced Fund shall limit investment in illiquid securities to 15% or less
of its net assets. Generally, an "illiquid security" is any security that cannot
be disposed of promptly and in the ordinary course of business at approximately
the amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities to broker-dealers, banks or other institutions. The Fund may lend
portfolio securities in an amount representing up to 33 1/3% of the value of the
Fund's total assets.
OTHER INVESTMENTS
The Fund may enter into repurchase agreements and reverse repurchase agreements.
The Balanced Fund may enter into forward commitments or purchase securities on a
"when-issued" basis. The Balanced Fund expects that commitments by it to enter
into forward commitments or purchase when-issued securities will not exceed 25%
of the value of the Fund's total assets under normal market conditions. The Fund
does not intend to purchase when-issued securities or forward commitments for
speculative or leveraging purposes but only for the purpose of acquiring
portfolio securities.
The Fund may also invest in money market instruments, money market funds, and in
cash, and may invest in other registered investment companies with similar
investment objectives.
The Balanced Fund may invest up to 5% of its total assets in the shares of any
one registered investment company, but may not own more than 3% of the
securities of any one registered investment company or invest more than 10% of
its assets in the securities of other registered investment companies. In
accordance with an exemptive order issued to HighMark by the SEC, such other
registered investment company securities may include shares of a money market
fund of HighMark, and may include registered investment companies for which the
Advisor or Sub-Advisor to a Fund of HighMark, or an affiliate of such Advisor or
Sub-Advisor, serves as investment advisor, administrator or distributor. Because
other registered investment companies employ an investment advisor, such
investment by a Fund may cause Shareholders to bear duplicative fees. The
Advisor will waive its fees attributable to the assets
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of the investing Fund invested in a money market fund of HighMark, and, to the
extent required by applicable law, the Advisor will waive its fees attributable
to the assets of the Fund invested in any investment company. Some Funds are
subject to additional restrictions on investment in other investment companies.
See "INVESTMENT RESTRICTIONS" in the Statement of Additional Information.
The Balanced Fund may write covered calls on its equity securities and enter
into closing transactions with respect to covered call options.
The Fund may also buy and sell options, futures contracts and options on
futures. The Fund may enter into futures contracts and options on futures only
to the extent that obligations under such contracts or transactions, together
with options on securities, represent not more than 25% of the Fund's assets.
The aggregate value of options on securities (long puts and calls) will not
exceed 10% of the Fund's net assets at the time such options are purchased by
the Fund.
The Fund may purchase options in stock indices to invest cash on an interim
basis. The aggregate premium paid on all options on stock indices cannot exceed
20% of the Fund's total assets.
All of the common stocks in which the Balanced Fund invests (including foreign
securities in the form of ADRs but not including Rule 144A Securities) are
traded on registered exchanges or in the over-the-counter market.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
Like any investment program, investment in the Balanced Fund entails certain
risks. As with a fund investing primarily in equity securities, the Balanced
Fund is subject to the risk that prices of equity securities, or certain types
of equity securities in which the Fund invests, in general will decline over
short or even extended periods. Since the Fund's shares will fluctuate in value,
the Fund may be more suitable for long-term investors who can bear the risk of
short-term fluctuations. In addition, the market value of fixed-income
securities bears an inverse relationship to changes in market interest rates,
which may affect the net asset value of Shares. The longer the remaining
maturity of a security, the greater is the effect of interest rate changes on
its market value. Generally, because of their fixed-income features, convertible
securities will fluctuate in value to a lesser degree than the common stocks
into which they are convertible. Changes in the value of a Fund's fixed-income
securities will not affect cash income received from ownership of such
securities, but will affect a Fund's net asset value.
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<PAGE> 107
Because the Balanced Fund also invests in debt securities, investors in the
Balanced Fund are also exposed to credit risk, which relates to the ability of
an issuer to make payments of principal and interest, and market risk, which
relates to changes in a security's value as a result of interest rate changes
generally. An increase in interest rates will generally reduce the value of the
investments in the Balanced Fund and a decline in interest rates will generally
increase the value of those investments. Accordingly, the net asset value of the
Fund's shares will vary as a result of changes in the value of the securities in
the Fund's portfolio. Therefore, an investment in the Fund may decline in value,
resulting in a loss of principal. Because interest rates vary, it is impossible
to predict the income or yield of the Fund for any particular period. While debt
securities normally fluctuate less in price than equity securities, there have
been extended periods of cyclical increases in interest rates that have caused
significant declines in debt securities prices. Certain fixed-income securities
which may be purchased by the Balanced Fund such as zero-coupon obligations,
mortgage-backed and asset-backed securities, and collateralized mortgage
obligations ("CMOs") will have greater price volatility then other fixed-income
obligations. Because declining interest rates may lead to prepayment of
underlying mortgages, automobile sales contracts or credit card receivables, the
prices of mortgage-related and asset-backed securities may not rise with a
decline in interest rates. Mortgage-backed and asset-backed securities and CMOs
are extremely sensitive to the rate of principal prepayment. Similarly, callable
corporate bonds also present risk of prepayment. During periods of falling
interest rates, securities that can be called or prepaid may decline in value
relative to similar securities that are not subject to call or prepayment.
Depending upon prevailing market conditions, the Balanced Fund may purchase debt
securities at a discount from face value, which produces a yield greater than
the coupon rate. Conversely, if debt securities are purchased at premium over
face value, the yield will be lower than the coupon rate. In making investment
decisions, the Advisor will consider many factors other than current yield,
including the preservation of capital, the potential for realizing capital
appreciation, maturity, and yield to maturity. From time to time, the equity and
debt markets may fluctuate independently of one another. In other words, a
decline in equity markets may in certain instances be offset by a rise in debt
markets, or vice versa. As a result, the Balanced Fund, with its balance of
equity and debt investments, may entail less investment risk (and a potentially
smaller investment return) than a mutual fund investing primarily in equity
securities.
As described above, the Balanced Fund may invest in debt securities within the
four highest rating categories assigned by a NRSRO and comparable unrated
securities. Securities rated BBB by S&P or Baa by Moody's are considered
investment grade, but are deemed by these rating services to have some
speculative characteristics, and adverse economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher-grade bonds. Should
subsequent events cause the rating of a debt security purchased by the Balanced
Fund to fall below the fourth highest rating category, the Advisor will consider
such an event in determining whether the Balanced Fund should continue to hold
that security. In no event, however, would the Balanced Fund be
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required to liquidate any such portfolio security where the Balanced Fund would
suffer a loss on the sale of such security.
The Balanced Fund may invest in convertible securities, which include corporate
bonds, notes or preferred stocks that can be converted into common stocks or
other equity securities. Convertible securities also include other securities,
such as warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into common stock, their values will
normally vary in some proportion with those of the underlying common stock.
Convertible securities usually provide a higher yield than the underlying common
stock, however, so that the price decline of a convertible security may
sometimes be less substantial than that of the underlying common stock. The
value of convertible securities that pay dividends or interest, like the value
of all fixed-income securities, generally fluctuates inversely with changes in
interest rates. Warrants have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. They do not
represent ownership of the securities for which they are exercisable, but only
the right to buy such securities at a particular price. The Balanced Fund will
not purchase any convertible debt security or convertible preferred stock unless
it has been rated as investment grade at the time of acquisition by a NRSRO or
that is not rated but is determined to be of comparable quality by the Advisor.
The Balanced Fund may invest in securities issued or guaranteed by foreign
corporations or foreign governments, their political subdivisions, agencies or
instrumentalities and obligations of supranational entities such as the World
Bank and the Asian Development Bank. Any investments in these securities will be
in accordance with the Fund's investment objective and policies, and are subject
to special risks, such as adverse political and economic developments, possible
seizure, nationalization or expropriation of foreign investments, less stringent
disclosure requirements, changes in foreign currency exchange rates, increased
costs associated with the conversion of foreign currency into U.S. dollars, the
possible establishment of exchange controls or taxation at the source or the
adoption of other foreign governmental restrictions. To the extent that the Fund
may invest in securities of foreign issuers that are not traded on any exchange,
there is a further risk that these securities may not be readily marketable. The
Balanced Fund will not hold foreign currency for investment purposes.
INVESTMENT LIMITATIONS
The Balanced Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of the Fund's total
assets would be invested in the issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the issuer's
outstanding voting securities (except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations);
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2) Purchase any securities that would cause more than 25% of the Fund's
total assets at the time of purchase to be invested in securities of one or more
issuers conducting their principal business activities in the same industry,
provided that (a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
and (c) utilities will be divided according to their services (for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry);
3) Make loans, except that the Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements in
accordance with its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. The Fund's
portfolio turnover rate may vary greatly from year to year as well as within a
particular year. High portfolio turnover rates generally will result in
correspondingly higher brokerage and other transactions costs to the Fund and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the Fund. See FEDERAL TAXATION.
HOW TO PURCHASE SHARES
As noted above, the Fund is divided into two classes of Shares, Retail and
Fiduciary. Retail Shares may be purchased at net asset value plus a sales
charge. For a description of investors who qualify to purchase Fiduciary Shares,
see the Fiduciary Shares prospectus of the Balanced Fund. HighMark's Retail
Shares are offered to investors who are not fiduciary clients of Union Bank of
California, N.A., and who are not otherwise eligible for HighMark's Fiduciary
class.
Retail Shares are sold on a continuous basis by HighMark's Distributor, SEI
Financial Services Company. The principal office of the Distributor is 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658. If you wish to purchase Shares,
you may contact your investment professional or telephone HighMark at
1-800-734-2922.
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<PAGE> 110
The minimum initial investment is generally $1,000 and the minimum subsequent
investment is generally only $100. For present and retired directors, officers,
and employees (and their spouses and children under the age of 21) of Union Bank
of California, SEI Financial Services Company and their affiliates, the minimum
initial investment is $250 and the minimum subsequent investment is $50. The
Fund's initial and subsequent minimum purchase amounts may be waived if
purchases are made in connection with Individual Retirement Accounts, Keoghs,
payroll deduction plans, 401(k) or similar plans. Purchases and redemption of
Shares of the Fund may be made on days on which both the New York Stock Exchange
and the Federal Reserve wire system are open for business ("Business Days").
Purchase orders for Shares will be executed at a per Share price equal to the
net asset value next determined after the receipt of the purchase order by the
Distributor (plus any applicable sales charge). The net asset value per Share of
the Fund is determined by dividing the total market value of the Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of the Fund. Net asset value per Share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day.
Purchases will be made in full and fractional Shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor determines that it is not in the best interest of HighMark
and/or its Shareholders to accept such order.
The securities in the Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method that HighMark's
Board of Trustees believes accurately reflects fair value. For further
information about valuation of investments in the Balanced Fund, see the
Statement of Additional Information.
Shares of the Fund are offered only to residents of states in which the Shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase Shares of the Balanced Fund by completing and signing an
Account Application form and mailing it, along with a check (or other negotiable
bank instrument or money order) payable to "HighMark Funds (Fund Name)," to the
transfer agent at P.O. Box 8416, Boston, Massachusetts 02266-8416. All purchases
made by check should be in U.S. dollars and made payable to "HighMark Funds
(Fund Name)." Third party checks, credit card checks or cash will not be
accepted. You may purchase more Shares at any time by mailing payment also to
the transfer agent at the above address. Orders placed by mail will be executed
on receipt of your payment. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred.
You may obtain Account Application Forms for the Balanced Fund by calling the
Distributor at 1-800-734-2922.
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HOW TO PURCHASE BY WIRE
You may purchase Shares of the Balanced Fund by wiring Federal funds, provided
that your Account Application has been previously received. You must wire funds
to the transfer agent and the wire instructions must include your account
number. You must call the transfer agent at 1-800-734-2922 before wiring any
funds. An order to purchase Shares by Federal funds wire will be deemed to have
been received by the Fund on the Business Day of the wire; provided that the
Shareholder wires funds to the transfer agent prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). If the transfer agent does not receive the wire by
1:00 p.m., Pacific time (4:00 p.m., Eastern time), the order will be executed on
the next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC INVESTMENT PLAN ("AIP")
You may arrange for periodic additional investments in the Balanced Fund through
automatic deductions by Automated Clearing House ("ACH") from a checking account
by completing this section in the Account Application form. The minimum
pre-authorized investment amount is $100 per month. The AIP is available only
for additional investments to an existing account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
Shares of the Fund may be purchased through financial institutions, including
the Advisor, that provide distribution assistance or Shareholder services.
Shares purchased by persons ("Customers") through financial institutions may be
held of record by the financial institution. Financial institutions may impose
an earlier cut-off time for receipt of purchase orders directed through them to
allow for processing and transmittal of these orders to the transfer agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to HighMark.
Customers who desire to transfer the registration of Shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
SALES CHARGES
The following table shows the regular sales charge on Retail Shares to a "single
purchaser" (defined below) together with the dealer discount paid to dealers and
the agency commission paid to brokers (collectively the "commission"):
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<TABLE>
<CAPTION>
SALES CHARGE AS
SALES CHARGE AS A APPROPRIATE COMMISSION AS
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
<S> <C> <C> <C>
0-$49,999 4.50% 4.71% 4.05%
$ 50,000-$99,000 4.00% 4.17% 3.60%
$100,000-$249,000 3.50% 3.63% 3.15%
$250,000-$499,999 2.50% 2.56% 2.25%
$500,000-$999,999 1.50% 1.52% 1.35%
$1,000,000 and Over* 0.00% 0.00% 0.00%
<FN>
* A contingent deferred sales charge of 1.00% will be assessed against any
proceeds of any redemption of such Retail Shares prior to one year from date of
purchase.
</TABLE>
The commissions shown in the table apply to sales through authorized dealers and
brokers. Under certain circumstances, the Distributor may use its own funds to
compensate financial institutions and intermediaries in amounts that are
additional to the commissions shown above. In addition, the Distributor may,
from time to time and at its own expense, provide promotional incentives in the
form of cash or other compensation to certain financial institutions and
intermediaries whose registered representatives have sold or are expected to
sell significant amounts of the Retail Shares of the Fund. Such other
compensation may take the form of payments for travel expenses, including
lodging, incurred in connection with trips taken by qualifying registered
representatives to places within or without the United States. Under certain
circumstances, commissions up to the amount of the entire sales charge may be
reallowed to dealers or brokers, who might then be deemed to be "underwriters"
under the Securities Act of 1933. Commission rates may vary among the Funds.
In calculating the sales charge rates applicable to current purchases of the
Fund's Shares, a "single purchaser" is entitled to cumulate current purchases
with the net purchase of previously purchased Shares of the Fund and other of
HighMark's funds (the "Eligible Funds") which are sold subject to a comparable
sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing Shares of the Fund for their own account or for trust or
custodial accounts for their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account including employee benefit plans
created under Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), including related plans of the same employer. To be
entitled to a reduced sales charge based upon Shares already owned, the investor
must ask the Distributor for such entitlement at the time of purchase and
provide the account number(s) of the investor, the investor and spouse, and
their minor children, and give the age of such children. The Fund may amend or
terminate this right of accumulation at any time as to subsequent purchases.
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<PAGE> 113
LETTER OF INTENT
By initially investing at least $1,000 and submitting a Letter of Intent (the
"Letter") to the Distributor, a "single purchaser" may purchase Shares of the
Fund and the other Eligible Funds during a 13-month period at the reduced sales
charge rates applicable to the aggregate amount of the intended purchases stated
in the Letter. The Letter may apply to purchases made up to 90 days before the
date of the Letter. To receive credit for such prior purchases and later
purchases benefitting from the Letter, the Shareholder must notify the Transfer
Agent at the time the Letter is submitted that there are prior purchases that
may apply, and, at the time of later purchases, notify the Transfer Agent that
such purchases are applicable under the Letter.
RIGHTS OF ACCUMULATION
In calculating the sales charge rates applicable to current purchases of Retail
Shares, a "single purchaser" is entitled to cumulate current purchases with the
current market value of previously purchased Retail Shares of the Funds sold
subject to a comparable sales charge.
To exercise your right of accumulation based upon Shares you already own, you
must ask the Distributor for this reduced sales charge at the time of your
additional purchase and provide the account number(s) of the investor, as
applicable, the investor and spouse, and their minor children. The Funds may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
SALES CHARGE WAIVERS
The following categories of investors may purchase Retail Shares of the Funds
with no sales charge in the manner described below (which may be changed or
eliminated at any time by the Distributor):
(1) Existing holders of Retail Shares of a Fund upon the reinvestment of
dividend and capital gain distributions on those Shares;
(2) Investment companies advised by Pacific Alliance Capital Management or
distributed by SEI Financial Services Company or its affiliates placing
orders on each entity's behalf;
(3) State and local governments;
(4) Individuals who have received distributions from employee benefit trust
accounts who are rolling over such distributions into an individual
retirement account for which the Bank serves as trustee or custodian;
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<PAGE> 114
(5) Individuals who purchase Shares with proceeds from a required minimum
distribution at age 70 1/2 from their employee benefit qualified plan
or an individual retirement account administered by Union Bank of
California;
(6) Individuals who purchase Shares with proceeds received in connection
with a distribution paid from a Union Bank of California trust or
agency account;
(7) Investment advisors or financial planners regulated by a federal or
state governmental authority who are purchasing Shares for their own
account or for an account for which they are authorized to make
investment decisions (i.e., a discretionary account) and who charge a
management, consulting or other fee for their services; and clients of
such investment advisors or financial planners who place trades for
their own accounts if the accounts are linked to the master account of
such investment advisor or financial planner on the books and records
of a broker or agent;
(8) Investors purchasing Shares with proceeds from a redemption of Shares
of another open-end investment company (other than HighMark Funds) on
which a sales charge was paid if such redemption occurred within thirty
(30) days prior to the date of the purchase order. Satisfactory
evidence of the purchaser's eligibility must be provided at the time of
purchase (e.g., a confirmation of the redemption);
(9) Brokers, dealers and agents who are purchasing for their own account
and who have a sales agreement with the Distributor, and their
employees (and their spouses and children under the age of 21);
(10) Investors purchasing Shares on behalf of a qualified prototype
retirement plan (other than an IRA, SEP-IRA or Keogh) sponsored by
Union Bank of California;
(11) Purchasers of Retail Shares of the Growth Fund that are sponsors of
other investment companies that are unit investment trusts for deposit
by such sponsors into such unit investment trusts, and to purchasers of
Retail Shares of the Growth Fund that are holders of such unit
investment trusts that invest distributions from such investment trusts
in Retail Shares of the Growth Fund;
(12) Present and retired directors, officers, and employees (and their
spouses and children under the age of 21) of Union Bank of California,
SEI Financial Services Company or their affiliated companies; and
(13) Investors receiving Shares issued in plans of reorganization, such as
mergers, asset acquisitions, and exchange offers, to which HighMark is
a party.
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<PAGE> 115
The Distributor may also periodically waive the sales charge for all investors
with respect to a Fund.
With regard to categories 2 through 12 above, the Distributor must be notified
that the purchase qualifies for a sales charge waiver at the time of purchase.
REDUCTIONS FOR QUALIFIED GROUPS
Reductions in sales charges also apply to purchases by individual members of a
"qualified group." The reductions are based on the aggregate dollar amount of
Shares purchased by all members of the qualified group. For purposes of this
paragraph, a qualified group consists of a "company," as defined in the 1940
Act, which has been in existence for more than six months and which has a
primary purpose other than acquiring Shares of a Fund at a reduced sales charge,
and the "related parties" of such company. For purposes of this paragraph, a
"related party" of a company is (i) any individual or other company who directly
or indirectly owns, controls or has the power to vote five percent or more of
the outstanding voting securities of such company; (ii) any other company of
which such company directly or indirectly owns, controls or has the power to
vote five percent or more of its outstanding voting securities; (iii) any other
company under common control with such company; (iv) any executive officer,
director or partner of such company or of a related party; and (v) any
partnership of which such company is a partner. Investors seeking to rely on
their membership in a qualified group to purchase Shares at a reduced sales load
must provide evidence satisfactory to the Transfer Agent of the existence of a
bona fide qualified group and their membership therein.
All orders from a qualified group will have to be placed through a single source
and identified at the time of purchase as originating from the same qualified
group, although such orders may be placed into more than one discrete account
that identifies HighMark.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into
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<PAGE> 116
which the Shares are exchanged. Shareholders may exchange their Retail Shares
for Retail Shares of a Fund with the same or lower sales charge on the basis of
the relative net asset value of the Retail Shares exchanged. Shareholders may
exchange their Retail Shares for Retail Shares of a Fund with a higher sales
charge by paying the difference between the two sales charges. Shareholders may
also exchange Retail Shares of a Money Market Fund for which no sales load was
paid for Retail Shares of an Equity Fund. Under such circumstances, the cost of
the acquired Retail Shares will be the net asset value per share plus the
appropriate sales load. If Retail Shares of the Money Market Fund were acquired
in a previous exchange involving Shares of a non-money market HighMark Fund,
then such Shares of the Money Market Fund may be exchanged for Shares of an
Equity Fund without payment of any additional sales load within a twelve month
period. In order to receive a reduced sales charge when exchanging into a Fund,
the Shareholder must notify HighMark that a sales charge was originally paid and
provide sufficient information to permit confirmation of qualification.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including Participating Organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in the Balanced Fund may do so by
contacting the transfer agent at 1-800-734-2922. Exchanges will be effected on
any Business Day at the net asset value of the Funds involved in the exchange
next determined after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
REDEMPTION OF SHARES
You may redeem your Shares of the Balanced Fund without charge on any Business
Day. There is presently a $15 charge for wiring redemption proceeds to a
Shareholder's designated account. Shares may be redeemed by mail, by telephone
or through a pre-arranged systematic withdrawal plan. Investors who own Shares
held by a financial institution should contact that institution for information
on how to redeem Shares.
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BY MAIL
A written request for redemption of Shares of the Balanced Fund must be received
by the transfer agent, P.O. Box 8416, Boston, Massachusetts 02266-8416 in order
to constitute a valid redemption request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the transfer
agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker dealer, credit union, securities exchange or association, clearing agency
or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
Shares, (2) the redemption check is payable to the shareholder(s) of record, and
(3) the redemption check is mailed to the shareholder(s) at his or her address
of record.
TELEPHONE TRANSACTIONS
You may redeem your Shares of the Balanced Fund by calling the transfer agent at
1-800-734- 2922. Under most circumstances, payments will be transmitted on the
next Business Day following receipt of a valid request for redemption. You may
have the proceeds mailed to your address or wired to a commercial bank account
previously designated on your Account Application. There is no charge for having
redemption proceeds mailed to you, but there is a $15 charge for wiring
redemption proceeds.
You may request a wire redemption for redemptions of Shares of the Balanced Fund
in excess of $500 by calling the transfer agent at 1-800-734-2922 who will
deduct a wire charge of $15 from the amount of the wire redemption. Shares
cannot be redeemed by Federal Reserve wire on Federal holidays restricting wire
transfers.
Neither the transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. HighMark and transfer agent will each
employ reasonable procedures to confirm that instructions, communicated by
telephone are genuine. Such procedures may include taping of telephone
conversations.
If market conditions are extraordinarily active or other extraordinary
circumstances exist, and you experience difficulties placing redemption orders
by telephone, you may consider placing your order by mail.
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SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Balanced Fund offers a Systematic Withdrawal Plan ("SWP"), which you may use
to receive regular distributions from your account. Upon commencement of the
SWP, your account must have a current net asset value of $5,000 or more. You may
elect to receive automatic payments via check or ACH of $100 or more on a
monthly, quarterly, semi-annual or annual basis. You may arrange to receive
regular distributions from your account via check or ACH by completing this
section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per Share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the transfer agent. The transfer agent may require that the signature
on the written notice be guaranteed.
It is generally not in your best interest to be participating in the SWP at the
same time that you are purchasing additional Shares if you have to pay a sales
load in connection with such purchases
OTHER INFORMATION REGARDING REDEMPTIONS
Shareholders who desire to redeem Shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Fund reserves the right to make payment for
redemptions in securities rather than cash.
Payment to the Shareholders for Shares redeemed will be made within seven days
after the transfer agent receives the valid redemption request. At various
times, however, the Fund may be requested to redeem Shares for which it has not
yet received good payment; collection of payment may take ten or more days. In
such circumstances, the redemption request will be rejected by the Fund. Once
the Fund has received good payment for the Shares a Shareholder may submit
another request for redemption.
Due to the relatively high costs of handling small investments, the Fund
reserves the right to redeem your Shares at net asset value if your account in
the Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase Shares of the Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any Shares.
Before the Fund exercises its right to redeem such Shares you will be given
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notice that the value of the Shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in the Fund
in an amount which will increase the value of the account to at least the
minimum amount.
DIVIDENDS
The net income of the Balanced Fund is declared and paid monthly as a dividend
to Shareholders of record at the close of business on the day of declaration.
Net realized capital gains are distributed at least annually to Shareholders of
record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of the Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
FEDERAL TAXATION
The Balanced Fund intends to qualify for treatment as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
to distribute substantially all of its net investment income and net realized
capital gains so that the Fund is not required to pay federal taxes on these
amounts.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. The 70 percent dividends received deduction for
corporations generally will apply to these distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction when received by the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. Distributions by the Fund
of the excess of net long-term capital gain over net short-term capital loss is
taxable to Shareholders as long-term capital gain in the year with respect to
which it is received, regardless of how long the Shareholder has held Shares of
the Fund. Such distributions are not eligible for the dividends received
deduction. If a Shareholder disposes of Shares in the Fund at a loss before
holding such Shares for longer than six months, such loss will be treated as a
long-term capital loss to the extent the Shareholder has received long-term
capital gain dividends on the Shares.
Prior to purchasing Shares of the Balanced Fund, the impact of dividends or
capital gain distributions that are expected to be declared or have been
declared, but not paid, should be carefully considered. Dividends or capital
gain distributions received after a purchase of
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Shares are subject to federal income taxes, although in some circumstances, the
dividends or distributions may be, as an economic matter, a return of capital to
the Shareholder. A Shareholder should consult his or her advisor for specific
advice about the tax consequences to the Shareholder of investing in the Fund.
Fund investments in foreign securities may be subject to withholding taxes at
the source on dividend or interest payments. In that case, the Fund's yield on
those securities would be decreased. The Fund does not expect to be eligible to
elect to permit shareholders to claim a credit or deduction on their income tax
return for their pro rata share of such taxes.
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Investment in an entity that qualifies as a "passive foreign investment company"
under the Code could subject the Fund to a U.S. federal income tax or other
charge on certain "excess distributions" received with respect to the
investment, and on the proceeds from disposition of the investment.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A., serves as the Balanced Fund's investment advisor. Subject to the general
supervision of HighMark's Board of Trustees, the Advisor manages the Fund in
accordance with its investment objective and policies, makes decisions with
respect to and places orders for all purchases and sales of
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the Fund's investment securities, and maintains the Fund's records relating to
such purchases and sales.
All investment decisions for the Balanced Fund are made by a team of investment
professionals, all of whom take an active part in the decision making process.
The team leader for the Balanced Fund is Carl J. Colombo. Mr. Colombo is a Vice
President of the Advisor, and has served as team leader for the Stepstone
Balanced and Growth Equity Funds. Mr. Colombo has been with the Advisor and its
predecessor, Union Bank, since 1985.
For the expenses assumed and services provided by the Advisor as the Fund's
investment advisor, Union Bank of California receives a fee from the Balanced
Fund, computed daily and paid monthly, at the annual rate of sixty
one-hundredths of one percent (.60%) of the Fund's average daily net assets.
This fee may be higher than the advisory fee paid by most mutual funds, although
the Board of Trustees believes it will be comparable to advisory fees paid by
many funds having similar objectives and policies. Union Bank of California may
from time to time agree to voluntarily reduce its advisory fee, however, it is
not currently doing so. While there can be no assurance that Union Bank of
California will choose to make such an agreement, any voluntary reductions in
Union Bank of California's advisory fee will lower the Fund's expenses, and thus
increase the Fund's yield and total return, during the period such voluntary
reductions are in effect. During HighMark's fiscal year ended July 31, 1996,
Union Bank of California received investment advisory fees from the Balanced
Fund aggregating 0.54% of the Fund's average daily net assets.
On April 1, 1996, the Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group which, as of June 30,
1996, had approximately 13.4 billion of assets under management. The Advisor,
with a team of approximately 45 stock and bond research analysts, portfolio
managers and traders, has been providing investment management services to
individuals, institutions and large corporations since 1917.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration
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Agreement, the Administrator provides HighMark with certain management services,
including all necessary office space, equipment, personnel, and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Retail Shares. Any
such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of the Fund, for
which it receives a fee paid by the Administrator at the annual rate of up to
0.05% of the average daily net assets of the Fund. Union Bank of California has
voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Retail Shares of
HighMark for which services it receives a fee.
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, the Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.09% of average
daily net assets.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor.
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THE DISTRIBUTION PLAN
Pursuant to HighMark's Distribution Plan, the Balanced Fund pays the Distributor
as compensation for its services in connection with the Distribution Plan a
distribution fee, computed daily and paid monthly, equal to twenty-five
one-hundredths of one percent (0.25%) of the average daily net assets
attributable to the Fund's Retail Shares.
The Distributor may use the distribution fee applicable to the Fund's Retail
Shares to provide distribution assistance with respect to the sale of the Fund's
Retail Shares or to provide Shareholder services to the holders of the Fund's
Retail Shares. The Distributor may also use the distribution fee (i) to pay
financial institutions and intermediaries (such as insurance companies and
investment counselors but not including banks and savings and loan
associations), broker-dealers, and the Distributor's affiliates and subsidiaries
compensation for services or reimbursement of expenses incurred in connection
with the distribution of the Fund's Retail Shares to their customers or (ii) to
pay banks, savings and loan associations, other financial institutions and
intermediaries, broker-dealers, and the Distributor's affiliates and
subsidiaries compensation for services or reimbursement of expenses incurred in
connection with the provision of Shareholder services to their customers owning
the Fund's Retail Shares. All payments by the Distributor for distribution
assistance or Shareholder services under the Distribution Plan will be made
pursuant to an agreement between the Distributor and such bank, savings and loan
association, other financial institution or intermediary, broker-dealer, or
affiliate or subsidiary of the Distributor (a "Servicing Agreement"; banks,
savings and loan associations, other financial institutions and intermediaries,
broker-dealers, and the Distributor's affiliates and subsidiaries that may enter
into a Servicing Agreement are hereinafter referred to individually as a
"Participating Organization"). A Participating Organization may include Union
Bank of California, its subsidiaries and its affiliates.
Participating Organizations may charge customers fees in connection with
investments in the Balanced Fund on their customers' behalf. Such fees would be
in addition to any amounts the Participating Organization may receive pursuant
to its Servicing Agreement. Under the terms of the Servicing Agreements,
Participating Organizations are required to provide their customers with a
schedule of fees charged directly to such customers in connection with
investments in the Fund. Customers of Participating Organizations should read
this Prospectus in light of the terms governing their accounts with the
Participating Organization.
The distribution fee under the Distribution Plan will be payable without regard
to whether the amount of the fee is more or less than the actual expenses
incurred in a particular year by the Distributor in connection with
distribution assistance or Shareholder services rendered by the Distributor
itself or incurred by the Distributor pursuant to the Servicing Agreements
entered into under the Distribution Plan. The Distributor may from time to time
voluntarily reduce its distribution fee with respect to the Balanced Fund in
significant amounts for substantial periods of time pursuant to an agreement
with HighMark. While there can be no assurance that
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the Distributor will choose to make such an agreement, any voluntary reduction
in the Distributor's distribution fee will lower the Balanced Fund's expenses,
and thus increase the Fund's yield and total returns, during the period such
voluntary reductions are in effect.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Fund
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of the
Fund, for which it receives compensation from SEI Fund Resources without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Fund.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Balanced Fund. The Custodian holds cash, securities and
other assets of HighMark as required by the 1940 Act.
Services performed by Union Bank of California, as the Fund's shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
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Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund and the California Intermediate Tax-Free Bond Fund had been
offered for sale in HighMark Funds. Shares of each Fund are freely transferable,
are entitled to distributions from the assets of the Fund as declared by the
Board of Trustees, and, if HighMark were liquidated, would receive a pro rata
share of the net assets attributable to that Fund. Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Fiduciary Shares of the Balanced Fund, interested persons may
contact the Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996 there was no person who owned of
record or beneficially more than 25% of the Retail Shares of the Balanced Fund.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Retail
Shares of the Balanced Fund. Performance information is computed separately for
the Fund's Retail and Fiduciary Shares in accordance with the formulas described
below.
The aggregate total return and average annual total return of the Fund may be
quoted for the life of the Fund and for ten-year, five-year, three-year and
one-year periods, in each case through the most recent calendar quarter.
Aggregate total return is determined by calculating the change in the value of a
hypothetical $1,000 investment in the Fund over the applicable period that would
equate the initial amount invested to the ending redeemable value of the
investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing the Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the average positive or
negative investment results that an investor in the Fund would have experienced
on an annual basis from changes in Share price and reinvestment of dividends and
capital gain distributions.
The yield of the Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of the Fund is determined by dividing the income and
capital gains distributions, or where indicated the income distributions alone,
on a Share of the Fund over a twelve-month period by the per Share public
offering price of the Fund on the last day of the period.
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Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical);
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
All performance information presented for the Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
The Balanced Fund invests in only the instruments permitted by its individual
investment objective and policies.
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AMERICAN DEPOSITARY RECEIPTS (ADRs) -- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. The purchase of non-mortgage asset-backed securities raises
risk considerations peculiar to the financing of the instruments underlying such
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the Fixed Income Funds
may invest in other asset-backed securities that may be developed in the
future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
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DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
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MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TRs, TIGRs and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations issued by a bank in the United States
with assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose obligations the Fund may invest; (viii) money market funds
and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases
a mortgage-related security at a premium, that portion may be lost if there is
a decline in the market value of the security whether due to changes in
interest rates or prepayments of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of mortgage-related securities
are inversely affected by changes in interest rates. However, although the
value of a mortgage-related security may decline when interest rates rise, the
converse is not necessarily true because in periods of declining interest rates
the mortgages underlying the securities are prone to prepayment which results
in amounts being available for reinvestment which are likely to be invested at
a lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call
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dates, ARMs provide for monthly payments based on a pro rata share of both
periodic interest and principal payments and prepayments of principal on the
underlying mortgage pool (less GNMA's, FNMA's, or FHLMC's fees and any
applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have
greater price volatility then other fixed-income obligations. Because declining
interest rates may lead to prepayment of underlying mortgages, automobile
sales contracts or credit card receivables, the prices of mortgage-related and
asset-backed securities may not rise with a decline in interest rates.
Mortgage-backed and asset-backed securities and CMOs are extremely sensitive to
the rate of principal prepayment. Similarly, callable corporate bonds also
present risk of prepayment. During periods of falling interest rates,
securities that can be called or prepaid may decline in value relative to
similar securities that are not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for
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refunding outstanding obligations, for general operating expenses and for
lending such funds to other public institutions and facilities, and (ii) 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. Municipal notes include
general obligation notes, tax anticipation notes, revenue anticipation notes,
bond anticipation notes, certificates of indebtedness, demand notes and
construction loan notes. Municipal bonds include general obligation bonds,
revenue or special obligation bonds, private activity and industrial development
bonds. General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility,
tolls from a toll bridge, for example. The payment of principal and interest on
private activity and industrial development bonds generally is dependent solely
on the ability of the facility's user to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, certain Funds may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
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RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the
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securities sold by a Fund may decline below the price at which a Fund is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by a Fund under the 1940 Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of HighMark has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, HighMark's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
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STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally
lower than the yields available from otherwise comparable corporate
fixed-income securities. Like other fixed-income securities, however, the values
of U.S. Government Securities change as interest rates fluctuate. Fluctuations
in the value of portfolio securities will in many cases not affect interest
income on existing portfolio securities, but will be reflected in the
Fund's net asset value. Because the magnitude of these fluctuations will
generally be greater at times when a Fund's average maturity is longer, under
certain market conditions the Fund may invest in short-term investments
yielding lower current income rather than investing in higher yielding
longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the
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governments of foreign countries. Supranational bonds are those issued by
supranational entities, such as the World Bank and European Investment Bank.
Canadian bonds are bonds issued by Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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HIGHMARK BALANCED FUND
INVESTMENT PORTFOLIO OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources and
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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CROSS REFERENCE SHEET
HIGHMARK BALANCED FUND
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities Purchase and Redemption of Shares;
Exchange Privileges; Dividends; Federal
Taxation; Service Arrangements--
Administrator; Distributor; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
</TABLE>
<PAGE> 140
<TABLE>
<S> <C>
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Exchange Privileges; Service
Arrangements-- Administrator; Distributor
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
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HIGHMARK FUNDS
BALANCED FUND
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's Balanced Fund.
FIDUCIARY SHARES
HighMark's Fiduciary Shares are offered to the following investors: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Income Funds prior to June 20, 1994, which have remained continuously
open thereafter and which are not considered to be fiduciary accounts; (iii)
Shareholders who currently own Shares of HighMark's Equity or Income Funds that
were purchased prior to June 20, 1994 within an account registered in their name
with the Funds; and (iv) present and retired directors, officers and employees
(and their spouses and children under the age of 21) of Union Bank of
California, N.A., HighMark's current or former distributors or their respective
affiliated companies who currently own Shares of HighMark Funds which were
purchased before April 30, 1997.
This Prospectus sets forth concisely the information about HighMark and the
Balanced Fund that a prospective investor should know before investing.
Investors are advised to read this Prospectus and retain it for future
reference. A Statement of Additional Information dated the same date as this
Prospectus has been filed with the Securities and Exchange Commission and is
available without charge by writing the Distributor, SEI Financial Services
Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling
1-800-734-2922. The Statement of Additional Information is incorporated into
this Prospectus by reference. This Prospectus relates only to the Fiduciary
Shares of the Balanced Fund. Interested persons who wish to obtain a prospectus
for the other Funds of HighMark may contact the Distributor at the above address
and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
[_______________, 1997]
Fiduciary Shares
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SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Fiduciary Shares of HighMark Balanced Fund (the "Balanced Fund" or the "Fund").
This summary is qualified in its entirety by reference to the more detailed
information provided elsewhere in the Prospectus and in the Statement of
Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Balanced Fund seeks capital
appreciation and income, with a secondary investment objective of conservation
of capital. (See "INVESTMENT OBJECTIVE").
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund primarily invests,
consistent with its investment objective, in equity securities including common
stocks and securities convertible into common stocks. The Fund may also invest
consistent with its investment objective and investment policies in fixed-income
securities. (See "INVESTMENT POLICIES").
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE BALANCED FUND? The
investment policies of the Fund entail certain risks and considerations of which
an investor should be aware. The Fund may purchase common stocks and other
equity securities that are volatile and which may fluctuate in value more than
other types of investments. Values of fixed income securities and,
correspondingly, share prices of Funds invested in such securities, tend to vary
inversely with interest rates, and may be affected by other market and economic
factors as well. (See "Risk Factors").
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which the Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of the Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The
Advisor").
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator").
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian").
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WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor").
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective. Redemption orders must be placed prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) on any Business Day for the order to be effective that
day. (See "PURCHASE AND REDEMPTION OF SHARES").
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS").
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY ...........................................................................4
BALANCED FUND FEE TABLE.............................................................8
FINANCIAL HIGHLIGHTS...............................................................10
BALANCED FUND FINANCIAL HIGHLIGHTS.................................................11
FUND DESCRIPTION...................................................................12
INVESTMENT OBJECTIVE...............................................................12
INVESTMENT POLICIES................................................................12
Money Market Instruments .................................................13
Lending of Portfolio Securities ..........................................14
Other Investments ........................................................14
Risk Factors .............................................................15
INVESTMENT LIMITATIONS.............................................................17
Portfolio Turnover .......................................................18
PURCHASE AND REDEMPTION OF SHARES..................................................18
EXCHANGE PRIVILEGES................................................................20
DIVIDENDS..........................................................................21
FEDERAL TAXATION...................................................................21
SERVICE ARRANGEMENTS...............................................................22
Investment Advisor .......................................................22
Administrator ............................................................23
The Transfer Agent .......................................................24
Distributor ..............................................................24
Banking Laws .............................................................25
Custodian ................................................................25
</TABLE>
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<TABLE>
<S> <C>
GENERAL INFORMATION..................................................................25
Description of HighMark & Its Shares .......................................25
Performance Information.....................................................26
Miscellaneous ..............................................................27
DESCRIPTION OF PERMITTED INVESTMENTS.................................................27
</TABLE>
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BALANCED FUND FEE TABLE
<TABLE>
<CAPTION>
Balanced Fund
Fiduciary Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as
applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if
applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.60%
12b-1 Fees 0.00%
Other Expenses (after voluntary
reduction)(c) 0.30%
Total Fund Operating 0.90%
Expenses(d) =====
<FN>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
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<PAGE> 147
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced Fund
Fiduciary Shares $9 $29 $50 $111
</TABLE>
The purpose of the table above is to assist an investor in the Balanced
Fund in understanding the various costs and expenses that a Shareholder will
bear directly or indirectly. For a more complete discussion of the Fund's annual
operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the Balanced Fund on behalf of their customers may
charge customers fees for services provided in connection with the
investment in, redemption of, and exchange of Shares. (See PURCHASE AND
REDEMPTION OF SHARES, EXCHANGE PRIVILEGES, and SERVICE
ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder. (See PURCHASE AND REDEMPTION
OF SHARES below.)
(c) Absent voluntary fee waivers, OTHER EXPENSES would be 0.48% for the
Fiduciary Shares of the Balanced Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be 1.08%
for the Fiduciary Shares of the Balanced Fund.
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FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect
to the Fiduciary Shares of the Balanced Fund. Financial highlights for the Fund
for the period ended July 31, 1996 have been derived from financial statements
audited by Deloitte & Touche LLP, independent auditors for HighMark, whose
report thereon is included in the Statement of Additional Information. Prior to
the fiscal year ended July 31, 1996, Coopers & Lybrand L.L.P. served as
independent accountants for HighMark.
Prior to June 20, 1994, the Balanced Fund offered a single class of
Shares (now designated Fiduciary Shares) throughout the periods shown.
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<PAGE> 149
BALANCED FUND FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended July 31, Nov. 14, 1993 to
-------------------
1996 1995 July 31, 1994(a)
---- ---- ----------------
Fiduciary Fiduciary Fiduciary
--------- --------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.85 $ 9.76 $10.00
------ ------- ------
Investment Activities
Net investment income 0.40 0.39 0.26
Net realized and unrealized gains (losses) on investments 0.79 1.09 (0.24)
---- ------- -------
Total from Investment Activities 1.19 1.48 0.02
---- ------- -------
Distributions
Net investment income (0.40) (0.39) (0.26)
------ ------- -------
Net Asset Value, End of Period $11.64 $ 10.85 $ 9.76
====== ======= =======
Total Return 11.06% 15.62% (0.26%)(d)
Ratios/Supplementary Data:
Net Assets at end of period (000) $39,502 $29,961 $25,851
Ratio of expenses to average net assets 0.94% 0.89% 0.87%(b)
Ratio of net investment income to average net assets 3.49% 3.93% 3.77%(b)
Ratio of expenses to average net assets* 1.78% 1.80% 1.79%(b)
Ratio of net investment income to average net assets* 2.65% 3.02% 2.85%(b)
Portfolio turnover (c) 12.84% 20.70% 44.14%
<FN>
(a) Period from commencement of operations. On June 20, 1994, the Balanced Fund
commenced offering Investor Shares (now called "Retail Shares") and
designated existing shares as Fiduciary Shares.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(d) Not annualized.
</TABLE>
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<PAGE> 150
FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1- 800-734-2922.
For information concerning those investors who qualify to purchase Fiduciary
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Fiduciary Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The Balanced Fund seeks capital appreciation and income. Conservation of capital
is a secondary consideration.
The investment objective and certain of the investment limitations of the
Balanced Fund may not be changed without a vote of the holders of a majority of
the outstanding Shares of the Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES
The Balanced Fund may invest in any type or class of security. Under normal
market conditions, the Balanced Fund will invest between 50% and 70% of its
total assets in equity securities. Senior fixed-income securities will normally
constitute at least 25% of the Balanced Fund's net assets.
Equity securities include common stocks, warrants to purchase common stocks,
American Depositary Receipts ("ADRs"), preferred stocks, securities (including
debt securities) convertible into or exercisable for common stocks and Standard
& Poor's Depositary Receipts ("SPDRs"). The Balanced Fund's fixed-income
investments consist of bonds, debentures, notes, zero-coupon securities, all
forms of mortgage-related securities (including collateralized mortgage
obligations), and obligations issued or guaranteed by the U.S. or foreign
Governments or their agencies or instrumentalities. Privately issued
mortgage-backed
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securities must be rated in one of the top two categories by at least one NRSRO
as defined below. In addition to mortgage-backed securities, the Balanced Fund
may invest in other asset-backed securities including, but not limited to, those
backed by company receivables, truck and auto loans, leases, and credit card or
other receivables.
The Balanced Fund may invest in bonds, notes and debentures of any maturity
issued by U.S. and foreign corporate and governmental issuers. The Balanced Fund
will invest only in corporate fixed-income securities that are rated at the time
of purchase as investment grade by a nationally recognized statistical rating
organization ("NRSRO") (e.g., at least Baa from Moody's Investors Service, Inc.
("Moody's") or BBB from Standard & Poor's Corporation ("S&P")) or, if unrated,
which the Advisor deems to be attractive opportunities and of comparable
quality. For a description of the rating symbols of the NRSROs utilized by the
Advisor, see the Appendix to the Statement of Additional Information.
In the event that a security owned by the Fund is downgraded below the stated
rating categories, the Advisor will take appropriate action with regard to that
security.
The portions of the Balanced Fund's assets invested in equity securities and
fixed-income securities will vary from time to time within the stated ranges,
depending upon the Advisor's assessment of business, economic and market
conditions. The Advisor considers a combination of risk, capital appreciation,
income, and protection of capital value.
GENERAL
MONEY MARKET INSTRUMENTS
Under normal market conditions, the Balanced Fund may invest up to 35% of its
total assets in money market instruments. When market conditions indicate a
temporary "defensive" investment strategy as determined by the Advisor, the Fund
may invest more than 35% of its total assets in money market instruments. The
Fund will not be pursuing its investment objective to the extent that a
substantial portion of its assets are invested in money market instruments.
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ILLIQUID AND RESTRICTED SECURITIES
The Balanced Fund shall limit investment in illiquid securities to 15% or less
of its net assets. Generally, an "illiquid security" is any security that cannot
be disposed of promptly and in the ordinary course of business at approximately
the amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities to broker-dealers, banks or other institutions. The Fund may lend
portfolio securities in an amount representing up to 33 1/3% of the value of the
Fund's total assets.
OTHER INVESTMENTS
The Fund may enter into repurchase agreements and reverse repurchase agreements.
The Balanced Fund may enter into forward commitments or purchase securities on a
"when-issued" basis. The Balanced Fund expects that commitments by it to enter
into forward commitments or purchase when-issued securities will not exceed 25%
of the value of the Fund's total assets under normal market conditions. The Fund
does not intend to purchase when-issued securities or forward commitments for
speculative or leveraging purposes but only for the purpose of acquiring
portfolio securities.
The Fund may also invest in money market instruments, money market funds, and in
cash, and may invest in other registered investment companies with similar
investment objectives.
The Balanced Fund may invest up to 5% of its total assets in the shares of any
one registered investment company, but may not own more than 3% of the
securities of any one registered investment company or invest more than 10% of
its assets in the securities of other registered investment companies. In
accordance with an exemptive order issued to HighMark by the SEC, such other
registered investment company securities may include shares of a money market
fund of HighMark, and may include registered investment companies for which the
Advisor or Sub-Advisor to a Fund of HighMark, or an affiliate of such Advisor or
Sub-Advisor, serves as investment advisor, administrator or distributor. Because
other registered investment companies employ an investment advisor, such
investment by a Fund may cause Shareholders to bear duplicative fees. The
Advisor will waive its fees attributable to the assets
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of the investing Fund invested in a money market fund of HighMark, and, to the
extent required by applicable law, the Advisor will waive its fees attributable
to the assets of the Fund invested in any investment company. Some Funds are
subject to additional restrictions on investment in other investment companies.
See "INVESTMENT RESTRICTIONS" in the Statement of Additional Information.
The Balanced Fund may write covered calls on its equity securities and enter
into closing transactions with respect to covered call options.
The Fund may also buy and sell options, futures contracts and options on
futures. The Fund may enter into futures contracts and options on futures only
to the extent that obligations under such contracts or transactions, together
with options on securities, represent not more than 25% of the Fund's assets.
The aggregate value of options on securities (long puts and calls) will not
exceed 10% of the Fund's net assets at the time such options are purchased by
the Fund.
The Fund may purchase options in stock indices to invest cash on an interim
basis. The aggregate premium paid on all options on stock indices cannot exceed
20% of the Fund's total assets.
All of the common stocks in which the Balanced Fund invests (including foreign
securities in the form of ADRs but not including Rule 144A Securities) are
traded on registered exchanges or in the over-the-counter market.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
Like any investment program, investment in the Balanced Fund entails certain
risks. As with a fund investing primarily in equity securities, the Balanced
Fund is subject to the risk that prices of equity securities, or certain types
of equity securities in which the Fund invests, in general will decline over
short or even extended periods. Since the Fund's shares will fluctuate in value,
the Fund may be more suitable for long-term investors who can bear the risk of
short-term fluctuations. In addition, the market value of fixed-income
securities bears an inverse relationship to changes in market interest rates,
which may affect the net asset value of Shares. The longer the remaining
maturity of a security, the greater is the effect of interest rate changes on
its market value. Generally, because of their fixed-income features, convertible
securities will fluctuate in value to a lesser degree than the common stocks
into which they are convertible. Changes in the value of a Fund's fixed-income
securities will not affect cash income received from ownership of such
securities, but will affect a Fund's net asset value.
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Because the Balanced Fund also invests in debt securities, investors in the
Balanced Fund are also exposed to credit risk, which relates to the ability of
an issuer to make payments of principal and interest, and market risk, which
relates to changes in a security's value as a result of interest rate changes
generally. An increase in interest rates will generally reduce the value of the
investments in the Balanced Fund and a decline in interest rates will generally
increase the value of those investments. Accordingly, the net asset value of the
Fund's shares will vary as a result of changes in the value of the securities in
the Fund's portfolio. Therefore, an investment in the Fund may decline in value,
resulting in a loss of principal. Because interest rates vary, it is impossible
to predict the income or yield of the Fund for any particular period. While debt
securities normally fluctuate less in price than equity securities, there have
been extended periods of cyclical increases in interest rates that have caused
significant declines in debt securities prices. Certain fixed-income securities
which may be purchased by the Balanced Fund such as zero-coupon obligations,
mortgage-backed and asset-backed securities, and collateralized mortgage
obligations ("CMOs") will have greater price volatility then other fixed-income
obligations. Because declining interest rates may lead to prepayment of
underlying mortgages, automobile sales contracts or credit card receivables, the
prices of mortgage-related and asset-backed securities may not rise with a
decline in interest rates. Mortgage-backed and asset-backed securities and CMOs
are extremely sensitive to the rate of principal prepayment. Similarly, callable
corporate bonds also present risk of prepayment. During periods of falling
interest rates, securities that can be called or prepaid may decline in value
relative to similar securities that are not subject to call or prepayment.
Depending upon prevailing market conditions, the Balanced Fund may purchase debt
securities at a discount from face value, which produces a yield greater than
the coupon rate. Conversely, if debt securities are purchased at premium over
face value, the yield will be lower than the coupon rate. In making investment
decisions, the Advisor will consider many factors other than current yield,
including the preservation of capital, the potential for realizing capital
appreciation, maturity, and yield to maturity. From time to time, the equity and
debt markets may fluctuate independently of one another. In other words, a
decline in equity markets may in certain instances be offset by a rise in debt
markets, or vice versa. As a result, the Balanced Fund, with its balance of
equity and debt investments, may entail less investment risk (and a potentially
smaller investment return) than a mutual fund investing primarily in equity
securities.
As described above, the Balanced Fund may invest in debt securities within the
four highest rating categories assigned by a NRSRO and comparable unrated
securities. Securities rated BBB by S&P or Baa by Moody's are considered
investment grade, but are deemed by these rating services to have some
speculative characteristics, and adverse economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher-grade bonds. Should
subsequent events cause the rating of a debt security purchased by the Balanced
Fund to fall below the fourth highest rating category, the Advisor will consider
such an event in determining whether the Balanced Fund should continue to hold
that security. In no event, however, would the Balanced Fund be
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required to liquidate any such portfolio security where the Balanced Fund would
suffer a loss on the sale of such security.
The Balanced Fund may invest in convertible securities, which include corporate
bonds, notes or preferred stocks that can be converted into common stocks or
other equity securities. Convertible securities also include other securities,
such as warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into common stock, their values will
normally vary in some proportion with those of the underlying common stock.
Convertible securities usually provide a higher yield than the underlying common
stock, however, so that the price decline of a convertible security may
sometimes be less substantial than that of the underlying common stock. The
value of convertible securities that pay dividends or interest, like the value
of all fixed-income securities, generally fluctuates inversely with changes in
interest rates. Warrants have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. They do not
represent ownership of the securities for which they are exercisable, but only
the right to buy such securities at a particular price. The Balanced Fund will
not purchase any convertible debt security or convertible preferred stock unless
it has been rated as investment grade at the time of acquisition by a NRSRO or
that is not rated but is determined to be of comparable quality by the Advisor.
The Balanced Fund may invest in securities issued or guaranteed by foreign
corporations or foreign governments, their political subdivisions, agencies or
instrumentalities and obligations of supranational entities such as the World
Bank and the Asian Development Bank. Any investments in these securities will be
in accordance with the Fund's investment objective and policies, and are subject
to special risks, such as adverse political and economic developments, possible
seizure, nationalization or expropriation of foreign investments, less stringent
disclosure requirements, changes in foreign currency exchange rates, increased
costs associated with the conversion of foreign currency into U.S. dollars, the
possible establishment of exchange controls or taxation at the source or the
adoption of other foreign governmental restrictions. To the extent that the Fund
may invest in securities of foreign issuers that are not traded on any exchange,
there is a further risk that these securities may not be readily marketable. The
Balanced Fund will not hold foreign currency for investment purposes.
INVESTMENT LIMITATIONS
The Balanced Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of the Fund's total
assets would be invested in the issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the issuer's
outstanding voting securities (except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations);
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2) Purchase any securities that would cause more than 25% of the Fund's
total assets at the time of purchase to be invested in securities of one or more
issuers conducting their principal business activities in the same industry,
provided that (a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
and (c) utilities will be divided according to their services (for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry);
3) Make loans, except that the Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements in
accordance with its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. The Fund's
portfolio turnover rate may vary greatly from year to year as well as within a
particular year. High portfolio turnover rates generally will result in
correspondingly higher brokerage and other transactions costs to the Fund and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the Fund. See FEDERAL TAXATION.
PURCHASE AND REDEMPTION OF SHARES
As noted above, the Fund is divided into two classes of Shares, Retail and
Fiduciary. Fiduciary Shares may be purchased at net asset value. Only the
following investors qualify to purchase the Balanced Fund's Fiduciary Shares:
(i) fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Income Funds prior to June 20, 1994, which have remained continuously
open thereafter and which are not considered to be fiduciary accounts; (iii)
Shareholders who currently own Shares of HighMark's Equity or Income Funds that
were purchased prior to June 20, 1994 within an account registered in their name
with the Funds. For a description of investors who qualify to purchase Retail
Shares, see the Retail Shares prospectus of the Balanced Fund; and (iv) present
and retired directors, officers and employees
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(and their spouses and children under the age of 21 of Union Bank of California,
N.A., HighMark's current or former distributors or their respective affiliated
companies who currently own Shares of HighMark Funds which were purchased before
April 30, 1997.
Purchases and redemptions of Shares of the Balanced Fund may be made on days on
which both the New York Stock Exchange and Federal Reserve wire system are open
for business ("Business Days"). The minimum initial investment is generally
$1,000 and the minimum subsequent investment is generally only $100. For present
and retired directors, officers, and employees (and their spouses and children
under the age of 21) of Union Bank of California, SEI Financial Services Company
and their affiliates, the minimum initial investment is $250 and the minimum
subsequent investment is $50. The Fund's initial and subsequent minimum purchase
amounts may be waived if purchases are made in connection with Individual
Retirement Accounts, Keoghs, payroll deduction plans, or 401(k) or similar
plans. However, the minimum investment may be waived in the Distributor's
discretion. Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
1:00 p.m., Pacific time (4:00 p.m., Eastern time) and the custodian receives
Federal funds before the close of business on the next Business Day. The
purchase price of Shares of a Fund is the net asset value next determined after
a purchase order is received and accepted by HighMark. The net asset value per
Share of a Fund is determined by dividing the total market value of a Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of a Fund. Net asset value per share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day.
Purchases will be made in full and fractional shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor determines that it is not in the best interest of HighMark
and/or its Shareholders to accept such order.
Shares of the Balanced Fund are offered only to residents of states in which the
shares are eligible for purchase.
Shareholders who desire to redeem shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Fund reserves the right to make payment for
redemptions in securities rather than cash.
Neither HighMark's transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. HighMark and its
transfer agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures
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may include taping of telephone conversations. If market conditions are
extraordinarily active or other extraordinary circumstances exist, and you
experience difficulties placing redemption orders by telephone, you may wish to
consider placing your order by other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Fiduciary Shares for Fiduciary Shares of another Fund on the
basis of the relative net asset value of the Fiduciary Shares exchanged.
Shareholders may also exchange Fiduciary Shares of a Fund for Retail Shares of
another Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per share plus the appropriate sales load.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including participating organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in the Balanced Fund may do so by
contacting the transfer agent at 1-800-734-2922. Exchanges will be effected on
any Business Day at the net asset value of the Funds involved in the exchange
next determined after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark
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may materially amend or terminate the exchange privileges described herein upon
sixty days' notice.
DIVIDENDS
The net income of the Balanced Fund is declared and paid monthly as a dividend
to Shareholders of record at the close of business on the day of declaration.
Net realized capital gains are distributed at least annually to Shareholders of
record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of the Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
FEDERAL TAXATION
The Balanced Fund intends to qualify for treatment as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
to distribute substantially all of its net investment income and net realized
capital gains so that the Fund is not required to pay federal taxes on these
amounts.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. The 70 percent dividends received deduction for
corporations generally will apply to these distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction when received by the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. Distributions by the Fund
of the excess of net long-term capital gain over net short-term capital loss is
taxable to Shareholders as long-term capital gain in the year with respect to
which it is received, regardless of how long the Shareholder has held Shares of
the Fund. Such distributions are not eligible for the dividends received
deduction. If a Shareholder disposes of Shares in the Fund at a loss before
holding such Shares for longer than six months, such loss will be treated as a
long-term capital loss to the extent the Shareholder has received long-term
capital gain dividends on the Shares.
Prior to purchasing Shares of the Balanced Fund, the impact of dividends or
capital gain distributions that are expected to be declared or have been
declared, but not paid, should be carefully considered. Dividends or capital
gain distributions received after a purchase of Shares are subject to federal
income taxes, although in some circumstances, the dividends or
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distributions may be, as an economic matter, a return of capital to the
Shareholder. A Shareholder should consult his or her advisor for specific advice
about the tax consequences to the Shareholder of investing in the Fund.
Fund investments in foreign securities may be subject to withholding taxes at
the source on dividend or interest payments. In that case, the Fund's yield on
those securities would be decreased. The Fund does not expect to be eligible to
elect to permit shareholders to claim a credit or deduction on their income tax
return for their pro rata share of such taxes.
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Investment in an entity that qualifies as a "passive foreign investment company"
under the Code could subject the Fund to a U.S. federal income tax or other
charge on certain "excess distributions" received with respect to the
investment, and on the proceeds from disposition of the investment.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A. serves as the Balanced Fund's investment advisor. Subject to the general
supervision of HighMark's Board of Trustees, the Advisor manages the Fund in
accordance with its investment objective and policies, makes decisions with
respect to and places orders for all purchases and sales of the Fund's
investment securities, and maintains the Fund's records relating to such
purchases and sales.
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All investment decisions for the Balanced Fund are made by a team of investment
professionals, all of whom take an active part in the decision making process.
The team leader for the Balanced Fund is Carl J. Colombo. Mr. Colombo is a
Vice-President of the Advisor, and has served as team leader for the Stepstone
Balanced and Growth Equity Funds. Mr. Colombo has been with the Advisor and its
predecessor, Union Bank, since 1985.
For the expenses assumed and services provided by the Advisor as the Fund's
investment advisor, Union Bank of California receives a fee from the Balanced
Fund, computed daily and paid monthly, at the annual rate of sixty
one-hundredths of one percent (.60%) of the Fund's average daily net assets.
This fee may be higher than the advisory fee paid by most mutual funds, although
the Board of Trustees believes it will be comparable to advisory fees paid by
many funds having similar objectives and policies. Union Bank of California may
from time to time agree to voluntarily reduce its advisory fee, however, it is
not currently doing so. While there can be no assurance that Union Bank of
California will choose to make such an agreement, any voluntary reductions in
Union Bank of California's advisory fee will lower the Fund's expenses, and thus
increase the Fund's yield and total return, during the period such voluntary
reductions are in effect. During HighMark's fiscal year ended July 31, 1996,
Union Bank of California received investment advisory fees from the Balanced
Fund aggregating 0.54% of the Fund's average daily net assets.
On April 1, 1996, the Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group which, as of June 30,
1996, had approximately $13.4 billion of assets under management. The Advisor,
with a team of approximately 45 stock and bond research analysts, portfolio
managers and traders, has been providing investment management services to
individuals, institutions and large corporations since 1917.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
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The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Fiduciary Shares.
Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of the Fund, for
which it receives a fee paid by the Administrator at the annual rate of up to
0.05% of the average daily net assets of the Fund. Union Bank of California has
voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Fiduciary Shares
of HighMark, for which services it receives a fee.
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, the Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.09% of average
daily net assets.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor. Fiduciary Shares are not subject
to HighMark's Distribution Plan or a distribution fee.
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BANKING LAWS
Union Bank of California believes that it may perform the services for the Fund
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of the
Fund, for which it receives compensation from SEI Fund Resources without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Fund.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Balanced Fund. The Custodian holds cash, securities and
other assets of HighMark as required by the 1940 Act.
Services performed by Union Bank of California, as the Fund's shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund and the California Intermediate Tax-Free Bond Fund had been
offered for sale in HighMark Funds. Shares of each Fund are freely transferable,
are entitled to distributions from the assets of the Fund as declared by the
Board of Trustees, and, if HighMark were liquidated, would receive a pro rata
share of the net assets attributable to that Fund. Shares are without par value.
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As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Retail Shares of the Balanced Fund, interested persons may contact
the Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996, Union Bank of California (475
Sansome Street, Post Office Box 45000, San Francisco, CA 94104) was the
Shareholder of record of 97.91% of the Fiduciary Shares of the Balanced Fund.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Fiduciary
Shares of the Balanced Fund. Performance information is computed separately for
the Fund's Retail and Fiduciary Shares in accordance with the formulas described
below.
The aggregate total return and average annual total return of the Fund may be
quoted for the life of the Fund and for ten-year, five-year, three-year and
one-year periods, in each case through the most recent calendar quarter.
Aggregate total return is determined by calculating the change in the value of a
hypothetical $1,000 investment in the Fund over the applicable period that would
equate the initial amount invested to the ending redeemable value of the
investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing the Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the average positive or
negative investment results that an investor in the Fund would have experienced
on an annual basis from changes in Share price and reinvestment of dividends and
capital gain distributions.
The yield of the Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of the Fund is determined by dividing the income and
capital gains distributions, or where indicated the income distributions alone,
on a Share of the Fund over a twelve-month period by the per Share public
offering price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical);
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may
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advertise performance that includes results from periods in which the Fund's
assets were managed in a non-registered predecessor vehicle.
All performance information presented for the Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the High Mark Funds.
The Balanced Fund invests in only the instruments permitted by its individual
investment objective and policies.
AMERICAN DEPOSITARY RECEIPTS (ADRs) -- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership
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interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
The purchase of non-mortgage asset-backed securities raises risk considerations
peculiar to the financing of the instruments underlying such securities.
Asset-backed securities entail prepayment risk, which may vary depending on the
type of asset, but is generally less than the prepayment risk associated with
mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial
prepayment risk, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary as much in response
to changes in interest rates and the short-term nature of the underlying car
loans or other receivables tend to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying sales contracts or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with their investment objectives and policies, the
Fixed Income Funds may invest in other asset-backed securities that may be
developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
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FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total
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assets of $1 billion or more as shown on their last published financial
statements at the time of investment; (iii) short-term corporate obligations
rated within the three highest rating categories by a NRSRO (e.g., at least A by
S&P or A by Moody's) at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (iv) general obligations issued by the
U.S. Government and backed by its full faith and credit, and obligations issued
or guaranteed as to principal and interest by agencies or instrumentalities of
the U.S. Government (e.g., obligations issued by Farmers Home Administration,
Government National Mortgage Association, Federal Farm Credit Bank and Federal
Housing Administration); (v) receipts, including TRs, TIGRs and CATS; (vi)
repurchase agreements involving such obligations; (vii) loan participations
issued by a bank in the United States with assets exceeding $1 billion and for
which the underlying loan is issued by borrowers in whose obligations the Fund
may invest; (viii) money market funds and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases
a mortgage-related security at a premium, that portion may be lost if there is
a decline in the market value of the security whether due to changes in
interest rates or prepayments of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of mortgage-related securities
are inversely affected by changes in interest rates. However, although the
value of a mortgage-related security may decline when interest rates rise, the
converse is not necessarily true because in periods of declining interest rates
the mortgages underlying the securities are prone to prepayment which results
in amounts being available for reinvestment which are likely to be invested at
a lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of
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mortgage loans. Payments of principal and interest on the collateral mortgages
are used to pay debt service on the CMO. In a CMO, a series of bonds or
certificates is issued in multiple classes. Each class of CMOs, often referred
to as a "tranche," is issued at a specific coupon rate and has a stated maturity
or final distribution date. The principal and interest payment on the underlying
mortgages may be allocated among the classes of CMOs in several ways. Typically,
payments of principal, including any prepayments, on the underlying mortgages
would be applied to the classes in the order of their respective stated
maturities or final distribution dates, so that no payment of principal will be
made on CMOs of a class until all CMOs of other classes having earlier stated
maturities or final distribution dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining
interest rates may lead to prepayment of underlying mortgages, automobile sales
contracts or credit card receivables, the prices of mortgage-related and
asset-backed securities may not rise with a decline in interest rates.
Mortgage-backed and asset-backed securities and CMOs are extremely sensitive to
the rate of principal prepayment. Similarly, callable corporate bonds also
present risk of prepayment. During periods of falling interest rates,
securities that can be called or prepaid may decline in value relative to
similar securities that are not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private
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activity and industrial development bonds. General obligation bonds are backed
by the taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, certain Funds may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of
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Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and CATS 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 securities. See
also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market
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may affect the value of the Rule 144A Securities. The Board of Trustees of
HighMark has established guidelines and procedures to be utilized to determine
the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, HighMark's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
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<PAGE> 173
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally
lower than the yields available from otherwise comparable corporate
fixed-income securities. Like other fixed-income securities, however, the
values of U.S. Government Securities change as interest rates fluctuate.
Fluctuations in the value of portfolio securities will in many cases not affect
interest income on existing portfolio securities, but will be reflected in the
Fund's net asset value. Because the magnitude of these fluctuations will
generally be greater at times when a Fund's average maturity is longer, under
certain market conditions the Fund may invest in short-term investments
yielding lower current income rather than investing in higher yielding
longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return
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on a zero-coupon obligation, when held to maturity, equals the difference
between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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HIGHMARK BALANCED FUND
INVESTMENT PORTFOLIO OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources and
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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<PAGE> 176
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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<PAGE> 177
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 178
CROSS REFERENCE SHEET
HIGHMARK INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities Purchase and Redemption of Shares;
Exchange Privileges; Dividends; Federal
Taxation; Service Arrangements--
Administrator; Distributor; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Exchange Privileges; Service
Arrangements-- Administrator;
Distributor
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 179
HIGHMARK FUNDS
INTERNATIONAL EQUITY FUND
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's International Equity Fund.
FIDUCIARY SHARES
HighMark's Fiduciary Shares are offered to the following investors: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Income Funds prior to June 20, 1994, which have remained continuously
open thereafter and which are not considered to be fiduciary accounts; (iii)
Shareholders who currently own Shares of HighMark's Equity or Income Funds that
were purchased prior to June 20, 1994 within an account registered in their name
with the Funds; and (iv) present and retired directors, officers and employees
(and their spouses and children under the age of 21) of Union Bank of
California, N.A., HighMark's current or former distributors or their respective
affiliated companies who currently own Shares of HighMark Funds which were
purchased before April 30, 1997.
This Prospectus sets forth concisely the information about HighMark and the
International Equity Fund that a prospective investor should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference. A Statement of Additional Information dated the same date as
this Prospectus has been filed with the Securities and Exchange Commission and
is available without charge by writing the Distributor, SEI Financial Services
Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling
1-800-734-2922. The Statement of Additional Information is incorporated into
this Prospectus by reference. This Prospectus relates only to the Fiduciary
Shares of the International Equity Fund. Interested persons who wish to obtain a
prospectus for the other Funds of HighMark may contact the Distributor at the
above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
- --------------------------------------------------------------------------------
[_______________, 1997]
Fiduciary Shares
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SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Fiduciary Shares of the HighMark International Equity Fund (the "International
Equity Fund" or the "Fund"). This summary is qualified in its entirety by
reference to the more detailed information provided elsewhere in the Prospectus
and in the Statement of Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The International Equity Fund seeks to
provide long-term capital appreciation by investing primarily in a diversified
portfolio of equity securities of non-U.S. issuers. (See "INVESTMENT OBJECTIVE")
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund primarily invests,
consistent with its investment objective, in equity securities including common
stocks and securities convertible into common stocks of non-U.S. issuers. The
Fund may also invest consistent with its investment objective and policies in
certain other instruments. (See "INVESTMENT POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE INTERNATIONAL EQUITY FUND?
The investment policies of the Fund entail certain risks and considerations of
which an investor should be aware. The Fund may purchase common stocks and other
equity securities that are volatile and which may fluctuate in value more than
other types of investments. In addition, the Fund will invest in securities of
foreign companies that involve special risks and considerations not typically
associated with investing in U.S. companies. (See "Risk Factors")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which the Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of the Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE SUB-ADVISOR? Tokyo-Mitsubishi Asset Management (U.K.), Ltd. serves as
the Sub-Advisor to the Fund. (See "The Sub-Advisor")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator")
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<PAGE> 181
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) and the Custodian receives Federal funds before the
close of business on the next Business Day. Purchase orders for Shares will be
executed at a per Share price equal to the asset value next determined after the
purchase order is received and accepted by HighMark. Redemption orders must be
placed prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any
Business Day for the order to be effective that day. (See "PURCHASE AND
REDEMPTION OF SHARES")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is periodically declared and paid as a
dividend to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS")
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<PAGE> 182
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY ..........................................................3
INTERNATIONAL EQUITY FUND FEE TABLE................................6
FUND DESCRIPTION...................................................9
INVESTMENT OBJECTIVE...............................................9
INVESTMENT POLICIES................................................9
Money Market Instruments ................................10
Lending of Portfolio Securities .........................11
Other Investments .......................................11
Risk Factors ............................................12
INVESTMENT LIMITATIONS............................................13
Portfolio Turnover ......................................14
PURCHASE AND REDEMPTION OF SHARES.................................14
EXCHANGE PRIVILEGES...............................................15
DIVIDENDS.........................................................16
FEDERAL TAXATION..................................................17
SERVICE ARRANGEMENTS..............................................18
Investment Advisor ......................................18
Administrator ...........................................20
The Transfer Agent ......................................20
Distributor .............................................21
Banking Laws ............................................21
Custodian ...............................................21
GENERAL INFORMATION...............................................22
Description of HighMark & Its Shares ....................22
Performance Information..................................22
Miscellaneous ...........................................23
DESCRIPTION OF PERMITTED INVESTMENTS..............................24
</TABLE>
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<PAGE> 183
INTERNATIONAL EQUITY FUND FEE TABLE
<TABLE>
<CAPTION>
International Equity Fund
Fiduciary Shares
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0%
percentage of original purchase
price or redemption proceeds, as
applicable)
Redemption Fees (as a percentage 0%
of amount redeemed, if
applicable)(b)
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.95%
12b-1 Fees 0.00%
Other Expenses (after voluntary
reduction)(c) 0.31%
Total Fund Operating 1.26%
Expenses(d)
<FN>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
-6-
<PAGE> 184
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
International Equity Fund
Fiduciary Shares $13 $40 $69 $152
</TABLE>
The purpose of the table above is to assist an investor in the
International Equity Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the International Equity Fund on behalf of their
customers may charge customers fees for services provided in connection
with the investment in, redemption of, and exchange of Shares. (See
PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES, and SERVICE
ARRANGEMENTS--below.)
(b) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder. (See PURCHASE AND REDEMPTION
OF SHARES below.)
(c) OTHER EXPENSES are based on the Fund's estimated expenses for the current
fiscal year. Absent voluntary fee waivers, OTHER EXPENSES would be 0.58%
for the Fiduciary Shares of the International Equity Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be 1.53%
for the Fiduciary Shares of the International Equity Fund.
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FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1- 800-734-2922.
For information concerning those investors who qualify to purchase Fiduciary
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Fiduciary Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The International Equity Fund seeks to provide long-term capital appreciation by
investing primarily in a diversified portfolio of equity securities of non-U.S.
issuers.
The investment objective and certain of the investment limitations of the
International Equity Fund may not be changed without a vote of the holders of a
majority of the outstanding Shares of the Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES
Under normal market conditions, at least 65% of the Fund's assets will be
invested in the following equity securities of non-U.S. issuers: common stocks,
securities convertible into common stocks, preferred stocks, warrants and rights
to purchase common stock. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in securities of issuers organized under
the laws of at least five countries other than the United States that are
included in the Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE Index").1 Countries may be over- or under-weighted in
comparison to the EAFE Index based upon the Advisor's and Sub-Advisors's view of
forecasted rates of returns. Regional and individual country weightings,
therefore, may vary from the EAFE Index
- --------
1 'MSCI-EAFE Index" is a registered service mark of Morgan Stanley
Capital International which does not sponsor and is in no way affiliated with
the International Equity Fund.
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benchmark. The Advisor and Sub-Advisor will select individual securities for the
Fund on the basis of their growth opportunities or undervaluation in relation to
other securities. The Fund expects its investments to emphasize companies with
market capitalizations in excess of $100,000,000.
The Fund will typically invest in equity securities listed on recognized foreign
exchanges, but may also invest up to 15% of its total assets in securities
traded in over-the-counter markets. Equity securities of non-U.S. issuers may
also be purchased in the form of sponsored or unsponsored American Depositary
Receipts ("ADRs") and sponsored or unsponsored European Depositary Receipts
("EDRs").
The Fund may enter into forward foreign currency contracts as a hedge against
possible variations in foreign exchange rates. A forward foreign currency
contract is a commitment to purchase or sell a specified currency at a specified
date, at a specified price. The Fund may enter into forward foreign currency
contracts to hedge a specific security transaction or to hedge a portfolio
position. These contracts may be bought and sold to protect the Fund, to some
degree, against a possible loss resulting from an adverse change in the
relationship between foreign currencies. The Fund may also invest in options on
currencies.
The premium paid on options on securities positions will not exceed 10% of the
Fund's net assets at the time such options are entered into by the Fund. The
aggregate premium paid on all options on stock indices will not exceed 20% of
the Fund's total assets.
The Fund's remaining assets may be invested in investment grade bonds and
debentures issued by non-U.S. or U.S. companies, obligations of supranational
entities, securities issued or guaranteed by foreign and U.S. governments, and
foreign and U.S. commercial paper. Certain of these instruments may have
floating or variable interest rate provisions. In addition, the Fund may invest
in securities of issuers whose principal activities are in countries with
emerging markets. The Fund defines an emerging market country as any country
whose economy and market the World Bank or the United Nations considers to be
emerging or developing. The Fund may also purchase shares of closed-end
investment companies that invest in the securities of issuers in a single
country or region and shares of open-end management investment companies.
GENERAL
MONEY MARKET INSTRUMENTS
Under normal market conditions, the International Equity Fund may invest up to
35% of its total assets in money market instruments. When market conditions
indicate a temporary "defensive" investment strategy as determined by the
Advisor, the Fund may invest more than 35% of its total assets in money market
instruments. The Fund will not be pursuing its
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investment objective to the extent that a substantial portion of its assets are
invested in money market instruments.
ILLIQUID AND RESTRICTED SECURITIES
The International Equity Fund shall limit investment in illiquid securities to
15% or less of its net assets. Generally, an "illiquid security" is any security
that cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which the Fund has valued the instrument. The
absence of a trading market can make it difficult to ascertain the market value
of illiquid securities. The Fund may purchase restricted securities which have
not been registered under the Securities Act of 1933 (e.g., Rule 144A Securities
and Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities to broker-dealers, banks or other institutions. The Fund may lend
portfolio securities in an amount representing up to 33 1/3% of the value of the
Fund's total assets.
OTHER INVESTMENTS
The Fund may enter into repurchase agreements and reverse repurchase agreements.
The International Equity Fund may enter into forward commitments or purchase
securities on a "when-issued" basis. The International Equity Fund expects that
commitments by it to enter into forward commitments or purchase when-issued
securities will not exceed 25% of the value of the Fund's total assets under
normal market conditions. The Fund does not intend to purchase when-issued
securities or forward commitments for speculative or leveraging purposes but
only for the purpose of acquiring portfolio securities.
The International Equity Fund may invest up to 5% of its total assets in the
shares of any one registered investment company, but may not own more than 3% of
the securities of any one registered investment company or invest more than 10%
of its assets in the securities of other registered investment companies. In
accordance with an exemptive order issued to HighMark by the SEC, such other
registered investment company securities may include shares of a money market
fund of HighMark, and may include registered investment companies for which the
Advisor or Sub-Advisor to a Fund of HighMark, or an affiliate of such Advisor or
Sub- Advisor, serves as investment advisor, administrator or distributor.
Because other investment companies employ an investment advisor, such investment
by a Fund may cause Shareholders
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to bear duplicative fees. The Advisor will waive its fees attributable to the
assets of the investing Fund invested in a money market fund of HighMark, and,
to the extent required by applicable law, the Advisor will waive its fees
attributable to the assets of the Fund invested in any investment company. Some
Funds are subject to additional restrictions on investment in other investment
companies. See "INVESTMENT RESTRICTIONS" in the Statement of Additional
Information.
The Fund may invest in futures and options on futures for the purpose of
achieving the Fund's objectives. The Fund may invest in futures and related
options based on any type of security or index traded on U.S. or foreign
exchanges or over the counter, as long as the underlying security or securities
represented by an index, are permitted investments of the Fund. Such futures
contracts may include index contracts and contracts for foreign currencies. The
Fund may enter into futures contracts and options on futures only to the extent
that its obligations under such contracts or transactions, together with options
on securities or indices represent not more than 25% of the Fund's assets.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
Since the Fund invests in equity securities, the Fund's Shares will fluctuate in
value, and thus may be more suitable for long-term investors who can bear the
risk of short-term fluctuations.
There may be certain risks connected with investing in foreign securities,
including risks of adverse political and economic developments (including
possible governmental seizure or nationalization of assets), the possible
imposition of exchange controls or other governmental restrictions, including
less uniformity in accounting and reporting requirements, the possibility that
there will be less information on such securities and their issuers available to
the public, the difficulty of obtaining or enforcing court judgments abroad,
restrictions on foreign investments in other jurisdictions, difficulties in
effecting repatriation of capital invested abroad, and difficulties in
transaction settlements and the effect of delay on shareholder equity. Foreign
securities may be subject to foreign taxes, which reduce yield, and may be less
marketable than comparable U.S. securities. The value of the Fund's investments
denominated in foreign currencies will depend on the relative strengths of those
currencies and the U.S. dollar, and the Fund may be affected favorably or
unfavorably by changes in the exchange rates or exchange control regulations
between foreign currencies and the U.S. dollar. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities, and net investment income and
gains, if any, to be distributed to Shareholders by the Fund.
Forward foreign currency contracts do not eliminate fluctuations in the
underlying prices of securities. Rather, they simply establish a rate of
exchange which one can achieve at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss
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due to a decline in the value of the hedged currency at the same time, they tend
to limit any potential gain which might result, should the value of such
currency increase.
The Fund's investments in emerging markets can be considered speculative, and
therefore, may offer higher potential for gains and losses than developed
markets of the world. With respect to any emerging country, there is the greater
potential for nationalization, expropriation or confiscatory taxation, political
changes, government regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
investments in such countries. In addition, it may be difficult to obtain and
enforce a judgment in the courts of such countries. The economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade.
Securities rated BBB by Standard & Poor's Corporation ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's") are deemed by these ratings services to have
some speculative characteristics and adverse economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
INVESTMENT LIMITATIONS
The International Equity Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, and
repurchase agreements involving such securities if, immediately after the
purchase, more than 5% of the value of the Fund's total assets would be invested
in the issuer or the Fund would hold more than 10% of any class of securities of
the issuer or more than 10% of the issuer's outstanding voting securities
(except that up to 25% of the value of the Fund's total assets may be invested
without regard to these limitations). For purposes of this investment
limitation, each foreign governmental issuer is deemed a separate issuer.
2) Purchase any securities that would cause more than 25% of the Fund's
total assets at the time of purchase to be invested in securities of one or more
issuers conducting their principal business activities in the same industry,
provided that (a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
and (c) utilities will be divided according to their
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services (for example, gas, gas transmission, electric and gas, electric, and
telephone will each be considered a separate industry);
3) Make loans, except that the Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements in
accordance with its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. The Fund's
portfolio turnover rate may vary greatly from year to year as well as within a
particular year. High portfolio turnover rates generally will result in
correspondingly higher brokerage and other transactions costs to the Fund and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the Fund. See FEDERAL TAXATION.
PURCHASE AND REDEMPTION OF SHARES
Fiduciary Shares may be purchased at net asset value. Only the following
investors qualify to purchase the International Equity Fund's Fiduciary Shares:
(i) fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Income Funds prior to June 20, 1994, which have remained continuously
open thereafter and which are not considered to be fiduciary accounts; (iii)
Shareholders who currently own Shares of HighMark's Equity or Income Funds that
were purchased prior to June 20, 1994 within an account registered in their name
with the Funds; and (iv) present and retired directors, officers and employees
(and their spouses and children under the age of 21) of Union Bank of
California, N.A., HighMark's current or former distributors or their respective
affiliated companies who currently own Shares of HighMark Funds which were
purchased before April 30, 1997.
Purchases and redemptions of Shares of the International Equity Fund may be made
on days on which both the New York Stock Exchange and Federal Reserve wire
system are open for business ("Business Days"). The minimum initial investment
is generally $1,000 and the minimum subsequent investment is generally only
$100. For present and retired directors, officers, and employees (and their
spouses and children under the age of 21) of Union Bank of California, SEI
Financial Services Company and their affiliates, the minimum initial
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investment is $250 and the minimum subsequent investment is $50. The Fund's
initial and subsequent minimum purchase amounts may be waived if purchases are
made in connection with Individual Retirement Accounts, Keoghs, payroll
deduction plans, or 401(k) or similar plans. However, the minimum investment may
be waived in the Distributor's discretion.
Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
1:00 p.m., Pacific time (4:00 p.m., Eastern time) and the custodian receives
Federal funds before the close of business on the next Business Day. The
purchase price of Shares of a Fund is the net asset value next determined after
a purchase order is received and accepted by HighMark. The net asset value per
Share of a Fund is determined by dividing the total market value of a Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of a Fund. Net asset value per share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day.
Purchases will be made in full and fractional shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor determines that it is not in the best interest of HighMark
and/or its Shareholders to accept such order.
Shares of the International Equity Fund are offered only to residents of states
in which the shares are eligible for purchase.
Shareholders who desire to redeem shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Fund reserves the right to make payment for
redemptions in securities rather than cash.
Neither HighMark's transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. HighMark and its
transfer agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures may include taping of telephone
conversations. If market conditions are extraordinarily active or other
extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a
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particular class of Shares will be determined at the time of the exchange. The
Shareholder must supply, at the time of the exchange, the necessary information
to permit confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Fiduciary Shares for Fiduciary Shares of another Fund on the
basis of the relative net asset value of the Fiduciary Shares exchanged.
Shareholders may also exchange Fiduciary Shares of a Fund for Retail Shares of
another Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per share plus the appropriate sales load.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including participating organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in the International Equity Fund may do
so by contacting the transfer agent at 1-800-734-2922. Exchanges will be
effected on any Business Day at the net asset value of the Funds involved in the
exchange next determined after the exchange request is received by the transfer
agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
the Fund is periodically declared and paid as a dividend to Shareholders of
record. Currently, capital gains of the Fund, if any, will be distributed at
least annually.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of the Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or
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distributions in cash. Shareholders wishing to receive their dividends in cash
(or wishing to revoke a previously made election) must notify the transfer agent
at P.O. Box 8416, Boston, MA 02266-8416, and such election (or revocation
thereof) will become effective with respect to dividends and distributions
having record dates after notice has been received. Dividends paid in additional
Shares receive the same tax treatment as dividends paid in cash.
FEDERAL TAXATION
The International Equity Fund intends to qualify for treatment as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and to distribute substantially all of its net investment income and
net realized capital gains so that the Fund is not required to pay federal taxes
on these amounts.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. The 70 percent dividends received deduction for
corporations generally will apply to these distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction when received by the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. Distributions by the Fund
of the excess of net long-term capital gain over net short-term capital loss is
taxable to Shareholders as long-term capital gain in the year with respect to
which it is received, regardless of how long the Shareholder has held Shares of
the Fund. Such distributions are not eligible for the dividends received
deduction. If a Shareholder disposes of Shares in the Fund at a loss before
holding such Shares for longer than six months, such loss will be treated as a
long-term capital loss to the extent the Shareholder has received long-term
capital gain dividends on the Shares.
Prior to purchasing Shares of the International Equity Fund, the impact of
dividends or capital gain distributions that are expected to be declared or have
been declared, but not paid, should be carefully considered. Dividends or
capital gain distributions received after a purchase of Shares are subject to
federal income taxes, although in some circumstances, the dividends or
distributions may be, as an economic matter, a return of capital to the
Shareholder. A Shareholder should consult his or her advisor for specific advice
about the tax consequences to the Shareholder of investing in the Fund.
Fund investments in foreign securities may be subject to withholding taxes at
the source on dividend or interest payments. In that case, the Fund's yield on
those securities would be decreased. If at the end of the Fund's fiscal year
more than 50% of the value of its total assets represents securities of foreign
corporations, the Fund intends to make an election permitted by the Internal
Revenue Code to treat any foreign taxes paid by it as paid by its Shareholders.
In this case, Shareholders who are U.S. citizens, U.S. corporations and, in some
cases, U.S. residents generally will be required to include in U.S. taxable
income their pro rata share of
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such taxes, but may then generally be entitled to claim a foreign tax credit or
deduction (but not both) for their share of such taxes.
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Investment in an entity that qualifies as a "passive foreign investment company"
under the Code could subject the Fund to a U.S. federal income tax or other
charge on certain "excess distributions" received with respect to the
investment, and on the proceeds from disposition of the investment.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A., serves as the International Equity Fund's investment advisor. Subject to
the general supervision of HighMark's Board of Trustees, the Advisor manages the
Fund in accordance with its investment objective and policies, makes decisions
with respect to and places orders for all purchases and sales of the Fund's
investment securities, and maintains the Fund's records relating to such
purchases and sales.
For the expenses assumed and services provided by the Advisor as the Fund's
investment advisor, Union Bank of California receives a fee from the
International Equity Fund, computed daily and paid monthly, at the annual rate
of ninety-five one-hundredths of one percent (.95%) of the Fund's average daily
net assets. This fee may be higher than the advisory fee paid by most mutual
funds, although the Board of Trustees believes it will be
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comparable to advisory fees paid by many funds having similar objectives and
policies. Union Bank of California may from time to time agree to voluntarily
reduce its advisory fee, however, it is not currently doing so. While there can
be no assurance that Union Bank of California will choose to make such an
agreement, any voluntary reductions in Union Bank of California's advisory fee
will lower the Fund's expenses, and thus increase the Fund's yield and total
return, during the period such voluntary reductions are in effect.
On April 1, 1996, the Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group which, as of June 30
1996, had approximately $13.4 billion of assets under management. The Advisor,
with a team of approximately 45 stock and bond research analysts, portfolio
managers and traders, has been providing investment management services to
individuals, institutions and large corporations since 1917.
THE SUB-ADVISOR
The Advisor and Tokyo-Mitsubishi Asset Management (U.K.), Ltd. (the
"Sub-Advisor"), have entered into an investment sub-advisory agreement relating
to the Fund (the "Investment Sub- Advisory Agreement"). Under the Investment
Sub-Advisory Agreement, the Sub-Advisor makes the day-to-day investment
decisions for the assets of the Fund, subject to the supervision of, and
policies established by, the Advisor and the Trustees of HighMark. HighMark's
Shares are not sponsored, endorsed or guaranteed by and do not constitute
obligations or deposits of the Sub-Advisor and are not guaranteed by the FDIC or
any other governmental agency.
Tokyo-Mitsubishi Asset Management (U.K.), Ltd., 12-15 Finsbury Circus, London
EC2 M7BT operates as a subsidiary of The Bank of Tokyo-Mitsubishi, Ltd.
Established in 1989, the Sub-Advisor provides active global investment services
for segregated funds and specialist fund management.
Prior to February 1995 the Sub-Advisor had not previously served as the
investment advisor to mutual funds. As of April 1, 1996 Tokyo-Mitsubishi Asset
Management (U.K.), Ltd., managed assets of $2.2 billion in individual portfolios
and collective funds.
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The Sub-Advisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .30% of the average daily net
assets of the Fund.
Andrew Richmond has served as portfolio manager of the Fund since its inception.
Mr. Richmond has been with the Sub-Advisor and its predecessor, Bank of Tokyo
Asset Management (U.K.), Ltd., since 1990, and has served as senior equity
investment manager since June, 1992.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Fiduciary Shares.
Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of the Fund, for
which it receives a fee paid by the Administrator at the annual rate of up to
0.05% of the average daily net assets of the Fund. Union Bank of California has
voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Fiduciary Shares
of HighMark, for which services it receives a fee.
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
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affiliates, the Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.00% of average
daily net assets.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor. Fiduciary Shares are not subject
to HighMark's Distribution Plan or a distribution fee.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Fund
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of the
Fund, for which it receives compensation from SEI Fund Resources without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Fund.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the International Equity Fund. The custodian holds cash,
securities and other assets of HighMark as required by the 1940 Act.
Services performed by Union Bank of California, as the Fund's shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
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GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax- Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund and the California Intermediate Tax-Free Bond Fund had been
offered for sale in HighMark. Shares of each Fund are freely transferable, are
entitled to distributions from the assets of the Fund as declared by the Board
of Trustees, and, if HighMark were liquidated, would receive a pro rata share of
the net assets attributable to that Fund. Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Retail Shares, interested persons may contact the Distributor at
1-800-734-2922.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Fiduciary
Shares of the International Equity Fund.
The aggregate total return and average annual total return of the Fund may be
quoted for the life of the Fund and for ten-year, five-year, three-year, and
one-year periods, in each case through the most recent calendar quarter.
Aggregate total return is determined by calculating the change in the value of a
hypothetical $1,000 investment in the Fund over the applicable period that would
equate the initial amount invested to the ending redeemable value of the
investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing the Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the average positive or
negative investment results that an investor in the Fund would
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have experienced on an annual basis from changes in Share price and reinvestment
of dividends and capital gain distributions.
The yield of the Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of the Fund is determined by dividing the income and
capital gains distributions, or where indicated the income distributions alone,
on a Share of the Fund over a twelve-month period by the per Share public
offering price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical);
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs, or
other investment alternatives. Certain Funds may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
All performance information presented for the Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
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Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the Highmark Funds.
The California Intermediate Tax-Free Bond Fund invests in only the instruments
permitted by its individual investment objective and policies.
AMERICAN DEPOSITARY RECEIPTS (ADRs) and EUROPEAN DEPOSITARY
RECEIPTS ("EDRs") -- Receipts, typically issued by a U.S. financial institution
(a "depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. ADRs
include American Depositary Shares and New York Shares. EDRs, which are
sometimes referred to as Continental Depositary Receipts ("CDRs'), are receipts,
typically issued by a non-U.S. financial institution, that evidence ownership
interests in a security or a pool of securities issued by either a U.S. or
foreign issuer. ADRs, EDRs and CDRs may be available for investment through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the security underlying the receipt and a depositary,
whereas an unsponsored facility may be established by a depositary without
participation by the issuer of the receipt's underlying security. Holders of an
unsponsored depositary receipt generally bear all the costs of the unsponsored
facility. The depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through to the holders of the receipts voting
rights with respect to the deposited securities.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. The purchase of non-mortgage asset-backed securities raises
risk considerations peculiar to the financing of the instruments underlying such
securities. Asset- backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial
prepayment risk, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary as much in response
to changes in interest rates and the short-term nature of the underlying car
loans or other receivables tend to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying sales contracts or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with their investment objectives and policies, the
Fixed Income Funds may invest in other asset-backed securities that may be
developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit are issued by banks and savings and
loan institutions in
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exchange for the deposit of funds and normally can be traded in the secondary
market prior to maturity.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or through entering into
forward currency contracts to protect against uncertainty in the level of future
exchange rates between particular currencies or between foreign currencies in
which the Fund's securities are or may be denominated. A forward contract
involves an obligation to purchase or sell a specific currency amount at a
future date, which may be any fixed number of days from the date of the
contract, agreed upon by the parties, at a price set at the time of the
contract. Under normal circumstances, consideration of the prospect for changes
in currency exchanges rates will be incorporated into the Fund's long-term
investment strategies. However, the Advisor and Sub-Advisor believe that it is
important to have the flexibility to enter into forward currency contracts when
it determines that the best interests of the Fund will be served.
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When the Advisor and Sub-Advisor believe that the currency of a particular
country may suffer a significant decline against another currency, the Fund may
enter into a currency contract to sell, for the appropriate currency, the amount
of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency.
At the maturity of a forward contract, the Fund may either sell a fund security
and make delivery of the foreign currency, or it may retain the security and
terminate its contractual obligations 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.
The Fund may realize a gain or loss from currency transactions.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such
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borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TRs, TIGRs and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations issued by a bank in the United States
with assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose obligations the Fund may invest; (viii) money market funds
and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
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Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases
a mortgage-related security at a premium, that portion may be lost if there is
a decline in the market value of the security whether due to changes in
interest rates or prepayments of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of mortgage-related securities
are inversely affected by changes in interest rates. However, although the
value of a mortgage-related security may decline when interest rates rise, the
converse is not necessarily true because in periods of declining interest rates
the mortgages underlying the securities are prone to prepayment which results
in amounts being available for reinvestment which are likely to be invested at
a lower interest rate. For this and other reasons, the stated majority of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have
greater price volatility than other fixed-income obligations. Because declining
interest rates may lead to prepayment of underlying mortgages, automobile sales
contracts or credit card receivables, the prices of mortgage-related and
asset-backed securities may not rise with a decline in interest rates.
Mortgage-backed and asset-backed securities and CMOs are extremely sensitive to
the rate of principal prepayment. Similarly, callable corporate bonds also
present risk of prepayment. During periods of falling interest rates,
securities that can be called or prepaid may decline in value relative to
similar securities that are not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to
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be illiquid investments. The Fund will maintain liquid, high-grade securities in
a segregated account in an amount at least equal to the purchase price of the
municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Obligations of supranational entities
are established through the joint participation of several governments, and
include the Asian Development Bank, the Inter-American Development Bank,
International Bank for Reconstruction and Development (World Bank), African
Development Bank, European Economic Community, European Investment Bank and the
Nordic Investment Bank.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, certain Funds may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary
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market for options; and (4) while a Fund will receive a premium when it writes
covered call options, it may not participate fully in a rise in the market value
of the underlying security.
OPTIONS ON CURRENCIES -- The Fund may purchase options and write covered call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter markets) to manage the Fund's exposure to changes in dollar
exchange rates. Call options on foreign currency written by the Fund will be
"covered" which means that the Fund will own an equal amount of the underlying
foreign currency. With respect to put options on foreign currency written by the
Fund, the Fund will establish a segregated account with its Custodian consisting
of cash, U.S. government securities or other liquid high grade debt securities
in an amount of equal to the amount the Fund would be required to pay upon
exercise of the put.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or
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<PAGE> 207
becomes insolvent, the Fund holding such obligations would suffer a loss to the
extent that either the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price or the Fund's disposition of the
securities was delayed pending court action. Securities subject to repurchase
agreements will be held by a qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of HighMark has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, HighMark's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
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<PAGE> 208
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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
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<PAGE> 209
Separately Traded Registered Interest and Principal Securities ("STRIPS") that
are transferable through the Federal book-entry system.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally
lower than the yields available from otherwise comparable corporate
fixed-income securities. Like other fixed-income securities, however, the
values of U.S. Government Securities change as interest rates fluctuate.
Fluctuations in the value of portfolio securities will in many cases not affect
interest income on existing portfolio securities, but will be reflected in the
Fund's net asset value. Because the magnitude of these fluctuations will
generally be greater at times when a Fund's average maturity is longer, under
certain market conditions the Fund may invest in short-term investments
yielding lower current income rather than investing in higher yielding
longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
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<PAGE> 210
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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<PAGE> 211
HIGHMARK INTERNATIONAL EQUITY FUND
INVESTMENT PORTFOLIO OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
SUB-ADVISOR
Tokyo-Mitsubishi Asset Management (U.K.), Ltd.
12-15 Finsbury Circus
London EC2 M7BT
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources and
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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<PAGE> 212
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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<PAGE> 213
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 214
CROSS REFERENCE SHEET
THE HIGHMARK MONEY MARKET FUNDS
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities How to Purchase Shares; Exchange
Privileges; Redemption of Shares;
Dividends; Federal Taxation; Service
Arrangements--Administrator; Distributor;
The Distribution Plan; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
7. Purchase of Securities Being Offered How to Purchase Shares; Exchange
Privileges; Service Arrangements--
Administrator; Distributor; The
Distribution Plan
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
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<PAGE> 215
HIGHMARK FUNDS
MONEY MARKET FUNDS
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's:
o Diversified Money Market Fund
o U.S. Government Money Market Fund
o 100% U.S. Treasury Money Market Fund
o California Tax-Free Money Market Fund
RETAIL SHARES
HighMark's Retail Shares are offered to investors who are not fiduciary clients
of Union Bank of California, N.A., and who are not otherwise eligible for
HighMark's Fiduciary Shares.
This Prospectus sets forth concisely the information about HighMark and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-800-734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference. This Prospectus relates only to the Retail Shares of the Money Market
Funds. Interested persons who wish to obtain a prospectus for the other Funds of
HighMark may contact the Distributor at the above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
[_______________, 1997]
Retail Shares
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<PAGE> 216
SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Retail Shares of the Diversified Money Market, U.S. Government Obligations Money
Market, 100% U.S. Treasury Obligations Money Market, and California Tax-Free
Money Market Funds (each a "Fund" and sometimes referred to in this prospectus
as the "Funds.") This summary is qualified in its entirety by reference to the
more detailed information provided elsewhere in the Prospectus and in the
Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? The Diversified Money Market Fund,
the U.S. Government Money Market Fund, and the 100% U.S. Treasury Money Market
Fund seek current income with liquidity and stability of principal. The
California Tax-Free Money Market Fund seeks as high a level of current interest
income free from federal income tax and California personal income tax as is
consistent with the preservation of capital and relative stability of principal.
(See "INVESTMENT OBJECTIVES")
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE DIVERSIFIED MONEY MARKET FUND
invests in obligations with maturities deemed under SEC rules to be 397 days or
less ("short-term investments") issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, in high-quality short-term obligations issued by
banks and corporations, and other high-quality rated and unrated short-term
instruments; some of the obligations and short-term instruments in which the
Fund invests may be subject to repurchase agreements. THE U.S. GOVERNMENT MONEY
MARKET FUND invests in short-term obligations issued or guaranteed by the U.S.
Treasury, and additionally invests in obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government; some of the obligations in
which the Fund invests may be subject to repurchase agreements. THE 100% U.S.
TREASURY MONEY MARKET FUND invests exclusively in direct U.S. Treasury
short-term obligations. THE CALIFORNIA TAX-FREE MONEY MARKET FUND invests
primarily in bonds and notes issued by or on behalf of the State of California
and other states, territories, possessions of the United States, and the
District of Columbia and their respective authorities, agencies,
instrumentalities and political sub-divisions, the interest on which is excluded
from gross income for federal income and California personal income tax purposes
and not treated as a preference item for individuals for purposes of the federal
alternative minimum tax. (See "INVESTMENT POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? Each Fund seeks to
maintain a net asset value of $1.00 per share. There can be no assurance that a
Fund will be able to maintain a net asset value of $1.00 per share on a
continuous basis. The California Tax-Free Money Market Fund concentrates its
investments in California municipal securities, and an investment in the Fund
therefore may be riskier than an investment in other types of money market
funds. (See "Risk Factors")
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<PAGE> 217
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the yield or value of the security or yield or
value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator")
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as the
Custodian of HighMark's assets. (See "The Custodian")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. In order to be effective on the
Business Day received, orders to purchase and redeem must be placed prior to
8:00 a.m., Pacific time (11:00 a.m., Eastern time) for the California Tax-Free
Money Market Fund, prior to 9:00 a.m., Pacific time (12:00 noon, Eastern time)
for the 100% U.S. Treasury Money Market Fund and prior to 10:00 a.m., Pacific
time (1:00 p.m., Eastern time) for the Diversified Money Market and U.S.
Government Money Market Funds on any Business Day. Otherwise, the order will be
effective the next Business Day. In addition, effectiveness of a purchase is
contingent on the Custodian's receipt of Federal funds before 11:00 a.m.,
Pacific time (2:00 p.m., Eastern time). (See "HOW TO PURCHASE SHARES and
REDEMPTION OF SHARES")
HOW ARE DIVIDENDS PAID? The net investment income (exclusive of short-term
capital gains) of the Funds is determined and declared on each Business Day as a
dividend for Shareholders of record as of the close of business on that day.
Dividends are paid monthly in additional shares unless the Shareholder elects to
take the payment in cash. (See "Dividends")
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<PAGE> 218
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY....................................................................3
MONEY MARKET FUNDS FEE TABLE...............................................7
FINANCIAL HIGHLIGHTS.......................................................9
FUND DESCRIPTION..........................................................18
INVESTMENT OBJECTIVES.....................................................18
INVESTMENT POLICIES ......................................................19
Diversified Money Market Fund........................................19
U.S. Government Money Market Fund....................................21
The 100% U.S. Treasury Money Market Fund.............................21
California Tax-Free Money Market Fund................................21
Municipal Securities.................................................23
GENERAL...................................................................24
Illiquid and Restricted Securities...................................25
Lending of Portfolio Securities......................................25
Other Investments....................................................25
Risk Factors.........................................................26
INVESTMENT LIMITATIONS....................................................27
Valuation of Shares ......................................29
HOW TO PURCHASE SHARES....................................................29
How to Purchase By Mail..............................................30
How to Purchase By Wire..............................................30
How to Purchase through an Automatic Investment Plan ("AIP").........31
How to Purchase Through Financial Institutions.......................31
EXCHANGE PRIVILEGES.......................................................31
REDEMPTION OF SHARES......................................................32
By Mail..............................................................33
Telephone Transactions...............................................33
Systematic Withdrawal Plan ("SWP")...................................34
Other Information Regarding Redemptions..............................34
</TABLE>
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<PAGE> 219
<TABLE>
<S> <C>
DIVIDENDS...................................................................35
FEDERAL TAXATION............................................................36
SERVICE ARRANGEMENTS........................................................38
The Advisor............................................................38
Administrator..........................................................39
The Transfer Agent.....................................................39
Distributor............................................................40
The Distribution Plan..................................................40
Banking Laws...........................................................41
Custodian..............................................................41
GENERAL INFORMATION.........................................................42
Description of HighMark & Its Shares...................................42
Performance Information................................................42
Miscellaneous..........................................................44
DESCRIPTION OF PERMITTED INVESTMENTS........................................44
</TABLE>
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<PAGE> 220
MONEY MARKET FUNDS FEE TABLE
<TABLE>
<CAPTION>
Diversified U.S. Government 100% U.S. Treasury
Money Market Money Money California Tax-Free
Fund Market Fund Market Fund Money Market Fund
---- ----------- ----------- -----------------
Retail Shares Retail Shares Retail Shares Retail Shares
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0% 0% 0% 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0% 0% 0% 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0% 0% 0% 0%
percentage of original purchase
price or redemption proceeds, as
applicable)
Redemption Fees (as a percentage 0% 0% 0% 0%
of amount redeemed, if
applicable)(b)
Exchange Fee(a) $ 0 $ 0 $ 0 $0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.30% 0.29% 0.24% 0.09%
12b-1 Fees 0.25% 0.25% 0.25% 0.25%
Other Expenses (after voluntary reduction)(d) 0.20% 0.21% 0.21% 0.21%
----- ----- ----- -----
Total Fund Operating Expenses(e) 0.75% 0.75% 0.70% 0.55%
===== ===== ===== =====
<FN>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
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<PAGE> 221
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Diversified Money Market Fund
Retail Share $8 $24 $42 $93
U.S. Government Money Market Fund
Retail Shares $8 $24 $42 $93
100% U.S. Treasury Money Market Fund
Retail Shares $7 $22 $39 $87
California Tax-Free Money Market Fund
Retail Shares $6 $18 $31 $69
</TABLE>
The purpose of the tables above is to assist an investor in the Funds in
understanding the various costs and expenses that a Shareholder will bear
directly or indirectly. For a more complete discussion of each Fund's annual
operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the Funds on behalf of their customers may charge
customers fees for services provided in connection with the investment in,
redemption of, and exchange of Shares. (See HOW TO PURCHASE SHARES,
EXCHANGE PRIVILEGES, REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder. (See REDEMPTION OF SHARES
below.)
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.30% for the Retail
Shares of the U.S. Government Money Market Fund, the 100% U.S. Treasury
Money Market Fund, and the California Tax-Free Money Market Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.47% for the Retail
Shares of the Diversified Money Market Fund and 0.48% for the Retail Shares
of each of the U.S. Government Money Market Fund, the 100% U.S. Treasury
Money Market Fund and the California Tax-Free Money Market Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 1.02%
for the Retail Shares of the Diversified Money Market Fund, and 1.03% for
the Retail Shares of each of the U.S. Government Money Market Fund, the
100% U.S. Treasury Money Market Fund, and the California Tax-Free Money
Market Fund.
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<PAGE> 222
FINANCIAL HIGHLIGHTS
The tables below set forth certain financial information with respect to the
Retail Shares of the Diversified Money Market Fund, U.S. Government Money Market
Fund, 100% U.S. Treasury Money Market Fund, and California Tax-Free Money Market
Fund. Financial highlights for the Funds for the period ended July 31, 1996 have
been derived from financial statements audited by Deloitte & Touche LLP,
independent auditors for HighMark, whose report thereon is included in the
Statement of Additional Information. Prior to the fiscal year ended July 31,
1996, Coopers & Lybrand L.L.P. served as independent accountants for HighMark.
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<PAGE> 223
Diversified Money Market Fund
<TABLE>
<CAPTION>
(formerly Diversified Obligations Fund)
Financial Highlights
--------------------
Year Ended July 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Retail Retail Retail Retail Retail Retail
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ----------- ----------- ----------- -----------
Investment Activities
Net investment income 0.049 0.049 0.028 0.027 0.043 0.066
------------ ------------ ----------- ----------- ----------- -----------
Distributions
Net investment income (0.049) (0.049) (0.028) (0.027) (0.043) (0.066)
------------ ------------ ----------- ----------- ----------- -----------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ =========== =========== =========== ===========
Total Return 5.01% 4.99% 2.88% 2.75% 4.41% 7.00%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 185,952 $ 128,191 $ 75,725 $ 77,589 $ 17,600 $ 16,618
Ratio of expenses to average
net assets 0.75% 0.74% 0.74% 0.72% 0.72% 0.70%
Ratio of net investment income
to average net assets 4.89% 4.92% 2.83% 2.72% 4.34% 6.71%
Ratio of expenses to average
net assets* 1.23% 1.23% 1.14% 0.79% 0.97% 0.70%
Ratio of net investment income
to average net assets* 4.41% 4.43% 2.42% 2.65% 4.09% 6.71%
</TABLE>
On December 1, 1990, the Diversified Obligations Fund, now renamed the
Diversified Money Market Fund, commenced offering Class A Shares and designated
existing shares as Class B Shares. As of June 20, 1994, Class A and Class B
Shares were designated as "Investor" (now called "Retail") and "Fiduciary"
Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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<PAGE> 224
<TABLE>
<CAPTION>
August 10,
1987
Year Ended July 31, to
-------------------- July 31
1990 1989 1988(a)
---- ---- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00
Investment Activities
Net investment income 0.079 0.085 0.066
Distributions
Net investment income (0.079) (0.085) (0.066)
-------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Return 8.23% 8.84% 6.94%
Ratios/Supplementary Data:
Net Assets at end of period (000) $593,116 $621,462 $350,499
Ratio of expenses to average net assets 0.66% 0.59% 0.50%(b)
Ratio of net investment income to average net assets 7.92% 8.50% 6.73%(b)
Ratio of expenses to average net assets* 0.69% 0.71% 0.70%(b)
Ratio of net investment income to average net assets* 7.89% 8.38% 6.53%(b)
</TABLE>
On December 1, 1990, the Diversified Obligations Fund, now renamed the
Diversified Money Market Fund, commenced offering Class A Shares and designated
existing shares as Class B Shares. As of June 20, 1994, Class A and Class B
Shares were designated as "Investor" (now called "Retail") and "Fiduciary"
Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
-11-
<PAGE> 225
<TABLE>
<CAPTION>
U.S. Government Money Market Fund
(formerly U.S. Government Obligations Money Market Fund)
Financial Highlights
Year Ended July 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Retail Retail Retail Retail Retail Retail
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- -------
Investment Activities
Net investment income 0.048 0.048 0.027 0.027 0.042 0.063
------ ------- ------- ------- ------- -------
Distributions
Net investment income (0.048) (0.048) (0.027) (0.027) (0.042) (0.063)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
Total Return 4.86% 4.86% 2.74% 2.72% 4.25% 6.49%
Ratios/Supplementary
Data:
Net Assets at end of period (000) $75,714 $48,474 $24,055 $37,332 $12,527 $ 1,761
Ratio of expenses to
average net assets 0.79% 0.78% 0.77% 0.71% 0.73% 0.63%
Ratio of net investment income
to average net assets 4.77% 4.82% 2.63% 2.67% 4.15% 6.29%
Ratio of expenses to
average net assets* 1.26% 1.27% 1.17% 0.79% 0.99% 0.73%
Ratio of net investment income
to average net assets* 4.30% 4.33% 2.23% 2.59% 3.89% 6.19%
</TABLE>
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<PAGE> 226
<TABLE>
<CAPTION>
August 10,
Year Ended July 31 1987
------------------ to
1990 1989 July 31,
---- ---- --------
1988(a)
-------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00
Investment Activities
Net investment income 0.078 0.083 0.064
------- -------- --------
Distributions
Net investment income (0.078) (0.083) (0.064)
------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00
======= ======== ========
Total Return 8.09% 8.62% 6.78%
Ratios/Supplementary Data:
Net Assets at end of period (000) $80,774 $114,945 $131,985
Ratio of expenses to average net assets 0.65% 0.62% 0.42%(b)
Ratio of net investment income to average net assets 7.80% 8.30% 6.59%(b)
Ratio of expenses to average net assets* 0.72% 0.75% 0.71%(b)
Ratio of net investment income to average net assets* 7.73% 8.17% 6.30%(b)
</TABLE>
On December 1, 1990, the U.S. Government Obligations Money Market Fund (now
renamed the U.S. Government Money Market Fund) commenced offering Class A Shares
and designated existing shares as Class B Shares. As of June 20, 1994, Class A
and Class B Shares were designated as "Investor" (now called "Retail") and
"Fiduciary" Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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<PAGE> 227
<TABLE>
<CAPTION>
100% U.S. Treasury Money Market Fund
(formerly 100% U.S. Treasury Obligations Money Market Fund)
Financial Highlights
--------------------
Year Ended July 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Retail Retail Retail Retail Retail Retail
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
Investment Activities
Net investment income 0.046 0.046 0.026 0.026 0.040 0.063
Net realized and unrealized
gains on investments _____ _____ _____ _____ 0.001 _____
-----
Total from Investment Activities 0.046 0.046 0.026 0.026 0.041 0.063
----- ----- ----- ----- ----- -----
Distributions
Net investment income (0.046) (0.046) (0.026) (0.026) (0.040) (0.063)
Net realized gains _____ _____ _____ _____ (0.001) _____
-------
Total Distributions (0.046) (0.046) (0.026) (0.026) (0.041) (0.063)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
Total Return 4.74% 4.69% 2.68% 2.64% 4.18% 6.53%
Ratios/Supplementary Data:
Net Assets at end of period (000) $100,623 $88,660 $39,157 $32,629 $11,551 $19,187
Ratio of expenses to
average net assets 0.74% 0.73% 0.74% 0.67% 0.65% 0.62%
Ratio of net investment income
to average net assets 4.64% 4.68% 2.68% 2.60% 3.99% 6.25%
Ratio of expenses to
average net assets* 1.23% 1.22% 1.15% 0.75% 0.97% 0.70%
Ratio of net investment income
to average net assets* 4.15% 4.19% 2.27% 2.52% 3.67% 6.17%
</TABLE>
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<PAGE> 228
<TABLE>
<CAPTION>
August 10,
1987
to
Year Ended July 31, July 31,
------------------- --------
1990 1989 1988(a)
---- ---- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00
------ ------ ------
Investment Activities
Net investment income 0.078 0.081 0.063
Total from Investment Activities 0.078 0.081 0.063
----- ----- -----
Distributions
Net investment income (0.078) (0.081) (0.063)
------- ------- -------
Total Distributions (0.078) (0.081) (0.063)
------- ------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00
====== ====== ======
Total Return 8.04% 8.43% 6.62%
Ratios/Supplementary Data:
Net Assets at end of period (000) $205,787 $174,258 $151,854
Ratio of expenses to average net assets 0.65% 0.54% 0.41%(b)
Ratio of net investment income to
average net assets 7.76% 8.12% 6.45%(b)
Ratio of expenses to average net assets* 0.71% 0.72% 0.72%(b)
Ratio of net investment income average
net assets* 7.70% 7.94% 6.14%(b)
</TABLE>
On December 1, 1990, the 100% U.S. Treasury Obligations Money Market Fund (now
renamed the 100% U.S. Treasury Money Market Fund) commenced offering Class A
Shares and designated existing shares as Class B Shares. As of June 20, 1994,
Class A and Class B Shares were designated as "Investor" (now called "Retail")
and "Fiduciary" Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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<PAGE> 229
<TABLE>
<CAPTION>
California Tax-Free Money Market Fund
(formerly California Tax-Free Fund)
Financial Highlights
--------------------
Year Ended July 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Retail Retail Retail Retail Retail Retail
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- ------- ------- -------
Investment Activities
Net investment income 0.029 0.031 0.020 0.021 0.032 0.045
-------- -------- ------- -------- ------- -------
Distributions
Net investment income (0.029) (0.031) (0.020) (0.021) (0.032) (0.045)
--------- -------- ------- ------- ------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======= ======= =======
Total Return 2.91% 3.16% 1.99% 2.13% 3.20% 4.57%
Ratios/Supplementary
Data:
Net Assets at end of period (000) $53,627 $40,544 $31,521 $44,410 $4,609 $4,426
Ratio of expenses to average
net assets 0.55% 0.50% 0.50% 0.44% 0.54% 0.53%
Ratio of net investment income
to average net assets 2.89% 3.14% 1.96% 2.08% 3.15% 4.47%
Ratio of expenses to average
net assets* 1.25% 1.26% 1.18% 0.79% 0.99% 0.72%
Ratio of net investment income
to average net assets* 2.19% 2.38% 1.28% 1.73% 2.70% 4.28%
</TABLE>
-16-
<PAGE> 230
<TABLE>
<CAPTION>
August 10,
1987
to
Year Ended July 31, July 31,
------------------- --------
1990 1989 1988(a)
---- ---- -------
<S> <C> <C> <C>
Net Asset Value, beginning of Period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Investment Activities
Net investment income 0.052 0.054 0.042
-------- -------- --------
Distributions
Net Investment income (0.052) (0.054) (0.042)
-------- --------- --------
Net Asset Value,
End of Period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Return 5.28% 5.58% 4.41%
Ratios/Supplementary Data:
Net Assets at end of period (000) $137,308 $147,868 $121,940
Ratio of expenses to average net assets 0.66% 0.71% 0.70%(b)
Ratio of net investment income to
average net assets 5.17% 5.45% 4.34%(b)
Ratio of expenses to average net
assets* 0.72% 0.76% 0.75%(b)
Ratio of net investment income to
average net assets* 5.11% 5.40% 4.29%(b)
</TABLE>
On December 1, 1990, the California Tax-Free Fund (now renamed the California
Tax-Free Money Market Fund) commenced offering Class A Shares and designated
existing shares as Class B Shares. As of June 20, 1994, Class A and Class B
Shares were designated as "Investor" (now called "Retail") and "Fiduciary"
Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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<PAGE> 231
FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Retail Shares
and the operation of HighMark's Distribution Plan, see HOW TO PURCHASE SHARES
and SERVICE ARRANGEMENTS below. (Retail Shares may be hereinafter referred to as
"Shares.")
INVESTMENT OBJECTIVES
The investment objectives of the Funds are as follows:
The Diversified Money Market Fund, the U.S. Government Money Market Fund and the
100% U.S. Treasury Money Market Fund each seek current income with liquidity and
stability of principal.
The California Tax-Free Money Market Fund seeks as high a level of current
interest income free from federal income tax and California personal income tax
as is consistent with the preservation of capital and relative stability of
principal.
The investment objectives and certain of the investment limitations of the
Diversified Money Market Fund, the U.S. Government Money Market Fund, the 100%
U.S. Treasury Money Market Fund, and the California Tax-Free Money Market Fund
may not be changed without a vote of the holders of a majority of the
outstanding Shares of the respective Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that a Fund will
achieve its investment objective.
-18-
<PAGE> 232
INVESTMENT POLICIES
While the Diversified Money Market Fund, the U.S. Government Money Market Fund
and the 100% U.S. Treasury Money Market Fund have the same investment objective,
they differ as follows with respect to the types of instruments that may be
purchased. Each Fund may invest only in U.S. dollar denominated obligations
determined by the Advisor to present minimal credit risks under guidelines
adopted by HighMark's Board of Trustees.
Diversified Money Market Fund
The Diversified Money Market Fund may invest in the following obligations:
(i) obligations issued by the U.S. Government, and backed by its full
faith and credit, and obligations issued or guaranteed as to
principal and interest by the agencies or instrumentalities of
the U.S. Government (e.g., obligations issued by Farmers Home
Administration, Government National Mortgage Association, Federal
Farm Credit Bank and Federal Housing Administration);
(ii) obligations such as bankers' acceptances, bank notes,
certificates of deposit and time deposits of thrift institutions,
savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign
banks, provided that such institutions (or, in the case of a
branch, the parent institution) have total assets of $1 billion
or more as shown on their last published financial statements at
the time of investment;
(iii) short-term promissory notes issued by corporations, including
Canadian Commercial Paper ("CCP"), which is U.S. dollar
denominated commercial paper issued by a Canadian corporation or
a Canadian counterpart of a U.S. corporation, and Europaper,
which is U.S. dollar denominated commercial paper of a foreign
issuer;
(iv) U.S. dollar denominated securities issued or guaranteed by
foreign governments, their political subdivisions, agencies or
instrumentalities, and obligations of supranational entities such
as the World Bank and the Asian Development Bank (provided that
the Fund invests no more than 5% of its assets in any such
instrument and invests no more than 25% of its assets in such
instruments in the aggregate);
(v) up to 5% of its total assets in loan participations issued by a
bank in the U.S. with assets exceeding $1 billion where the
underlying loan is made to a borrower in whose obligations the
Fund may invest and the underlying loan has a remaining maturity
of 397 days or less;
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<PAGE> 233
(vi) readily-marketable, short-term debt securities including, but
not limited to, those backed by company receivables, truck and
auto loans, leases, and credit card loans;
(vii) Treasury receipts, including TRs, TIGRs and CATs; and
(viii) repurchase agreements involving such obligations.
Certain of the obligations in which the Funds may invest may be variable or
floating rate instruments, may involve a conditional or unconditional demand
feature, and may include variable amount master demand notes.
Subject to the provisions of Rule 2a-7 under the Investment Company Act of 1940
(the "1940 Act"), investments of the Diversified Money Market Fund will consist
of those obligations that, at the time of purchase, possess the highest
short-term rating from at least one nationally recognized statistical rating
organization ("NRSRO") (for example, commercial paper rated "A-1" by Standard &
Poor's Corporation ("S&P") or "P-1" by Moody's Investors Service, Inc.
("Moody's")). Although the Diversified Money Market Fund does not presently
expect to do so, it may also invest up to 5% of its net assets in obligations
that, at the time of purchase, possess one of the two highest short-term ratings
from at least one NRSRO, and in obligations that do not possess an equivalent
short-term rating (i.e., are unrated) but are determined by the Advisor to be of
comparable quality to the rated instruments eligible for purchase by the Fund
under guidelines adopted by the Board of Trustees.
The Diversified Money Market Fund will not invest more than 5% of its total
assets in the securities of any one first tier issuer, except that the Fund may
invest up to 25% of its total assets in the securities of a single first tier
issuer for a period of up to three business days. There is no limit on the
percentage of the Fund's assets that may be invested in obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities and
repurchase agreements fully collateralized by such obligations.
The Fund may concentrate its investments in certain instruments issued by U.S.
Banks, U.S. branches of foreign banks, and foreign branches of U.S. banks, but
only so long as the investment risk associated with investing in foreign
branches of U.S. banks is the same as that associated with investing in
instruments issued by the U.S. parent. Domestic certificates of deposit and
bankers' acceptances include those issued by domestic branches of a foreign bank
to the extent permitted by the rules of the Securities and Exchange Commission.
The rules currently permit U.S. branches of foreign banks to be treated as a
domestic bank if it can be demonstrated that they are subject to the same
regulations as domestic banks.
-20-
<PAGE> 234
U.S. Government Money Market Fund
As a fundamental policy, the U.S. Government Money Market Fund may not purchase
securities other than U.S. Treasury bills, notes, and other obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities (such
as obligations issued by the Government National Mortgage Association and the
Export-Import Bank of the United States) some of which may be subject to
repurchase agreements.
The 100% U.S. Treasury Money Market Fund
The 100% U.S. Treasury Money Market Fund invests exclusively in direct U.S.
Treasury obligations and separately traded component parts of such obligations
transferable through the Federal Reserve book-entry system ("STRIPs").
California Tax-Free Money Market Fund
The California Tax-Free Money Market Fund invests in obligations issued by the
State of California and its political subdivisions or municipal authorities and
obligations issued by territories or possessions of the United States
("Municipal Securities").
Under normal market conditions and, as a matter of fundamental policy, at least
80% of the value of the total assets of the California Tax-Free Money Market
Fund will be invested in Municipal Securities, the interest on which, in the
opinion of bond counsel, is excluded from gross income both for federal income
tax purposes and for California personal income tax purposes, and does not
constitute a preference item for individuals for purposes of the federal
alternative minimum tax.
Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments and may involve a conditional or unconditional demand
feature.
Under normal market conditions, up to 20% of the California Tax-Free Money
Market Fund's total assets may be invested in short-term obligations, the
interest on which is treated as a preference item for individuals for purposes
of the federal alternative minimum tax or subject to federal or California
personal income tax ("Taxable Obligations"). These short-term obligations may
include bonds from other states and cash equivalents as described below.
Dividends paid by the California Tax-Free Money Market Fund that are derived
from obligations, the interest on which is exempt from California taxation when
received by an individual ("California Exempt-Interest Securities"), are
excluded from gross income for California personal income tax purposes.
Dividends derived from interest on obligations other than California
Exempt-Interest Securities may be excluded from gross income for federal income
tax purposes but will be subject to California personal income tax.
-21-
<PAGE> 235
In order for the California Tax-Free Money Market Fund to pay exempt-interest
dividends, at least 50% of its total assets must be invested in California
Exempt-Interest Securities at the close of each quarter of its taxable year.
Dividends, regardless of their source, may be subject to local taxes.
In seeking to achieve its investment objective, the California Tax-Free Money
Market Fund may invest all or any part of its assets in Municipal Securities
that are private activity bonds, including those known as industrial development
bonds under prior federal law. (Any reference herein to private activity bonds
includes industrial development bonds.) Interest on private activity bonds is
excluded from gross income for federal income tax purposes only if the bonds
fall within certain defined categories of qualified private activity bonds and
meet the requirements specified for those respective categories. However, even
if the California Tax-Free Money Market Fund invests in private activity bonds
that fall within these categories, Shareholders may become subject to the
federal alternative minimum tax on that part of such Fund's distributions
derived from interest on such bonds. For further information, see TAXATION
below.
The California Tax-Free Money Market Fund may invest up to 10% of its total
assets in shares of other investment companies with like investment objectives.
As a shareholder of an investment company, a Fund may indirectly bear investment
management fees of that investment company, which are in addition to the
management fees the Fund pays its own advisor.
Investments of the California Tax-Free Money Market Fund will consist of those
obligations that, at the time of purchase, possess one of the two highest
short-term ratings by a NRSRO, and in obligations that do not possess a rating
(i.e., are unrated) but are determined by the Advisor to be of comparable
quality to the rated instruments eligible for purchase by the Fund under the
guidelines adopted by the Board of Trustees.
The California Tax-Free Money Market Fund may hold uninvested cash reserves
pending investment during temporary "defensive" periods or if, in the opinion of
the Advisor, desirable tax-exempt obligations are unavailable. In accordance
with the Fund's investment objective and subject to its fundamental policies,
investments may be made in Taxable Obligations if, for example, suitable
tax-exempt obligations are unavailable or if acquisition of U.S. Government or
other taxable securities is deemed appropriate for temporary "defensive"
purposes.
As discussed in greater detail in the Statement of Additional Information,
Taxable Obligations may include obligations issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities (some of which may be subject to
repurchase agreements), certificates of deposit, bankers' acceptances, and
commercial paper. As noted above, Taxable Obligations may also include private
activity bonds depending on their tax treatment.
-22-
<PAGE> 236
The California Tax-Free Money Market Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation nor maximum tax-exempt income irrespective of fluctuations in
principal. Investment in the California Tax-Free Money Market Fund would not be
appropriate for tax-deferred plans, such as IRA and Keogh plans, and investors
should consult a tax or other financial advisor to determine whether investment
in the California Tax-Free Fund would be appropriate for them.
Municipal Securities
The two principal classifications of Municipal Securities that may be held by
the California Tax-Free Money Market Fund are "general obligation" securities
and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith and credit and general taxing power for the payment of principal and
interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the California Tax-Free
Money Market Fund are in most cases revenue securities and are not payable from
the unrestricted revenues of the issuer. Consequently, the credit quality of
private activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
In addition, Municipal Securities may include "moral obligation" bonds, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation bonds is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from federal income tax or California personal income tax
are rendered at the time of issuance by counsel experienced in matters relating
to the validity of and tax exemption of interest on bonds issued by states and
their political sub-divisions. Neither the California Tax-Free Money Market Fund
nor the Advisor will review the proceedings relating to the issuance of
Municipal Securities or the basis for such opinions.
Municipal Securities purchased by the California Tax-Free Money Market Fund may
include adjustable rate tax-exempt notes which may have a stated maturity in
excess of 397 days, but which will be subject to a demand feature that will
permit the Fund to demand payment of the principal of the note either (i) at any
time upon not more than thirty days' notice or (ii) at specified intervals not
exceeding 397 days and upon no more than thirty days' notice. There may be no
active secondary market with respect to a particular adjustable rate note.
Nevertheless, as described in greater detail in the Statement of Additional
Information, the
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<PAGE> 237
adjustable interest rate feature included in this type of note is intended
generally to assure that the value of the note to the Fund will approximate its
par value.
Municipal Securities may include, but are not limited to, short-term
anticipation notes, bond anticipation notes, revenue anticipation notes, and
other forms of short-term tax-exempt securities. These instruments are issued in
anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues. In addition, the California Tax-Free Money Market Fund may
purchase tax-exempt commercial paper. Under certain circumstances, and subject
to the limitations described in the Statement of Additional Information, the
California Tax-Free Money Market Fund may invest indirectly in Municipal
Securities by purchasing shares of other tax-exempt money market mutual funds.
The California Tax-Free Money Market Fund may also acquire Municipal Securities
that have "put" features. Under a put feature, the Fund has the right to sell
the Municipal Security within a specified period of time at a specified price.
The put feature cannot be sold, transferred, or assigned separately from the
Municipal Security. Each Fund may buy Municipal Securities with put features to
facilitate portfolio liquidity, shorten the maturity of the underlying Municipal
Securities, or permit investment at a more favorable rate of return. The
aggregate price of a security subject to a put may be higher than the price that
otherwise would be paid for the security without such a feature, thereby
increasing the security's cost and reducing its yield.
GENERAL
The Funds intend to comply with Rule 2a-7 under the 1940 Act. Shares of each
Fund are priced pursuant to the amortized cost method whereby HighMark seeks to
maintain each Fund's net asset value per Share at $1.00. There can be, however,
no assurance that a stable net asset value of $1.00 per Share will be
maintained.
Securities or instruments in which each Fund invests have remaining maturities
of 397 days or less, although instruments subject to repurchase agreements and
certain adjustable rate instruments may bear longer maturities. The
dollar-weighted average portfolio maturity of each Fund will not exceed 90 days.
Although the Diversified Money Market Fund, the U.S. Government Money Market
Fund and the 100% U.S. Treasury Money Market Fund have the same investment
advisor and the same investment objective, particular securities held and
respective yields of these Funds may differ due to differences in the types of
permitted investments, cash flow, and the availability of particular
investments.
Additional information concerning each Fund's investments, including certain
investment restrictions that may not be changed with respect to a particular
Fund without a vote of the
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<PAGE> 238
holders of a majority of the outstanding Shares of that Fund, is set forth below
and in the Statement of Additional Information. For further information
concerning the rating and other requirements governing the investments
(including the treatment of securities subject to a tender or demand feature or
deemed to possess a rating based on comparable rated securities of the same
issuer) of a Fund, see the Statement of Additional Information. The Statement of
Additional Information also identifies the NRSROs that may be utilized by the
Advisor with respect to portfolio investments for the Funds and provides a
description of the relevant ratings assigned by each such NRSRO.
In the event that a security owned by a Fund is downgraded below the stated
rating categories, the Advisor will take appropriate action with regard to that
security.
Illiquid and Restricted Securities
The Funds shall limit investments in illiquid securities to 10% or less of their
net assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. Each Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
Time deposits, including ETDs and CTDs but not including certificates of deposit
and repurchase agreements, which have maturities in excess of seven days are
considered to be illiquid.
Lending of Portfolio Securities
In order to generate additional income, each Fund (except the California
Tax-Free Money Market Fund) may lend its portfolio securities to
broker-dealers, banks or other institutions. A Fund may lend portfolio
securities in an amount representing up to 33 1/3% of the value of the Fund's
total assets.
Other Investments
The Diversified Money Market Fund, the U.S. Government Money Market Fund, and
the California Tax-Free Money Market Fund may enter into repurchase agreements
and reverse repurchase agreements. Each Fund intends to limit its respective
activity in reverse repurchase agreements to no more than 10% of the Fund's
total assets.
The Funds may enter into forward commitments or purchase securities on a
"when-issued" basis. Each Fund expects that commitments by a Fund to enter into
forward commitments or purchase when-issued securities will not exceed 25% of
the value of the Fund's total assets
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under normal market conditions. The Funds do not intend to purchase when-issued
securities or enter into forward commitments for speculative or leveraging
purposes but only for the purpose of acquiring portfolio securities.
For further information, see "Description of Permitted Investments."
Risk Factors
Investments by the Funds in obligations of certain agencies and
instrumentalities of the U.S. Government may not be guaranteed by the full faith
and credit of the U.S. Treasury, and there can be no assurance that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
As in the case of mortgage-related securities, loan participations and certain
asset-backed securities are subject to prepayments and there can be no assurance
that the Diversified Money Market Fund will be able to reinvest the proceeds of
any prepayment at the same interest rate or on the same terms as the original
investment.
With regard to loan participations, although a Fund's ability to receive
payments of principal and interest in connection with a particular loan is
primarily dependent on the financial condition of the underlying borrower, the
lending institution or bank may provide assistance in collecting interest and
principal from the borrower and in enforcing its rights against the borrower in
the event of a default. In selecting loan participations on behalf of a Fund,
the Advisor will evaluate the creditworthiness of both the borrower and the loan
originator and will treat both as an "issuer" of the loan participation for
purposes of the Fund's investment policies and restrictions (see INVESTMENT
RESTRICTIONS in the Statement of Additional Information).
Foreign securities which the Diversified Money Market Fund may purchase may
subject the Fund to investment risks that differ in some respects from those
related to investments in obligations of U.S. issuers. These risks include
adverse political and economic developments, possible imposition of withholding
taxes on interest income, possible seizure, nationalization, or expropriation of
foreign investments, possible establishment of exchange controls, or adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and different accounting, auditing, reporting, and recordkeeping
standards than those applicable to domestic branches of U.S. banks.
Certain risks are inherent in the California Tax-Free Money Market Fund's
concentrated investment in California Municipal Securities, which may make an
investment in the Fund riskier than an investment in other types of money market
funds. Because of the California Tax-Free Money Market Fund's investment
objective, many of the securities in its portfolio
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are likely to be obligations of California governmental issuers that rely in
whole or in part, directly or indirectly, on real property taxes as a source of
revenue. The ability of the State of California and its political sub-divisions
to generate revenue through real property and other taxes and to increase
spending has been significantly restricted by various constitutional and
statutory amendments and voter-passed initiatives. Such limitations could affect
the ability of California state and municipal issuers to pay interest or repay
principal on their obligations. In addition, during the first half of the
decade, California faced severe economic and fiscal conditions and experienced
recurring budget deficits that caused it to deplete its available cash resources
and to become increasingly dependent upon external borrowings to meet its cash
needs.
The financial difficulties experienced by the State of California and other
issuers of California Municipal Securities during the recession have resulted in
the credit ratings of certain of their obligations being downgraded
significantly by the major rating agencies.
A more detailed description of special factors affecting investments in
obligations of California governmental issuers of which investors should be
aware is set forth in the Statement of Additional Information.
INVESTMENT LIMITATIONS
The Diversified Money Market Fund, the U.S. Government Money Market
Fund and the 100% U.S. Treasury Money Market Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer (except that up to 25% of the value of
the Fund's total assets may be invested without regard to the 5% limitation).
(As indicated below, the Funds have adopted a non-fundamental investment policy
that is more restrictive than this fundamental investment limitation);
2) Purchase any securities that would cause more than 25% of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities, domestic bank certificates of deposit or bankers'
acceptances, and repurchase agreements secured by bank instruments or
obligations of the U.S. Government, its agencies, or instrumentalities; (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents; and (c) utilities will be divided according to
their services (for example, gas, gas transmission, electric and gas, electric
and telephone will each be considered a separate industry).
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3) Make loans, except that a Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements as
permitted by its individual investment objective and policies.
The California Tax-Free Money Market Fund may not:
4) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of its total assets
would be invested in such issuer (except that up to 25% of the value of the
Fund's total assets may be invested without regard to the 5% limitation). For
purposes of this investment restriction, a security is considered to be issued
by the government entity (or entities) whose assets and revenues back the
security or, with respect to a private activity bond that is backed only by the
assets and revenues of a non-governmental user, by the non-governmental user;
5) Purchase any securities that would cause 25% or more of such Fund's
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry; provided that this limitation shall not apply to securities of the
U.S. Government, its agencies or instrumentalities or Municipal Securities or
governmental guarantees of Municipal Securities; and provided, further, that for
the purpose of this limitation, private activity bonds that are backed only by
the assets and revenues of a non-governmental user shall not be deemed to be
Municipal Securities.
6) Make loans; except that the Fund may purchase or hold debt
instruments, lend portfolio securities and enter into repurchase agreements as
permitted by its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a security.
The investment limitations listed above are fundamental policies the substance
of which may not be changed without a vote of a majority of the outstanding
Shares of the respective Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
The Diversified Money Market Fund, the Government Obligations Money Market Fund,
and the 100% U.S. Treasury Money Market Fund have each adopted, in accordance
with Rule 2a-7, a non-fundamental policy providing that the 5% limit noted in
limitation (1) above shall apply to 100% of each Fund's assets. Notwithstanding,
each such Fund may invest up to 25% of its assets in First Tier qualified
securities of a single issuer for up to three business days.
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Valuation of Shares
Each Fund's net asset value per share is determined by the Administrator as of
1:00 p.m. Eastern Time on days on which both the New York Stock Exchange and the
Federal Reserve wire system are open for business. Net asset value per share for
purposes of pricing sales and redemptions for each of the Funds is calculated by
adding the value of all securities and other assets belonging to a Fund,
subtracting its liabilities, and dividing the result by the total number of the
Fund's outstanding shares, irrespective of class.
The assets in each Fund are valued based upon the amortized cost method whereby
HighMark seeks to maintain a Fund's net asset value per Share at $1.00, although
there can be no assurance that a stable net asset value of $1.00 per Share will
be maintained. For further information concerning the use of the amortized cost
method of valuation, see the Statement of Additional Information.
HOW TO PURCHASE SHARES
As noted above, each Fund is divided into two classes of Shares, Retail and
Fiduciary. For a description of investors who qualify to purchase Fiduciary
Shares, see the Fiduciary Shares prospectus of the Money Market Funds.
HighMark's Retail Shares are offered to investors who are not fiduciary clients
of Union Bank of California, N.A., and who are not otherwise eligible for
HighMark's Fiduciary class.
Retail Shares are sold on a continuous basis by HighMark's Distributor, SEI
Financial Services Company. The principal office of the Distributor is 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658. If you wish to purchase Shares,
you may contact your investment professional or telephone HighMark at
1-800-734-2922.
The minimum initial investment is generally $1,000 for each Fund and the minimum
subsequent investment is generally only $100. For present and retired directors,
officers, and employees (and their spouses and children under the age of 21) of
Union Bank of California, SEI Financial Services Company and their affiliates,
the minimum initial investment is $250 and the minimum subsequent investment is
$50. A Fund's initial and subsequent minimum purchase amounts may be waived if
purchases are made in connection with Individual Retirement Accounts, Keoghs,
payroll deduction plans, 401(k) or similar programs or accounts. Purchases and
redemption of Shares of the Funds may be made on any Business Day.
Purchase orders will be effective on the Business Day made if the Distributor
receives an order before 8:00 a.m., Pacific time (11:00 a.m., Eastern time) for
the California Tax-Free Money Market Fund, 9:00 a.m., Pacific time (12:00 noon,
Eastern time) for the 100% U.S. Treasury Money Market Fund and 10:00 a.m.,
Pacific time (1:00 p.m., Eastern time) for the
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Diversified Money Market and U.S. Government Money Market Funds, on any Business
Day. Otherwise, the purchase order will be effective the next Business Day.
Effectiveness of a purchase order on any Business Day is contingent on the
Custodian's receipt of Federal funds before 11:00 a.m., Pacific time (2:00 p.m.,
Eastern time), on such day. The purchase price is the net asset value per Share,
which is expected to remain constant at $1.00. The net asset value per Share is
calculated as of 10:00 a.m., Pacific time (1:00 p.m., Eastern time) each
Business Day based on the amortized cost method. The net asset value per Share
of a Fund is determined by dividing the total value of its investments and other
assets, less any liabilities, by the total number of its outstanding Shares.
HighMark reserves the right to reject a purchase order when the Distributor or
the Advisor determines that it is not in the best interest of HighMark and/or
Shareholder(s).
Shares of the Fund are offered only to residents of states in which the shares
are eligible for purchase.
How to Purchase By Mail
You may purchase Shares of the Diversified Money Market, U.S. Government
Obligations Money Market, 100% U.S. Treasury Obligations Money Market, and
California Tax-Free Money Market Funds by completing and signing an Account
Application form and mailing it, along with a check (or other negotiable bank
instrument or money order) payable to "HighMark Funds (Fund Name)," to the
transfer agent at P.O. Box 8416, Boston, Massachusetts 02266-8416. All purchases
made by check should be in U.S. dollars and made payable to "HighMark Funds
(Fund Name)." Third party checks, credit card checks or cash will not be
accepted. You may purchase more Shares at any time by mailing payment also to
the transfer agent at the above address. Orders placed by mail will be executed
on receipt of your payment. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred.
You may obtain Account Application Forms for the Diversified Money Market, U.S.
Government Obligations Money Market, 100% U.S. Treasury Obligations Money
Market, and California Tax-Free Money Market Funds by calling the Distributor at
1-800-734-2922.
How to Purchase By Wire
You may purchase Shares of the Diversified Money Market, U.S. Government
Obligations Money Market, 100% U.S. Treasury Obligations Money Market, and
California Tax-Free Money Market Funds by wiring Federal funds, provided that
your Account Application has been previously received. You must wire funds to
the transfer agent and the wire instructions must include your account number.
You must call the transfer agent at 1-800-734-2922 before wiring any funds. An
order to purchase Shares by Federal funds wire will be deemed to have been
received by a Fund on the Business Day of the wire; provided that the
Shareholder wires funds to the transfer agent prior to 11:00 a.m., Pacific time
(2:00 p.m., Eastern time). If the
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transfer agent does not receive the wire by 11:00 a.m., Pacific time (2:00 p.m.
Eastern time), the order will be executed on the next Business Day.
How to Purchase through an Automatic Investment Plan ("AIP")
You may arrange for periodic additional investments in the Diversified Money
Market, U.S. Government Obligations Money Market, 100% U.S. Treasury Obligations
Money Market, and California Tax-Free Money Market Funds through automatic
deductions by Automated Clearing House ("ACH") from a checking account by
completing this section in the Account Application form. The minimum
pre-authorized investment amount is $100 per month. The AIP is available only
for additional investments to an existing account.
How to Purchase Through Financial Institutions
Shares of the Funds may be purchased through financial institutions, including
the Advisor, that provide distribution assistance or Shareholder services.
Shares purchased by persons ("Customers") through financial institutions may be
held of record by the financial institution. Financial institutions may impose
an earlier cut-off time for receipt of purchase orders directed through them to
allow for processing and transmittal of these orders to the transfer agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to HighMark.
Customers who desire to transfer the registration of Shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
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Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Retail Shares for Retail Shares of a Fund with the same or
lower sales charge on the basis of the relative net asset value of the Retail
Shares exchanged. Shareholders may exchange their Retail Shares for Retail
Shares of a Fund with a higher sales charge by paying the difference between the
two sales charges. Shareholders may also exchange Retail Shares of a money
market fund for which no sales load was paid for Retail Shares of another
HighMark Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per share plus the appropriate sales load. If Retail
Shares of the money market fund were acquired in a previous exchange involving
Shares of a non-money market HighMark Fund, then such Shares of the money market
fund may be exchanged for Shares of the non-money market HighMark Fund without
payment of any additional sales load within a twelve month period. In order to
receive a reduced sales charge when exchanging into a Fund, the Shareholder must
notify HighMark that a sales charge was originally paid and provide sufficient
information to permit confirmation of qualification.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including Participating Organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in a Fund may do so by contacting the
transfer agent at 1-800-734-2922. Exchanges will be effected on any Business Day
at the net asset value of the Funds involved in the exchange next determined
after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
REDEMPTION OF SHARES
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You may redeem your Shares of the Diversified Money Market, U.S. Government
Obligations Money Market, 100% U.S. Treasury Obligations Money Market, and
California Tax-Free Money Market Funds without charge on any Business Day. There
is presently a $15 charge for wiring redemption proceeds to a Shareholder's
designated account. Shares may be redeemed by mail, by telephone or through a
pre-arranged systematic withdrawal plan. Investors who own Shares held by a
financial institution should contact that institution for information on how to
redeem Shares.
By Mail
A written request for redemption of Shares of the Diversified Money Market, U.S.
Government Obligations Money Market, 100% U.S. Treasury Obligations Money
Market, and California Tax-Free Money Market Funds must be received by the
transfer agent, P.O. Box 8416, Boston, Massachusetts 02266-8416 in order to
constitute a valid redemption request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the transfer
agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker dealer, credit union, securities exchange or association, clearing agency
or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
Shares, (2) the redemption check is payable to the shareholder(s) of record, and
(3) the redemption check is mailed to the shareholder(s) at his or her address
of record.
Telephone Transactions
You may redeem your Shares of the Diversified Money Market, U.S. Government
Obligations Money Market, 100% U.S. Treasury Obligations Money Market, and
California Tax-Free Money Market Funds by calling the transfer agent at
1-800-734-2922. Under most circumstances, payments will be transmitted on the
next Business Day following receipt of a valid request for redemption. You may
have the proceeds mailed to your address or wired to a commercial bank account
previously designated on your Account Application. There is no charge for having
redemption proceeds mailed to you, but there is a $15 charge for wiring
redemption proceeds.
You may request a wire redemption for redemptions of Shares of the Diversified
Money Market, U.S. Government Obligations Money Market, 100% U.S. Treasury
Obligations Money Market, and California Tax-Free Money Market Funds in excess
of $500 by calling the transfer agent at 1-800-734-2922 who will deduct a wire
charge of $15 from the amount of the wire redemption. Shares cannot be redeemed
by Federal Reserve wire on Federal holidays restricting wire transfers.
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Neither the transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. HighMark and the transfer agent will each
employ reasonable procedures to confirm that instructions, communicated by
telephone are genuine. Such procedures may include taping of telephone
conversations.
If market conditions are extraordinarily active or other extraordinary
circumstances exist, and you experience difficulties placing redemption orders
by telephone, you may consider placing your order by mail.
Systematic Withdrawal Plan ("SWP")
The Diversified Money Market, U.S. Government Obligations Money Market, 100%
U.S. Treasury Obligations Money Market, and California Tax-Free Money Market
Funds offer a Systematic Withdrawal Plan ("SWP"), which you may use to receive
regular distributions from your account. Upon commencement of the SWP, your
account must have a current net asset value of $5,000 or more. You may elect to
receive automatic payments via check or ACH of $100 or more on a monthly,
quarterly, semi-annual or annual basis. You may arrange to receive regular
distributions from your account via check or ACH by completing this section in
the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per Share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the transfer agent. The transfer agent may require that the signature
on the written notice be guaranteed.
Other Information Regarding Redemptions
HighMark is required to redeem for cash all full and fractional shares of
HighMark. The redemption price is the net asset value per share of a Fund
(normally $1.00 per share).
Redemption orders may be made any time before 8:00 a.m., Pacific time (11:00
a.m., Eastern time) for the California Tax-Free Money Market Fund, 9:00 a.m.,
Pacific time (12:00 noon, Eastern time) for the 100% U.S. Treasury Money Market
Fund and 10:00 a.m., Pacific time (1:00 p.m., Eastern time) for the Diversified
Money Market and U.S. Government Money Market Funds in order to receive that
day's redemption price (i.e., the next determined net asset value per share).
For redemption orders received before such times, payment will be made the same
day by transfer of federal funds. Otherwise, payment will be made on the next
Business Day. Redeemed shares are not entitled to dividends declared the day the
redemption
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order is effective. The Funds reserve the right to make payment on redemptions
in securities rather than cash.
Payment to the Shareholders for Shares redeemed will be made within seven days
after the Transfer Agent receives the valid redemption request. At various
times, however, a Fund may be requested to redeem Shares for which it has not
yet received good payment; collection of payment may take ten or more days. In
such circumstances, the redemption request will be rejected by the Fund. Once a
Fund has received good payment for the Shares a Shareholder may submit another
request for redemption.
Due to the relatively high costs of handling small investments, each Fund
reserves the right to redeem your Shares at net asset value if your account in
any Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase Shares of any Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any Shares.
Before any Fund exercises its right to redeem such Shares you will be given
notice that the value of the Shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in such Fund
in an amount which will increase the value of the account to at least the
minimum amount.
DIVIDENDS
The net income of each Fund is declared daily as a dividend to Shareholders of
record at the close of business on the day of declaration. The net income
attributable to a Fund's Retail Shares and the dividends payable on Retail
Shares will be reduced by the distribution fee assessed against such Shares
under the Distribution Plan (see SERVICE ARRANGEMENTS-The Distribution Plan
below).
Dividends with respect to each Fund are paid monthly in additional full and
fractional Shares of the Fund at net asset value as of the date of payment,
unless the Shareholder elects to receive such dividends in cash as described
below. Shareholders will automatically receive all income dividends and capital
gains distributions (if any) paid in respect of a Fund's Shares in additional
full and fractional Shares of the same class. Shareholders wishing to receive
their dividends in cash (or wishing to revoke a previously made election) must
notify the transfer agent at P.O. Box 8416, Boston, MA 02266-8416, and such
election (or revocation thereof) will become effective with respect to dividends
having record dates after notice has been received. Dividends paid in additional
Shares receive the same tax treatment as dividends paid in cash. Dividends are
paid in cash not later than seven Business Days after a Shareholder's complete
redemption of his or her Shares. Net realized capital gains, if any, are
distributed at least annually to Shareholders of record.
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FEDERAL TAXATION
Each Fund intends to qualify for treatment as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), and to
distribute substantially all of its net investment income so that it is not
required to pay federal taxes on these amounts. Because all of the net
investment income of the Diversified Money Market Fund, the U.S. Government
Money Market Fund, the 100% U.S. Treasury Money Market Fund and the California
Tax-Free Money Market Fund is expected to be derived from interest, it is
anticipated that no part of any distribution will be eligible for the federal
dividends received deduction for corporations. The Funds are not managed to
generate any long-term capital gains and, therefore, the Funds do not foresee
paying any significant "capital gains dividends" as described in the Code.
Shareholders will be subject to federal income tax with respect to dividends
paid by the Diversified Money Market Fund, the U.S. Government Money Market Fund
and the 100% U.S. Treasury Money Market Fund (including any capital gains
dividends). Dividends that are attributable to interest on U.S. Government
obligations earned by the Funds may be exempt from state and local tax, and
Shareholders should consult their own tax advisors to determine whether these
dividends are eligible for the state and local tax exemption. Dividends (except
to the extent attributable to gains or securities lending income) paid by the
100% U.S. Treasury Money Market Fund will be exempt from California and Oregon
personal income taxes. HighMark intends to advise Shareholders annually of the
proportion of a Fund's dividends that consists of interest on U.S. Government
obligations.
Exempt-interest dividends from the California Tax-Free Money Market Fund are
excludable from gross income for federal income tax purposes. Such dividends may
be taxable to Shareholders under state or local law as ordinary income even
though all or a portion of the amounts may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
taxes. Shareholders are advised to consult a tax advisor with respect to whether
exempt-interest dividends retain the exclusion if such Shareholder would be
treated as a "substantial user" or a "related person" to such user under the
Code.
Under the Code, interest on indebtedness incurred or continued by a Shareholder
to purchase or carry Shares of the California Tax-Free Money Market Fund is not
deductible for federal income tax purposes to the extent the Fund distributes
exempt-interest dividends during the Shareholder's taxable year.
Under the Code, if a Shareholder sells a Share of the California Tax-Free Money
Market Fund after holding it for six months or less, any loss on the sale or
exchange of such Share will be disallowed to the extent of the amount of any
exempt-interest dividends that the Shareholder has received with respect to the
Share that is sold.
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In addition, any loss (not already disallowed as provided in the preceding
sentence) realized upon a taxable disposition of shares held for six months or
less will be treated as long-term, rather than short-term, to the extent of any
long-term capital gain distributions received by the shareholder with respect to
the shares.
The California Tax-Free Money Market Fund may at times purchase Municipal
Securities at a discount from the price at which they were originally issued.
For federal income tax purposes, some or all of this market discount will be
included in the California Tax-Free Money Market Fund's ordinary income and will
be taxable to Shareholders as such when it is distributed to them.
To the extent dividends paid to Shareholders are derived from taxable income
(for example, from interest on certificates of deposit or repurchase
agreements), or from long-term or short-term capital gains, such dividends will
be subject to federal income tax, whether such dividends are paid in the form of
cash or additional Shares. A Shareholder should consult his or her tax advisor
for special advice.
Under the Code, dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included in alternative minimum
taxable income for the purpose of determining liability (if any) for the federal
alternative minimum tax. In addition, exempt-interest dividends will be included
in a corporation's "adjusted current earnings" for purposes of the alternative
minimum tax (except to the extent derived from interest on certain private
activity bonds issued after August 7, 1986, which interest would already be
included in alternative minimum taxable income as a specific item of tax
preference). Shareholders of the California Tax-Free Money Market Fund receiving
social security or railroad retirement benefits may be taxed on a portion of
those benefits as a result of receiving tax-exempt income (including
exempt-interest dividends distributed by the California Tax-Free Money Market
Fund).
If, at the close of each quarter of its taxable year, the California Tax-Free
Money Market Fund continues to qualify for the special federal income tax
treatment afforded regulated investment companies and at least 50% of the value
of the Fund's total assets consists of California Exempt-Interest Securities,
then "California exempt interest dividends" attributable to these securities
will be exempt from California personal income tax. A "California-exempt
interest dividend" is any dividend distributed by the Fund to the extent that it
is derived from the interest received by the Fund on California Exempt-Interest
Securities (less related expenses) and designated as such by written notice to
Shareholders. For further details, see the Statement of Additional Information.
Dividends received by Shareholders subject to California state corporate
franchise tax will be taxed as ordinary dividends notwithstanding that all or a
portion of such dividends are exempt from California personal income tax.
Distributions other than "California-exempt interest dividends" by the Fund to
California residents will be subject to California personal income tax, whether
or not such dividends are reinvested.
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Additional information regarding federal and California taxes is contained in
the Statement of Additional Information. However, the foregoing and the material
in the Statement of Additional Information are only brief summaries of some of
the important tax considerations generally affecting a money market fund and its
Shareholders. In addition, the foregoing discussion and the federal and
California tax information in the Statement of Additional Information are based
on tax laws and regulations which are in effect as of the date of this
Prospectus; these laws and regulations may subsequently change, and such changes
could be retroactive. Shareholders will be advised at least annually as to the
federal income tax status, and, in the case of Shareholders of the California
Tax-Free Money Market Fund, as to the California income tax status, of
distributions made during the year.
SERVICE ARRANGEMENTS
The Advisor
Pacific Alliance Capital Management, a division of Union Bank of California,
serves as the Funds' investment advisor. Subject to the general supervision of
HighMark's Board of Trustees, the Advisor manages each Fund in accordance with
its investment objective and policies, makes decisions with respect to and
places orders for all purchases and sales of the Fund's investment securities,
and maintains the Fund's records relating to such purchases and sales.
For the expenses assumed and services provided by the Advisor as each Fund's
investment advisor, Union Bank of California receives a fee from the Diversified
Money Market Fund, the U.S. Government Money Market Fund, the 100% U.S. Treasury
Money Market Fund and the California Tax-Free Money Market Fund, computed daily
and paid monthly, at the annual rate of thirty one-hundredths of one percent
(.30%) of each Fund's average daily net assets. Union Bank of California may
from time to time agree to voluntarily reduce its advisory fee. While there can
be no assurance that Union Bank of California will choose to make such an
agreement, any voluntary reductions in Union Bank of California's advisory fee
will lower the Fund's expenses, and thus increase the Fund's yield and total
return, during the period such voluntary reductions are in effect. During
HighMark's fiscal year ended July 31, 1996, Union Bank of California received
investment advisory fees from the Diversified Money Market Fund, the U.S.
Government Money Market Fund, and the 100% U.S. Treasury Money Market Fund
aggregating 0.40% of each Fund's average daily net assets, and from the
California Tax-Free Money Market Fund aggregating 0.23% of the Fund's average
daily net assets.
On April 1, 1996, The Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor
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banks) has been in banking since the early 1900's and, historically, each has
had significant investment functions within its trust and investment division.
UnionBanCal Corporation, the parent of Union Bank of California, N.A., is a
publicly held corporation, but is principally held by the Bank of
Tokyo-Mitsubishi, Limited. As of September 30, 1996, Union Bank of California
and its subsidiaries had approximately $28.7 billion in commercial assets.
Pacific Alliance Capital Management is a division of Union Bank of California's
Trust and Investment Management Group, which, as of June 30, 1996, had
approximately $13.4 billion of assets under management. The Advisor, with a team
of approximately 45 stock and bond research analysts, portfolio managers and
traders, has been providing investment management services to individuals,
institutions and large corporations since 1917.
Administrator
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Retail Shares. Any
such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of each Fund,
for which it receives a fee paid by the Administrator at the annual rate of up
to 0.05% of the average daily net assets of the Funds. Union Bank of California
has voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
The Transfer Agent
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Retail Shares of
HighMark, for which services it receives a fee.
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Shareholder Service Plan
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.00% of average
daily net assets.
Distributor
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor.
The Distribution Plan
Pursuant to HighMark's Distribution Plan, each Fund pays the Distributor as
compensation for its services in connection with the Distribution Plan a
distribution fee, computed daily and paid monthly, equal to twenty-five
one-hundredths of one percent (0.25%) of the average daily net assets
attributable to that Fund's Retail Shares.
The Distributor may use the distribution fee applicable to a Fund's Retail
Shares to provide distribution assistance with respect to the sale of the Fund's
Retail Shares or to provide Shareholder services to the holders of the Fund's
Retail Shares. The Distributor may also use the distribution fee (i) to pay
financial institutions and intermediaries (such as insurance companies and
investment counselors but not including banks and savings and loan
associations), broker-dealers, and the Distributor's affiliates and subsidiaries
compensation for services or reimbursement of expenses incurred in connection
with the distribution of a Fund's Retail Shares to their customers or (ii) to
pay banks, savings and loan associations, other financial institutions and
intermediaries, broker-dealers, and the Distributor's affiliates and
subsidiaries compensation for services or reimbursement of expenses incurred in
connection with the provision of Shareholder services to their customers owning
a Fund's Retail Shares. All payments by the Distributor for distribution
assistance or Shareholder services under the Distribution Plan will be made
pursuant to an agreement between the Distributor and such bank, savings and loan
association, other financial institution or intermediary, broker-dealer, or
affiliate or subsidiary of the Distributor (a "Servicing Agreement"; banks,
savings and loan associations, other financial institutions and intermediaries,
broker-dealers, and the
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Distributor's affiliates and subsidiaries that may enter into a Servicing
Agreement are hereinafter referred to individually as a "Participating
Organization"). A Participating Organization may include Union Bank of
California, its subsidiaries and its affiliates.
Participating Organizations may charge customers fees in connection with
investments in a Fund on their customers' behalf. Such fees would be in addition
to any amounts the Participating Organization may receive pursuant to its
Servicing Agreement. Under the terms of the Servicing Agreements, Participating
Organizations are required to provide their customers with a schedule of fees
charged directly to such customers in connection with investments in a Fund.
Customers of Participating Organizations should read this Prospectus in light of
the terms governing their accounts with the Participating Organization.
The distribution fee under the Distribution Plan will be payable without regard
to whether the amount of the fee is more or less than the actual expenses
incurred in a particular year by the Distributor in connection with distribution
assistance or Shareholder services rendered by the Distributor itself or
incurred by the Distributor pursuant to the Servicing Agreements entered into
under the Distribution Plan. The Distributor may from time to time voluntarily
reduce its distribution fee with respect to a Fund in significant amounts for
substantial periods of time pursuant to an agreement with HighMark. While there
can be no assurance that the Distributor will choose to make such an agreement,
any voluntary reduction in the Distributor's distribution fee will lower such
Fund's expenses, and thus increase such Fund's yield and total returns, during
the period such voluntary reductions are in effect.
Banking Laws
Union Bank of California believes that it may perform the services for the Funds
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of each
Fund, for which it receives compensation from SEI Fund Resources without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Funds.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
Custodian
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Funds. The Custodian holds cash, securities and other
assets of HighMark as required by the 1940 Act.
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Services performed by Union Bank of California, as the Funds' shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
Description of HighMark & Its Shares
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Money Market Fund, 100% U.S. Treasury Money Market
Fund and California Tax-Free Money Market Fund. As of the date hereof, no Shares
of the Value Momentum Fund, the Blue Chip Growth Fund, the Emerging Growth Fund,
the International Equity Fund, the Intermediate-Term Bond Fund, the Convertible
Securities Fund, the Government Securities Fund and the California Intermediate
Tax-Free Bond Fund had been offered for sale in HighMark. Shares of each Fund
are freely transferable, are entitled to distributions from the assets of the
Fund as declared by the Board of Trustees, and, if HighMark were liquidated,
would receive the a pro rata share of net assets attributable to that Fund.
Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Fiduciary Shares of the Funds, interested persons may contact the
Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996, there was no person who owned of
record or beneficially more than 25% of the Retail Shares of the Diversified
Money Market Fund, the U.S. Government Money Market Fund, the 100% U.S. Treasury
Money Market Fund, or the California Tax-Free Money Market Fund.
Performance Information
From time to time, HighMark may advertise the "yield" and "effective yield" with
respect to the Retail Shares of each Fund and a "tax-equivalent yield" and
"tax-equivalent effective yield" for federal, California and Oregon income tax
purposes with regard to the Retail Shares of each of the 100% U.S. Treasury
Money Market Fund and the California Tax-Free Money Market Fund. Performance
information is computed separately for a Fund's Retail and
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Fiduciary Shares in accordance with the formulas described below. Each yield
figure is based on historical earnings and is not intended to indicate future
performance.
The "yield" of a Fund's Retail Shares refers to the income generated by an
investment in the class over a seven-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the class is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment.
The 100% U.S. Treasury Money Market Fund's tax-equivalent yield and
tax-equivalent effective yield will reflect the amount of income subject to
California or Oregon personal income taxation at the rate specified in the
advertisement that a taxpayer would have to earn in order to obtain the same
after tax income as that derived from the yield and effective yield of the
Retail class. The California Tax-Free Money Market Fund's tax-equivalent yield
and tax-equivalent effective yield reflect the amount of income subject to
federal income taxation and California personal income taxation at the rate
specified in the advertisement that a taxpayer would have to earn in order to
obtain the same after tax income as that derived from the yield and effective
yield of the Retail class.
Tax-equivalent yields and tax-equivalent effective yields with respect to a
class will be significantly higher than the yield and effective yield of that
class.
From time to time, HighMark may advertise the aggregate total return and average
annual total return of the Funds. The aggregate total return and average annual
total return of each Fund may be quoted for the life of each Fund and for
five-year and one-year periods, in each case, through the most recent calendar
quarter. Aggregate total return is determined by calculating the change in the
value of a hypothetical $1,000 investment in a Fund over the applicable period
that would equate the initial amount invested to the ending redeemable value of
the investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing a Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the positive or negative
investment results that an investor in a Fund would have experienced from
changes in Share price and reinvestment of dividends and capital gain
distributions.
Each Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual-fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may
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advertise performance that includes results from periods in which the Fund's
assets were managed in a non-registered predecessor vehicle.
Miscellaneous
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
Each Fund invests in only the instruments permitted by its individual investment
objective and policies.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Debt Instruments secured by
company receivables, truck and auto loans, leases, and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such securities. Asset-backed securities entail
prepayment risk, which may vary depending on the type of asset, but is generally
less than the prepayment risk associated with mortgage-backed securities.
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Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the Fixed Income Funds
may invest in other asset-backed securities that may be developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
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intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
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PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of participations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
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repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of the Group has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, the Group's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
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<PAGE> 262
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
VARIABLE AMOUNT MASTER DEMAND NOTES -- Unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between HighMark and the issuer, they are
not normally traded. Although there is no secondary market in these notes, the
Fund may demand payment of principal and accrued interest at specified
intervals. For purposes of the Fund's investment policies, a variable
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<PAGE> 263
amount master demand note will be deemed to have a maturity equal to the longer
of the period of time remaining until the next readjustment of its interest rate
or the period of time remaining until the principal amount can be recovered from
the issuer through demand.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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<PAGE> 264
HIGHMARK MONEY MARKET FUNDS
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
For further information (including current
yield, purchase and redemption information),
call 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources and
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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<PAGE> 265
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE GROUP OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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<PAGE> 266
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 267
CROSS REFERENCE SHEET
THE HIGHMARK MONEY MARKET FUNDS
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities Purchase and Redemption of Shares;
Exchange Privileges; Dividends; Federal
Taxation; Service Arrangements--
Administrator; Distributor; General
Information-- Description of HighMark &
Its Shares; General Information--
Miscellaneous
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Exchange Privileges; Service
Arrangements-- Administrator; Distributor
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
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<PAGE> 268
HIGHMARK FUNDS
MONEY MARKET FUNDS
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's:
o Diversified Money Market Fund
o U.S. Government Money Market Fund
o 100% U.S. Treasury Money Market Fund
o California Tax-Free Money Market Fund
FIDUCIARY SHARES
HighMark's Fiduciary Shares are offered to the following investors: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Fixed Income Funds prior to June 20, 1994, which have remained
continuously open thereafter and which are not considered to be fiduciary
accounts; (iii) Shareholders who currently own Shares of HighMark's Equity or
Fixed Income Funds that were purchased prior to June 20, 1994 within an account
registered in their name with the Funds; and (iv) present and retired directors,
officers and employees (and their spouses and children under the age of 21) of
Union Bank of California, N.A., HighMark's current or former distributors or
their respective affiliated companies who currently own Shares of HighMark Funds
which were purchased before April 30, 1997.
This Prospectus sets forth concisely the information about HighMark and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-800-734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference. This Prospectus relates only to the Fiduciary Shares of the Money
Market Funds. Interested persons who wish to obtain a prospectus for the other
Funds of HighMark may contact the Distributor at the above address and telephone
number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN HIGHMARK INVOLVES
RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
[_______________, 1997]
Fiduciary Shares
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<PAGE> 269
SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Fiduciary Shares of the Diversified Money Market, U.S. Government Obligations
Money Market, 100% U.S. Treasury Obligations Money Market, and California
Tax-Free Money Market Funds (each a "Fund" and sometimes referred to in this
prospectus as the "Funds.") This summary is qualified in its entirety by
reference to the more detailed information provided elsewhere in the Prospectus
and in the Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? The Diversified Money Market Fund,
the U.S. Government Money Market Fund, and the 100% U.S. Treasury Money Market
Fund seek current income with liquidity and stability of principal. The
California Tax-Free Money Market Fund seeks as high a level of current interest
income free from federal income tax and California personal income tax as is
consistent with the preservation of capital and relative stability of principal.
(See "INVESTMENT OBJECTIVES")
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE DIVERSIFIED MONEY MARKET FUND
invests in obligations with maturities deemed under SEC rules to be 397 days or
less ("short-term investments") issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, in high-quality short-term obligations issued by
banks and corporations, and in other high-quality rated and unrated short-term
instruments; some of the obligations and short-term instruments in which the
Fund invests may be subject to repurchase agreements. THE U.S. GOVERNMENT MONEY
MARKET FUND invests in short-term obligations issued or guaranteed by the U.S.
Treasury, and additionally invests in obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government; some of the obligations in
which the Fund invests may be subject to repurchase agreements. THE 100% U.S.
TREASURY MONEY MARKET FUND invests exclusively in direct U.S. Treasury
short-term obligations. THE CALIFORNIA TAX-FREE MONEY MARKET FUND invests
primarily in bonds and notes issued by or on behalf of the State of California
and other states, territories, possessions of the United States, and the
District of Columbia and their respective authorities, agencies,
instrumentalities and political sub-divisions, the interest on which is excluded
from gross income for federal income and California personal income tax purposes
and not treated as a preference item for individuals for purposes of the federal
alternative minimum tax. (See "INVESTMENT POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? Each Fund seeks to
maintain a net asset value of $1.00 per share. There can be no assurance that a
Fund will be able to maintain a net asset value of $1.00 per share on a
continuous basis. The California Tax-Free Money Market Fund concentrates its
investments in California municipal securities, and an investment in the Fund
therefore may be riskier than an investment in other types of money market
funds. (See "Risk Factors")
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<PAGE> 270
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the yield or value of the security or yield or
value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator")
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. In order to be effective on the
Business Day received, orders to purchase and redeem must be placed prior to
8:00 a.m., Pacific time (11:00 a.m., Eastern time) for the California Tax-Free
Money Market Fund, prior to 9:00 a.m., Pacific time (12:00 noon, Eastern time)
for the 100% U.S. Treasury Money Market Fund and prior to 10:00 a.m., Pacific
time (1:00 p.m. Eastern time) for the Diversified Money Market and U.S.
Government Money Market Funds on any Business Day. Otherwise, the order will be
effective the next Business Day. In addition, effectiveness of a purchase is
contingent on the Custodian's receipt of Federal funds before 11:00 a.m.,
Pacific time (2:00 p.m., Eastern time). (See "PURCHASE AND REDEMPTION OF
SHARES")
HOW ARE DIVIDENDS PAID? The net investment income (exclusive of short-term
capital gains) of the Funds is determined and declared on each Business Day as a
dividend for Shareholders of record as of the close of business on that day.
Dividends are paid monthly in additional shares unless the Shareholder elects to
take the payment in cash. (See "Dividends")
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<PAGE> 271
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.............................................................3
MONEY MARKET FUNDS FEE TABLE........................................7
FINANCIAL HIGHLIGHTS................................................9
FUND DESCRIPTION...................................................18
INVESTMENT OBJECTIVES..............................................18
INVESTMENT POLICIES ...............................................19
Diversified Money Market Fund.................................19
U.S. Government Money Market Fund.............................21
The 100% U.S. Treasury Money Market Fund......................21
California Tax-Free Money Market Fund.........................21
Municipal Securities..........................................23
GENERAL............................................................24
Illiquid and Restricted Securities............................25
Lending of Portfolio Securities...............................25
Other Investments.............................................25
Risk Factors..................................................26
INVESTMENT LIMITATIONS.............................................27
PURCHASE AND REDEMPTION OF SHARES..................................29
EXCHANGE PRIVILEGES................................................30
DIVIDENDS..........................................................31
FEDERAL TAXATION...................................................32
</TABLE>
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<PAGE> 272
<TABLE>
<S> <C>
SERVICE ARRANGEMENTS........................................................34
The Advisor............................................................34
Administrator..........................................................35
The Transfer Agent.....................................................35
Distributor............................................................36
Banking Laws...........................................................36
Custodian..............................................................36
GENERAL INFORMATION.........................................................37
Description of HighMark & Its Shares...................................37
Performance Information................................................37
Miscellaneous..........................................................39
DESCRIPTION OF PERMITTED INVESTMENTS........................................39
</TABLE>
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<PAGE> 273
MONEY MARKET FUNDS FEE TABLE
<TABLE>
<CAPTION>
Diversified U.S. Government 100% U.S. Treasury
Money Market Money Market Money Market California Tax-Free
Fund Fund Fund Money Market Fund
---- ---- ---- -----------------
Fiduciary Shares Fiduciary Shares Fiduciary Shares Fiduciary Shares
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on 0% 0% 0% 0%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on 0% 0% 0% 0%
Reinvested Dividends (as a
percentage of offering price)
Deferred Sales Load (as a 0% 0% 0% 0%
percentage of original purchase
price or redemption proceeds, as
applicable)
Redemption Fees (as a percentage 0% 0% 0% 0%
of amount redeemed, if
applicable)(b)
Exchange Fee(a) $ 0 $ 0 $ 0 $0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.30% 0.29% 0.24% 0.09%
12b-1 Fees 0.00% 0.00% 0.00% 0.00%
Other Expenses (after voluntary reduction)(d) 0.20% 0.21% 0.21% 0.21%
---- ---- ---- ----
Total Fund Operating Expenses(e) 0.50% 0.50% 0.45% 0.30%
==== ==== ==== ====
<FN>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
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<PAGE> 274
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Diversified Money Market Fund
Fiduciary Shares $5 $16 $28 $63
U.S. Government Money Market Fund
Fiduciary Shares $5 $16 $28 $63
100% U.S. Treasury Money Market Fund
Fiduciary Shares $5 $14 $25 $57
California Tax-Free Money Market Fund
Fiduciary Shares $3 $10 $17 $38
</TABLE>
The purpose of the tables above is to assist an investor in the Funds in
understanding the various costs and expenses that a Shareholder will bear
directly or indirectly. For a more complete discussion of each Fund's annual
operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the Funds on behalf of their customers may charge
customers fees for services provided in connection with the investment in,
redemption of, and exchange of Shares. (See PURCHASE AND REDEMPTION OF
SHARES, EXCHANGE PRIVILEGES and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder. (See PURCHASE AND REDEMPTION
OF SHARES below.)
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.30% for the
Fiduciary Shares of the U.S. Government Money Market Fund, the 100% U.S.
Treasury Money Market Fund, and the California Tax-Free Money Market Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.47% for the
Fiduciary Shares of the Diversified Money Market Fund, and 0.48% for the
Fiduciary Shares of each of the U.S. Government Money Market Fund, the 100%
U.S. Treasury Money Market Fund and the California Tax-Free Money Market
Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 0.77%
for the Fiduciary Shares of the Diversified Money Market Fund, 0.78% for
the Fiduciary Shares of the U.S. Government Money Market Fund, the 100%
U.S. Treasury Money Market Fund, and the California Tax-Free Money Market
Fund.
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<PAGE> 275
FINANCIAL HIGHLIGHTS
The tables below set forth certain financial information with respect to the
Fiduciary Shares of the Diversified Money Market Fund, U.S. Government Money
Market Fund, 100% U.S. Treasury Money Market Fund, and California Tax-Free Money
Market Fund. Financial highlights for the Funds for the period ended July 31,
1996 have been derived from financial statements audited by Deloitte & Touche
LLP, independent auditors for HighMark, whose report thereon is included in the
Statement of Additional Information. Prior to the fiscal year ended July 31,
1996, Coopers & Lybrand L.L.P. served as independent accountants for HighMark.
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<PAGE> 276
DIVERSIFIED MONEY MARKET FUND
(FORMERLY DIVERSIFIED OBLIGATIONS FUND)
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
--------------------
YEAR ENDED JULY 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- ------- -------
Investment Activities
Net investment income 0.049 0.049 0.028 0.027 0.043
-------- -------- ------- -------- -------
Distributions
Net investment income (0.049) (0.049) (0.028) (0.027) (0.043)
--------- -------- ------- ------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======= =======
Total Return 5.01% 4.99% 2.88% 2.75% 4.41%
Ratios/Supplementary
Data:
Net Assets at end of period (000) $244,775 $270,476 $228,934 $254,034 $337,485
Ratio of expenses to average
net assets 0.75% 0.74% 0.74% 0.72% 0.72%
Ratio of net investment income
to average net assets 4.91% 4.88% 2.83% 2.72% 4.34%
Ratio of expenses to average
net assets* 0.99% 0.98% 0.89% 0.73% 0.72%
Ratio of net investment income
to average net assets* 4.67% 4.64% 2.67% 2.71% 4.34%
</TABLE>
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<PAGE> 277
<TABLE>
<CAPTION>
AUGUST 10,
YEAR ENDED JULY 31, 1987
------------------- TO
1991 1990 1989 JULY 31,
---- ---- ---- --------
FIDUCIARY 1988(A)
--------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment Activities
Net investment income 0.066 0.079 0.085 0.066
Distributions
Net investment income (0.066) (0.079) (0.085) (0.066)
-------- -------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total Return 7.00% 8.23% 8.84% 6.94%
Ratios/Supplementary Data:
Net Assets at end of period (000) $405,447 $593,116 $621,462 $350,499
Ratio of expenses to
average net assets 0.70% 0.66% 0.59% 0.50%(b)
Ratio of net investment
income to average net assets 6.71% 7.92% 8.50% 6.73%(b)
Ratio of expenses to
average net assets* 0.70% 0.69% 0.71% 0.70%(b)
Ratio of net investment
income to average net assets* 6.71% 7.89% 8.38% 6.53%(b)
</TABLE>
On December 1, 1990, the Diversified Obligations Fund, now renamed the
Diversified Money Market Fund, commenced offering Class A Shares and designated
existing shares as Class B Shares. As of June 20, 1994, Class A and Class B
Shares were designated as "Investor" (now called "Retail") and "Fiduciary"
Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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<PAGE> 278
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND
(FORMERLY U.S. GOVERNMENT OBLIGATIONS FUND)
FINANCIAL HIGHLIGHTS
--------------------
YEAR ENDED JULY 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- -------- -------
Investment Activities
Net investment income 0.048 0.048 0.027 0.027 0.042
------- -------- ------- -------- -------
Distributions
Net investment income (0.048) (0.048) (0.027) (0.027) (0.042)
------- -------- ------- -------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======== =======
Total Return 4.88% 4.87% 2.74% 2.72% 4.25%
Ratios/Supplementary
Data:
Net Assets at end of period (000) $151,483 $159,747 $162,094 $166,182 $94,252
Ratio of expenses to average net assets 0.77% 0.78% 0.78% 0.71% 0.73%
Ratio of net investment income
to average net assets 4.76% 4.76% 2.70% 2.67% 4.15%
Ratio of expenses to average net assets* 1.00% 1.02% 0.94% 0.74% 0.74%
Ratio of net
investment income to average net assets* 4.53% 4.52% 2.54% 2.65% 4.14%
</TABLE>
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<PAGE> 279
<TABLE>
<CAPTION>
AUGUST 10,
YEAR ENDED JULY 31, 1987
------------------- TO
1991 1990 1989 JULY 31,
---- ---- ---- --------
FIDUCIARY 1988(A)
--------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment Activities
Net investment income 0.063 0.078 0.083 0.064
-------- ------- -------- --------
Distributions
Net investment income (0.063) (0.078) (0.083) (0.064)
-------- ------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======== ========
Total Return 6.49% 8.09% 8.62% 6.78%
Ratios/Supplementary Data:
Net Assets at end of period (000) $103,725 $80,774 $114,945 $131,985
Ratio of expenses to average net assets 0.63% 0.65% 0.62% 0.42%(b)
Ratio of net investment income to
average net assets 6.29% 7.80% 8.30% 6.59%(b)
Ratio of expenses to average net assets* 0.73% 0.72% 0.75% 0.71%(b)
Ratio of net investment income to average net assets* 6.19% 7.73% 8.17% 6.30%(b)
</TABLE>
On December 1, 1990, the U.S. Government Obligations Fund (now renamed the U.S.
Government Money Market Fund) commenced offering Class A Shares and designated
existing shares as Class B Shares. As of June 20, 1994, Class A and Class B
Shares were designated as "Investor" (now called "Retail") and "Fiduciary"
Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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<TABLE>
<CAPTION>
100% U.S. TREASURY MONEY MARKET FUND
(FORMERLY 100% U.S. TREASURY OBLIGATIONS FUND)
FINANCIAL HIGHLIGHTS
--------------------
YEAR ENDED JULY 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- -------- -------
Investment Activities
Net investment income 0.046 0.046 0.026 0.026 0.040
Net realized and
unrealized gains on investments 0.001
------- -------- ------- -------- -----
Total from Investment Activities 0.046 0.046 0.026 0.026 0.041
------ ----- ------- -------- -------
Distributions
Net investment income (0.046) (0.046) (0.026) (0.026) (0.040)
Net realized gains (0.001)
------- -------- ------- --------- -------
Total Distributions (0.046) (0.046) (0.026) (0.026) (0.041)
------- -------- ------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======== =======
Total Return 4.74% 4.69% 2.68% 2.64% 4.18%
Ratios/Supplementary
Data:
Net Assets at end of period (000) $173,340 $190,604 $160,721 $191,946 $219,451
Ratio of expenses to average net assets 0.74% 0.73% 0.74% 0.67% 0.65%
Ratio of net investment income
to average net assets 4.64% 4.60% 2.63% 2.60% 3.99%
Ratio of expenses to average net assets* 0.97% 0.97% 0.90% 0.72% 0.72%
Ratio of net investment income
average net assets* 4.41% 4.36% 2.48% 2.55% 3.92%
</TABLE>
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<TABLE>
<CAPTION>
AUGUST 10,
YEAR ENDED JULY 31, 1987
------------------- TO
1991 1990 1989 JULY 31,
---- ---- ---- --------
FIDUCIARY 1988(A)
--------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment Activities
Net investment income 0.063 0.078 0.081 0.063
----- ----- ----- -----
Distributions
Net investment income (0.063) (0.078) (0.081) (0.063)
------- ------- ------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ======
Total Return 6.53% 8.04% 8.43% 6.62%
Ratios/Supplementary Data:
Net Assets at end of period (000) $265,528 $205,787 $174,258 $151,854
Ratio of expenses to average net assets 0.62% 0.65% 0.54% 0.41%(b)
Ratio of net investment income to
average net assets 6.25% 7.76% 8.12% 6.45%(b)
Ratio of expenses to average net assets* 0.70% 0.71% 0.72% 0.72%(b)
Ratio of net investment income average net assets* 6.17% 7.70% 7.94% 6.14%(b)
</TABLE>
On December 1, 1990, the 100% U.S. Treasury Obligations Fund (now renamed the
100% U.S. Treasury Money Market Fund) commenced offering Class A Shares and
designated existing shares as Class B Shares. As of June 20, 1994, Class A and
Class B Shares were designated as "Investor" (now called "Retail") and
"Fiduciary" Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE MONEY MARKET FUND
(FORMERLY CALIFORNIA TAX-FREE FUND)
FINANCIAL HIGHLIGHTS
--------------------
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment Activities
Net investment income 0.029 0.031 0.020 0.021 0.032
------- -------- ------- ------- --------
Distributions
Net Investment income (0.029) (0.031) (0.020) (0.021) (0.032)
------- --------- ------- ------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======= ========
Total Return 2.91% 3.16% 1.99% 2.13% 3.20%
Ratios/Supplementary
Data:
Net Assets at end of period (000) $98,352 $105,742 $114,993 $142,939 $116,062
Ratio of expenses to
average net assets 0.55% 0.50% 0.50% 0.44% 0.54%
Ratio of net investment income
to average net assets 2.88% 3.11% 1.96% 2.08% 3.15%
Ratio of expenses to
average net assets* 1.00% 1.01% 0.93% 0.73% 0.74%
Ratio of net investment income
to average net assets* 2.43% 2.60% 1.53% 1.78% 2.95%
</TABLE>
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<PAGE> 283
<TABLE>
<CAPTION>
AUGUST 10,
YEAR ENDED JULY 31, 1987
------------------- TO
1991 1990 1989 JULY 31,
---- ---- ---- --------
FIDUCIARY 1988(A)
--------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Investment Activities
Net investment income 0.045 0.052 0.054 0.042
-------- -------- -------- --------
Distributions
Net Investment income (0.045) (0.052) (0.054) (0.042)
-------- -------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total Return 4.57% 5.28% 5.58% 4.41%
Ratios/Supplementary Data:
Net Assets at end of period (000) $142,365 $137,308 $147,868 $121,940
Ratio of expenses to average net assets 0.53% 0.66% 0.71% 0.70%(b)
Ratio of net investment income to
average net assets 4.47% 5.17% 5.45% 4.34%(b)
Ratio of expenses to average net assets* 0.72% 0.72% 0.76% 0.75%(b)
Ratio of net investment income to average net assets* 4.28% 5.11% 5.40% 4.29%(b)
</TABLE>
On December 1, 1990, the California Tax-Free Fund (now renamed the California
Tax-Free Money Market Fund) commenced offering Class A Shares and designated
existing shares as Class B Shares. As of June 20, 1994, Class A and Class B
Shares were designated as "Investor" (now called "Retail") and "Fiduciary"
Shares, respectively.
* During each period the investment advisory, administration and
distribution fees (Retail Shares) were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
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FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Fiduciary
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Fiduciary Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVES
The investment objectives of the Funds are as follows:
The Diversified Money Market Fund, the U.S. Government Money Market Fund and the
100% U.S. Treasury Money Market Fund each seek current income with liquidity and
stability of principal.
The California Tax-Free Money Market Fund seeks as high a level of current
interest income free from federal income tax and California personal income tax
as is consistent with the preservation of capital and relative stability of
principal.
The investment objectives and certain of the investment limitations of the
Diversified Money Market Fund, the U.S. Government Money Market Fund, the 100%
U.S. Treasury Money Market Fund, and the California Tax-Free Money Market Fund
may not be changed without a vote of the holders of a majority of the
outstanding Shares of the respective Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that a Fund will
achieve its investment objective.
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<PAGE> 285
INVESTMENT POLICIES
While the Diversified Money Market Fund, the U.S. Government Money Market Fund
and the 100% U.S. Treasury Money Market Fund have the same investment objective,
they differ as follows with respect to the types of instruments that may be
purchased. Each Fund may invest only in U.S. dollar denominated obligations
determined by the Advisor to present minimal credit risks under guidelines
adopted by HighMark's Board of Trustees.
DIVERSIFIED MONEY MARKET FUND
The Diversified Money Market Fund may invest in the following obligations:
(i) obligations issued by the U.S. Government, and backed by its full
faith and credit, and obligations issued or guaranteed as to
principal and interest by the agencies or instrumentalities of
the U.S. Government (e.g., obligations issued by Farmers Home
Administration, Government National Mortgage Association, Federal
Farm Credit Bank and Federal Housing Administration);
(ii) obligations such as bankers' acceptances, bank notes,
certificates of deposit and time deposits of thrift institutions,
savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign
banks, provided that such institutions (or, in the case of a
branch, the parent institution) have total assets of $1 billion
or more as shown on their last published financial statements at
the time of investment;
(iii) short-term promissory notes issued by corporations, including
Canadian Commercial Paper ("CCP"), which is U.S. dollar
denominated commercial paper issued by a Canadian corporation or
a Canadian counterpart of a U.S. corporation, and Europaper,
which is U.S. dollar denominated commercial paper of a foreign
issuer;
(iv) U.S. dollar denominated securities issued or guaranteed by
foreign governments, their political subdivisions, agencies or
instrumentalities, and obligations of supranational entities such
as the World Bank and the Asian Development Bank (provided that
the Fund invests no more than 5% of its assets in any such
instrument and invests no more than 25% of its assets in such
instruments in the aggregate);
(v) up to 5% of its total assets in loan participations issued by a
bank in the U.S. with assets exceeding $1 billion where the
underlying loan is made to a borrower in whose obligations the
Fund may invest and the underlying loan has a remaining maturity
of 397 days or less;
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<PAGE> 286
(vi) readily-marketable, short-term debt securities including, but
not limited to, those backed by company receivables, truck and
auto loans, leases, and credit card loans;
(vii) Treasury receipts, including TRs, TIGRs and CATs; and
(viii) repurchase agreements involving such obligations.
Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments, may involve a conditional or unconditional demand
feature, and may include variable amount master demand notes.
Subject to the provisions of Rule 2a-7 under the Investment Company Act of 1940
(the "1940 Act"), investments of the Diversified Money Market Fund will consist
of those obligations that, at the time of purchase, possess the highest
short-term rating from at least one nationally recognized statistical rating
organization ("NRSRO") (for example, commercial paper rated "A-1" by Standard &
Poor's Corporation ("S&P") or "P-1" by Moody's Investors Service, Inc.
("Moody's")). Although the Diversified Money Market Fund does not presently
expect to do so, it may also invest up to 5% of its net assets in obligations
that, at the time of purchase, possess one of the two highest short-term ratings
from at least one NRSRO, and in obligations that do not possess an equivalent
short-term rating (i.e., are unrated) but are determined by the Advisor to be of
comparable quality to the rated instruments eligible for purchase by the Fund
under guidelines adopted by the Board of Trustees.
The Diversified Money Market Fund will not invest more than 5% of its total
assets in the securities of any one first tier issuer, except that the Fund may
invest up to 25% of its total assets in the securities of a single first tier
issuer for a period of up to three business days. There is no limit on the
percentage of the Fund's assets that may be invested in obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities and
repurchase agreements fully collateralized by such obligations.
The Fund may concentrate its investments in certain instruments issued by U.S.
Banks, U.S. branches of foreign banks, and foreign branches of U.S. banks, but
only so long as the investment risk associated with investing in foreign
branches of U.S. banks is the same as that associated with investing in
instruments issued by the U.S. parent. Domestic certificates of deposit and
bankers' acceptances include those issued by domestic branches of a foreign bank
to the extent permitted by the rules of the Securities and Exchange Commission.
The rules currently permit U.S. branches of foreign banks to be treated as a
domestic bank if it can be demonstrated that they are subject to the same
regulations as domestic banks.
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<PAGE> 287
U.S. GOVERNMENT MONEY MARKET FUND
As a fundamental policy, the U.S. Government Money Market Fund may not purchase
securities other than U.S. Treasury bills, notes, and other obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities (such
as obligations issued by the Government National Mortgage Association and the
Export-Import Bank of the United States) some of which may be subject to
repurchase agreements.
THE 100% U.S. TREASURY MONEY MARKET FUND
The 100% U.S. Treasury Money Market Fund invests exclusively in direct U.S.
Treasury obligations and separately traded component parts of such obligations
transferable through the Federal Reserve book-entry system ("STRIPs").
CALIFORNIA TAX-FREE MONEY MARKET FUND
The California Tax-Free Money Market Fund invests in obligations issued by the
State of California and its political subdivisions or municipal authorities and
obligations issued by territories or possessions of the United States
("Municipal Securities").
Under normal market conditions and, as a matter of fundamental policy, at least
80% of the value of the total assets of the California Tax-Free Money Market
Fund will be invested in Municipal Securities, the interest on which, in the
opinion of bond counsel, is both excluded from gross income both for federal
income tax purposes and for California personal income tax purposes, and does
not constitute a preference item for individuals for purposes of the federal
alternative minimum tax.
Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments and may involve a conditional or unconditional demand
feature.
Under normal market conditions, up to 20% of the California Tax-Free Money
Market Fund's total assets may be invested in short-term obligations, the
interest on which is treated as a preference item for individuals for purposes
of the federal alternative minimum tax or subject to federal or California
personal income tax ("Taxable Obligations"). These short-term obligations may
include bonds from other states and cash equivalents as described below.
Dividends paid by the California Tax-Free Money Market Fund that are derived
from obligations, the interest on which is exempt from California taxation when
received by an individual ("California Exempt-Interest Securities"), are
excluded from gross income for California personal income tax purposes.
Dividends derived from interest on obligations other than California
Exempt-Interest Securities may be excluded from gross income for federal income
tax purposes but will be subject to California personal income tax.
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<PAGE> 288
In order for the California Tax-Free Money Market Fund to pay exempt-interest
dividends, at least 50% of its total assets must be invested in California
Exempt-Interest Securities at the close of each quarter of its taxable year.
Dividends, regardless of their source, may be subject to local taxes.
In seeking to achieve its investment objective, the California Tax-Free Money
Market Fund may invest all or any part of its assets in Municipal Securities
that are private activity bonds, including those known as industrial development
bonds under prior federal law. (Any reference herein to private activity bonds
includes industrial development bonds.) Interest on private activity bonds is
excluded from gross income for federal income tax purposes only if the bonds
fall within certain defined categories of qualified private activity bonds and
meet the requirements specified for those respective categories. However, even
if the California Tax-Free Money Market Fund invests in private activity bonds
that fall within these categories, Shareholders may become subject to the
federal alternative minimum tax on that part of such Fund's distributions
derived from interest on such bonds. For further information, see TAXATION
below.
The California Tax-Free Money Market Fund may invest up to 10% of its total
assets in shares of other investment companies with like investment objectives.
As a shareholder of an investment company, a Fund may indirectly bear investment
management fees of that investment company, which are in addition to the
management fees the Fund pays its own advisor.
Investments of the California Tax-Free Money Market Fund will consist of those
obligations that, at the time of purchase, possess one of the two highest
short-term ratings by a NRSRO, and in obligations that do not possess a rating
(i.e., are unrated) but are determined by the Advisor to be of comparable
quality to the rated instruments eligible for purchase by the Fund under the
guidelines adopted by the Board of Trustees.
The California Tax-Free Money Market Fund may hold uninvested cash reserves
pending investment during temporary "defensive" periods or if, in the opinion of
the Advisor, desirable tax-exempt obligations are unavailable. In accordance
with the Fund's investment objective and subject to its fundamental policies,
investments may be made in Taxable Obligations if, for example, suitable
tax-exempt obligations are unavailable or if acquisition of U.S. Government or
other taxable securities is deemed appropriate for temporary "defensive"
purposes.
As discussed in greater detail in the Statement of Additional Information,
Taxable Obligations may include obligations issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities (some of which may be subject to
repurchase agreements), certificates of deposit, bankers' acceptances, and
commercial paper. As noted above, Taxable Obligations may also include private
activity bonds depending on their tax treatment.
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<PAGE> 289
The California Tax-Free Money Market Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation nor maximum tax-exempt income irrespective of fluctuations in
principal. Investment in the California Tax-Free Money Market Fund would not be
appropriate for tax-deferred plans, such as IRA and Keogh plans, and investors
should consult a tax or other financial advisor to determine whether investment
in the California Tax-Free Fund would be appropriate for them.
MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities that may be held by
the California Tax-Free Money Market Fund are "general obligation" securities
and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith and credit and general taxing power for the payment of principal and
interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the California Tax-Free
Money Market Fund are in most cases revenue securities and are not payable from
the unrestricted revenues of the issuer. Consequently, the credit quality of
private activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
In addition, Municipal Securities may include "moral obligation" bonds, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation bonds is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from federal income tax or California personal income tax
are rendered at the time of issuance by counsel experienced in matters relating
to the validity of and tax exemption of interest on bonds issued by states and
their political sub-divisions. Neither the California Tax-Free Money Market Fund
nor the Advisor will review the proceedings relating to the issuance of
Municipal Securities or the basis for such opinions.
Municipal Securities purchased by the California Tax-Free Money Market Fund may
include adjustable rate tax-exempt notes which may have a stated maturity in
excess of 397 days, but which will be subject to a demand feature that will
permit the Fund to demand payment of the principal of the note either (i) at any
time upon not more than thirty days' notice or (ii) at specified intervals not
exceeding 397 days and upon no more than thirty days' notice. There may be no
active secondary market with respect to a particular adjustable rate note.
Nevertheless, as described in greater detail in the Statement of Additional
Information, the
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<PAGE> 290
adjustable interest rate feature included in this type of note is intended
generally to assure that the value of the note to the Fund will approximate its
par value.
Municipal Securities may include, but are not limited to, short-term
anticipation notes, bond anticipation notes, revenue anticipation notes, and
other forms of short-term tax-exempt securities. These instruments are issued in
anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues. In addition, the California Tax-Free Money Market Fund may
purchase tax-exempt commercial paper. Under certain circumstances, and subject
to the limitations described in the Statement of Additional Information, the
California Tax-Free Money Market Fund may invest indirectly in Municipal
Securities by purchasing shares of other tax-exempt money market mutual funds.
The California Tax-Free Money Market Fund may also acquire Municipal Securities
that have "put" features. Under a put feature, the Fund has the right to sell
the Municipal Security within a specified period of time at a specified price.
The put feature cannot be sold, transferred, or assigned separately from the
Municipal Security. Each Fund may buy Municipal Securities with put features to
facilitate portfolio liquidity, shorten the maturity of the underlying Municipal
Securities, or permit investment at a more favorable rate of return. The
aggregate price of a security subject to a put may be higher than the price that
otherwise would be paid for the security without such a feature, thereby
increasing the security's cost and reducing its yield.
GENERAL
The Funds intend to comply with Rule 2a-7 under the 1940 Act. Shares of each
Fund are priced pursuant to the amortized cost method whereby HighMark seeks to
maintain each Fund's net asset value per Share at $1.00. There can be, however,
no assurance that a stable net asset value of $1.00 per Share will be
maintained.
Securities or instruments in which each Fund invests have remaining maturities
of 397 days or less, although instruments subject to repurchase agreements and
certain adjustable rate instruments may bear longer maturities. The
dollar-weighted average portfolio maturity of each Fund will not exceed 90 days.
Although the Diversified Money Market Fund, the U.S. Government Money Market
Fund and the 100% U.S. Treasury Money Market Fund have the same investment
advisor and the same investment objective, particular securities held and
respective yields of these Funds may differ due to differences in the types of
permitted investments, cash flow, and the availability of particular
investments.
Additional information concerning each Fund's investments, including certain
investment restrictions that may not be changed with respect to a particular
Fund without a vote of the holders of a majority of the outstanding Shares of
that Fund, is set forth below and in the
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<PAGE> 291
Statement of Additional Information. For further information concerning the
rating and other requirements governing the investments (including the treatment
of securities subject to a tender or demand feature or deemed to possess a
rating based on comparable rated securities of the same issuer) of a Fund, see
the Statement of Additional Information. The Statement of Additional Information
also identifies the NRSROs that may be utilized by the Advisor with respect to
portfolio investments for the Funds and provides a description of the relevant
ratings assigned by each such NRSRO.
In the event that a security owned by a Fund is downgraded below the stated
rating categories, the Advisor will take appropriate action with regard to that
security.
ILLIQUID AND RESTRICTED SECURITIES
The Funds shall limit investments in illiquid securities to 10% or less of their
net assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. Each Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
Time deposits, including ETDs and CTDs but not including certificates of deposit
and repurchase agreements, which have maturities in excess of seven days are
considered to be illiquid.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each Fund (except the California
Tax-Free Money Market Fund) may lend its portfolio securities to
broker-dealers, banks or other institutions. A Fund may lend portfolio
securities in an amount representing up to 33 1/3% of the value of the Fund's
total assets.
OTHER INVESTMENTS
The Diversified Money Market Fund, the U.S. Government Money Market Fund, and
the California Tax-Free Money Market Fund may enter into repurchase agreements
and reverse repurchase agreements. Each Fund intends to limit its respective
activity in reverse repurchase agreements to no more than 10% of the Fund's
total assets.
The Funds may enter into forward commitments or purchase securities on a
"when-issued" basis. Each Fund expects that commitments by a Fund to enter into
forward commitments or purchase when-issued securities will not exceed 25% of
the value of the Fund's total assets
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<PAGE> 292
under normal market conditions. The Funds do not intend to purchase when-issued
securities or enter into forward commitments for speculative or leveraging
purposes but only for the purpose of acquiring portfolio securities.
For further information, see "Description of Permitted Investments."
RISK FACTORS
Investments by the Funds in obligations of certain agencies and
instrumentalities of the U.S. Government may not be guaranteed by the full faith
and credit of the U.S. Treasury, and there can be no assurance that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
As in the case of mortgage-related securities, participations and certain
asset-backed securities are subject to prepayments and there can be no assurance
that the Diversified Money Market Fund will be able to reinvest the proceeds of
any prepayment at the same interest rate or on the same terms as the original
investment.
With regard to loan participations, although a Fund's ability to receive
payments of principal and interest in connection with a particular loan is
primarily dependent on the financial condition of the underlying borrower, the
lending institution or bank may provide assistance in collecting interest and
principal from the borrower and in enforcing its rights against the borrower in
the event of a default. In selecting loan participations on behalf of a Fund,
the Advisor will evaluate the creditworthiness of both the borrower and the loan
originator and will treat both as an "issuer" of the loan participation for
purposes of the Fund's investment policies and restrictions (see INVESTMENT
RESTRICTIONS in the Statement of Additional Information).
Foreign securities which the Diversified Money Market Fund may purchase may
subject the Fund to investment risks that differ in some respects from those
related to investments in obligations of U.S. issuers. These risks include
adverse political and economic developments, possible imposition of withholding
taxes on interest income, possible seizure, nationalization, or expropriation of
foreign investments, possible establishment of exchange controls, or adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and different accounting, auditing, reporting, and recordkeeping
standards than those applicable to domestic branches of U.S. banks.
Certain risks are inherent in the California Tax-Free Money Market Fund's
concentrated investment in California Municipal Securities, which may make an
investment in the Fund
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riskier than an investment in other types of money market funds. Because of the
California Tax-Free Money Market Fund's investment objective, many of the
securities in its portfolio are likely to be obligations of California
governmental issuers that rely in whole or in part, directly or indirectly, on
real property taxes as a source of revenue. The ability of the State of
California and its political sub-divisions to generate revenue through real
property and other taxes and to increase spending has been significantly
restricted by various constitutional and statutory amendments and voter-passed
initiatives. Such limitations could affect the ability of California state and
municipal issuers to pay interest or repay principal on their obligations. In
addition, during the first half of the decade, California faced severe economic
and fiscal conditions and experienced recurring budget deficits that caused it
to deplete its available cash resources and to become increasingly dependent
upon external borrowings to meet its cash needs.
The financial difficulties experienced by the State of California and other
issuers of California Municipal Securities during the recession resulted in the
credit ratings of certain of their obligations being downgraded significantly by
the major rating agencies.
A more detailed description of special factors affecting investments in
obligations of California governmental issuers of which investors should be
aware is set forth in the Statement of Additional Information.
INVESTMENT LIMITATIONS
The Diversified Money Market Fund, the U.S. Government Money Market Fund and the
100% U.S. Treasury Money Market Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer (except that up to 25% of the value of
the Fund's total assets may be invested without regard to the 5% limitation).
(As indicated below, the Funds have adopted a non-fundamental investment policy
that is more restrictive than this fundamental investment limitation);
2) Purchase any securities that would cause more than 25% of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities, domestic bank certificates of deposit or bankers'
acceptances, and repurchase agreements secured by bank instruments or
obligations of the U.S. Government, its agencies, or instrumentalities; (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to
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financing the activities of their parents; and (c) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry).
3) Make loans, except that a Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements as
permitted by its individual investment objective and policies.
The California Tax-Free Money Market Fund may not:
4) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of its total assets
would be invested in such issuer (except that up to 25% of the value of the
Fund's total assets may be invested without regard to the 5% limitation). For
purposes of this investment restriction, a security is considered to be issued
by the government entity (or entities) whose assets and revenues back the
security or, with respect to a private activity bond that is backed only by the
assets and revenues of a non-governmental user, by the non-governmental user;
5) Purchase any securities that would cause 25% or more of such Fund's
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry; provided that this limitation shall not apply to securities of the
U.S. Government, its agencies or instrumentalities or Municipal Securities or
governmental guarantees of Municipal Securities; and provided, further, that for
the purpose of this limitation, private activity bonds that are backed only by
the assets and revenues of a non-governmental user shall not be deemed to be
Municipal Securities.
6) Make loans; except that the Fund may purchase or hold debt
instruments, lend portfolio securities and enter into repurchase agreements as
permitted by its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a security.
The investment limitations listed above are fundamental policies the substance
of which may not be changed without a vote of a majority of the outstanding
Shares of the respective Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
The Diversified Money Market Fund, the Government Obligations Money Market Fund,
and the 100% U.S. Treasury Money Market Fund have each adopted, in accordance
with Rule 2a- 7, a non-fundamental policy providing that the 5% limit noted in
limitation (1) above shall apply to 100% of each Fund's assets. Notwithstanding,
each such Fund may invest up to 25% of its assets in First Tier qualified
securities of a single issuer for up to three business days.
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PURCHASE AND REDEMPTION OF SHARES
As noted above, the Funds are divided into two classes of Shares, Retail and
Fiduciary. Only the following investors qualify to purchase the Funds' Fiduciary
Shares: (i) fiduciary, advisory, agency, custodial and other similar accounts
maintained with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA
accounts established with The Bank of California, N.A. and invested in any of
HighMark's Equity or Income Funds prior to June 20, 1994, which have remained
continuously open thereafter and which are not considered to be fiduciary
accounts; (iii) Shareholders who currently own Shares of HighMark's Equity or
Income Funds that were purchased prior to June 20, 1994 within an account
registered in their name with the Funds; and (iv) present and retired directors,
officers and employees (and their spouses and children under the age of 21) of
Union Bank of California, N.A., HighMark's current or former distributors or
their respective affiliated companies who currently own Shares of HighMark Funds
which were purchased before April 30, 1997. For a description of investors who
qualify to purchase Retail Shares, see the Retail Shares prospectus of the Money
Market Funds.
Purchases and redemptions of Shares of the Funds may be made on days on which
both the New York Stock Exchange and Federal Reserve wire system are open for
business ("Business Days"). The minimum initial investment is generally $1,000
and the minimum subsequent investment is generally $100. For present and retired
directors, officers, and employees (and their spouses and children under the age
of 21) of Union Bank of California, SEI Financial Services Company and their
affiliates, the minimum initial investment is $250 and the minimum subsequent
investment is $50. The Fund's initial and subsequent minimum purchase amounts
may be waived, in the Distributor's discretion if purchases are made in
connection with Individual Retirement Accounts, Keoghs, payroll deduction plans,
401(k) or similar programs or accounts. Shareholders may place orders by
telephone.
Purchase orders will be effective on the Business Day made if the Distributor
receives an order before 8:00 a.m., Pacific time (11:00 a.m., Eastern time) for
the California Tax-Free Money Market Fund, 9:00 a.m., Pacific time (12:00 noon,
Eastern time) for the 100% U.S. Treasury Money Market Fund and 10:00 a.m.,
Pacific time (1:00 p.m., Eastern time) for the Diversified Money Market and U.S.
Government Money Market Funds, on such Business Day. Otherwise, the purchase
order will be effective the next Business Day. Effectiveness of a purchase order
on any Business Day is contingent on the Custodian's receipt of Federal funds
before 11:00 a.m., Pacific time (2:00 p.m., Eastern time), on such day. The
purchase price is the net asset value per Share, which is expected to remain
constant at $1.00. The net asset value per Share is calculated as of 10:00 a.m.,
Pacific time (1:00 p.m., Eastern time), each Business Day based on the amortized
cost method. The net asset value per Share of a Fund is determined by dividing
the total value of its investments and other assets, less any liabilities, by
the total number of its outstanding Shares. HighMark reserves the right to
reject a purchase order when the Distributor or the Advisor determines that it
is not in the best interest of HighMark and/or Shareholder(s).
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Shares of the Fund are offered only to residents of states in which the shares
are eligible for purchase.
Redemption orders may be made any time before 8:00 a.m., Pacific time (11:00
a.m., Eastern time) for the California Tax-Free Money Market Fund, 9:00 a.m.,
Pacific time (12:00 noon, Eastern time) for the 100% U.S. Treasury Money Market
Fund, and 10:00 a.m., Pacific time (1:00 p.m., Eastern time) for the Diversified
Money Market and U.S. Government Money Market Funds in order to receive that
day's redemption price (i.e. the next determined net asset value per share). For
redemption orders received before such times for such Funds, payment will be
made the same day by transfer of Federal funds. Otherwise, payment will be made
on the next Business Day. Redeemed shares are not entitled to dividends declared
the day the redemption order is effective. The Funds reserve the right to make
payment on redemptions in securities rather than cash.
Neither HighMark's transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes are genuine. HighMark and its transfer
agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures may include taping of telephone
conversations. If market conditions are extraordinarily active or extraordinary
circumstances exist, and you experience difficulties placing redemption orders
by telephone, you may wish to consider placing your order by other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Fiduciary Shares for Fiduciary Shares of another Fund on the
basis of the relative net asset value of the Fiduciary Shares exchanged.
Shareholders may also exchange Fiduciary Shares of a Fund for Retail Shares of
another Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per share plus the appropriate sales load.
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Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including Participating Organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in a Fund may do so by contacting the
transfer agent at 1-800-734-2922. Exchanges will be effected on any Business Day
at the net asset value of the Funds involved in the exchange next determined
after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
DIVIDENDS
The net income of each Fund is declared daily as a dividend to Shareholders of
record at the close of business on the day of declaration.
Dividends with respect to each Fund are paid monthly in additional full and
fractional Shares of the Fund at net asset value as of the date of payment,
unless the Shareholder elects to receive such dividends in cash as described
below. Shareholders will automatically receive all income dividends and capital
gains distributions (if any) paid in respect of a Fund's Shares in additional
full and fractional Shares of the same class. Shareholders wishing to receive
their dividends in cash (or wishing to revoke a previously made election) must
notify the transfer agent at P.O. Box 8416, Boston, MA 02266-8416, and such
election (or revocation thereof) will become effective with respect to dividends
having record dates after notice has been received. Dividends paid in additional
Shares receive the same tax treatment as dividends paid in cash. Dividends are
paid in cash not later than seven Business Days after a Shareholder's complete
redemption of his or her Shares. Net realized capital gains, if any, are
distributed at least annually to Shareholders of record.
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FEDERAL TAXATION
Each Fund intends to qualify for treatment as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), and to
distribute substantially all of its net investment income so that it is not
required to pay federal taxes on these amounts. Because all of the net
investment income of the Diversified Money Market Fund, the U.S. Government
Money Market Fund, the 100% U.S. Treasury Money Market Fund and the California
Tax-Free Money Market Fund is expected to be derived from interest, it is
anticipated that no part of any distribution will be eligible for the federal
dividends received deduction for corporations. The Funds are not managed to
generate any long-term capital gains and, therefore, the Funds do not foresee
paying any significant "capital gains dividends" as described in the Code.
Shareholders will be subject to federal income tax with respect to dividends
paid by the Diversified Money Market Fund, the U.S. Government Money Market Fund
and the 100% U.S. Treasury Money Market Fund (including any capital gains
dividends). Dividends that are attributable to interest on U.S. Government
obligations earned by the Funds may be exempt from state and local tax, and
Shareholders should consult their own tax advisors to determine whether these
dividends are eligible for the state and local tax exemption. Dividends (except
to the extent attributable to gains or securities lending income) paid by the
100% U.S. Treasury Money Market Fund will be exempt from California and Oregon
personal income taxes. HighMark intends to advise Shareholders annually of the
proportion of a Fund's dividends that consists of interest on U.S. Government
obligations.
Exempt-interest dividends from the California Tax-Free Money Market Fund are
excludable from gross income for federal income tax purposes. Such dividends may
be taxable to Shareholders under state or local law as ordinary income even
though all or a portion of the amounts may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
taxes. Shareholders are advised to consult a tax advisor with respect to whether
exempt-interest dividends retain the exclusion if such Shareholder would be
treated as a "substantial user" or a "related person" to such user under the
Code.
Under the Code, interest on indebtedness incurred or continued by a Shareholder
to purchase or carry Shares of the California Tax-Free Money Market Fund is not
deductible for federal income tax purposes to the extent the Fund distributes
exempt-interest dividends during the Shareholder's taxable year.
Under the Code, if a Shareholder sells a Share of the California Tax-Free Money
Market Fund after holding it for six months or less, any loss on the sale or
exchange of such Share will be disallowed to the extent of the amount of any
exempt-interest dividends that the Shareholder has received with respect to the
Share that is sold.
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In addition, any loss (not already disallowed as provided in the preceding
sentence) realized upon a taxable disposition of shares held for six months or
less will be treated as long-term, rather than short-term, to the extent of any
long-term capital gain distributions received by the shareholder with respect to
the shares.
The California Tax-Free Money Market Fund may at times purchase Municipal
Securities at a discount from the price at which they were originally issued.
For federal income tax purposes, some or all of this market discount will be
included in the California Tax-Free Money Market Fund's ordinary income and will
be taxable to Shareholders as such when it is distributed to them.
To the extent dividends paid to Shareholders are derived from taxable income
(for example, from interest on certificates of deposit or repurchase
agreements), or from long-term or short-term capital gains, such dividends will
be subject to federal income tax, whether such dividends are paid in the form of
cash or additional Shares. A Shareholder should consult his or her tax advisor
for special advice.
Under the Code, dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included in alternative minimum
taxable income for the purpose of determining liability (if any) for the federal
alternative minimum tax. In addition, exempt-interest dividends will be included
in a corporation's "adjusted current earnings" for purposes of the alternative
minimum tax (except to the extent derived from interest on certain private
activity bonds issued after August 7, 1986, which interest would already be
included in alternative minimum taxable income as a specific item of tax
preference). Shareholders of the California Tax-Free Money Market Fund receiving
social security or railroad retirement benefits may be taxed on a portion of
those benefits as a result of receiving tax-exempt income (including
exempt-interest dividends distributed by the California Tax-Free Money Market
Fund).
If, at the close of each quarter of its taxable year, the California Tax-Free
Money Market Fund continues to qualify for the special federal income tax
treatment afforded regulated investment companies and at least 50% of the value
of the Fund's total assets consists of California Exempt-Interest Securities,
then "California exempt interest dividends" attributable to these securities
will be exempt from California personal income tax. A "California-exempt
interest dividend" is any dividend distributed by the Fund to the extent that it
is derived from the interest received by the Fund on California Exempt-Interest
Securities (less related expenses) and designated as such by written notice to
Shareholders. For further details, see the Statement of Additional Information.
Dividends received by Shareholders subject to California state corporate
franchise tax will be taxed as ordinary dividends notwithstanding that all or a
portion of such dividends are exempt from California personal income tax.
Distributions other than "California-exempt interest dividends" by the Fund to
California residents will be subject to California personal income tax, whether
or not such dividends are reinvested.
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Additional information regarding federal and California taxes is contained in
the Statement of Additional Information. However, the foregoing and the material
in the Statement of Additional Information are only brief summaries of some of
the important tax considerations generally affecting a money market fund and its
Shareholders. In addition, the foregoing discussion and the federal and
California tax information in the Statement of Additional Information are based
on tax laws and regulations which are in effect as of the date of this
Prospectus; these laws and regulations may subsequently change, and such changes
could be retroactive. Shareholders will be advised at least annually as to the
federal income tax status, and, in the case of Shareholders of the California
Tax-Free Money Market Fund, as to the California income tax status, of
distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A. serves as the Funds' investment advisor. Subject to the general supervision
of HighMark's Board of Trustees, the Advisor manages each Fund in accordance
with its investment objective and policies, makes decisions with respect to and
places orders for all purchases and sales of the Fund's investment securities,
and maintains the Fund's records relating to such purchases and sales.
For the expenses assumed and services provided by the Advisor as each Fund's
investment advisor, Union Bank of California receives a fee from the Diversified
Money Market Fund, the U.S. Government Money Market Fund, the 100% U.S. Treasury
Money Market Fund, and the California Tax-Free Money Market Fund computed daily
and paid monthly, at the annual rate of thirty one-hundredths of one percent
(.30%) of each Fund's average daily net assets. Union Bank of California may
from time to time agree to voluntarily reduce its advisory fee. While there can
be no assurance that Union Bank of California will choose to make such an
agreement, any voluntary reductions in Union Bank of California's advisory fee
will lower the Fund's expenses, and thus increase the Fund's yield and total
return, during the period such voluntary reductions are in effect. During
HighMark's fiscal year ended July 31, 1996, Union Bank of California received
investment advisory fees from the Diversified Money Market Fund, the U.S.
Government Money Market Fund, and the 100% U.S. Treasury Money Market Fund
aggregating 0.40% of each Fund's average daily net assets and from the
California Tax-Free Money Market Fund aggregating 0.23% of the Fund's average
daily net assets.
On April 1, 1996, The Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor
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banks) has been in banking since the early 1900's and, historically, each has
had significant investment functions within its trust and investment division.
UnionBanCal Corporation, the parent of Union Bank of California, N.A., is a
publicly held corporation, but is principally held by the Bank of
Tokyo-Mitsubishi, Limited. As of September 30, 1996, Union Bank of California
and its subsidiaries had approximately $28.7 billion in commercial assets.
Pacific Alliance Capital Management is a division of Union Bank of California's
Trust and Investment Management Group, which, as of June 30, 1996, had
approximately $13.4 billion of assets under management. The Advisor, with a team
of approximately 45 stock and bond research analysts, portfolio managers and
traders, has been providing investment management services to individuals,
institutions and large corporations since 1917.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Fiduciary Shares.
Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of each Fund,
for which it receives a fee paid by the Administrator at the annual rate of up
to 0.05% of the average daily net assets of the Funds. Union Bank of California
has voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Fiduciary Shares
of HighMark, for which services it receives a fee.
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SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.00% of average
daily net assets.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor. Fiduciary Shares are not subject
to HighMark's Distribution Plan or a distribution fee.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Funds
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of each
Fund, for which it receives compensation from SEI Fund Resources without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Funds.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Funds. The Custodian holds cash, securities and other
assets of HighMark as required by the 1940 Act.
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Services performed by Union Bank of California, as the Funds' shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Money Market Fund, 100% U.S. Treasury Money Market
Fund and California Tax-Free Money Market Fund. As of the date hereof, no Shares
of the Value Momentum Fund, the Blue Chip Growth Fund, the Emerging Growth Fund,
the International Equity Fund, the Intermediate-Term Bond Fund, the Convertible
Securities Fund, the Government Securities Fund and the California Intermediate
Tax-Free Bond Fund had been offered for sale in HighMark. Shares of each Fund
are freely transferable, are entitled to distributions from the assets of the
Fund as declared by the Board of Trustees, and, if HighMark were liquidated,
would receive a pro rata share of the net assets attributable to that Fund.
Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Retail Shares of the Funds, interested persons may contact the
Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996 Union Bank of California (475
Sansome Street, Post Office Box 45000, San Francisco, CA 94104) was the
Shareholder of record of 98.42% of the Fiduciary Shares of the Diversified Money
Market Fund, 93.46% of the Fiduciary Shares of the U.S. Government Money Market
Fund, 95.03% of the Fiduciary Shares of the 100% U.S. Treasury Money Market
Fund, and substantially all of the Fiduciary Shares of the California Tax-Free
Money Market Fund.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the "yield" and "effective yield" with
respect to the Fiduciary Shares of each Fund and a "tax-equivalent yield" and
"tax-equivalent effective yield" for federal, California and Oregon income tax
purposes with regard to the Fiduciary Shares of each of the 100% U.S. Treasury
Money Market Fund and the California Tax-Free
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Money Market Fund. Performance information is computed separately for a Fund's
Retail and Fiduciary Shares in accordance with the formulas described below.
Each yield figure is based on historical earnings and is not intended to
indicate future performance.
The "yield" of a Fund's Fiduciary Shares refers to the income generated by an
investment in the class over a seven-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the class is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment.
The 100% U.S. Treasury Money Market Fund's tax-equivalent yield and
tax-equivalent effective yield will reflect the amount of income subject to
California or Oregon personal income taxation at the rate specified in the
advertisement that a taxpayer would have to earn in order to obtain the same
after tax income as that derived from the yield and effective yield of the
Fiduciary class. The California Tax-Free Money Market Fund's tax-equivalent
yield and tax-equivalent effective yield reflect the amount of income subject to
federal income taxation and California personal income taxation at the rate
specified in the advertisement that a taxpayer would have to earn in order to
obtain the same after tax income as that derived from the yield and effective
yield of the Fiduciary class.
Tax-equivalent yields and tax-equivalent effective yields with respect to a
class will be significantly higher than the yield and effective yield of that
class.
From time to time, HighMark may advertise the aggregate total return and average
annual total return of the Funds. The aggregate total return and average annual
total return of each Fund may be quoted for the life of each Fund and for
five-year and one-year periods, in each case, through the most recent calendar
quarter. Aggregate total return is determined by calculating the change in the
value of a hypothetical $1,000 investment in a Fund over the applicable period
that would equate the initial amount invested to the ending redeemable value of
the investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing a Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the positive or negative
investment results that an investor in a Fund would have experienced from
changes in Share price and reinvestment of dividends and capital gain
distributions.
Each Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual-fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for
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administrative and management costs; or other investment alternatives. Certain
Funds may advertise performance that includes results from periods in which the
Fund's assets were managed in a non-registered predecessor vehicle.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
Each Fund invests in only the instruments permitted by its individual investment
objective and policies.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Debt Instruments secured by
company receivables, truck and auto loans, leases, and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such
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securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the Fixed Income Funds
may invest in other asset-backed securities that may be developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
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LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or
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facility, tolls from a toll bridge, for example. The payment of principal and
interest on private activity and industrial development bonds generally is
dependent solely on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
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REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of the Group has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, the Group's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the
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securities in the event the borrower were to default on its lending agreement or
enter into bankruptcy, a Fund will receive 100% collateral in the form of cash
or U.S. Government securities. This collateral will be valued daily by the
lending agent, with oversight by the Advisor, and, should the market value of
the loaned securities increase, the borrower will be required to furnish
additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
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VARIABLE AMOUNT MASTER DEMAND NOTES -- Unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between HighMark and the issuer, they are
not normally traded. Although there is no secondary market in these notes, the
Fund may demand payment of principal and accrued interest at specified
intervals. For purposes of the Fund's investment policies, a variable amount
master demand note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
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Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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HIGHMARK MONEY MARKET FUNDS
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources &
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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CROSS REFERENCE SHEET
THE HIGHMARK FIXED INCOME FUNDS
<TABLE>
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FORM N-1A PART A ITEM PROSPECTUS CAPTION
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<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities How to Purchase Shares; Exchange
Privileges; How to Redeem Shares;
Dividends; Federal Taxation; Service
Arrangements--Administrator;
Distributor; The Distribution Plan;
General Information--Description of
HighMark & Its Shares; General
Information-- Miscellaneous
7. Purchase of Securities Being Offered How to Purchase Shares; Exchange
Privileges; Service Arrangements--
Administrator; Distributor; The
Distribution Plan
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
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HIGHMARK FUNDS
FIXED INCOME FUNDS
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's:
o Intermediate-Term Bond Fund
o Bond Fund
RETAIL SHARES
HighMark's Retail Shares are offered to investors who are not fiduciary clients
of Union Bank of California, N.A., and who are not otherwise eligible for
HighMark's Fiduciary Shares.
This Prospectus sets forth concisely the information about HighMark and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-800-734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference. This Prospectus relates only to the Retail Shares of the Fixed Income
Funds. Interested persons who wish to obtain a prospectus for the other Funds of
HighMark may contact the Distributor at the above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
[_______________, 1997]
Retail Shares
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SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Retail Shares of the Intermediate-Term Bond and Bond Funds (each a "Fund" and
sometimes referred to in this prospectus as the "Fixed Income Funds.") This
summary is qualified in its entirety by reference to the more detailed
information provided elsewhere in the Prospectus and in the Statement of
Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE INTERMEDIATE-TERM BOND FUND seeks
total return through investments in fixed-income securities. THE BOND FUND seeks
current income through investments in long-term, fixed-income securities. (See
"INVESTMENT OBJECTIVE")
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE INTERMEDIATE-TERM BOND FUND
primarily invests in bonds. THE BOND FUND invests in long-term bonds. Bonds
include debt obligations such as bonds, notes, debentures and securities
convertible into or exercisable for debt obligations that are issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities; investments may also include zero-coupon obligations,
mortgage-related securities and asset-backed securities. (See "INVESTMENT
POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. The market value of a Fund's fixed income investments
will change in response to interest rate changes and other factors. During
periods of falling interest rates, the value of outstanding fixed income
securities generally rises. Conversely, during periods of rising interest rates,
the value of such securities generally declines. (See "Risk Factors")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator")
WHO IS THE CUSTODIAN? Union Bank of California, N.A., (the "Bank") serves as the
Custodian of HighMark's assets. (See "The Custodian")
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WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective (plus any applicable sales charge). Redemption orders must be placed
prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day
for the order to be effective that day. (See "HOW TO PURCHASE SHARES and
REDEMPTION OF SHARES")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Funds is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS")
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TABLE OF CONTENTS
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PAGE
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SUMMARY.....................................................................3
FIXED INCOME FUNDS FEE TABLE................................................7
FUND DESCRIPTION...........................................................13
INVESTMENT OBJECTIVE.......................................................13
INVESTMENT POLICIES........................................................13
Intermediate-Term Bond Fund...........................................13
Bond Fund.............................................................14
GENERAL....................................................................15
Money Market Instruments..............................................15
Illiquid and Restricted Securities....................................15
Lending of Portfolio Securities.......................................15
Risk Factors..........................................................16
INVESTMENT LIMITATIONS.....................................................17
Portfolio Turnover....................................................18
HOW TO PURCHASE SHARES.....................................................18
How to Purchase By Mail...............................................19
How to Purchase By Wire...............................................20
How to Purchase through an Automatic Investment Plan ("AIP")..........20
How to Purchase Through Financial Institutions........................20
Sales Charges.........................................................21
Letter of Intent......................................................22
Rights of Accumulation................................................22
Sales Charge Waivers..................................................22
Reductions for Qualified Groups ......................................24
EXCHANGE PRIVILEGES........................................................24
REDEMPTION OF SHARES.......................................................25
By Mail...............................................................26
Telephone Transactions................................................26
Systematic Withdrawal Plan ("SWP")....................................27
Other Information Regarding Redemptions...............................27
</TABLE>
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<PAGE> 321
<TABLE>
<S> <C>
DIVIDENDS.....................................................................28
FEDERAL TAXATION..............................................................28
SERVICE ARRANGEMENTS..........................................................29
The Advisor..............................................................29
Administrator............................................................31
The Transfer Agent.......................................................31
Distributor..............................................................32
The Distribution Plan....................................................32
Banking Laws.............................................................33
Custodian................................................................33
GENERAL INFORMATION...........................................................34
Description of HighMark & Its Shares.....................................34
Performance Information..................................................34
Miscellaneous............................................................35
DESCRIPTION OF PERMITTED INVESTMENTS..........................................36
</TABLE>
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<PAGE> 322
FIXED INCOME FUNDS FEE TABLE
<TABLE>
<CAPTION>
Intermediate-Term
Bond Fund Bond Fund
----------------- ---------
Retail Retail
Shares Shares
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 3.00% 3.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0% 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable)(b) 0% 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(c) 0% 0%
Exchange Fee(a) $ 0 $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.50% 0.50%
12b-1 Fees (after voluntary reduction)(d) 0.00% 0.00%
Other Expenses (after voluntary reduction)(e) 0.25% 0.25%
Total Fund Operating Expenses (after voluntary
reduction)(f) 0.75% 0.75%
==== ====
<FN>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Intermediate-Term Bond Fund
Retail Shares $37 $53 $70 $120
Bond Fund
Retail Shares $37 $53 $70 $120
</TABLE>
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<PAGE> 323
The purpose of the tables above is to assist an investor in the Fixed
Income Funds in understanding the various costs and expenses that a Shareholder
will bear directly or indirectly. For a more complete discussion of each Fund's
annual operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the Fixed Income Funds on behalf of their customers
may charge customers fees for services provided in connection with the
investment in, redemption of, and exchange of Shares. (See HOW TO PURCHASE
SHARES, EXCHANGE PRIVILEGES, REDEMPTION OF SHARES, and SERVICE ARRANGEMENTS
below.)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Retail Shares of the Funds
that were purchased without a sales charge in reliance upon the waiver
accorded to purchases in the amount of $1 million or more, but only where
such redemption request is made within one year of the date the Shares were
purchased.
(c) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder. (See REDEMPTION OF SHARES
below.)
(d) As indicated under SERVICE ARRANGEMENTS--The Distribution Plan below, the
Distributor may voluntarily reduce the 12b-1 fee. Absent voluntary fee
waivers, 12b-1 fees would be 0.25% for each Fund. The Distributor reserves
the right to terminate its waiver at any time in its sole discretion.
(e) OTHER EXPENSES for the Intermediate-Term Bond Fund are based on that Fund's
estimated expenses for the current fiscal year. Absent voluntary fee
waivers, OTHER EXPENSES would be 0.49% for the Retail Shares of the
Intermediate-Term Bond Fund and 0.51% for the Retail Shares of the Bond
Fund.
(f) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 1.24%
for the Retail Shares of the Intermediate-Term Bond Fund, and 1.26% for the
Retail Shares of the Bond Fund.
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<PAGE> 324
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect
to the Retail Shares of the Bond Fund. Information prior to fiscal 1994 is for
Fiduciary Shares only. Financial highlights for the Bond Fund for the period
ended July 31, 1996 have been derived from financial statements audited by
Deloitte & Touche LLP, independent auditors for HighMark, whose report thereon
is included in the Statement of Additional Information. Prior to the fiscal year
ended July 31, 1996, Coopers & Lybrand L.L.P. served as independent auditors for
HighMark. Financial highlights for the Bond Fund for the years ended December
31, 1987, 1986 and 1985 have been derived from financial statements examined by
other auditors whose report thereon is on file with the Securities and Exchange
Commission. Financial highlights for the Bond Fund for the period from January
1, 1988 through June 22, 1988 are derived from unaudited financial statements
prepared by HighMark. The Intermediate-Term Bond Fund had not commenced
operations in HighMark as of July 31, 1996.
The Bond Fund offered a single class of shares (now designated
Fiduciary Shares) throughout the periods shown.
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<PAGE> 325
<TABLE>
<CAPTION>
BOND FUND
FINANCIAL HIGHLIGHTS
--------------------
YEAR ENDED JULY 31, JUNE 20, 1994 YEAR ENDED JULY 31,
------------------- TO JULY 31, -------------------
1996 1995 1994(a)(b) 1993 1992 1991 1990
---- ---- ---------- ---- ---- ---- ----
RETAIL RETAIL RETAIL FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
------ ------ ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.29 $10.04 $10.12 $11.02 $10.29 $10.18 $10.42
----- ----- ----- ----- ----- ----- -----
Investment Activities
Net investment income 0.69 0.66 0.07 0.70 0.67 0.78 0.79
Net realized and unrealized gains
(losses) on investments (0.18) 0.23 (0.05) 0.35 0.77 0.04 (0.25)
----- ----- ----- ----- ----- ----- -----
Total from Investment Activities 0.51 0.89 0.02 1.05 1.44 0.82 0.54
----- ----- ----- ----- ----- ----- -----
Distributions
Net investment income (0.65) (0.64) (0.10) (0.70) (0.67) (0.71) (0.78)
Net realized gains -- -- -- (0.24) (0.04) -- --
----- ----- ----- ----- ----- ----- -----
Total Distributions (0.65) (0.64) (0.10) (0.94) (0.71) (0.71) (0.78)
----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of Period $10.15 $10.29 $10.04 $11.13 $11.02 $10.29 $10.18
===== ===== ===== ===== ===== ===== =====
Total Return 4.95% 9.29% (3.81)%(c)(e) 10.07% 14.43% 8.99% 5.52%
Ratios/Supplementary Data:
Net Assets at end of period (000) $1,157 $ 558 $ 7 $33,279 $21,651 $10,799 $ 6,974
Ratio of expenses to average net
assets 0.89% 0.92% 0.99%(d) 0.93% 0.91% 0.79% 1.01%
Ratio of net investment income to
average net assets 6.10% 6.29% 5.77%(d) 6.41% 6.23% 7.61% 7.77%
Ratio of expenses to average net
assets* 1.85% 1.89% 2.96%(d) 1.55% 1.55% 1.59% 1.94%
Ratio of net investment income to
average net assets* 5.14% 5.32% 3.80%(d) 5.79% 5.59% 6.81% 6.84%
Portfolio turnover 20.65% 36.20% 44.33% 58.81% 79.56% 65.81% 53.50%
<CAPTION>
JUNE 23, 1988
TO JULY 31,
1989 1988(F)
---- -------
FIDUCIARY FIDUCIARY
--------- ---------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 9.86 $10.00
----- -----
Investment Activities
Net investment income 0.82 0.09
Net realized and unrealized gains
(losses) on investments 0.56 (0.14)
----- -----
Total from Investment Activities 1.38 (0.05)
----- -----
Distributions
Net investment income (0.82) (0.09)
Net realized gains -- --
----- -----
Total Distributions (0.82) (0.09)
----- -----
Net Asset Value, End of Period $10.42 $ 9.86
===== =====
Total Return 14.79% (0.96)%(e)
Ratios/Supplementary Data:
Net Assets at end of period (000) $4,655 $3,487
Ratio of expenses to average net
assets 1.18% 1.04%(d)
Ratio of net investment income to
average net assets 8.24% 8.63%(d)
Ratio of expenses to average net
assets* 2.11% 2.06%(d)
Ratio of net investment income to
average net assets* 7.31% 7.61%(d)
Portfolio turnover 24.83% 0.00%
<FN>
(a) Period from commencement of operations.
(b) On June 20, 1994, the Bond Fund commenced offering Investor Shares (now
called "Retail Shares") and designated existing shares as Fiduciary Shares.
(c) Represents total return for the Fiduciary Shares for the period from August
1, 1993 to June 19, 1994 plus the total return for the Investor Shares for
the period from June 20, 1994 to July 31, 1994.
(d) Annualized.
(e) Not annualized.
(f) The Bond Fund commenced operations on June 23, 1988 as a result of the
reorganization involving the Bond Portfolio of the IRA Collective
Investment Fund described under GENERAL INFORMATION-- Reorganization of The
IRA Fund & HighMark.
* During the period the investment advisory and administration fees were
voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
</TABLE>
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<PAGE> 326
<TABLE>
<CAPTION>
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS)
THE IRA COLLECTIVE INVESTMENT FUND BOND PORTFOLIO
JAN. 1,
1988
THROUGH
JUNE 22, YEAR ENDED YEAR ENDED
1988 DEC. 31, DEC. 31,
(UNAUDITED) 1987 1986
----------- ---- ----
<S> <C> <C> <C>
Investment income $ 0.503 $ 1.061 $ 1.129
Operating expenses 0.065 0.128(b) 0.119(b)
-------- -------- --------
Net investment income 0.438 0.933 1.010
Dividends from net investment
income (0.438) (0.933) (1.010)
Net realized and unrealized
gain (loss) on investments (0.050) (0.966) 0.947
-------- -------- --------
Increase (decrease) in net
asset value (0.050) (0.966) 0.947
Net Asset Value:
Beginning of period 11.281 12.247 11.300
-------- -------- --------
End of period $ 11.231 $ 11.281 $ 12.247
======== ======== ========
Ratio of expenses to average
net assets(a)(b) 1.20% 1.09% 0.92%
Ratio of net investment income
to average net assets(a) 8.03% 7.93% 7.83%
Portfolio turnover 0.00% 0.00% 1.61%
Number of Shares/units
outstanding at end of period 317,633 344,456 206,664
<FN>
(a) Annualized based on the period for which assets were held.
(b) The expenses shown are not representative of expenses actually incurred
by the Bond Portfolio through May 31, 1987. During mid-May 1985, The
Bank of California, N.A., investment adviser to the Bond Portfolio,
commenced charging its management fee, and commencing June 1, 1987,
operating expenses were charged to the Bond Portfolio. Had the maximum
allowable operating expenses and management fees been paid by the Bond
Portfolio for the entire period pursuant to the Management Agreement
between the Bond Portfolio and The Bank of California, N.A., the per
unit expenses and net investment income would have been as follows:
</TABLE>
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<PAGE> 327
<TABLE>
<CAPTION>
JAN. 1,
1988
THROUGH
JUNE 22, YEAR ENDED YEAR ENDED
1988 DEC. 31, DEC. 31,
(UNAUDITED) 1987 1986
----------- ---- ----
<S> <C> <C>
Expenses $ 0.240 $ 0.226 $ 0.231
Net investment income 0.263 0.793 0.779
Net asset value, end of year 11.231 11,281 12.247
Expenses as a percentage of
average net asset 2.00%(a) 2.00% 2.00%
</TABLE>
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<PAGE> 328
FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Adviser"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Retail
Shares, sales charges and the operation of HighMark's Distribution Plan, see HOW
TO PURCHASE SHARES and SERVICE ARRANGEMENTS below. (Retail Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The investment objectives of the Funds are as follows:
The Intermediate-Term Bond Fund seeks total return through investments in
fixed-income securities.
The Bond Fund seeks current income through investments in long-term,
fixed-income securities.
The investment objectives and certain of the investment limitations of the
Intermediate-Term Bond Fund and the Bond Fund may not be changed without a vote
of the holders of a majority of the outstanding Shares of the respective Fund
(as defined under GENERAL INFORMATION--Miscellaneous below). There can be no
assurance that a Fund will achieve its investment objective.
INVESTMENT POLICIES
INTERMEDIATE-TERM BOND FUND
Under normal market conditions, at least 65% of the Intermediate-Term Bond
Fund's assets will be invested in bonds. For purposes of this policy "bonds"
include (i) corporate bonds and debentures rated at the time of purchase as
"investment grade" (one of the four highest bond
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<PAGE> 329
rating categories by a nationally recognized statistical rating organization
("NRSRO") i.e., AAA, AA, A, or BBB by Standard & Poor's Corporation ("S&P") or
Aaa, Aa, A, or Baa by Moody's Investors Service ("Moody's")) or determined by
the Advisor to be of comparable quality; (ii) Yankee Bonds and Eurodollar
instruments; (iii) notes or bonds issued by the U.S. Government and its agencies
and instrumentalities (such as Government National Mortgage Association ("GNMA")
securities); (iv) mortgage-backed securities, including privately issued
mortgage-backed securities and readily-marketable asset-backed securities, which
must be rated at the time of purchase as investment grade, or be determined by
the Advisor to be of comparable quality; (v) securities issued or guaranteed by
foreign governments, their political subdivisions, agencies or
instrumentalities; (vi) obligations of supranational entities such as the World
Bank and the Asian Development Bank; and (vii) zero coupon obligations. The
remainder of the Fund's assets may be invested in money market instruments.
The dollar-weighted average portfolio maturity of the Intermediate-Term Bond
Fund will be from three to ten years.
BOND FUND
The Bond Fund invests in fixed-income securities with maturities in excess of
one year, except for amounts held in money market instruments. Fixed-income
securities can have maturities of up to thirty years or more. Under normal
market conditions, the Bond Fund will invest at least 65% of the value of its
total assets in bonds and may invest up to 35% of its total assets in money
market instruments.
For purposes of this policy "bonds" include (i) corporate bonds and debentures
rated at the time of purchase as investment grade or determined by the Advisor
to be of comparable quality; (ii) Yankee Bonds and Eurodollar instruments; (iii)
notes or bonds issued by the U.S. Government and its agencies and
instrumentalities (such as GNMA securities); (iv) mortgage-backed securities,
including privately issued mortgage-backed securities and readily-marketable
asset-backed securities, which must be rated at the time of purchase as
investment grade, or be determined by the Advisor to be of comparable quality;
(v) securities issued or guaranteed by foreign governments, their political
subdivisions, agencies or instrumentalities; (vi) obligations of supranational
entities such as the World Bank and the Asian Development Bank; and (vii) zero
coupon obligations. In the event that a security owned by the Fund is downgraded
below the stated rating categories, the Advisor will take appropriate action
with regard to that security. The remainder of the Fund's assets may be invested
in money market instruments.
The dollar-weighted average portfolio maturity of the Bond Fund will be from
five to twenty years.
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<PAGE> 330
GENERAL
In the event that a security owned by the Fund is downgraded below the stated
rating categories, the Advisor will take appropriate action with regard to that
security.
MONEY MARKET INSTRUMENTS
Under normal market conditions, each Fixed Income Fund may invest up to 35% of
its total assets in money market instruments. When market conditions indicate a
temporary "defensive" investment strategy as determined by the Advisor, a Fund
may invest more than 35% of its total assets in money market instruments. A Fund
will not be pursuing its investment objective to the extent that a substantial
portion of its assets are invested in money market instruments.
ILLIQUID AND RESTRICTED SECURITIES
Each Fund shall limit investment in illiquid securities to 15% or less of its
net assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, a Fund may lend its portfolio securities
to broker-dealers, banks or other institutions. A Fund may lend portfolio
securities in an amount representing up to 33 1/3% of the value of the Fund's
total assets.
OTHER INVESTMENTS
The Funds may enter into repurchase agreements and reverse repurchase
agreements.
The Fixed Income Funds may enter into forward commitments or purchase securities
on a "when-issued" basis. Each Fixed Income Fund expects that commitments by a
Fund to enter into forward commitments or purchase when-issued securities will
not exceed 25% of the value of the Fund's total assets under normal market
conditions. The Fixed Income Funds do not intend to purchase when-issued
securities or enter into forward commitments for speculative or leveraging
purposes but only for the purpose of acquiring portfolio securities.
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<PAGE> 331
A Fund may invest up to 5% of its total assets in the securities of any one
registered investment company, but may not own than 3% of the securities of any
one registered investment company or invest more than 10% of its assets in the
securities of other registered investment companies. In accordance with an
exemptive order issued to HighMark by the SEC, such other registered investment
company securities may include securities of a money market fund of HighMark,
and such companies may include companies for which the Advisor or a Sub-Advisor
to a Fund of HighMark, or an affiliate of such Advisor or Sub-Advisor serves as
investment advisor, administrator or distributor. Because other registered
investment companies employ an investment advisor, such investment by a Fund may
cause Shareholders to bear duplicative fees. The Advisor will waive its fees
attributable to the assets of the investing Fund invested in a money market fund
of HighMark, and, to the extent required by applicable law, the Advisor will
waive its fees attributable to the assets of the Fund invested in any investment
company. Some Funds are subject to additional restrictions on investment in
other investment companies. See "INVESTMENT RESTRICTIONS" in the Statement of
Additional Information.
A Fund may invest in futures and options on futures for the purpose of achieving
the Fund's objectives and for adjusting portfolio duration. The Fund may invest
in futures and related options based on any type of security or index traded on
U.S. or foreign exchanges or over the counter, as long as the underlying
security, or securities represented by an index, are permitted investments of
the Fund. The Fund may enter into futures contracts and related options only to
the extent that obligations under such contracts or transactions represent not
more than 10% of the Fund's assets.
Certain of the obligations in which the Funds may invest may be variable or
floating rate instruments, may involve a conditional or unconditional demand
feature, and may include variable amount master demand notes.
For further information, see "Description of Permitted Investments."
RISK FACTORS
In addition to credit risk which relates to the ability of an issuer to make
payments of principal and interest, all types of bonds are also subject to
market risk. Market risk relates to changes in a security's value as a result of
interest rate changes generally. An increase in interest rates will generally
reduce the value of the investments in the Fixed Income Funds and a decline in
interest rates will generally increase the value of those investments.
Accordingly, the net asset value of the Fund's shares will vary as a result of
changes in the value of the securities in a Fund's portfolio. Therefore, an
investment in the Funds may decline in value, resulting in a loss of principal.
Because interest rates vary, it is impossible to predict the income or yield of
the Fund for any particular period.
-16-
<PAGE> 332
Depending upon prevailing market conditions, the Fixed Income Funds may purchase
debt securities at a discount from face value, which produces a yield greater
than the coupon rate. Conversely, if debt securities are purchased at premium
over face value, the yield will be lower than the coupon rate. In making
investment decisions, the Advisor will consider many factors other than current
yield, including the preservation of capital, the potential for realizing
capital appreciation, maturity, and yield to maturity.
Securities rated BBB by S&P or Baa by Moody's are considered investment grade,
but are deemed by these rating services to have some speculative
characteristics, and adverse economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case with higher grade bonds.
Each of the Fixed Income Funds may invest in securities issued or guaranteed by
foreign corporations or foreign governments, their political subdivisions,
agencies or instrumentalities and obligations of supranational entities such as
the World Bank and the Asian Development Bank. Any investments in these
securities will be in accordance with a Fund's investment objective and
policies, and are subject to special risks, such as adverse political and
economic developments, possible seizure, nationalization or expropriation of
foreign investments, less stringent disclosure requirements, changes in foreign
currency exchange rates, increased costs associated with the conversion of
foreign currency into U.S. dollars, the possible establishment of exchange
controls or taxation at the source or the adoption of other foreign governmental
restrictions. To the extent that a Fund may invest in securities of foreign
issuers that are not traded on any exchange, there is a further risk that these
securities may not be readily marketable. The Fixed Income Funds will not hold
foreign currency for investment purposes.
For further information regarding risks of particular permitted investments, see
"Description of Permitted Investments."
INVESTMENT LIMITATIONS
Each Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of such Fund's total
assets would be invested in the issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the issuer's
outstanding voting securities (except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations);
2) Purchase any securities that would cause more than 25% of such
Fund's total assets at the time of purchase to be invested in securities of one
or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with
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<PAGE> 333
respect to obligations issued or guaranteed by the U.S. or foreign governments
or their agencies or instrumentalities and repurchase agreements secured by
obligations of the U.S. Government or its agencies or instrumentalities; (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents; and (c) utilities will be divided according to
their services (for example, gas, gas transmission, electric and gas, electric,
and telephone will each be considered a separate industry); and
3) Make loans, except that a Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements as
permitted by its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies and
may not be changed without a vote of a majority of the outstanding Shares of the
respective Fund. Additional fundamental and non-fundamental investment
limitations are set forth in the Statement of Additional Information.
PORTFOLIO TURNOVER
A Fund will not purchase securities solely for the purpose of short-term trading
nor will the Fund's portfolio turnover rate be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. Each of
the Fixed Income Fund's portfolio turnover rate may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates
generally will result in correspondingly higher brokerage and other transactions
costs to the Fixed Income Funds and could involve the realization of capital
gains that would be taxable when distributed to shareholders of the relevant
Fixed Income Fund. See FEDERAL TAXATION.
HOW TO PURCHASE SHARES
As noted above, each Fund is divided into two classes of Shares, Retail and
Fiduciary. Retail Shares may be purchased at net asset value plus a sales
charge. For a description of investors who qualify to purchase Fiduciary Shares,
see the Fiduciary Shares prospectus of the Fixed Income Funds. HighMark's Retail
Shares are offered to investors who are not fiduciary clients of Union Bank of
California, N.A., and who are not otherwise eligible for HighMark's Fiduciary
Class.
Retail Shares are sold on a continuous basis by HighMark's Distributor, SEI
Financial Services Company. The principal office of the Distributor is 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658. If you wish to purchase Shares,
you may contact your investment professional or telephone HighMark at
1-800-734-2922.
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<PAGE> 334
The minimum initial investment is generally $1,000 for each Fund and the minimum
subsequent investment is generally $100. For present and retired directors,
officers, and employees (and their spouses and children under the age of 21) of
Union Bank of California, SEI Financial Services Company and their affiliates,
the minimum initial investment is $250 and the minimum subsequent investment is
$50. A Fund's initial and subsequent minimum purchase amounts may be waived if
purchases are made in connection with Individual Retirement Accounts, Keoghs,
payroll deduction plans, 401(k) or similar programs or accounts. Purchases and
redemption of Shares of the Funds may be made on days on which both the New York
Stock Exchange and the Federal Reserve wire system are open for business
("Business Days").
Purchase orders for Shares will be executed at a per Share price equal to the
net asset value next determined after the receipt of the purchase order by the
Distributor (plus any applicable sales charge). The net asset value per Share of
a Fund is determined by dividing the total market value of the Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of the Fund. Net asset value per Share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any Business Day.
Purchases will be made in full and fractional Shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor or the Advisor determines that it is not in the best
interest of HighMark and/or its Shareholders to accept such order.
The securities in each Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method that HighMark's
Board of Trustees believes accurately reflects fair value. For further
information about valuation of investments in the Fixed Income Funds, see the
Statement of Additional Information.
Shares of the Funds are offered only to residents of states in which the Shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase Shares of the Intermediate-Term Bond and Bond Funds by
completing and signing an Account Application form and mailing it, along with a
check (or other negotiable bank instrument or money order) payable to "HighMark
Funds (Fund Name)," to the Transfer agent at P.O. Box 8416, Boston,
Massachusetts 02266-8416. All purchases made by check should be in U.S. dollars
and made payable to "HighMark Funds (Fund Name)." Third party checks, credit
card checks or cash will not be accepted. You may purchase more Shares at any
time by mailing payment also to the transfer agent at the above address. Orders
placed by mail will be executed on receipt of your payment. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
You may obtain Account Application Forms for the Intermediate-Term Bond and Bond
Funds by calling the Distributor at 1-800-734-2922.
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HOW TO PURCHASE BY WIRE
You may purchase Shares of the Intermediate-Term Bond and Bond Funds by wiring
Federal funds, provided that your Account Application has been previously
received. You must wire funds to the transfer agent and the wire instructions
must include your account number. You must call the transfer agent at
1-800-734-2922 before wiring any funds. An order to purchase Shares by Federal
funds wire will be deemed to have been received by a Fund on the Business Day of
the wire; provided that the Shareholder wires funds to the transfer agent prior
to 1:00 p.m., Pacific time (4:00 p.m., Eastern time). If the transfer agent does
not receive the wire by 1:00 p.m., Pacific time (4:00 p.m., Eastern time), the
order will be executed on the next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC INVESTMENT PLAN ("AIP")
You may arrange for periodic additional investments in the Intermediate-Term
Bond and Bond Funds through automatic deductions by Automated Clearing House
("ACH") from a checking account by completing this section in the Account
Application form. The minimum pre-authorized investment amount is $100 per
month. The AIP is available only for additional investments to an existing
account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
Shares of the Funds may be purchased through financial institutions, including
the Advisor, that provide distribution assistance or Shareholder services.
Shares purchased by persons ("Customers") through financial institutions may be
held of record by the financial institution. Financial institutions may impose
an earlier cut-off time for receipt of purchase orders directed through them to
allow for processing and transmittal of these orders to the transfer agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to HighMark.
Customers who desire to transfer the registration of Shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
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SALES CHARGES
The following table shows the regular sales charge on Retail Shares to a "single
purchaser" (defined below) together with the dealer discount paid to dealers and
the agency commission paid to brokers (collectively the "commission"):
<TABLE>
<CAPTION>
SALES CHARGE AS
SALES CHARGE AS A APPROPRIATE COMMISSION AS
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
<S> <C> <C> <C>
0-$24,999 3.00% 3.09% 2.70%
$ 25,000-$49,000 2.50% 2.56% 2.25%
$50,000-$99,000 2.00% 2.04% 1.80%
$100,000-$249,999 1.50% 1.52% 1.35%
$250,000-$999,999 1.00% 1.01% 0.90%
$1,000,000 and Over 0.00%* 0.00% 0.00%
<FN>
- ------------------
* A contingent deferred sales charge of 1.00% will be assessed against
any proceeds of any redemption of such Retail Shares prior to one year
from date of purchase.
</TABLE>
The commissions shown in the table apply to sales through authorized dealers and
brokers. Under certain circumstances, the Distributor may use its own funds to
compensate financial institutions and intermediaries in amounts that are
additional to the commissions shown above. In addition, the Distributor may,
from time to time and at its own expense, provide promotional incentives in the
form of cash or other compensation to certain financial institutions and
intermediaries whose registered representatives have sold or are expected to
sell significant amounts of the Retail Shares of a Fund. Such other compensation
may take the form of payments for travel expenses, including lodging, incurred
in connection with trips taken by qualifying registered representatives to
places within or without the United States. Under certain circumstances,
commissions up to the amount of the entire sales charge may be reallowed to
dealers or brokers, who might then be deemed to be "underwriters" under the
Securities Act of 1933. Commission rates may vary among the Funds.
In calculating the sales charge rates applicable to current purchases of a
Fund's Shares, a "single purchaser" is entitled to cumulate current purchases
with the net purchase of previously purchased Shares of a Fund and other of
HighMark's funds (the "Eligible Funds") which are sold subject to a comparable
sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing Shares of a Fund for their own account or for trust or
custodial accounts for their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account including employee benefit plans
created under Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), including related plans of the same
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employer. To be entitled to a reduced sales charge based upon Shares already
owned, the investor must ask the Distributor for such entitlement at the time of
purchase and provide the account number(s) of the investor, the investor and
spouse, and their minor children, and give the age of such children. A Fund may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
LETTER OF INTENT
By initially investing at least $1,000 and submitting a Letter of Intent (the
"Letter") to the Distributor, a "single purchaser" may purchase Shares of a Fund
and the other Eligible Funds during a 13-month period at the reduced sales
charge rates applicable to the aggregate amount of the intended purchases stated
in the Letter. The Letter may apply to purchases made up to 90 days before the
date of the Letter. To receive credit for such prior purchases and later
purchases benefitting from the Letter, the Shareholder must notify the transfer
agent at the time the Letter is submitted that there are prior purchases that
may apply, and, at the time of later purchases, notify the transfer agent that
such purchases are applicable under the Letter.
RIGHTS OF ACCUMULATION
In calculating the sales charge rates applicable to current purchases of Retail
Shares, a "single purchaser" is entitled to cumulate current purchases with the
current market value of previously purchased Retail Shares of the Funds sold
subject to a comparable sales charge.
To exercise your right of accumulation based upon Shares you already own, you
must ask the Distributor for this reduced sales charge at the time of your
additional purchase and provide the account number(s) of the investor, as
applicable, the investor and spouse, and their minor children. The Funds may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
SALES CHARGE WAIVERS
The following categories of investors may purchase Retail Shares of the Funds
with no sales charge in the manner described below (which may be changed or
eliminated at any time by the Distributor):
(1) Existing holders of Retail Shares of a Fund upon the reinvestment of
dividend and capital gain distributions on those Shares;
(2) Investment companies advised by Pacific Alliance Capital Management or
distributed by SEI Financial Services Company or its affiliates placing
orders on each entity's behalf;
(3) State and local governments;
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(4) Individuals who have received distributions from employee benefit trust
accounts administered by Union Bank of California who are rolling over such
distributions into an individual retirement account for which the Bank
serves as trustee or custodian;
(5) Individuals who purchase Shares with proceeds from a required minimum
distribution at age 70 1/2 from their employee benefit qualified plan or an
individual retirement account administered by Union Bank of California;
(6) Individuals who purchase Shares with proceeds received in connection with a
distribution paid from a Union Bank of California trust or agency account;
(7) Investment advisors or financial planners regulated by a federal or state
governmental authority who are purchasing Shares for their own account or
for an account for which they are authorized to make investment decisions
(i.e., a discretionary account) and who charge a management, consulting or
other fee for their services; and clients of such investment advisors or
financial planners who place trades for their own accounts if the accounts
are linked to the master account of such investment advisor or financial
planner on the books and records of a broker or agent;
(8) Investors purchasing Shares with proceeds from a redemption of Shares of
another open-end investment company (other than The HighMark Funds) on
which a sales charge was paid if such redemption occurred within thirty
(30) days prior to the date of the purchase order. Satisfactory evidence of
the purchaser's eligibility must be provided at the time of purchase (e.g.,
a confirmation of the redemption);
(9) Brokers, dealers and agents who are purchasing for their own account and
who have a sales agreement with the Distributor, and their employees (and
their spouses and children under the age of 21);
(10) Investors purchasing Shares on behalf of a qualified prototype retirement
plan (other than an IRA, SEP-IRA or Keogh) sponsored by Union Bank of
California;
(11) Purchasers of Retail Shares of the Growth Fund that are sponsors of other
investment companies that are unit investment trusts for deposit by such
sponsors into such unit investment trusts, and to purchasers of Retail
Shares of the Growth Fund that are holders of such unit investment trusts
that invest distributions from such investment trusts in Retail Shares of
the Growth Fund;
(12) Present and retired directors, officers and employees (and their spouses
and children under the age of 21) of Union Bank of California, SEI
Financial Company or their affiliated companies; and
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(13) Investors receiving Shares issued in plans of reorganization, such as
mergers, asset acquisitions, and exchange offers, to which HighMark is
a party.
The Distributor may also periodically waive the sales charge for all investors
with respect to a Fund.
With regard to categories 2 through 12 above, the Distributor must be notified
that the purchase qualifies for a sales charge waiver at the time of purchase.
REDUCTIONS FOR QUALIFIED GROUPS
Reductions in sales charges also apply to purchases by individual members of a
"qualified group." The reductions are based on the aggregate dollar amount of
Shares purchased by all members of the qualified group. For purposes of this
paragraph, a qualified group consists of a "company," as defined in the 1940
Act, which has been in existence for more than six months and which has a
primary purpose other than acquiring Shares of a Fund at a reduced sales charge,
and the "related parties" of such company. For purposes of this paragraph, a
"related party" of a company is (i) any individual or other company who directly
or indirectly owns, controls or has the power to vote five percent or more of
the outstanding voting securities of such company; (ii) any other company of
which such company directly or indirectly owns, controls or has the power to
vote five percent or more of its outstanding voting securities; (iii) any other
company under common control with such company; (iv) any executive officer,
director or partner of such company or of a related party; and (v) any
partnership of which such company is a partner. Investors seeking to rely on
their membership in a qualified group to purchase Shares at a reduced sales load
must provide evidence satisfactory to the transfer agent of the existence of a
bona fide qualified group and their membership therein.
All orders from a qualified group will have to be placed through a single source
and identified at the time of purchase as originating from the same qualified
group, although such orders may be placed into more than one discrete account
that identifies HighMark.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issues two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to each Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
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Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Retail Shares for Retail Shares of a Fund with the same or
lower sales charge on the basis of the relative net asset value of the Retail
Shares exchanged. Shareholders may exchange their Retail Shares for Retail
Shares of a Fund with a higher sales charge by paying the difference between the
two sales charges. Shareholders may also exchange Retail Shares of a Money
Market Fund for which no sales load was paid for Retail Shares of a Fixed Income
Fund. Under such circumstances, the cost of the acquired Retail Shares will be
the net asset value per share plus the appropriate sales load. If Retail Shares
of the Money Market Fund were acquired in a previous exchange involving Shares
of a non-money market HighMark Fund, then such Shares of the Money Market Fund
may be exchanged for Shares of a Fixed Income Fund without payment of any
additional sales load within a twelve month period. In order to receive a
reduced sales charge when exchanging into a Fund, the Shareholder must notify
HighMark that a sales charge was originally paid and provide sufficient
information to permit confirmation of qualification.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including Participating Organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in a Fixed Income Fund may do so by
contacting the transfer agent at 1-800-734-2922. Exchanges will be effected on
any Business Day at the net asset value of the Funds involved in the exchange
next determined after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
REDEMPTION OF SHARES
You may redeem your Shares of the Intermediate-Term Bond and Bond Funds without
charge on any Business Day. There is presently a $15 charge for wiring
redemption proceeds to a
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Shareholder's designated account. Shares may be redeemed by mail, by telephone
or through a pre-arranged systematic withdrawal plan. Investors who own Shares
held by a financial institution should contact that institution for information
on how to redeem Shares.
BY MAIL
A written request for redemption of Shares of the Intermediate-Term Bond and
Bond Funds must be received by the transfer agent, P.O. Box 8416, Boston,
Massachusetts 02266-8416 in order to constitute a valid redemption request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the transfer
agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker dealer, credit union, securities exchange or association, clearing agency
or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
Shares, (2) the redemption check is payable to the shareholder(s) of record, and
(3) the redemption check is mailed to the shareholder(s) at his or her address
of record.
TELEPHONE TRANSACTIONS
You may redeem your Shares of the Intermediate-Term Bond and Bond Funds by
calling the transfer agent at 1-800-734-2922. Under most circumstances, payments
will be transmitted on the next Business Day following receipt of a valid
request for redemption. You may have the proceeds mailed to your address or
wired to a commercial bank account previously designated on your Account
Application. There is no charge for having redemption proceeds mailed to you,
but there is a $15 charge for wiring redemption proceeds.
You may request a wire redemption for redemptions of Shares of the
Intermediate-Term Bond and Bond Funds in excess of $500 by calling the transfer
agent at 1-800-734-2922 who will deduct a wire charge of $15 from the amount of
the wire redemption. Shares cannot be redeemed by Federal Reserve wire on
Federal holidays restricting wire transfers.
Neither the transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. HighMark and the transfer agent will each
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Such procedures may include taping of telephone
conversations.
If market conditions are extraordinarily active or other extraordinary
circumstances exist, and you experience difficulties placing redemption orders
by telephone, you may consider placing your order by mail.
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SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Intermediate-Term Bond and Bond Funds offer a Systematic Withdrawal Plan
("SWP"), which you may use to receive regular distributions from your account.
Upon commencement of the SWP, your account must have a current net asset value
of $5,000 or more. You may elect to receive automatic payments via check or ACH
of $100 or more on a monthly, quarterly, semi-annual or annual basis. You may
arrange to receive regular distributions from your account via check or ACH by
completing this section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per Share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the transfer agent. The transfer agent may require that the signature
on the written notice be guaranteed.
It is generally not in your best interest to be participating in the SWP at the
same time that you are purchasing additional Shares if you have to pay a sales
load in connection with such purchases.
OTHER INFORMATION REGARDING REDEMPTIONS
Shareholders who desire to redeem Shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Funds reserve the right to make payment on
redemptions in securities rather than cash.
Payment to the Shareholders for Shares redeemed will be made within seven days
after the transfer agent receives the valid redemption request. At various
times, however, a Fund may be requested to redeem Shares for which it has not
yet received good payment; collection of payment may take ten or more days. In
such circumstances, the redemption request will be rejected by the Fund. Once a
Fund has received good payment for the Shares a Shareholder may submit another
request for redemption.
Due to the relatively high costs of handling small investments, each Fund
reserves the right to redeem your Shares at net asset value if your account in
any Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase Shares of any Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem
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any Shares. Before any Fund exercises its right to redeem such Shares you will
be given notice that the value of the Shares in your account is less than the
minimum amount and will be allowed 60 days to make an additional investment in
such Fund in an amount which will increase the value of the account to at least
the minimum amount.
DIVIDENDS
The net income of each of the Fixed Income Funds is declared and paid monthly as
a dividend to Shareholders of record at the close of business on the day of
declaration. Net realized capital gains are distributed at least annually to
Shareholders of record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of a Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
FEDERAL TAXATION
Each Fixed Income Fund intends to qualify for treatment as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and to distribute substantially all of its net investment income and
net realized capital gains so that each Fund is not required to pay federal
taxes on these amounts. Because all of the net investment income of the Fixed
Income Funds is expected to be derived from interest, it is anticipated that no
part of any distribution will be eligible for the federal dividends received
deduction.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. Distributions by the Fund of the excess of net
long-term capital gain over net short-term capital loss is taxable to
Shareholders as long-term capital gain in the year with respect to which it is
received, regardless of how long the Shareholder has held Shares of the Fund.
Such distributions are not eligible for the dividends received deduction. If a
Shareholder disposes of Shares in a Fund at a loss before holding such Shares
for longer than six months, such loss will be treated as a long-term capital
loss to the extent the Shareholder has received long-term capital gain dividends
on the Shares.
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Prior to purchasing Shares of the Fixed Income Funds, the impact of dividends or
capital gain distributions that are expected to be declared or have been
declared, but not paid, should be carefully considered. Dividends or capital
gain distributions received after a purchase of Shares are subject to federal
income taxes, although in some circumstances, the dividends or distributions may
be, as an economic matter, a return of capital to the Shareholder. A Shareholder
should consult his or her advisor for specific advice about the tax consequences
to the Shareholder of investing in a Fund.
Fund investments in foreign securities may be subject to withholding taxes at
the source on dividend or interest payments. In that case, the Fund's yield on
those securities would be decreased. The Fund does not expect to be eligible to
elect to permit shareholders to claim a credit or deduction on their income tax
return for their pro rata share of such taxes.
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting each Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
serves as the Fixed Income Funds' investment advisor. Subject to the general
supervision of HighMark's Board of Trustees, the Advisor manages each Fund in
accordance with its investment objective and policies, makes decisions with
respect to and places orders for all purchases and sales of the Fund's
investment securities, and maintains the Fund's records relating to such
purchases and sales.
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<PAGE> 345
All investment decisions for the Fixed Income Funds are made by a team of
investment professionals, all of whom take an active part in the decision making
process. The team leader for both the Intermediate-Term Bond Fund and the Bond
Fund is E. Jack Montgomery. Mr. Montgomery is a Vice President of the Advisor
and has served as the portfolio manager of the Bond Fund since June, 1994. Prior
to joining the Advisor, Mr. Montgomery was employed by the San Francisco
Employees' Retirement System and, prior to that, First Interstate Bank of
Oregon. Mr. Montgomery graduated from the University of Oklahoma in 1971 and
earned his M.B.A. from the University of Oregon.
For the expenses assumed and services provided by the Advisor as each Fund's
investment advisor, Union Bank of California receives a fee from the
Intermediate-Term Bond Fund and the Bond Fund, computed daily and paid monthly,
at the annual rate of fifty one-hundredths of one percent (.50%) of the Fund's
average daily net assets. Depending on the size of the Fund, this fee may be
higher than the advisory fee paid by most mutual funds, although the Board of
Trustees believes it will be comparable to advisory fees paid by many funds
having similar objectives and policies. Union Bank of California may from time
to time agree to voluntarily reduce its advisory fee, however, it is not
currently doing so. While there can be no assurance that Union Bank of
California will choose to make such an agreement, any voluntary reductions in
Union Bank of California's advisory fee will lower the Fund's expenses, and thus
increase the Fund's yield and total return, during the period such voluntary
reductions are in effect. During HighMark's fiscal year ended July 31, 1996,
Union Bank of California received investment advisory fees from the Bond Fund
aggregating 0.45% of the Fund's average daily net assets. As of the date of this
prospectus, the Intermediate-Term Bond Fund had not yet commenced operations in
HighMark.
On April 1, 1996, The Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group, which, as of June
30, 1996, had approximately $13.4 billion of assets under management. The
Advisor, with a team of approximately 45 stock and bond research analysts,
portfolio managers and traders, has been providing investment management
services to individuals, institutions and large corporations since 1917.
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<PAGE> 346
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Retail Shares. Any
such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of each Fund,
for which it receives a fee paid by the Administrator at the annual rate of up
to 0.05% of the average daily net assets of the Funds. Union Bank of California
has voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Retail Shares of
HighMark, for which services it receives a fee.
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.03% of average
daily net assets for the Intermediate-Term Bond Fund and 0.01% for the Bond
Fund.
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DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor.
THE DISTRIBUTION PLAN
Pursuant to HighMark's Distribution Plan, each Fixed Income Fund pays the
Distributor as compensation for its services in connection with the Distribution
Plan a distribution fee, computed daily and paid monthly, equal to twenty-five
one-hundredths of one percent (0.25%) of the average daily net assets
attributable to that Fund's Retail Shares. The Distributor has agreed to waive
its fees to 0.00% of the average daily net assets for each Fund.
The Distributor may use the distribution fee applicable to a Fund's Retail
Shares to provide distribution assistance with respect to the sale of the Fund's
Retail Shares or to provide Shareholder services to the holders of the Fund's
Retail Shares. The Distributor may also use the distribution fee (i) to pay
financial institutions and intermediaries (such as insurance companies and
investment counselors but not including banks and savings and loan
associations), broker-dealers, and the Distributor's affiliates and subsidiaries
compensation for services or reimbursement of expenses incurred in connection
with the distribution of a Fund's Retail Shares to their customers or (ii) to
pay banks, savings and loan associations, other financial institutions and
intermediaries, broker-dealers, and the Distributor's affiliates and
subsidiaries compensation for services or reimbursement of expenses incurred in
connection with the provision of Shareholder services to their customers owning
a Fund's Retail Shares. All payments by the Distributor for distribution
assistance or Shareholder services under the Distribution Plan will be made
pursuant to an agreement between the Distributor and such bank, savings and loan
association, other financial institution or intermediary, broker-dealer, or
affiliate or subsidiary of the Distributor (a "Servicing Agreement"; banks,
savings and loan associations, other financial institutions and intermediaries,
broker-dealers, and the Distributor's affiliates and subsidiaries that may enter
into a Servicing Agreement are hereinafter referred to individually as a
"Participating Organization"). A Participating Organization may include Union
Bank of California, its subsidiaries and its affiliates.
Participating Organizations may charge customers fees in connection with
investments in a Fixed Income Fund on their customers' behalf. Such fees would
be in addition to any amounts the Participating Organization may receive
pursuant to its Servicing Agreement. Under the terms of the Servicing
Agreements, Participating Organizations are required to provide their customers
with a schedule of fees charged directly to such customers in connection with
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investments in a Fund. Customers of Participating Organizations should read this
Prospectus in light of the terms governing their accounts with the Participating
Organization.
The distribution fee under the Distribution Plan will be payable without regard
to whether the amount of the fee is more or less than the actual expenses
incurred in a particular year by the Distributor in connection with distribution
assistance or Shareholder services rendered by the Distributor itself or
incurred by the Distributor pursuant to the Servicing Agreements entered into
under the Distribution Plan. The Distributor may from time to time voluntarily
reduce its distribution fee with respect to a Fixed Income Fund in significant
amounts for substantial periods of time pursuant to an agreement with HighMark.
While there can be no assurance that the Distributor will choose to make such an
agreement, any voluntary reduction in the Distributor's distribution fee will
lower such Fixed Income Fund's expenses, and thus increase such Fund's yield and
total returns, during the period such voluntary reductions are in effect.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Funds
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of each
Fund, for which it receives compensation from SEI Fund Resources, without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Funds.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Fixed Income Funds. The Custodian holds cash securities
and other assets of HighMark as required by the 1940 Act.
Services performed by Union Bank of California, as the Funds' shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
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GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund, and the California Intermediate Tax-Free Bond Fund, had been
offered for sale in HighMark. Shares of each Fund are freely transferable, are
entitled to distributions from the assets of the Fund as declared by the Board
of Trustees, and, if HighMark were liquidated, would receive the net assets
attributable to that Fund. Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Fiduciary Shares of the Fixed Income Funds, interested persons may
contact the Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996, there was no person who owned of
record or beneficially more than 25% of the Retail Shares of the Bond Fund. As
of November 22, 1996, the Intermediate-Term Bond Fund had not yet commenced
operations in HighMark.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Retail
Shares of each Fixed Income Fund. Performance information is computed separately
for a Fund's Retail and Fiduciary Shares in accordance with the formulas
described below.
The aggregate total return and average annual total return of the Fixed Income
Funds may be quoted for the life of each Fund and for ten-year, five-year and
one-year periods, in each case through the most recent calendar quarter.
Aggregate total return is determined by calculating the change in the value of a
hypothetical $1,000 investment in a Fund over the applicable period that would
equate the initial amount invested to the ending redeemable value of the
investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing a Fund's
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aggregate total return over the relevant number of years. The resulting
percentage indicates the average positive or negative investment results that an
investor in a Fund would have experienced on an annual basis from changes in
Share price and reinvestment of dividends and capital gain distributions.
The yield of a Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of a Fund is determined by dividing the income and capital
gains distributions, or where indicated the income distributions alone, on a
Share of the Fund over a twelve-month period by the per Share public offering
price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
All performance information presented for a Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders
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may call such a meeting and communicate with other Shareholders for that
purpose, see ADDITIONAL INFORMATION--Miscellaneous in the Statement of
Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
Each Fund invests in only the instruments permitted by its individual investment
objective and policies.
AMERICAN DEPOSITORY RECEIPTS (ADRs) -- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Debt Instruments secured by
company receivables, truck and auto loans, leases, and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such securities. Asset-backed securities entail
prepayment risk, which may vary depending on the type of asset, but is generally
less than the prepayment risk associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the Fixed Income Funds
may invest in other asset-backed securities that may be developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
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CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives" and "Investment Policies" for more information about any
policies and limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at
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specific intervals, and to repay the principal amount of the loan at maturity.
Investment grade bonds are those rated BBB or better by S&P or Baa or better by
Moody's.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS -- Short-term, interest bearing instruments or deposits
and may include, for example, (i) commercial paper rated within the highest
rating category by a NRSRO at the time of investment, or, if not rated,
determined by the Advisor to be of comparable quality; (ii) obligations
(certificates of deposit, time deposits, bank master notes, and bankers'
acceptances) of thrift institutions, savings and loans, U.S. commercial banks
(including foreign branches of such banks), and U.S. and foreign branches of
foreign banks, provided that such institutions (or, in the case of a branch, the
parent institution) have total assets of $1 billion or more as shown on their
last published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TRs, TIGRs and CATS; (vi) repurchase agreements
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involving such obligations; (vii) loan participations issued by a bank in the
United States with assets exceeding $1 billion and for which the underlying loan
is issued by borrowers in whose obligations the Fund may invest; (viii) money
market funds and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether due to changes in interest
rates or prepayments of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of mortgage-related securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related security may decline when interest rates rise, the converse
is not necessarily true because in periods of declining interest rates the
mortgages underlying the securities are prone to prepayment which results in
amounts being available for reinvestment which are likely to be invested at a
lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
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Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining interest
rates may lead to prepayment of underlying mortgages, automobile sales contracts
or credit card receivables, the prices of mortgage-related and asset-backed
securities may not rise with a decline in interest rates. Mortgage-backed and
asset-backed securities and CMOs are extremely sensitive to the rate of
principal prepayment. Similarly, callable corporate bonds also present risk of
prepayment. During periods of falling interest rates, securities that can be
called or prepaid may decline in value relative to similar securities that are
not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
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MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, a Fund may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of
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securities held by a Fund and the price of options; (3) there may not be a
liquid secondary market for options; and (4) while a Fund will receive a premium
when it writes covered call options, it may not participate fully in a rise in
the market value of the underlying security.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of participations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "Taxes."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
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REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the
Investment Company Act of 1940.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of HighMark has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enters into forward commitments, HighMark's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. The purchase of securities
on a "when-issued" basis or forward commitments may have the effect of leverage,
which may increase the risk of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
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<PAGE> 359
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
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<PAGE> 360
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Fixed Income
Funds may elect to include market discount in income currently on a ratable
accrual method or
-45-
<PAGE> 361
a constant interest rate method. Market discount is the difference between the
obligation's "adjusted issue price" (the original issue price plus original
issue discount accrued to date) and the holder's purchase price. If no such
election is made, gain on the disposition of a market discount obligation is
treated as ordinary income (rather than capital gain) to the extent it does not
exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
-46-
<PAGE> 362
HIGHMARK FIXED INCOME FUNDS
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources &
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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<PAGE> 363
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
-48-
<PAGE> 364
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 365
CROSS REFERENCE SHEET
THE HIGHMARK FIXED INCOME FUNDS
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objectives;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities Purchase and Redemption of Shares;
Exchange Privileges; Dividends; Federal
Taxation; Service Arrangements
--Administrator; Distributor; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Exchange Privileges; Service
Arrangements-- Administrator;
Distributor
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 366
HIGHMARK FUNDS
FIXED INCOME FUNDS
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's:
o Intermediate-Term Bond Fund
o Bond Fund
o Government Securities Fund
FIDUCIARY SHARES
HighMark's Fiduciary Shares are offered to the following investors: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Fixed Income Funds prior to June 20, 1994, which have remained
continuously open thereafter and which are not considered to be fiduciary
accounts; (iii) Shareholders who currently own Shares of HighMark's Equity or
Fixed Income Funds that were purchased prior to June 20, 1994 within an account
registered in their name with the Funds; and (iv) present and retired directors,
officers and employees (and their spouses and children under the age of 21) of
Union Bank of California, N.A., HighMark's current or former distributors or
their respective affiliated companies who currently own Shares of HighMark Funds
which were purchased before April 30, 1997.
This Prospectus sets forth concisely the information about HighMark and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-800-734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference. This Prospectus relates only to the Fiduciary Shares of the Fixed
Income Funds. Interested persons who wish to obtain a prospectus for the other
Funds of HighMark may contact the Distributor at the above address and telephone
number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
- --------------------------------------------------------------------------------
[_______________, 1997]
Fiduciary Shares
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<PAGE> 367
SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Fiduciary Shares of the Intermediate-Term Bond, Bond, and Government Securities
Funds (each a "Fund" and sometimes referred to in this prospectus as the "Fixed
Income Funds.") This summary is qualified in its entirety by reference to the
more detailed information provided elsewhere in the Prospectus and in the
Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE INTERMEDIATE-TERM BOND FUND seeks
total return through investments in fixed-income securities. THE BOND FUND seeks
current income through investments in long-term, fixed-income securities. THE
GOVERNMENT SECURITIES FUND seeks to achieve total return consistent with the
preservation of capital by investing in a diversified portfolio of obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities. (See "INVESTMENT OBJECTIVES")
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE INTERMEDIATE-TERM BOND FUND
primarily invests in bonds. THE BOND FUND invests in long-term bonds. Bonds
include debt obligations such as bonds, notes, debentures and securities
convertible into or exercisable for debt obligations that are issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities; investments may also include zero-coupon obligations,
mortgage-related securities and asset-backed securities. THE GOVERNMENT
SECURITIES FUND invests primarily in debt obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities, including
mortgage-backed securities issued or guaranteed by U.S. government agencies.
(See "INVESTMENT POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. The market value of a Fund's fixed income investments
will change in response to interest rate changes and other factors. During
periods of falling interest rates, the value of outstanding fixed income
securities generally rises. Conversely, during periods of rising interest rates,
the value of such securities generally declines. (See "Risk Factors")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE SUB-ADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
Sub- Adviser to the Government Securities Fund. (See "The Sub-Advisor")
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<PAGE> 368
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark.
(See "The Administrator")
WHO IS THE CUSTODIAN? Union Bank of California, N.A., (the "Bank") serves as the
Custodian of HighMark's assets. (See "The Custodian")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective. Redemption orders must be placed prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) on any Business Day for the order to be effective that
day. (See "PURCHASE AND REDEMPTION OF SHARES")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Funds is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS")
-4-
<PAGE> 369
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY...............................................................3
FIXED INCOME FUNDS FEE TABLE..........................................7
FUND DESCRIPTION.....................................................13
INVESTMENT OBJECTIVE.................................................13
INVESTMENT POLICIES..................................................14
Intermediate-Term Bond Fund.....................................14
Bond Fund.......................................................14
Government Securities Fund......................................15
GENERAL..............................................................15
Money Market Instruments........................................15
Illiquid and Restricted Securities..............................16
Lending of Portfolio Securities.................................16
Risk Factors....................................................17
INVESTMENT LIMITATIONS...............................................18
Portfolio Turnover..............................................19
PURCHASE AND REDEMPTION OF SHARES....................................19
EXCHANGE PRIVILEGES..................................................20
DIVIDENDS............................................................21
FEDERAL TAXATION.....................................................22
SERVICE ARRANGEMENTS.................................................23
The Advisor.....................................................23
Administrator...................................................25
The Transfer Agent..............................................25
Distributor.....................................................26
Banking Laws....................................................26
Custodian.......................................................26
</TABLE>
-5-
<PAGE> 370
<TABLE>
<S> <C>
GENERAL INFORMATION..................................................27
Description of HighMark & Its Shares............................27
Performance Information.........................................27
Miscellaneous...................................................28
DESCRIPTION OF PERMITTED INVESTMENTS.................................29
</TABLE>
-6-
<PAGE> 371
FIXED INCOME FUNDS FEE TABLE
<TABLE>
<CAPTION>
Intermediate-Term Government
Bond Fund Bond Fund Securities Fund
--------- --------- ---------------
Fiduciary Fiduciary Fiduciary
Shares Shares Shares
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 0.00% 0.00% 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0% 0% 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable) 0% 0% 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0% 0% 0%
Exchange Fee(a) $ 0 $ 0 $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees 0.50% 0.50% 0.50%
12b-1 Fees 0.00% 0.00% 0.00%
Other Expenses (after voluntary reduction)(c) 0.25% 0.25% 0.25%
---- ---- ----
Total Fund Operating Expenses (after voluntary
reduction)(d) 0.75% 0.75% 0.75%
==== ==== ====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Intermediate-Term Bond Fund
Fiduciary Shares $8 $24 $42 $93
Bond Fund
Fiduciary Shares $8 $24 $42 $93
Government Securities Fund
Fiduciary Shares $8 $24 $42 $93
</TABLE>
The purpose of the tables above is to assist an investor in the Fixed
Income Funds in understanding the various costs and expenses that a Shareholder
will bear directly or indirectly. For a more complete discussion of each Fund's
annual operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
-7-
<PAGE> 372
(a) Certain entities (including Union Bank of California and its
affiliates) making investments in the Fixed Income Funds on behalf of
their customers may charge customers fees for services provided in
connection with the investment in, redemption of, and exchange of
Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES,
and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire
redemption payment made at the request of a Shareholder.
(c) OTHER EXPENSES for the Intermediate-Term Bond and Government Securities
Funds are based on each Fund's estimated expenses for the current
fiscal year. Absent voluntary fee waivers, OTHER EXPENSES would be
0.49% for the Fiduciary Shares of the Intermediate-Term Bond Fund,
0.51% for the Fiduciary Shares of the Bond Fund, and 0.52% for the
Fiduciary Shares of the Government Securities Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
0.99% for the Fiduciary Shares of the Intermediate-Term Bond Fund,
1.01% for the Fiduciary Shares of the Bond Fund, and 1.02% for the
Fiduciary Shares of the Government Securities Fund.
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<PAGE> 373
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect
to the Fiduciary Shares of the Bond Fund. Information prior to fiscal 1994 is
for Fiduciary Shares only. Financial highlights for the Bond Fund for the period
ended July 31, 1996 have been derived from financial statements audited by
Deloitte & Touche LLP, independent auditors for HighMark, whose report thereon
is included in the Statement of Additional Information. Prior to the fiscal year
ended July 31, 1996, Coopers & Lybrand L.L.P. served as independent auditors for
HighMark. Financial highlights for the Bond Fund for the years ended December
31, 1987, 1986 and 1985 have been derived from financial statements examined by
other auditors whose report thereon is on file with the Securities and Exchange
Commission. Financial highlights for the Bond Fund for the period from January
1, 1988 through June 22, 1988 are derived from unaudited financial statements
prepared by HighMark. The Intermediate-Term Bond Fund and the Government
Securities Fund had not commenced operations in HighMark as of July 31, 1996.
The Bond Fund offered a single class of shares (now designated
Fiduciary Shares) throughout the periods shown.
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<PAGE> 374
BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, YEAR ENDED YEAR ENDED JULY 31,
------------------- JULY 31, -------------------
1996 1995 1994(a) 1993 1992
---- ---- ------- ---- ----
FIDUCIARY FIDUCIARY FIDUCIARY
--------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.38 $10.11 $11.13 $11.02 $10.29
---------- ---------- ---------- ---------- ----------
Investment Activities
Net investment income 0.66 0.64 0.63 0.70 0.67
Net realized and unrealized gains
(losses) on investments (0.16) 0.27 (0.97) 0.35 0.77
---------- ---------- ---------- ---------- ----------
Total from Investment Activities 0.50 0.91 (0.34) 1.05 1.44
---------- ---------- ---------- ---------- ----------
Distributions
Net investment income (0.65) (0.64) (0.63) (0.70) (0.67)
Net realized gains (0.01) (0.24) (0.04)
In excess of net realized gains . . (0.04) . .
Total Distributions (0.65) (0.64) (0.68) (0.94) (0.71)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period $10.23 $10.38 $10.11 $11.13 $11.02
========== ========== ========== ========== ==========
Total Return 4.81% 9.43% (3.14)% 10.07% 14.43%
Ratios/Supplementary Data:
Net Assets at end of period (000) $60,374 $59,758 $64,185 $33,279 $21,651
Ratio of expenses to average net
assets 0.89% 0.92% 0.86% 0.93% 0.91%
Ratio of net investment income to
average net assets 6.10% 6.35% 6.11% 6.41% 6.23%
Ratio of expenses to average net
assets* 1.61% 1.64% 1.37% 1.55% 1.55%
Ratio of net investment income to
average net assets* 5.38% 5.62% 5.60% 5.79% 5.59%
Portfolio turnover 20.88% 36.20% 44.33% 58.81% 79.56%
<CAPTION>
YEAR ENDED JULY 31, JUNE 23, 1988
------------------- TO JULY 31,
1991 1990 1989 1988(d)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.18 $10.42 $9.86 $10.00
---------- --------- --------- ---------
Investment Activities
Net investment income 0.78 0.79 0.82 0.09
Net realized and unrealized gains
(losses) on investments 0.04 (0.25) 0.56 (0.14)
---------- --------- --------- ---------
Total from Investment Activities 0.82 0.54 1.38 (0.05)
---------- --------- --------- ---------
Distributions
Net investment income (0.71) (0.78) (0.82) (0.09)
Net realized gains
In excess of net realized gains . . . .
Total Distributions (0.71) (0.78) (0.82) (0.09)
---------- --------- --------- ---------
Net Asset Value, End of Period $10.29 $10.18 $10.42 $9.86
========== ========= ========= =========
Total Return 8.99% 5.52% 14.79% (0.96)%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) $10,799 $6,974 $4,655 $3,487
Ratio of expenses to average net
assets 0.79% 1.01% 1.18% 1.04%(b)
Ratio of net investment income to
average net assets 7.61% 7.77% 8.24% 8.63%(b)
Ratio of expenses to average net
assets* 1.59% 1.94% 2.11% 2.06%(b)
Ratio of net investment income to
average net assets* 6.81% 6.84% 7.31% 7.61%(b)
Portfolio turnover 65.81% 53.50% 24.83% 0.00%
<FN>
(a) On June 20, 1994, the Bond Fund commenced offering Investor Shares (now
called "Retail Shares") and designated existing shares as Fiduciary
Shares.
(b) Annualized.
(c) Not annualized.
(d) The Bond Fund commenced operations on June 23, 1988 as a result of the
reorganization involving the Bond Portfolio of the IRA Collective
Investment Fund described under GENERAL INFORMATION-- Reorganization of
The IRA Fund & HighMark.
* During the period the investment advisory and administration fees were
voluntarily reduced. If such voluntary fee reductions had not occurred,
the ratios would have been as indicated.
</TABLE>
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<PAGE> 375
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS)
THE IRA COLLECTIVE INVESTMENT FUND BOND PORTFOLIO
<TABLE>
<CAPTION>
JAN. 1,
1988
THROUGH
JUNE 22, YEAR ENDED YEAR ENDED
1988 DEC. 31, DEC. 31,
(UNAUDITED) 1987 1986
----------- ---- ----
<S> <C> <C> <C>
Investment income $ 0.503 $ 1.061 $ 1.129
Operating expenses 0.065 0.128(b) 0.119(b)
-------- -------- --------
Net investment income 0.438 0.933 1.010
Dividends from net investment
income (0.438) (0.933) (1.010)
Net realized and unrealized
gain (loss) on investments (0.050) (0.966) 0.947
-------- -------- --------
Increase (decrease) in net
asset value (0.050) (0.966) 0.947
Net Asset Value:
Beginning of period 11.281 12.247 11.300
-------- -------- --------
End of period $ 11.231 $ 11.281 $ 12.247
======== ======== ========
Ratio of expenses to average
net assets(a)(b) 1.20% 1.09% 0.92%
Ratio of net investment income
to average net assets(a) 8.03% 7.93% 7.83%
Portfolio turnover 0.00% 0.00% 1.61%
Number of Shares/units
outstanding at end of period 317,633 344,456 206,664
<FN>
(a) Annualized based on the period for which assets were held.
(b) The expenses shown are not representative of expenses actually incurred
by the Bond Portfolio through May 31, 1987. During mid-May 1985, The
Bank of California, N.A., investment adviser to the Bond Portfolio,
commenced charging its management fee, and commencing June 1, 1987,
operating expenses were charged to the Bond Portfolio. Had the maximum
allowable operating expenses and management fees been paid by the Bond
Portfolio for the entire period pursuant to the Management Agreement
between the Bond Portfolio and The Bank of California, N.A., the per
unit expenses and net investment income would have been as follows:
</TABLE>
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<TABLE>
<CAPTION>
JAN. 1,
1988
THROUGH
JUNE 22, YEAR ENDED YEAR ENDED
1988 DEC. 31, DEC. 31,
(UNAUDITED) 1987 1986
----------- ---- ----
<S> <C> <C> <C>
Expenses $ 0.240 $ 0.226 $ 0.231
Net investment income 0.263 0.793 0.779
Net asset value, end of year 11.231 11,281 12.247
Expenses as a percentage of
average net asset 2.00%(a) 2.00% 2.00%
</TABLE>
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FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes, (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Fiduciary
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Fiduciary Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The investment objectives of the Funds are as follows:
The Intermediate-Term Bond Fund seeks total return through investments in
fixed-income securities.
The Bond Fund seeks current income through investments in long-term,
fixed-income securities.
The Government Securities Fund seeks to achieve total return consistent with the
preservation of capital by investing in a diversified portfolio of obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
The investment objectives and certain of the investment limitations of the
Intermediate-Term Bond Fund, the Bond Fund, and the Government Securities Fund
may not be changed without a vote of the holders of a majority of the
outstanding Shares of the respective Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that a Fund will
achieve its investment objective.
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INVESTMENT POLICIES
INTERMEDIATE-TERM BOND FUND
Under normal market conditions, at least 65% of the Intermediate-Term Bond
Fund's assets will be invested in bonds. For purposes of this policy "bonds"
include (i) corporate bonds and debentures rated at the time of purchase as
"investment grade" (one of the four highest bond rating categories by a
nationally recognized statistical rating organization ("NRSRO") i.e., AAA, AA,
A, or BBB by Standard & Poor's Corporation ("S&P") or Aaa, Aa, A, or Baa by
Moody's Investors Service ("Moody's")) or determined by the Advisor to be of
comparable quality; (ii) Yankee Bonds and Eurodollar instruments; (iii) notes or
bonds issued by the U.S. Government and its agencies and instrumentalities (such
as Government National Mortgage Association ("GNMA") securities); (iv)
mortgage-backed securities, including privately issued mortgage-backed
securities and readily-marketable asset-backed securities, which must be rated
at the time of purchase as investment grade, or be determined by the Advisor to
be of comparable quality; (v) securities issued or guaranteed by foreign
governments, their political subdivisions, agencies or instrumentalities; (vi)
obligations of supranational entities such as the World Bank and the Asian
Development Bank; and (vii) zero coupon obligations. The remainder of the Fund's
assets may be invested in money market instruments.
The dollar-weighted average portfolio maturity of the Intermediate-Term Bond
Fund will be from three to ten years.
BOND FUND
The Bond Fund invests in fixed-income securities with maturities in excess of
one year, except for amounts held in money market instruments. Fixed-income
securities can have maturities of up to thirty years or more. Under normal
market conditions, the Bond Fund will invest at least 65% of the value of its
total assets in bonds and may invest up to 35% of its total assets in money
market instruments.
For purposes of this policy "bonds" include (i) corporate bonds and debentures
rated at the time of purchase as investment grade or determined by the Advisor
to be of comparable quality; (ii) Yankee Bonds and Eurodollar instruments; (iii)
notes or bonds issued by the U.S. Government and its agencies and
instrumentalities (such as GNMA securities); (iv) mortgage-backed securities,
including privately issued mortgage-backed securities and readily-marketable
asset-backed securities, which must be rated at the time of purchase as
investment grade, or be determined by the Advisor to be of comparable quality;
(v) securities issued or guaranteed by foreign governments, their political
subdivisions, agencies or instrumentalities; (vi) obligations of supranational
entities such as the World Bank and the Asian Development Bank; and (vii) zero
coupon obligations. The remainder of the Fund's assets may be invested in money
market instruments.
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<PAGE> 379
The dollar-weighted average portfolio maturity of the Bond Fund will be from
five to twenty years.
GOVERNMENT SECURITIES FUND
Under normal market conditions, the Government Securities Fund will invest at
least 80% of its assets in obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities, including mortgage-backed
securities issued or guaranteed by U.S. government agencies such as GNMA, the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") and repurchase agreements backed by such securities. The
Fund may invest any remaining assets in corporate bonds that are rated at the
time of purchase as investment grade or determined by the Sub-Advisor to be of
comparable quality; Yankee Bonds, including sovereign, supranational and
Canadian bonds; shares of other investment companies with similar investment
objectives; commercial paper; money market funds; privately issued
mortgage-backed and other readily-marketable asset-backed securities; and money
market instruments and cash.
The Sub-Advisor will seek to enhance the yield of the Fund by taking advantage
of yield disparities or other factors that occur in the government securities
and money markets. The Fund may dispose of any security prior to its maturity if
such disposition and reinvestment of the proceeds are expected to enhance its
yield consistent with the Sub-Advisor's judgment as to a desirable maturity
structure or if such disposition is believed to be advisable due to other
circumstances or considerations. The Fund will seek to achieve capital gains by
taking advantage of price appreciation caused by interest rate and credit
quality changes.
GENERAL
In the event that a security owned by the Fund is downgraded below the stated
rating categories, the Advisor will take appropriate action with regard to that
security.
MONEY MARKET INSTRUMENTS
Under normal market conditions, the Intermediate-Term Bond Fund and the Bond
Fund may invest up to 35% of their total assets in money market instruments, and
the Government Securities Fund may invest up to 20% of its total assets in money
market instruments. When market conditions indicate a temporary "defensive"
investment strategy as determined by the Advisor, a Fund may invest more than
the above-stated percentages of its total assets in money market instruments. A
Fund will not be pursuing its investment objective to the extent that a
substantial portion of its assets are invested in money market instruments.
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<PAGE> 380
ILLIQUID AND RESTRICTED SECURITIES
Each Fund shall limit investment in illiquid securities to 15% or less of its
net assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, a Fund may lend its portfolio securities
to broker-dealers, banks or other institutions. A Fund may lend portfolio
securities in an amount representing up to 33 1/3% of the value of the Fund's
total assets.
OTHER INVESTMENTS
The Funds may enter into repurchase agreements and reverse repurchase
agreements.
The Fixed Income Funds may enter into forward commitments or purchase securities
on a "when-issued" basis. Each Fixed Income Fund expects that commitments by a
Fund to enter into forward commitments or purchase when-issued securities will
not exceed 25% of the value of the Fund's total assets under normal market
conditions. The Fixed Income Funds do not intend to purchase when-issued
securities or enter into forward commitments for speculative or leveraging
purposes but only for the purpose of acquiring portfolio securities.
A Fund may invest up to 5% of its total assets in the securities of any one
registered investment company, but may not own than 3% of the securities of any
one registered investment company or invest more than 10% of its assets in the
securities of other registered investment companies. In accordance with an
exemptive order issued to HighMark by the SEC, such other registered investment
company securities may include registered securities of a money market fund of
HighMark, and such companies may include companies for which the Advisor or a
Sub-Advisor to a Fund of HighMark, or an affiliate of such Advisor or
Sub-Advisor serves as investment advisor, administrator or distributor. Because
other registered investment companies employ an investment advisor, such
investment by a Fund may cause Shareholders to bear duplicative fees. The
Advisor will waive its fees attributable to the assets of the investing Fund
invested in a money market fund of HighMark, and, to the extent required by
applicable law, the Advisor will waive its fees attributable to the assets of
the Fund invested in any investment company. Some Funds are subject to
additional restrictions on investment in other investment companies. See
"INVESTMENT RESTRICTIONS" in the Statement of Additional Information.
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<PAGE> 381
A Fund may invest in futures and options on futures for the purpose of achieving
the Fund's objectives and for adjusting portfolio duration. The Fund may invest
in futures and related options based on any type of security or index traded on
U.S. or foreign exchanges or over the counter, as long as the underlying
security, or securities represented by an index, are permitted investments of
the Fund. The Fund may enter into futures contracts and related options only to
the extent that obligations under such contracts or transactions represent not
more than 10% of the Fund's assets.
Certain of the obligations in which the Funds may invest may be variable or
floating rate instruments, may involve a conditional or unconditional demand
feature, and may include variable amount master demand notes.
For further information, see "Description of Permitted Investments."
RISK FACTORS
In addition to credit risk which relates to the ability of an issuer to make
payments of principal and interest, all types of bonds are also subject to
market risk. Market risk relates to changes in a security's value as a result of
interest rate changes generally. An increase in interest rates will generally
reduce the value of the investments in the Fixed Income Funds and a decline in
interest rates will generally increase the value of those investments.
Accordingly, the net asset value of the Fund's shares will vary as a result of
changes in the value of the securities in a Fund's portfolio. Therefore, an
investment in the Funds may decline in value, resulting in a loss of principal.
Because interest rates vary, it is impossible to predict the income or yield of
the Fund for any particular period.
Depending upon prevailing market conditions, the Fixed Income Funds may purchase
debt securities at a discount from face value, which produces a yield greater
than the coupon rate. Conversely, if debt securities are purchased at premium
over face value, the yield will be lower than the coupon rate. In making
investment decisions, the Advisor will consider many factors other than current
yield, including the preservation of capital, the potential for realizing
capital appreciation, maturity, and yield to maturity.
Securities rated BBB by S&P or Baa by Moody's are considered investment grade,
but are deemed by these rating services to have some speculative
characteristics, and adverse economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case with higher grade bonds.
Each of the Fixed Income Funds may invest in securities issued or guaranteed by
foreign corporations or foreign governments, their political subdivisions,
agencies or instrumentalities and obligations of supranational entities such as
the World Bank and the Asian Development Bank. Any investments in these
securities will be in accordance with a Fund's investment objective and
policies, and are subject to special risks, such as adverse political and
economic
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<PAGE> 382
developments, possible seizure, nationalization or expropriation of foreign
investments, less stringent disclosure requirements, changes in foreign currency
exchange rates, increased costs associated with the conversion of foreign
currency into U.S. dollars, the possible establishment of exchange controls or
taxation at the source or the adoption of other foreign governmental
restrictions. To the extent that a Fund may invest in securities of foreign
issuers that are not traded on any exchange, there is a further risk that these
securities may not be readily marketable. The Fixed Income Funds will not hold
foreign currency for investment purposes.
For further information regarding risks of particular permitted investments, see
"Description of Permitted Investments."
INVESTMENT LIMITATIONS
Each Fund may not:
1) Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies, or instrumentalities, if,
immediately after the purchase, more than 5% of the value of such Fund's total
assets would be invested in the issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the issuer's
outstanding voting securities (except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations);
2) Purchase any securities that would cause more than 25% of such
Fund's total assets at the time of purchase to be invested in securities of one
or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
and (c) utilities will be divided according to their services (for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry); and
3) Make loans, except that a Fund may purchase or hold debt
instruments, lend portfolio securities, and enter into repurchase agreements as
permitted by its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies and
may not be changed without a vote of a majority of the outstanding Shares of the
respective Fund. Additional fundamental and non-fundamental investment
limitations are set forth in the Statement of Additional Information.
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<PAGE> 383
PORTFOLIO TURNOVER
A Fund will not purchase securities solely for the purpose of short-term trading
nor will the Fund's portfolio turnover rate be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. Each of
the Fixed Income Fund's portfolio turnover rate may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates
generally will result in correspondingly higher brokerage and other transactions
costs to the Fixed Income Funds and could involve the realization of capital
gains that would be taxable when distributed to shareholders of the relevant
Fixed Income Fund. See FEDERAL TAXATION.
PURCHASE AND REDEMPTION OF SHARES
As noted above, each Fund (except the Government Securities Fund, which is
offered in only Fiduciary Shares) is divided into two classes of Shares, Retail
and Fiduciary. Fiduciary Shares may be purchased at net asset value. Only the
following investors qualify to purchase the Fixed Income Funds' Fiduciary
Shares: (i) fiduciary, advisory, agency, custodial and other similar accounts
maintained with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA
accounts established with The Bank of California, N.A. and invested in any of
HighMark's Equity or Fixed Income Funds prior to June 20, 1994, which have
remained continuously open thereafter and which are not considered to be
fiduciary accounts; (iii) Shareholders who currently own Shares of HighMark's
Equity or Fixed Income Funds that were purchased prior to June 20, 1994 within
an account registered in their name with the Funds; and (iv) present and retired
directors, officers and employees (and their spouses and children under the age
of 21) of Union Bank of California, N.A., HighMark's current or former
distributors or their respective affiliated companies who currently own Shares
of HighMark Funds which were purchased before April 30, 1997. For a description
of investors who qualify to purchase Retail Shares, see the Retail Shares
prospectus of the Fixed Income Funds.
Purchases and redemptions of Shares of the Fixed Income Funds may be made on
days on which both the New York Stock Exchange and Federal Reserve wire system
are open for business ("Business Days"). The minimum initial investment is
generally $1,000 and the minimum subsequent investment is generally $100. For
present and retired directors, officers, and employees (and their spouses and
children under the age of 21) of Union Bank of California, SEI Financial
Services Company and their affiliates, the minimum initial investment is $250
and the minimum subsequent investment is $50. A Fund's initial and subsequent
minimum purchase amounts may be waived in the Distributor's discretion if
purchases are made in connection with Individual Retirement Accounts, Keoghs,
payroll deduction plans, 401(k) or similar programs or accounts. However, the
minimum investment may be waived. Shareholders may place orders by telephone.
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<PAGE> 384
Purchase orders will be effective if the Distributor receives an order before
1:00 p.m., Pacific time (4:00 p.m., Eastern time) and the Custodian receives
Federal funds before the close of business on the next Business Day. The
purchase price of Shares of a Fund is the net asset value next determined after
a purchase order is received and accepted by HighMark. The net asset value per
Share of a Fund is determined by dividing the total market value of a Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of a Fund. Net asset value per share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day.
Purchases will be made in full and fractional shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor of the Advisor determines that it is not in the best
interest of HighMark and/or its Shareholders to accept such order.
Shares of the Funds are offered only to residents of states in which the Shares
are eligible for purchase.
Shareholders who desire to redeem shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Funds reserve the right to make payment on
redemptions in securities rather than cash.
Neither HighMark's transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. HighMark and its
transfer agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures may include taping of telephone
conversations. If market conditions are extraordinarily active or other
extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issues two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to each Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
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<PAGE> 385
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Fiduciary Shares for Fiduciary Shares of another Fund on the
basis of the relative net asset value of the Fiduciary Shares exchanged.
Shareholders may also exchange Fiduciary Shares of a Fund for Retail Shares of
another Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per share plus the appropriate sales load.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including Participating Organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in a Fixed Income Fund may do so by
contacting the Transfer Agent at 1-800-734-2922. Exchanges will be effected on
any Business Day at the net asset value of the Funds involved in the exchange
next determined after the exchange request is received by the Transfer Agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
DIVIDENDS
The net income of each of the Fixed Income Funds is declared and paid monthly as
a dividend to Shareholders of record at the close of business on the day of
declaration. Net realized capital gains are distributed at least annually to
Shareholders of record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of a Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect
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<PAGE> 386
to dividends and distributions having record dates after notice has been
received. Dividends paid in additional Shares receive the same tax treatment as
dividends paid in cash.
FEDERAL TAXATION
Each Fixed Income Fund intends to qualify for treatment as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and to distribute substantially all of its net investment income and
net realized capital gains so that each Fund is not required to pay federal
taxes on these amounts. Because all of the net investment income of the Fixed
Income Funds is expected to be derived from interest, it is anticipated that no
part of any distribution will be eligible for the federal dividends received
deduction.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. Distributions by the Fund of the excess of net
long-term capital gain over net short-term capital loss is taxable to
Shareholders as long-term capital gain in the year with respect to which it is
received, regardless of how long the Shareholder has held Shares of the Fund.
Such distributions are not eligible for the dividends received deduction. If a
Shareholder disposes of Shares in a Fund at a loss before holding such Shares
for longer than six months, such loss will be treated as a long-term capital
loss to the extent the Shareholder has received long-term capital gain dividends
on the Shares.
Prior to purchasing Shares of the Fixed Income Funds, the impact of dividends or
capital gain distributions that are expected to be declared or have been
declared, but not paid, should be carefully considered. Dividends or capital
gain distributions received after a purchase of Shares are subject to federal
income taxes, although in some circumstances, the dividends or distributions may
be, as an economic matter, a return of capital to the Shareholder. A Shareholder
should consult his or her advisor for specific advice about the tax consequences
to the Shareholder of investing in a Fund.
Fund investments in foreign securities may be subject to withholding taxes at
the source on dividend or interest payments. In that case, the Fund's yield on
those securities would be decreased. The Fund does not expect to be eligible to
elect to permit shareholders to claim a credit or deduction on their income tax
return for their pro rata share of such taxes.
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
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<PAGE> 387
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting each Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
serves as the Fixed Income Funds' investment advisor. Subject to the general
supervision of HighMark's Board of Trustees, the Advisor manages each Fund in
accordance with its investment objective and policies, makes decisions with
respect to and places orders for all purchases and sales of the Fund's
investment securities, and maintains the Fund's records relating to such
purchases and sales.
All investment decisions for the Fixed Income Funds are made by a team of
investment professionals, all of whom take an active part in the decision making
process. The team leader for both the Intermediate-Term Bond Fund and the Bond
Fund is E. Jack Montgomery. Mr. Montgomery is a Vice President of the Advisor
and has served as the portfolio manager of the Bond Fund since June, 1994. Prior
to joining the Advisor, Mr. Montgomery was employed by the San Francisco
Employees' Retirement System and, prior to that, First Interstate Bank of
Oregon. Mr. Montgomery graduated from the University of Oklahoma in 1971 and
earned his M.B.A. from the University of Oregon. Investment decisions for the
Government Securities Fund are primarily made by the Sub-Advisor as described
below.
For the expenses assumed and services provided by the Advisor as each Fund's
investment advisor, Union Bank of California receives a fee from the
Intermediate-Term Bond Fund, the Bond Fund, and the Government Securities Fund
computed daily and paid monthly, at the annual rate of fifty one-hundredths of
one percent (.50%) of the Fund's average daily net assets. Depending on the size
of the Fund, this fee may be higher than the advisory fee paid by most mutual
funds, although the Board of Trustees believes it will be comparable to advisory
fees paid by many funds having similar objectives and policies. Union Bank of
California may from time to time agree to voluntarily reduce its advisory fee,
however, it is not currently doing so. While there can be no assurance that
Union Bank of California will choose to make such an agreement, any voluntary
reductions in Union Bank of California's advisory fee will
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<PAGE> 388
lower the Fund's expenses, and thus increase the Fund's yield and total return,
during the period such voluntary reductions are in effect. During HighMark's
fiscal year ended July 31, 1996, Union Bank of California received investment
advisory fees from the Bond Fund aggregating 0.45% of the Fund's average daily
net assets. As of the date of this prospectus, the Intermediate-Term Bond Fund
and the Government Securities Fund had not yet commenced operations in HighMark.
On April 1, 1996, The Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group, which, as of June
30, 1996, had approximately $13.4 billion of assets under management. The
Advisor, with a team of approximately 45 stock and bond research analysts,
portfolio managers and traders, has been providing investment management
services to individuals, institutions and large corporations since 1917.
THE SUB-ADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "Sub-Advisor") have
entered into an investment sub-advisory agreement relating to the Government
Securities Fund (the "Investment Sub-Advisory Agreement"). Under the Investment
Sub-Advisory Agreement, the Sub-Advisor makes the day-to-day investment
decisions for the assets of the Government Securities Fund, subject to the
supervision of and policies established by the Advisor and the Trustees of
HighMark.
Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, operates as a wholly-owned subsidiary of The
Bank of Tokyo-Mitsubishi, Limited. The Sub-Advisor was formed by the combination
on April 1, 1996 of Bank of Tokyo Trust Company, a wholly-owned subsidiary of
the Bank of Tokyo, Ltd., and Mitsubishi Bank Trust Company of New York, a
wholly-owned subsidiary of The Mitsubishi Bank, Ltd. Bank of Tokyo Trust Company
was the surviving entity, and changed its name to Bank of Tokyo-Mitsubishi Trust
Company. Bank of Tokyo Trust Company was established in 1955 and has provided
trust services since that time and management services since 1965.
The Sub-Advisor serves as portfolio manager to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of June 30, 1996, the Sub-Advisor managed
$700 million in individual
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portfolios and collective funds. In addition, the Sub-Advisor also serves as
Sub-Advisor to HighMark's Convertible Securities, Emerging Growth and Blue Chip
Growth Funds.
The Sub-Advisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .20% of the average daily net
assets of the Government Securities Fund. As of the date of this prospectus,
the Government Securities Fund had not yet commenced operations in HighMark.
Stephen W. Blocklin will serve as portfolio manager of the Government Securities
Fund. Mr. Blocklin has been a Vice President with the Sub-Advisor and its
predecessor, Bank of Tokyo Trust Company since December, 1993. From September
1988 to December, 1993, he served as a senior fixed income fund manager in the
institutional investment management group at First Fidelity Bancorporation.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the average daily net assets of the Funds.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Fiduciary Shares.
Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of each Fund,
for which it receives a fee paid by the Administrator at the annual rate of up
to 0.05% of the average daily net assets of the Funds. Union Bank of California
has voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Fiduciary Shares
of HighMark, for which services it receives a fee.
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SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.03% of average
daily net assets for the Intermediate-Term Bond Fund, 0.01% of the average daily
net assets for the Bond Fund, and 0.00% of the average daily net assets for the
Government Securities Fund.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor. Fiduciary Shares are not subject
to HighMark's Distribution Plan or a distribution fee.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Funds
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of each
Fund, for which it receives compensation from SEI Fund Resources, without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Funds.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Fixed Income Funds. The Custodian holds cash securities
and other assets of HighMark as required by the 1940 Act.
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Services performed by Union Bank of California, as the Funds' shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund, and the California Intermediate Tax-Free Bond Fund, had been
offered for sale in HighMark. Shares of each Fund are freely transferable, are
entitled to distributions from the assets of the Fund as declared by the Board
of Trustees, and, if HighMark were liquidated, would receive the net assets
attributable to that Fund. Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Retail Shares of the Fixed Income Funds, interested persons may
contact the Distributor for a prospectus at 1-800-734-2922.
HighMark believes that as of November 22, 1996, Union Bank of California (475
Sansome Street, Post Office Box 45000, San Francisco, CA 94104) was the
Shareholder of record of 88.27% of the Fiduciary Shares of the Bond Fund. As of
November 22, 1996, the Intermediate-Term Bond Fund and the Government Securities
Fund had not yet commenced operations in HighMark.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Fiduciary
Shares of each Fixed Income Fund. Performance information is computed separately
for a Fund's Retail and Fiduciary Shares in accordance with the formulas
described below.
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The aggregate total return and average annual total return of the Fixed Income
Funds may be quoted for the life of each Fund and for ten-year, five-year and
one-year periods, in each case through the most recent calendar quarter.
Aggregate total return is determined by calculating the change in the value of a
hypothetical $1,000 investment in a Fund over the applicable period that would
equate the initial amount invested to the ending redeemable value of the
investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing a Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the average positive or
negative investment results that an investor in a Fund would have experienced on
an annual basis from changes in Share price and reinvestment of dividends and
capital gain distributions.
The yield of a Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of a Fund is determined by dividing the income and capital
gains distributions, or where indicated the income distributions alone, on a
Share of the Fund over a twelve-month period by the per Share public offering
price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
All performance information presented for a Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in a Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be
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entitled to vote on matters submitted to a Shareholder vote relating to the
Distribution Plan. HighMark is not required to hold regular annual meetings of
Shareholders, but may hold special meetings from time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
Each Fund invests in only the instruments permitted by its individual investment
objective and policies.
AMERICAN DEPOSITARY RECEIPTS (ADRs) -- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Debt Instruments secured by
company receivables, truck and auto loans, leases, and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such securities. Asset-backed securities entail
prepayment risk, which may vary depending on the type of asset, but is generally
less than the prepayment risk associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of
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depreciation or damage to the collateral (usually automobiles) securing certain
contracts, or other factors. If consistent with their investment objectives and
policies, the Fixed Income Funds may invest in other asset-backed securities
that may be developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
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FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total
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assets of $1 billion or more as shown on their last published financial
statements at the time of investment; (iii) short-term corporate obligations
rated within the three highest rating categories by a NRSRO (e.g., at least A by
S&P or A by Moody's) at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (iv) general obligations issued by the
U.S. Government and backed by its full faith and credit, and obligations issued
or guaranteed as to principal and interest by agencies or instrumentalities of
the U.S. Government (e.g., obligations issued by Farmers Home Administration,
Government National Mortgage Association, Federal Farm Credit Bank and Federal
Housing Administration); (v) receipts, including TRs, TIGRs and CATS; (vi)
repurchase agreements involving such obligations; (vii) loan participations
issued by a bank in the United States with assets exceeding $1 billion and for
which the underlying loan is issued by borrowers in whose obligations the Fund
may invest; (viii) money market funds and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether due to changes in interest
rates or prepayments of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of mortgage-related securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related security may decline when interest rates rise, the converse
is not necessarily true because in periods of declining interest rates the
mortgages underlying the securities are prone to prepayment which results in
amounts being available for reinvestment which are likely to be invested at a
lower
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interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining interest
rates may lead to prepayment of underlying mortgages, automobile sales contracts
or credit card receivables, the prices of
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mortgage-related and asset-backed securities may not rise with a decline in
interest rates. Mortgage-backed and asset-backed securities and CMOs are
extremely sensitive to the rate of principal prepayment. Similarly, callable
corporate bonds also present risk of prepayment. During periods of falling
interest rates, securities that can be called or prepaid may decline in value
relative to similar securities that are not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
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In addition, certain Funds may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to
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102% of the resale price stated in the agreement. Repurchase agreements
involving government securities are not subject to a Fund's fundamental
investment limitation on purchasing securities of any one issuer. If the seller
defaults on its repurchase obligation or becomes insolvent, the Fund holding
such obligations would suffer a loss to the extent that either the proceeds from
a sale of the underlying portfolio securities were less than the repurchase
price or the Fund's disposition of the securities was delayed pending court
action. Securities subject to repurchase agreements will be held by a qualified
custodian or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by a Fund under the Investment Company Act
of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of the Group has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, the Group's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities
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are recorded as an asset and are subject to changes in value based upon changes
in the general level of interest rates. Therefore, the purchase of securities on
a "when-issued" basis or forward commitments may increase the risk of
fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or
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supported by the issuing agencies' right to borrow from the U.S. Treasury. The
issues of other agencies are supported only by the credit of the instrumentality
(e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
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ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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HIGHMARK FIXED INCOME FUNDS
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
SUB-ADVISOR
Bank of Tokyo-Mitsubishi Trust Company
1251 Avenue of the Americas
New York, New York 10116
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources &
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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<PAGE> 405
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 407
CROSS REFERENCE SHEET
THE HIGHMARK CALIFORNIA INTERMEDIATE
TAX-FREE BOND FUND
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objective;
Investment Policies & Fund Portfolio;
General Information--Description of
HighMark & Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities How to Purchase Shares; Exchange
Privileges; Redemption of Shares;
Dividends; Federal Taxation; Service
Arrangements--Administrator; Distributor;
The Distribution Plan; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
7. Purchase of Securities Being Offered How to Purchase Shares; Exchange
Privileges; Service Arrangements--
Administrator; Distributor; The
Distribution Plan
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
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<PAGE> 408
HIGHMARK FUNDS
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's California Intermediate Tax-Free Bond Fund.
RETAIL SHARES
HighMark's Retail Shares are offered to investors who are not fiduciary clients
of Union Bank of California, N.A., and who are not otherwise eligible for
HighMark's Fiduciary Shares.
This Prospectus sets forth concisely the information about HighMark and the
California Intermediate Tax-Free Bond Fund that a prospective investor should
know before investing. Investors are advised to read this Prospectus and retain
it for future reference. A Statement of Additional Information dated the same
date as this Prospectus has been filed with the Securities and Exchange
Commission and is available without charge by writing the Distributor, SEI
Financial Services Company, 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658, or by calling 1-800-734-2922. The Statement of Additional
Information is incorporated into this Prospectus by reference. This Prospectus
relates only to the Retail Shares of the California Intermediate Tax-Free Bond
Fund. Interested persons who wish to obtain a prospectus for the other Funds of
HighMark may contact the Distributor at the above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
[_______________, 1997]
Retail Shares
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SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Retail Shares of the HighMark California Intermediate Tax-Free Bond Fund (the
"California Intermediate Tax-Free Bond Fund" or the "Fund"). This summary is
qualified in its entirety by reference to the more detailed information provided
elsewhere in the Prospectus and in the Statement of Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund seeks to provide high current
income that is exempt from federal and State of California income taxes. (See
"INVESTMENT OBJECTIVE")
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund invests primarily in
investment grade or better bonds and notes issued by the State of California,
its agencies, instrumentalities and political sub-divisions, the income on which
is exempt from regular federal and State of California personal income taxes
("California Municipal Securities"). (See "INVESTMENT POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUND? The investment
policies of the Fund entail certain risks and considerations of which an
investor should be aware. Shares of the Fund will fluctuate in value with the
value of the Fund's underlying portfolio securities. Values of fixed income
securities in which the Fund invests tend to vary inversely with interest rates,
and may be affected by other market and economic factors affecting the State of
California as well. (See "Risk Factors")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator")
WHO IS THE CUSTODIAN? Union Bank of California, N.A., (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian")
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<PAGE> 410
WHO IS THE SHAREHOLDER SERVICING AGENT? State Street Bank and Trust Company
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Retail Shares of HighMark. (See "Shareholder Servicing Agent")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
HighMark's Shares. (See "THE DISTRIBUTOR")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective (plus any applicable sales charge). Redemption orders must be placed
prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day
for the order to be effective that day. (See "HOW TO PURCHASE SHARES and
REDEMPTION OF SHARES")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS")
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.....................................................................3
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE........................7
FUND DESCRIPTION............................................................9
INVESTMENT OBJECTIVE........................................................9
INVESTMENT POLICIES.........................................................9
GENERAL....................................................................11
Money Market Instruments..............................................11
Illiquid and Restricted Securities....................................11
Lending of Portfolio Securities.......................................11
Risk Factors..........................................................12
INVESTMENT LIMITATIONS.....................................................13
Portfolio Turnover....................................................13
HOW TO PURCHASE SHARES.....................................................14
How to Purchase By Mail...............................................15
How to Purchase By Wire...............................................15
How to Purchase through an Automatic Investment Plan ("AIP")..........15
How to Purchase Through Financial Institutions........................15
Sales Charges.........................................................16
Letter of Intent......................................................17
Rights of Accumulation................................................17
Sales Charge Waivers..................................................18
Reductions for Qualified Groups ......................................19
EXCHANGE PRIVILEGES........................................................20
REDEMPTION OF SHARES.......................................................21
By Mail...............................................................21
Telephone Transactions................................................21
Systematic Withdrawal Plan ("SWP")....................................22
Other Information Regarding Redemptions...............................22
</TABLE>
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<TABLE>
<S> <C>
DIVIDENDS............................................................23
TAXES................................................................23
Federal Taxation................................................23
California Taxes................................................25
SERVICE ARRANGEMENTS.................................................26
The Advisor.....................................................26
Administrator...................................................27
The Transfer Agent..............................................27
Distributor.....................................................28
The Distribution Plan...........................................28
Banking Laws....................................................29
Custodian.......................................................29
GENERAL INFORMATION..................................................30
Description of HighMark & Its Shares............................30
Performance Information.........................................30
Miscellaneous...................................................31
DESCRIPTION OF PERMITTED INVESTMENTS.................................32
</TABLE>
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CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE
<TABLE>
<CAPTION>
California Intermediate
Tax-Free Bond Fund
------------------
<S> <C>
Retail
Shares
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 3.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable)(b) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(c) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(d) 0.00%
12b-1 Fees (after voluntary reductions)(e) 0.00%
Other Expenses (after voluntary reduction)(f) 0.22%
Total Fund Operating Expenses (after voluntary reduction)(g) 0.22%
====
<FN>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
California Intermediate
Tax-Free Bond Fund
Retail Shares $32 $37 $42 $57
</TABLE>
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The purpose of the tables above is to assist an investor in the California
Intermediate Tax-Free Bond Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long-term shareholders of Retail Shares may pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by rules
of the National Association of Securities Dealers, Inc.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the California Intermediate Tax-Free Bond Fund on
behalf of their customers may charge customers fees for services provided
in connection with the investment in, redemption of, and exchange of
Shares. (See HOW TO PURCHASE SHARES, EXCHANGE PRIVILEGES, REDEMPTION OF
SHARES, and SERVICE ARRANGEMENTS below)
(b) A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Retail Shares of the Fund
that were purchased without a sales charge in reliance upon the waiver
accorded to purchases in the amount of $1 million or more, but only where
such redemption request is made within one year of the date the Shares were
purchased.
(c) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder. (See REDEMPTION OF SHARES
below)
(d) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.50% for the Retail
Shares of the California Intermediate Tax-Free Bond Fund.
(e) As indicated under SERVICE ARRANGEMENTS -- the Distribution Plan below, the
Distributor may voluntarily reduce the 12b-1 fee. Absent voluntary fee
waivers, 12b-1 fees would 0.25% for the Fund. The Distributor reserves the
right to terminate its waiver at any time in its sole discretion.
(f) OTHER EXPENSES for the California Intermediate Tax-Free Bond Fund are based
on that Fund's estimated expenses for the current fiscal year. Absent
voluntary fee waivers, OTHER EXPENSES would be 0.74% for the Retail Shares
of the California Intermediate Tax-Free Bond Fund.
(g) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 1.49%
for the Retail Shares of the California Intermediate Tax-Free Bond Fund.
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<PAGE> 415
FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Retail
Shares, sales charges and the operation of HighMark's Distribution Plan, see HOW
TO PURCHASE SHARES and SERVICE ARRANGEMENTS below. (Retail Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The California Intermediate Tax-Free Bond Fund seeks to provide high current
income that is exempt from federal and State of California income taxes.
The investment objective and certain of the investment limitations of the
California Intermediate Tax-Free Bond Fund may not be changed without a vote of
the holders of a majority of the outstanding Shares of the Fund (as defined
under GENERAL INFORMATION--Miscellaneous below). There can be no assurance that
the Fund will achieve its investment objective.
INVESTMENT POLICIES
Under normal market conditions, the Fund will invest primarily in bonds and
notes issued by the State of California, its agencies, instrumentalities, and
political sub-divisions, the income on which is exempt from regular federal and
State of California personal income taxes ("California Municipal Securities").
The Fund may also invest in bonds and notes of other states, territories, and
possessions of the U.S. and their agencies, authorities, instrumentalities and
political sub-divisions which are exempt from federal income taxes, and in
shares of other investment companies, specifically money market funds, which
have similar investment objectives.
Under normal market conditions, at least 80% of the Fund's assets will be
invested in bonds and notes rated AAA, AA, A or BBB by Standard & Poor's
Corporation ("S&P"), Aaa, Aa, A or Baa by Moody's Investors Service ("Moody's"),
or AAA, AA, A or BBB by Fitch
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<PAGE> 416
Investors Service ("Fitch") and which pay interest that is not treated as a
preference item for purposes of the federal alternative maximum tax. The Fund
may purchase unrated securities that are determined by the Advisor to be of
comparable quality at the time of purchase pursuant to quality standards set by
the Board of Trustees. In the event that a security owned by the Fund is
downgraded below the stated ratings categories, the Advisor will take
appropriate action with regard to the security.
Under California law, a mutual fund must have at least 50% of its total assets
invested in California Municipal Securities at the end of each quarter of its
taxable year in order to be eligible to pay California residents dividends that
are wholly or partially exempt from California personal income taxes.
Accordingly, the Fund intends to maintain at least 65% of its assets in
California Municipal Securities and may invest up to 100% of its assets in such
securities.
The Fund has no restrictions on the maturity of municipal securities in which it
may invest. The dollar-weighted average portfolio maturity of the Fund will be
from three to ten years. Accordingly, the Fund seeks to invest in municipal
securities of such maturities which, in the judgment of the Advisor, will
provide a high level of current income consistent with prudent investment, with
consideration given to market conditions.
CALIFORNIA MUNICIPAL SECURITIES
The two principal classifications of California Municipal Securities are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit, and taxing power for the
payment of principal and interest. Revenue bonds are payable primarily from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source. Private activity bonds (formerly known as industrial revenue bonds) are
generally revenue bonds.
Certain California Municipal Securities are municipal lease revenue obligations
(or certificates of participation or "COPs"), which typically provide that the
municipality has no obligation to make lease or installment payments in future
years unless money is appropriated for such purpose. While the risk of
non-appropriation is inherent to COP financing, this risk is mitigated by the
Fund's policy to invest in COPs that are rated in one of the four highest rating
categories used by Moody's, S&P, or Fitch.
California Municipal Securities also include so-called Mello-Roos and assessment
district bonds, which are usually unrated instruments issued to finance the
building of roads and other public works and projects that are primarily secured
by real estate taxes levied on property located in the local community. Most of
these bonds do not seek agency ratings because the issues are too small, and in
most cases, the purchase of these bonds is based upon the Advisor's
determination that it is suitable for the Fund.
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Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments and may involve a conditional or unconditional demand
feature.
GENERAL
MONEY MARKET INSTRUMENTS
When market conditions indicate a temporary "defensive" investment strategy as
determined by the Advisor, the Fund may invest more than 20% of its total assets
in municipal obligations of other states or taxable money market instruments
including repurchase agreements. The Fund will not be pursuing its investment
objective to the extent that a substantial portion of its assets are invested in
taxable money market instruments.
ILLIQUID AND RESTRICTED SECURITIES
The Fund shall limit investment in illiquid securities to 15% or less of its net
assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities to broker-dealers, banks or other institutions. The Fund may lend
portfolio securities in an amount representing up to 33 1/3% of the value of the
Fund's total assets.
OTHER INVESTMENTS
The Fund may enter into repurchase agreements and reverse repurchase agreements.
The Fund may enter into forward commitments or purchase securities on a
"when-issued" basis. The Fund expects that commitments by it to enter into
forward commitments or purchase when-issued securities will not exceed 25% of
the value of the Fund's total assets under normal market conditions. The Fund
does not intend to purchase when-issued securities or forward commitments for
speculative or leveraging purposes but only for the purpose of acquiring
portfolio securities.
The Fund may invest up to 5% of its total assets in the securities of any one
registered investment company, but may not own more than 3% of the securities of
any one registered investment company or invest more than 10% of its assets in
the securities of other registered
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investment companies. In accordance with an exemptive order issued to HighMark
by the SEC, such other registered investment company securities may include
securities of a money market fund of HighMark, and such companies may include
companies for which the Advisor or a Sub-Advisor to a Fund of HighMark, or an
affiliate of such Advisor or Sub-Advisor serves as investment advisor,
administrator or distributor. Because other registered investment companies
employ an investment advisor, such investment by the Fund may cause Shareholders
to bear duplicative fees. The Advisor will waive its fees attributable to the
assets of the investing Fund invested in a money market fund of HighMark, and,
to the extent required by applicable law, the Advisor will waive its fees
attributable to the assets of the Fund invested in any investment company. Some
Funds are subject to additional restrictions on investment in other investment
companies. See "INVESTMENT RESTRICTIONS" in the Statement of Additional
Information.
The Fund may invest in futures and options on futures for the purpose of
achieving the Fund's objectives and for adjusting portfolio duration. The Fund
may invest in futures and related options related options based on any type of
security or index traded on U.S. or foreign exchanges or over the counter, as
long as the underlying security, or securities represented by an index, are
permitted investments of the Fund. The Fund may enter into futures contracts and
related options only to the extent that obligations under such contracts or
transactions represent not more than 10% of the Fund's assets.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
In addition to credit risk which relates to the ability of an issuer to make
payments of principal and interest, all types of bonds are also subject to
market risk. Market risk relates to changes in a security's value as a result of
interest rate changes generally. An increase in interest rates will generally
reduce the value of the investments in the Fund and a decline in interest rates
will generally increase the value of those investments. Accordingly, the net
asset value of the Fund's Shares will vary as a result of changes in the value
of the securities in the Fund's portfolio. Therefore, an investment in the Fund
may decline in value, resulting in a loss of principal. Because interest rates
vary, it is impossible to predict the income or yield of the Fund for any
particular period.
Changes by recognized rating agencies in the rating of any fixed income security
and in the ability of an issuer to make payments of interest and principal also
affect the value of these investments. Changes in the value of fund securities
will not affect cash income derived from these securities, but will affect the
Fund's net asset value.
The ability of the State of California and its political sub-divisions to
generate revenue through real property and other taxes and to increase spending
has been significantly restricted by various constitutional and statutory
amendments and voter-passed initiatives. Such limitations could affect the
ability of California state and municipal issuers to pay interest or repay
principal on their obligations. In addition, during the first half of the
decade, California faced
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severe economic and fiscal conditions and experienced recurring budget deficits
that caused it to deplete its available cash resources and to become
increasingly dependent upon external borrowings to meet its cash needs.
The financial difficulties experienced by the State of California and municipal
issuers during the recession resulted in the credit ratings of certain of their
obligations being downgraded significantly by the major rating agencies.
Securities rated BBB by S&P or Fitch or Baa by Moody's are considered investment
grade, but are deemed by these rating services to have some speculative
characteristics, and adverse economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case with higher grade bonds.
INVESTMENT LIMITATIONS
The Fund may not:
1. Purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities) if as a result more than 5% of
the total assets of the Fund would be invested in the securities of such issuer
provided, however, that the Fund may invest up to 25% of its total assets
without regard to this restriction as permitted by applicable law.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities, and provided further, that
utilities as a group will not be considered to be one industry, and wholly-owned
subsidiaries organized to finance the operations of their parent companies will
be considered to be in the same industries as their parent companies.
3. Make loans, except that the Fund may (a) purchase or hold debt
instruments in accordance with its investment objective and policies; (b) enter
into repurchase agreements; and (c) lend securities.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
PORTFOLIO TURNOVER
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The Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. The Fund's
portfolio turnover rate may vary greatly from year to year as well as within a
particular year. High portfolio turnover rates generally will result in
correspondingly higher brokerage and other transactions costs to the Fund and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the Fund. See FEDERAL TAXATION.
HOW TO PURCHASE SHARES
As noted above, the Fund is divided into two classes of Shares, Retail and
Fiduciary. Retail Shares may be purchased at net asset value plus a sales
charge. For a description of investors who qualify to purchase Fiduciary Shares,
see the Fiduciary Shares prospectus of the California Intermediate Tax-Free Bond
Fund. HighMark's Retail Shares are offered to investors who are not fiduciary
clients of Union Bank of California, N.A., and who are not otherwise eligible
for HighMark's Fiduciary Class.
Retail Shares are sold on a continuous basis by HighMark's Distributor, SEI
Financial Services Company. The principal office of the Distributor is 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658. If you wish to purchase Shares,
you may contact your investment professional or telephone HighMark at
1-800-734-2922.
The minimum initial investment is generally $1,000 and the minimum subsequent
investment is generally only $100. For present and retired directors, officers,
and employees (and their spouses and children under the age of 21) of Union Bank
of California, SEI Financial Services Company and their affiliates, the minimum
initial investment is $250 and the minimum subsequent investment is $50. The
Fund's initial and subsequent minimum purchase amounts may be waived if
purchases are made in connection with Individual Retirement Accounts, Keoghs,
payroll deduction plans, or 401(k) or similar plans. Purchases and redemption of
Shares of the Fund may be made on days on which both the New York Stock Exchange
and the Federal Reserve wire system are open for business ("Business Days").
Purchase orders for Shares will be executed at a per Share price equal to the
net asset value next determined after the receipt of the purchase order by the
Distributor (plus any applicable sales charge). The net asset value per Share of
the Fund is determined by dividing the total market value of the Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of the Fund. Net asset value per Share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any Business Day.
Purchases will be made in full and fractional Shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor determines that it is not in the best interest of HighMark
and/or its Shareholders to accept such order.
The securities in the Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method that HighMark's
Board of Trustees believes accurately reflects fair value. For further
information about valuation of investments
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in the California Intermediate Tax-Free Bond Fund, see the Statement of
Additional Information.
Shares of the Fund are offered only to residents of states in which the Shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase Shares of the California Intermediate Tax-Free Bond Fund by
completing and signing an Account Application form and mailing it, along with a
check (or other negotiable bank instrument or money order) payable to "HighMark
Funds (Fund Name)," to the transfer agent at P.O. Box 8416, Boston,
Massachusetts 02266-8416. All purchases made by check should be in U.S. dollars
and made payable to "HighMark Funds (Fund Name)." Third party checks, credit
card checks or cash will not be accepted. You may purchase more Shares at any
time by mailing payment also to the transfer agent at the above address. Orders
placed by mail will be executed on receipt of your payment. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
You may obtain Account Application Forms for the California Intermediate
Tax-Free Bond Fund by calling the Distributor at 1-800-734-2922.
HOW TO PURCHASE BY WIRE
You may purchase Shares of the California Intermediate Tax-Free Bond Fund by
wiring Federal funds, provided that your Account Application has been previously
received. You must wire funds to the transfer agent and the wire instructions
must include your account number. You must call the transfer agent at
1-800-734-2922 before wiring any funds. An order to purchase Shares by Federal
funds wire will be deemed to have been received by a Fund on the Business Day of
the wire; provided that the Shareholder wires funds to the transfer agent prior
to 1:00 p.m., Pacific time (4:00 p.m., Eastern time). If the transfer agent does
not receive the wire by 1:00 p.m., Pacific time (4:00 p.m., Eastern time), the
order will be executed on the next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC INVESTMENT PLAN ("AIP")
You may arrange for periodic additional investments in the California
Intermediate Tax-Free Bond Fund through automatic deductions by Automated
Clearing House ("ACH") from a checking account by completing this section in the
Account Application form. The minimum pre-authorized investment amount is $100
per month. The AIP is available only for additional investments to an existing
account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
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Shares of the Fund may be purchased through financial institutions, including
the Advisor, that provide distribution assistance or Shareholder services.
Shares purchased by persons ("Customers") through financial institutions may be
held of record by the financial institution. Financial institutions may impose
an earlier cut-off time for receipt of purchase orders directed through them to
allow for processing and transmittal of these orders to the transfer agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to HighMark.
Customers who desire to transfer the registration of Shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
SALES CHARGES
The following table shows the regular sales charge on Retail Shares to a "single
purchaser" (defined below) together with the dealer discount paid to dealers and
the agency commission paid to brokers (collectively the "commission"):
<TABLE>
<CAPTION>
AMOUNT OF PURCHASE SALES CHARGE AS A SALES CHARGE AS COMMISSION AS
PERCENTAGE OF APPROPRIATE PERCENTAGE OF
OFFERING PRICE PERCENTAGE OF NET OFFERING PRICE
AMOUNT INVESTED
<S> <C> <C> <C>
0-$24,999 3.00% 3.09% 2.70%
$ 25,000-$49,000 2.50% 2.56% 2.25%
$50,000-$99,000 2.00% 2.04% 1.80%
$100,000-$249,999 1.50% 1.52% 1.35%
$250,000-$999,999 1.00% 1.01% 0.90%
$1,000,000 and Over 0.00%* 0.00% 0.00%
<FN>
- ------------------
* A contingent deferred sales charge of 1.00% will be assessed against
any proceeds of any redemption of such Retail Shares prior to one year
from date of purchase.
</TABLE>
The commissions shown in the table apply to sales through authorized dealers and
brokers. Under certain circumstances, the Distributor may use its own funds to
compensate financial institutions and intermediaries in amounts that are
additional to the commissions shown above. In addition, the Distributor may,
from time to time and at its own expense, provide promotional incentives in the
form of cash or other compensation to certain financial institutions and
intermediaries whose registered representatives have sold or are expected to
sell significant amounts of the Retail Shares of the Fund. Such other
compensation may take the form of payments for travel expenses, including
lodging, incurred in connection with trips
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taken by qualifying registered representatives to places within or without the
United States. Under certain circumstances, commissions up to the amount of the
entire sales charge may be reallowed to dealers or brokers, who might then be
deemed to be "underwriters" under the Securities Act of 1933. Commission rates
may vary among the Funds.
In calculating the sales charge rates applicable to current purchases of the
Fund's Shares, a "single purchaser" is entitled to cumulate current purchases
with the net purchase of previously purchased Shares of the Fund and other of
HighMark's funds (the "Eligible Funds") which are sold subject to a comparable
sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing Shares of the Fund for their own account or for trust or
custodial accounts for their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account including employee benefit plans
created under Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), including related plans of the same employer. To be
entitled to a reduced sales charge based upon Shares already owned, the investor
must ask the Distributor for such entitlement at the time of purchase and
provide the account number(s) of the investor, the investor and spouse, and
their minor children, and give the age of such children. The Fund may amend or
terminate this right of accumulation at any time as to subsequent purchases.
LETTER OF INTENT
By initially investing at least $1,000 and submitting a Letter of Intent (the
"Letter") to the Distributor, a "single purchaser" may purchase Shares of the
Fund and the other Eligible Funds during a 13-month period at the reduced sales
charge rates applicable to the aggregate amount of the intended purchases stated
in the Letter. The Letter may apply to purchases made up to 90 days before the
date of the Letter. To receive credit for such prior purchases and later
purchases benefitting from the Letter, the Shareholder must notify the transfer
agent at the time the Letter is submitted that there are prior purchases that
may apply, and, at the time of later purchases, notify the transfer agent that
such purchases are applicable under the Letter.
RIGHTS OF ACCUMULATION
In calculating the sales charge rates applicable to current purchases of Retail
Shares, a "single purchaser" is entitled to cumulate current purchases with the
current market value of previously purchased Retail Shares of the Fund sold
subject to a comparable sales charge.
To exercise your right of accumulation based upon Shares you already own, you
must ask the Distributor for this reduced sales charge at the time of your
additional purchase and provide the account number(s) of the investor, as
applicable, the investor and spouse, and their minor children. The Fund may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
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SALES CHARGE WAIVERS
The following categories of investors may purchase Retail Shares of the Fund
with no sales charge in the manner described below (which may be changed or
eliminated at any time by the Distributor):
(1) Existing holders of Retail Shares of the Fund upon the reinvestment of
dividend and capital gain distributions on those Shares;
(2) Investment companies advised by Pacific Alliance Capital Management or
distributed by SEI Financial Services Company or its affiliates placing
orders on each entity's behalf;
(3) State and local governments;
(4) Individuals who have received distributions from employee benefit trust
accounts administered by Union Bank of California who are rolling over such
distributions into an individual retirement account for which the Bank
serves as trustee or custodian;
(5) Individuals who purchase Shares with proceeds from a required minimum
distribution at age 70 1/2 from their employee benefit qualified plan or an
individual retirement account administered by Union Bank of California;
(6) Individuals who purchase Shares with proceeds received in connection with a
distribution paid from a Union Bank of California trust or agency account;
(7) Investment advisors or financial planners regulated by a federal or state
governmental authority who are purchasing Shares for their own account or
for an account for which they are authorized to make investment decisions
(i.e., a discretionary account) and who charge a management, consulting or
other fee for their services; and clients of such investment advisors or
financial planners who place trades for their own accounts if the accounts
are linked to the master account of such investment advisor or financial
planner on the books and records of a broker or agent;
(8) Investors purchasing Shares with proceeds from a redemption of Shares of
another open-end investment company (other than HighMark Funds) on which a
sales charge was paid if such redemption occurred within thirty (30) days
prior to the date of the purchase order. Satisfactory evidence of the
purchaser's eligibility must be provided at the time of purchase (e.g., a
confirmation of the redemption);
(9) Brokers, dealers and agents who are purchasing for their own account and
who have a sales agreement with the Distributor, and their employees (and
their spouses and children under the age of 21);
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(10) Investors purchasing Shares on behalf of a qualified prototype
retirement plan (other than an IRA, SEP-IRA or Keogh) sponsored by
Union Bank of California;
(11) Purchasers of Retail Shares of the Growth Fund that are sponsors of
other investment companies that are unit investment trusts for deposit
by such sponsors into such unit investment trusts, and to purchasers of
Retail Shares of the Growth Fund that are holders of such unit
investment trusts that invest distributions from such investment trusts
in Retail Shares of the Growth Fund;
(12) Present and retired directors, officers, and employees (and their
spouses and children under the age of 21) of Union Bank of California,
SEI Financial Services Company or their affiliated companies; and
(13) Investors receiving Shares issued in plans of reorganization, such as
mergers, asset acquisitions, and exchange offers, to which HighMark is
a party.
The Distributor may also periodically waive the sales charge for all investors
with respect to the Fund.
With regard to categories 2 through 12 above, the Distributor must be notified
that the purchase qualifies for a sales charge waiver at the time of purchase.
REDUCTIONS FOR QUALIFIED GROUPS
Reductions in sales charges also apply to purchases by individual members of a
"qualified group." The reductions are based on the aggregate dollar amount of
Shares purchased by all members of the qualified group. For purposes of this
paragraph, a qualified group consists of a "company," as defined in the 1940
Act, which has been in existence for more than six months and which has a
primary purpose other than acquiring Shares of the Fund at a reduced sales
charge, and the "related parties" of such company. For purposes of this
paragraph, a "related party" of a company is (i) any individual or other company
who directly or indirectly owns, controls or has the power to vote five percent
or more of the outstanding voting securities of such company; (ii) any other
company of which such company directly or indirectly owns, controls or has the
power to vote five percent or more of its outstanding voting securities; (iii)
any other company under common control with such company; (iv) any executive
officer, director or partner of such company or of a related party; and (v) any
partnership of which such company is a partner. Investors seeking to rely on
their membership in a qualified group to purchase Shares at a reduced sales load
must provide evidence satisfactory to the transfer agent of the existence of a
bona fide qualified group and their membership therein.
All orders from a qualified group will have to be placed through a single source
and identified at the time of purchase as originating from the same qualified
group, although such orders may be placed into more than one discrete account
that identifies HighMark.
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EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Retail Shares for Retail Shares of a Fund with the same or
lower sales charge on the basis of the relative net asset value of the Retail
Shares exchanged. Shareholders may exchange their Retail Shares for Retail
Shares of a Fund with a higher sales charge by paying the difference between the
two sales charges. Shareholders may also exchange Retail Shares of a money
market fund for which no sales load was paid for Retail Shares of the California
Intermediate Tax-Free Bond Fund. Under such circumstances, the cost of the
acquired Retail Shares will be the net asset value per share plus the
appropriate sales load. If Retail Shares of the money market fund were acquired
in a previous exchange involving Shares of a non-money market HighMark Fund,
then such Shares of the money market fund may be exchanged for Shares of the
California Intermediate Tax-Free Bond Fund without payment of any additional
sales load within a twelve month period. In order to receive a reduced sales
charge when exchanging into a Fund, the Shareholder must notify HighMark that a
sales charge was originally paid and provide sufficient information to permit
confirmation of qualification.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including Participating Organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in the California Intermediate Tax-Free
Bond Fund may do so by contacting the transfer agent at 1-800-734-2922.
Exchanges will be effected on any Business Day at the net asset value of the
Funds involved in the exchange next determined after the exchange request is
received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in
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those states where Shares of such other Funds of HighMark may legally be sold.
HighMark may materially amend or terminate the exchange privileges described
herein upon sixty days' notice.
REDEMPTION OF SHARES
You may redeem your Shares of the California Intermediate Tax-Free Bond Fund
without charge on any Business Day. There is presently a $15 charge for wiring
redemption proceeds to a Shareholder's designated account. Shares may be
redeemed by mail, by telephone or through a pre-arranged systematic withdrawal
plan. Investors who own Shares held by a financial institution should contact
that institution for information on how to redeem Shares.
BY MAIL
A written request for redemption of Shares of the California Intermediate
Tax-Free Bond Fund must be received by the transfer agent, P.O. Box 8416,
Boston, Massachusetts 02266-8416 in order to constitute a valid redemption
request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the transfer
agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker dealer, credit union, securities exchange or association, clearing agency
or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
Shares, (2) the redemption check is payable to the Shareholder(s) of record, and
(3) the redemption check is mailed to the Shareholder(s) at his or her address
of record.
TELEPHONE TRANSACTIONS
You may redeem your Shares of the California Intermediate Tax-Free Bond Fund by
calling the transfer agent at 1-800-734-2922. Under most circumstances, payments
will be transmitted on the next Business Day following receipt of a valid
request for redemption. You may have the proceeds mailed to your address or
wired to a commercial bank account previously designated on your Account
Application. There is no charge for having redemption proceeds mailed to you,
but there is a $15 charge for wiring redemption proceeds.
You may request a wire redemption for redemptions of Shares of the California
Intermediate Tax-Free Bond Fund in excess of $500 by calling the transfer agent
at 1-800-734-2922 who will deduct a wire charge of $15 from the amount of the
wire redemption. Shares cannot be redeemed by Federal Reserve wire on Federal
holidays restricting wire transfers.
Neither the transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be
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genuine. HighMark and the transfer agent will each employ reasonable procedures
to confirm that instructions, communicated by telephone are genuine. Such
procedures may include taping of telephone conversations.
If market conditions are extraordinarily active or other extraordinary
circumstances exist, and you experience difficulties placing redemption orders
by telephone, you may consider placing your order by mail.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The California Intermediate Tax-Free Bond Fund offers a Systematic Withdrawal
Plan ("SWP"), which you may use to receive regular distributions from your
account. Upon commencement of the SWP, your account must have a current net
asset value of $5,000 or more. You may elect to receive automatic payments via
check or ACH of $100 or more on a monthly, quarterly, semi-annual or annual
basis. You may arrange to receive regular distributions from your account via
check or ACH by completing this section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per Share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the transfer agent. The transfer agent may require that the signature
on the written notice be guaranteed.
It is generally not in your best interest to be participating in the SWP at the
same time that you are purchasing additional Shares if you have to pay a sales
load in connection with such purchases.
OTHER INFORMATION REGARDING REDEMPTIONS
Shareholders who desire to redeem Shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Fund reserves the right to make payment on
redemptions in securities rather than cash.
Payment to the Shareholders for Shares redeemed will be made within seven days
after the transfer agent receives the valid redemption request. At various
times, however, the Fund may be requested to redeem Shares for which it has not
yet received good payment; collection of payment may take ten or more days. In
such circumstances, the redemption request will be
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rejected by the Fund. Once the Fund has received good payment for the Shares a
Shareholder may submit another request for redemption.
Due to the relatively high costs of handling small investments, the Fund
reserves the right to redeem your Shares at net asset value if your account in
the Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase Shares of the Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any Shares.
Before the Fund exercises its right to redeem such Shares you will be given
notice that the value of the Shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in the Fund
in an amount which will increase the value of the account to at least the
minimum amount.
DIVIDENDS
The net income of the California Intermediate Tax-Free Bond Fund is declared and
paid monthly as a dividend to Shareholders of record at the close of business on
the day of declaration. Net realized capital gains, if any, are distributed at
least annually to Shareholders of record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of the Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
TAXES
FEDERAL TAXATION
The California Intermediate Tax-Free Bond Fund intends to qualify for treatment
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and to distribute substantially all of its net investment
income and net realized capital gains, if any, so that the Fund is not required
to pay federal taxes on these amounts.
Because all of the Fund's net investment income is expected to be derived from
interest, it is anticipated that no part of any distribution will be eligible
for the federal dividends received deduction for corporations. The Fund is not
managed to generate any long-term capital gains and, therefore, does not foresee
paying any significant "capital gains dividends" as described in the Code.
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Exempt-interest dividends from the Fund are excludable from Shareholders' gross
income for federal income tax purposes. Such dividends may be taxable to
Shareholders under state or local law as ordinary income even though all or a
portion of the amounts may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such taxes. Shareholders are
advised to consult a tax advisor with respect to whether exempt-interest
dividends retain the exclusion if such Shareholder would be treated as a
"substantial user" or a "related person" to such user under the Code.
Under the Code, interest on indebtedness incurred or continued by a Shareholder
to purchase or carry Shares of the Fund is not deductible for federal income tax
purposes to the extent the Fund distributes exempt-interest dividends during the
Shareholder's taxable year.
Under the Code, if a Shareholder sells a Share of the Fund after holding it for
six months or less, any loss on the sale or exchange of such Share will be
disallowed to the extent of the amount of any exempt-interest dividends that the
Shareholder has received with respect to the Share that is sold.
In addition, any loss (not already disallowed as provided in the preceding
sentence) realized upon a taxable disposition of shares held for six months or
less will be treated as long-term, rather than short-term, to the extent of any
long-term capital gain distributions received by the shareholder with respect to
the shares.
The Fund may at times purchase California Municipal Securities at a discount
from the price at which they were originally issued. For federal income tax
purposes, some or all of this market discount will be included in the California
Tax-Free Money Market Fund's ordinary income and will be taxable to Shareholders
as such when it is distributed to them.
To the extent dividends paid to Shareholders are derived from taxable income
(for example, from interest on certificates of deposit or repurchase
agreements), or from long-term or short-term capital gains, such dividends will
be subject to federal income tax, whether such dividends are paid in the form of
cash or additional Shares.
Under the Code, dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included in alternative minimum
taxable income for the purpose of determining liability (if any) for the federal
alternative minimum tax. In addition, exempt-interest dividends will be included
in a corporation's "adjusted current earnings" for purposes of the alternative
minimum tax (except to the extent derived from interest on certain private
activity bonds issued after August 7, 1986, which interest would already be
included in alternative minimum taxable income as a specific item of tax
preference). Shareholders of the Fund receiving social security or railroad
retirement benefits may be taxed on a portion of those benefits as a result of
receiving tax-exempt income (including exempt-interest dividends distributed by
the Fund).
Prior to purchasing Shares of the California Intermediate Tax-Free Bond Fund,
the impact of dividends or capital gain distributions that are expected to be
declared or have been declared,
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but not paid, should be carefully considered. Dividends or capital gain
distributions received after a purchase of Shares are subject to federal income
taxes, although in some circumstances, the dividends or distributions may be, as
an economic matter, a return of capital to the Shareholder. A Shareholder should
consult his or her advisor for specific advice about the tax consequences to the
Shareholder of investing in the Fund.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
CALIFORNIA TAXES
The Fund intends to qualify to pay dividends to Shareholders that are exempt
from California personal income tax ("California exempt-interest dividends").
The Fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of the Fund's taxable year, at least 50 percent of the
value of the Fund's total assets consists of obligations the interest on which
would be exempt from California personal income tax if the obligations were held
by an individual ("California Tax Exempt Obligations") and (2) the Fund
continues to qualify as a regulated investment company.
If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to Shareholders will be considered California exempt-interest
dividends (1) if they are designated as exempt-interest dividends by the Fund in
a written notice to Shareholders mailed within 60 days of the close of the
Fund's taxable year and (2) to the extent that they are derived from the
interest received by the Fund during the year on California Tax Exempt
Obligations (less related expenses). If the aggregate dividends so designated
exceed the amount that may be treated as California exempt-interest dividends,
only that percentage of each dividend distribution equal to the ratio of
aggregate California exempt-interest dividends to aggregate dividends so
designated will be treated as a California exempt-interest dividend. The Fund
will notify Shareholders of the amount of California exempt-interest dividends
each year.
Corporations subject to California franchise tax that invest in the Fund
generally will not be entitled to exclude California exempt-interest dividends
from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends 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.
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Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of Shares of the Fund will not be deductible for California
personal income tax purposes if the Fund distributes California exempt-interest
dividends.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as they directly
govern the taxation of Shareholders subject to California personal income tax.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Fund transactions.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A., serves as the California Intermediate Tax-Free Bond Fund's investment
advisor. Subject to the general supervision of HighMark's Board of Trustees, the
Advisor manages the Fund in accordance with its investment objective and
policies, makes decisions with respect to and places orders for all purchases
and sales of the Fund's investment securities, and maintains the Fund's records
relating to such purchases and sales.
All investment decisions for the California Intermediate Tax-Free Bond Fund are
made by a team of investment professionals, all of whom take an active part in
the decision making process. The team leader for the Fund is Robert Bigelow. Mr.
Bigelow has been with Union Bank of California, and its predecessor, Union Bank
since June 1994. Mr. Bigelow served as a portfolio manager at City National Bank
from January, 1986 to June, 1994.
For the expenses assumed and services provided by the Advisor as the Fund's
investment advisor, Union Bank of California receives a fee from the California
Intermediate Tax-Free Bond Fund, computed daily and paid monthly, at the annual
rate of fifty one-hundredths of one percent (.50%) of the Fund's average daily
net assets. Depending on the size of the Fund, this fee may be higher than the
advisory fee paid by most mutual funds, although the Board of Trustees believes
it will be comparable to advisory fees paid by many funds having similar
objectives and policies. Union Bank of California may from time to time agree to
voluntarily reduce its advisory fee. While there can be no assurance that Union
Bank of California will choose to make such an agreement, any voluntary
reductions in Union Bank of California's advisory fee will lower the Fund's
expenses, and thus increase the Fund's yield and total return, during the period
such voluntary reductions are in effect. As of the date of this Prospectus, the
California Intermediate Tax-Free Bond Fund had not yet commenced operations in
HighMark.
On April 1, 1996, The Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of
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California, N.A. At the same time, the banks' investment management divisions
were combined. Each of Union Bank and The Bank of California, N.A. (or their
predecessor banks) has been in banking since the early 1900's and, historically,
each has had significant investment functions within its trust and investment
division. UnionBanCal Corporation, the parent of Union Bank of California, N.A.,
is a publicly held corporation, but is principally held by The Bank of
Tokyo-Mitsubishi, Ltd. As of September 30, 1996, Union Bank of California and
its subsidiaries had approximately $28.7 billion in commercial assets. Pacific
Alliance Capital Management is a division of Union Bank of California's Trust
and Investment Management Group, which, as of June 30, 1996, had approximately
$13.4 billion of assets under management. The Advisor, with a team of
approximately 45 stock and bond research analysts, portfolio managers and
traders, has been providing investment management services to individuals,
institutions and large corporations since 1917.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the Fund's average daily net assets. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of the Fund's Retail Shares. Any
such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of 0.15% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of the Fund, for
which it receives a fee paid by the Administrator at the annual rate of up to
0.05% of the Fund's average daily net assets. Union Bank of California has
voluntarily agreed to reduce this fee to 0.00%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Retail Shares of
HighMark, for which services it receives a fee.
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SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.00% of average
daily net assets.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor.
THE DISTRIBUTION PLAN
Pursuant to HighMark's Distribution Plan, the California Intermediate Tax-Free
Bond Fund pays the Distributor as compensation for its services in connection
with the Distribution Plan a distribution fee, computed daily and paid monthly,
equal to twenty-five one-hundredths of one percent (0.25%) of the average daily
net assets attributable to the Fund's Retail Shares. The Distributor has agreed
to waive its fee to the rate of 0.00% of the Fund's average daily net assets.
The Distributor may use the distribution fee applicable to the Fund's Retail
Shares to provide distribution assistance with respect to the sale of the Fund's
Retail Shares or to provide Shareholder services to the holders of the Fund's
Retail Shares. The Distributor may also use the distribution fee (i) to pay
financial institutions and intermediaries (such as insurance companies and
investment counselors but not including banks and savings and loan
associations), broker-dealers, and the Distributor's affiliates and subsidiaries
compensation for services or reimbursement of expenses incurred in connection
with the distribution of the Fund's Retail Shares to their customers or (ii) to
pay banks, savings and loan associations, other financial institutions and
intermediaries, broker-dealers, and the Distributor's affiliates and
subsidiaries compensation for services or reimbursement of expenses incurred in
connection with the provision of Shareholder services to their customers owning
the Fund's Retail Shares. All payments by the Distributor for distribution
assistance or Shareholder services under the Distribution Plan will be made
pursuant to an agreement between the Distributor and such bank, savings and loan
association, other financial institution or intermediary, broker-dealer, or
affiliate or subsidiary of the Distributor (a "Servicing Agreement"; banks,
savings and loan associations, other financial institutions and
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intermediaries, broker-dealers, and the Distributor's affiliates and
subsidiaries that may enter into a Servicing Agreement are hereinafter referred
to individually as a "Participating Organization"). A Participating Organization
may include Union Bank of California, its subsidiaries and its affiliates.
Participating Organizations may charge customers fees in connection with
investments in the California Intermediate Tax-Free Bond Fund on their
customers' behalf. Such fees would be in addition to any amounts the
Participating Organization may receive pursuant to its Servicing Agreement.
Under the terms of the Servicing Agreements, Participating Organizations are
required to provide their customers with a schedule of fees charged directly to
such customers in connection with investments in the Fund. Customers of
Participating Organizations should read this Prospectus in light of the terms
governing their accounts with the Participating Organization.
The distribution fee under the Distribution Plan will be payable without regard
to whether the amount of the fee is more or less than the actual expenses
incurred in a particular year by the Distributor in connection with distribution
assistance or Shareholder services rendered by the Distributor itself or
incurred by the Distributor pursuant to the Servicing Agreements entered into
under the Distribution Plan. The Distributor may from time to time voluntarily
reduce its distribution fee with respect to the California Intermediate Tax-Free
Bond Fund in significant amounts for substantial periods of time pursuant to an
agreement with HighMark. While there can be no assurance that the Distributor
will choose to make such an agreement, any voluntary reduction in the
Distributor's distribution fee will lower the California Intermediate Tax-Free
Bond Fund's expenses, and thus increase the Fund's yield and total returns,
during the period such voluntary reductions are in effect.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Fund
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of the
Fund, for which it receives compensation from SEI Fund Resources, without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Fund.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the California Intermediate Tax-Free Bond Fund. The
custodian holds cash securities and other assets of HighMark as required by the
1940 Act.
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Services performed by Union Bank of California, as the Fund's shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund, and the California Intermediate Tax-Free Bond Fund, had been
offered for sale in HighMark. Shares of each Fund are freely transferable, are
entitled to distributions from the assets of the Fund as declared by the Board
of Trustees, and, if HighMark were liquidated, would receive a pro rata share of
the net assets attributable to that Fund. Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Fiduciary Shares of the California Intermediate Tax-Free Bond
Fund, interested persons may contact the Distributor for a prospectus at
1-800-734-2922.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Retail
Shares of the California Intermediate Tax-Free Bond Fund. Performance
information is computed separately for the Fund's Retail and Fiduciary Shares in
accordance with the formulas described below.
The aggregate total return and average annual total return of the California
Intermediate Tax-Free Bond Fund may be quoted for the life of the Fund and for
ten-year, five-year and one-year periods, in each case through the most recent
calendar quarter. Aggregate total return is determined by calculating the change
in the value of a hypothetical $1,000 investment in the Fund over the applicable
period that would equate the initial amount invested to the ending redeemable
value of the investment. The ending redeemable value includes dividends and
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capital gain distributions reinvested at net asset value. Average annual total
return is calculated by annualizing the Fund's aggregate total return over the
relevant number of years. The resulting percentage indicates the average
positive or negative investment results that an investor in the Fund would have
experienced on an annual basis from changes in Share price and reinvestment of
dividends and capital gain distributions.
The yield of the Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of the Fund is determined by dividing the income and
capital gains distributions, or where indicated the income distributions alone,
on a Share of the Fund over a twelve-month period by the per Share public
offering price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may advertise performance that includes
results from periods in which the Fund's assets were managed in a non-registered
predecessor vehicle.
All performance information presented for the Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in the Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders
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may call such a meeting and communicate with other Shareholders for that
purpose, see ADDITIONAL INFORMATION--Miscellaneous in the Statement of
Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
The California Intermediate Tax-Free Bond Fund invests in only the instruments
permitted by its individual investment objective and policies.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Debt Instruments secured by
company receivables, truck and auto loans, leases, and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such securities. Asset-backed securities entail
prepayment risk, which may vary depending on the type of asset, but is generally
less than the prepayment risk associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the Fixed Income Funds
may invest in other asset-backed securities that may be developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
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COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TRs, TIGRs and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations issued by a bank in the United States
with assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose
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obligations the Fund may invest; (viii) money market funds and (ix) foreign
commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether due to changes in interest
rates or prepayments of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of mortgage-related securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related security may decline when interest rates rise, the converse
is not necessarily true because in periods of declining interest rates the
mortgages underlying the securities are prone to prepayment which results in
amounts being available for reinvestment which are likely to be invested at a
lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call
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dates, ARMs provide for monthly payments based on a pro rata share of both
periodic interest and principal payments and prepayments of principal on the
underlying mortgage pool (less GNMA's, FNMA's, or FHLMC's fees and any
applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining interest
rates may lead to prepayment of underlying mortgages, automobile sales contracts
or credit card receivables, the prices of mortgage-related and asset-backed
securities may not rise with a decline in interest rates. Mortgage-backed and
asset-backed securities and CMOs are extremely sensitive to the rate of
principal prepayment. Similarly, callable corporate bonds also present risk of
prepayment. During periods of falling interest rates, securities that can be
called or prepaid may decline in value relative to similar securities that are
not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued
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securities, municipal forwards are subject to market fluctuations due to
changes, real or anticipated, in market interest rates between the commitment
date and the settlement date and will have the effect of leveraging the Fund's
assets. Municipal forwards may be considered to be illiquid investments. The
Fund will maintain liquid, high-grade securities in a segregated account in an
amount at least equal to the purchase price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of participations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
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REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of the Group has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED SECURITIES --
Securities purchased for delivery beyond the normal settlement date at a stated
price and yield and which thereby involve a risk that the yield obtained in the
transaction will be less than that available in the market when delivery takes
place. When a Fund agrees to purchase when-issued securities or enter into
forward commitments, the Group's custodian will be instructed to set aside cash
or liquid portfolio securities equal to the
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amount of the commitment in a segregated account. A Fund will generally not pay
for such securities and no income will accrue on the securities until they are
received. These securities are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest rates. Therefore,
the purchase of securities on a "when-issued" basis or forward commitments may
increase the risk of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
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<PAGE> 445
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and
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the holder's purchase price. If no such election is made, gain on the
disposition of a market discount obligation is treated as ordinary income
(rather than capital gain) to the extent it does not exceed the accrued market
discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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<PAGE> 447
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources &
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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<PAGE> 449
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 450
CROSS REFERENCE SHEET
THE HIGHMARK CALIFORNIA INTERMEDIATE
TAX-FREE BOND FUND
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objective;
Investment Policies; General
Information--Description of HighMark &
Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities Purchase and Redemption of Shares;
Exchange Privileges; Dividends; Federal
Taxation; Service Arrangements--
Administrator; Distributor; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Exchange Privileges; Service
Arrangements-- Administrator;
Distributor
8. Redemption or Repurchase How to Redeem Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
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<PAGE> 451
HIGHMARK FUNDS
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's California Intermediate Tax-Free Bond Fund.
FIDUCIARY SHARES
HighMark's Fiduciary Shares are offered to the following investors: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Fixed Income Funds prior to June 20, 1994, which have remained
continuously open thereafter and which are not considered to be fiduciary
accounts; (iii) Shareholders who currently own Shares of HighMark's Equity or
Fixed Income Funds that were purchased prior to June 20, 1994 within an account
registered in their name with the Funds; and (iv) present and retired directors,
officers and employees (and their spouses and children under the age of 21) of
Union Bank of California, N.A., HighMark's current or former distributors or
their respective affiliated companies who currently own Shares of HighMark Funds
which were purchased before April 30, 1997.
This Prospectus sets forth concisely the information about HighMark and the
California Intermediate Tax-Free Bond Fund that a prospective investor should
know before investing. Investors are advised to read this Prospectus and retain
it for future reference. A Statement of Additional Information dated the same
date as this Prospectus has been filed with the Securities and Exchange
Commission and is available without charge by writing the Distributor, SEI
Financial Services Company, 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658, or by calling 1-800-734-2922. The Statement of Additional
Information is incorporated into this Prospectus by reference. This Prospectus
relates only to the Fiduciary Shares of the California Intermediate Tax-Free
Bond Fund. Interested persons who wish to obtain a prospectus for the other
Funds of HighMark may contact the Distributor at the above address and telephone
number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
[_______________, 1997]
Fiduciary Shares
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SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Fiduciary Shares of the HighMark California Intermediate Tax-Free Bond Fund (the
"California Intermediate Tax-Free Bond Fund" or the "Fund"). This summary is
qualified in its entirety by reference to the more detailed information provided
elsewhere in the Prospectus and in the Statement of Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund seeks to provide high current
income that is exempt from federal and State of California income taxes. (See
"INVESTMENT OBJECTIVE")
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund invests primarily in
investment grade or better bonds and notes issued by the State of California,
its agencies, instrumentalities and political sub-divisions, the income on which
is exempt from regular federal and State of California personal income taxes
("California Municipal Securities"). (See "INVESTMENT POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUND? The investment
policies of the Fund entail certain risks and considerations of which an
investor should be aware. Shares of the Fund will fluctuate in value with the
value of the Fund's underlying portfolio securities. Values of fixed income
securities in which the Fund invests tend to vary inversely with interest rates,
and may be affected by other market and economic factors affecting the State of
California as well. (See "Risk Factors")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator")
WHO IS THE CUSTODIAN? Union Bank of California, N.A., (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian")
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<PAGE> 453
WHO IS THE SHAREHOLDER SERVICING AGENT? State Street Bank and Trust Company
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Fiduciary Shares of HighMark. (See "Shareholder Servicing Agent")
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective. Redemption orders must be placed prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) on any Business Day for the order to be effective that
day. (See "PURCHASE AND REDEMPTION OF SHARES")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS")
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<PAGE> 454
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY...............................................................3
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE..................7
FUND DESCRIPTION......................................................9
INVESTMENT OBJECTIVE..................................................9
INVESTMENT POLICIES...................................................9
GENERAL..............................................................11
Money Market Instruments........................................11
Illiquid and Restricted Securities..............................11
Lending of Portfolio Securities.................................11
Risk Factors....................................................12
INVESTMENT LIMITATIONS...............................................13
Portfolio Turnover.............................................14
PURCHASE AND REDEMPTION OF SHARES....................................14
EXCHANGE PRIVILEGES..................................................15
DIVIDENDS............................................................16
TAXES................................................................16
Federal Taxation................................................16
California Taxes................................................18
SERVICE ARRANGEMENTS.................................................19
The Advisor.....................................................19
Administrator...................................................20
The Transfer Agent..............................................21
Distributor ....................................................21
Banking Laws....................................................21
Custodian.......................................................22
</TABLE>
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<TABLE>
<S> <C>
GENERAL INFORMATION.....................................................22
Description of HighMark & Its Shares...............................22
Performance Information............................................22
Miscellaneous......................................................23
DESCRIPTION OF PERMITTED INVESTMENTS....................................24
</TABLE>
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CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FEE TABLE
<TABLE>
<CAPTION>
California Intermediate
Tax-Free Bond Fund
------------------
<S> <C>
Fiduciary
Shares
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction) (c) 0.00%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(d) 0.22%
Total Fund Operating Expenses (after voluntary reduction)(e) 0.22%
====
<FN>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
California Intermediate
Tax-Free Bond Fund
Fiduciary Shares $2 $7 $12 $28
</TABLE>
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<PAGE> 457
The purpose of the tables above is to assist an investor in the California
Intermediate Tax-Free Bond Fund in understanding the various costs and expenses
that a Shareholder will bear directly or indirectly. For a more complete
discussion of the Fund's annual operating expenses, see SERVICE ARRANGEMENTS
below. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the California Intermediate Tax-Free Bond Fund on
behalf of their customers may charge customers fees for services provided
in connection with the investment in, redemption of, and exchange of
Shares. (See PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES, and
SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder.
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be 0.50% for the
Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
(d) OTHER EXPENSES for the California Intermediate Tax-Free Bond Fund are based
on that Fund's estimated expenses for the current fiscal year. Absent
voluntary fee waivers, OTHER EXPENSES would be 0.74% for the Fiduciary
Shares of the California Intermediate Tax-Free Bond Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 1.24%
for the Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
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FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Fiduciary
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Fiduciary Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The California Intermediate Tax-Free Bond Fund seeks to provide high current
income that is exempt from federal and State of California income taxes.
The investment objective and certain of the investment limitations of the
California Intermediate Tax-Free Bond Fund may not be changed without a vote of
the holders of a majority of the outstanding Shares of the Fund (as defined
under GENERAL INFORMATION--Miscellaneous below). There can be no assurance that
the Fund will achieve its investment objective.
INVESTMENT POLICIES
Under normal market conditions, the Fund will invest primarily in bonds and
notes issued by the State of California, its agencies, instrumentalities, and
political sub-divisions, the income on which is exempt from regular federal and
State of California personal income taxes ("California Municipal Securities").
The Fund may also invest in bonds and notes of other states, territories, and
possessions of the U.S. and their agencies, authorities, instrumentalities and
political sub-divisions which are exempt from federal income taxes, and in
shares of other investment companies, specifically money market funds, which
have similar investment objectives.
Under normal market conditions, at least 80% of the Fund's assets will be
invested in bonds and notes rated AAA, AA, A or BBB by Standard & Poor's
Corporation ("S&P"), Aaa, Aa, A or Baa by Moody's Investors Service ("Moody's"),
or AAA, AA, A or BBB by Fitch Investors Service ("Fitch") and which pay interest
that is not treated as a preference item for
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purposes of the federal alternative maximum tax. The Fund may purchase unrated
securities that are determined by the Advisor to be of comparable quality at the
time of purchase pursuant to quality standards set by the Board of Trustees. In
the event that a security owned by the Fund is downgraded below the stated
ratings categories, the Advisor will take appropriate action with regard to the
security.
Under California law, a mutual fund must have at least 50% of its total assets
invested in California Municipal Securities at the end of each quarter of its
taxable year in order to be eligible to pay California residents dividends that
are wholly or partially exempt from California personal income taxes.
Accordingly, the Fund intends to maintain at least 65% of its assets in
California Municipal Securities and may invest up to 100% of its assets in such
securities.
The Fund has no restrictions on the maturity of municipal securities in which it
may invest. The dollar-weighted average portfolio maturity of the Fund will be
from three to ten years. Accordingly, the Fund seeks to invest in municipal
securities of such maturities which, in the judgment of the Advisor, will
provide a high level of current income consistent with prudent investment, with
consideration given to market conditions.
CALIFORNIA MUNICIPAL SECURITIES
The two principal classifications of California Municipal Securities are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit, and taxing power for the
payment of principal and interest. Revenue bonds are payable primarily from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source. Private activity bonds (formerly known as industrial revenue bonds) are
generally revenue bonds.
Certain California Municipal Securities are municipal lease revenue obligations
(or certificates of participation or "COPs"), which typically provide that the
municipality has no obligation to make lease or installment payments in future
years unless money is appropriated for such purpose. While the risk of
non-appropriation is inherent to COP financing, this risk is mitigated by the
Fund's policy to invest in COPs that are rated in one of the four highest rating
categories used by Moody's, S&P, or Fitch.
California Municipal Securities also include so-called Mello-Roos and assessment
district bonds, which are usually unrated instruments issued to finance the
building of roads and other public works and projects that are primarily secured
by real estate taxes levied on property located in the local community. Most of
these bonds do not seek agency ratings because the issues are too small, and in
most cases, the purchase of these bonds is based upon the Advisor's
determination that it is suitable for the Fund.
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Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments and may involve a conditional or unconditional demand
feature.
GENERAL
MONEY MARKET INSTRUMENTS
When market conditions indicate a temporary "defensive" investment strategy as
determined by the Advisor, the Fund may invest more than 20% of its total assets
in municipal obligations of other states or taxable money market instruments
including repurchase agreements. The Fund will not be pursuing its investment
objective to the extent that a substantial portion of its assets are invested in
taxable money market instruments.
ILLIQUID AND RESTRICTED SECURITIES
The Fund shall limit investment in illiquid securities to 15% or less of its net
assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities to broker-dealers, banks or other institutions. The Fund may lend
portfolio securities in an amount representing up to 33 1/3% of the value of the
Fund's total assets.
OTHER INVESTMENTS
The Fund may enter into repurchase agreements and reverse repurchase agreements.
The Fund may enter into forward commitments or purchase securities on a
"when-issued" basis. The Fund expects that commitments by it to enter into
forward commitments or purchase when-issued securities will not exceed 25% of
the value of the Fund's total assets under normal market conditions. The Fund
does not intend to purchase when-issued securities or forward commitments for
speculative or leveraging purposes but only for the purpose of acquiring
portfolio securities.
The Fund may invest up to 5% of its total assets in the securities of any one
registered investment company, but may not own more than 3% of the securities of
any one registered investment company or invest more than 10% of its assets in
the securities of other registered
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investment companies. In accordance with an exemptive order issued to HighMark
by the SEC, such other registered investment company securities may include
securities of a money market fund of HighMark, and such companies may include
companies for which the Advisor or a Sub-Advisor to a Fund of HighMark, or an
affiliate of such Advisor or Sub-Advisor serves as investment advisor,
administrator or distributor. Because other registered investment companies
employ an investment advisor, such investment by the Fund may cause Shareholders
to bear duplicative fees. The Advisor will waive its fees attributable to the
assets of the investing Fund invested in a money market fund of HighMark, and,
to the extent required by applicable law, the Advisor will waive its fees
attributable to the assets of the Fund invested in any investment company. Some
Funds are subject to additional restrictions on investments in other investment
companies. See "INVESTMENT RESTRICTIONS" in the Statement of Additional
Information.
The Fund may invest in futures and options on futures for the purpose of
achieving the Fund's objectives and for adjusting portfolio duration. The Fund
may invest in futures and related options based on any type of security or index
traded on U.S. or foreign exchanges or over the counter, as long as the
underlying security, or securities represented by an index, are permitted
investments of the Fund. The Fund may enter into futures contracts and related
options only to the extent that obligations under such contracts or transactions
represent not more than 10% of the Fund's assets.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
In addition to credit risk which relates to the ability of an issuer to make
payments of principal and interest, all types of bonds are also subject to
market risk. Market risk relates to changes in a security's value as a result of
interest rate changes generally. An increase in interest rates will generally
reduce the value of the investments in the Fund and a decline in interest rates
will generally increase the value of those investments. Accordingly, the net
asset value of the Fund's Shares will vary as a result of changes in the value
of the securities in the Fund's portfolio. Therefore, an investment in the Fund
may decline in value, resulting in a loss of principal. Because interest rates
vary, it is impossible to predict the income or yield of the Fund for any
particular period.
Changes by recognized rating agencies in the rating of any fixed income security
and in the ability of an issuer to make payments of interest and principal also
affect the value of these investments. Changes in the value of fund securities
will not affect cash income derived from these securities, but will affect the
Fund's net asset value.
The ability of the State of California and its political sub-divisions to
generate revenue through real property and other taxes and to increase spending
has been significantly restricted by various constitutional and statutory
amendments and voter-passed initiatives. Such limitations could affect the
ability of California state and municipal issuers to pay interest or repay
principal on their obligations. In addition, during the first half of the
decade, California faced
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severe economic and fiscal conditions and experienced recurring budget deficits
that caused it to deplete its available cash resources and to become
increasingly dependent upon external borrowings to meet its cash needs.
The financial difficulties experienced by the State of California and municipal
issuers during the recession resulted in the credit ratings of certain of their
obligations being downgraded significantly by the major rating agencies.
Securities rated BBB by S&P or Fitch or Baa by Moody's are considered investment
grade, but are deemed by these rating services to have some speculative
characteristics, and adverse economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case with higher grade bonds.
INVESTMENT LIMITATIONS
The Fund may not:
1. Purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities) if as a result more than 5% of
the total assets of the Fund would be invested in the securities of such issuer
provided, however, that the Fund may invest up to 25% of its total assets
without regard to this restriction as permitted by applicable law.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities, and provided further, that
utilities as a group will not be considered to be one industry, and wholly-owned
subsidiaries organized to finance the operations of their parent companies will
be considered to be in the same industries as their parent companies.
3. Make loans, except the Fund may (a) purchase or hold debt
instruments in accordance with its investment objective and policies; (b) enter
into repurchase agreements; and (c) lend securities.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
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PORTFOLIO TURNOVER
The Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. The Fund's
portfolio turnover rate may vary greatly from year to year as well as within a
particular year. High portfolio turnover rates generally will result in
correspondingly higher brokerage and other transactions costs to the Fund and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the Fund. See "Federal Taxation."
PURCHASE AND REDEMPTION OF SHARES
As noted above, the Fund is divided into two classes of Shares, Retail and
Fiduciary. Fiduciary Shares may be purchased at net asset value. Only the
following investors qualify to purchase the California Intermediate Tax-Free
Bond Fund's Fiduciary Shares: (i) fiduciary, advisory, agency, custodial and
other similar accounts maintained with Union Bank of California, N.A. or its
affiliates; (ii) SelectIRA accounts established with The Bank of California,
N.A. and invested in any of HighMark's Equity or Fixed Income Funds prior to
June 20, 1994, which have remained continuously open thereafter and which are
not considered to be fiduciary accounts; (iii) Shareholders who currently own
Shares of HighMark's Equity or Fixed Income Funds; and (iv) present and retired
directors, officers and employees (and their spouses and children under the age
of 21) of Union Bank of California, N.A., HighMark's current or former
distributors or their respective affiliated companies who currently own Shares
of HighMark Funds which were purchased before April 30, 1997. For a description
of investors who qualify to purchase Retail Shares, see the Retail Shares
prospectus of the California Intermediate Tax-Free Bond Fund.
Purchases and redemptions of Shares of the California Intermediate Tax-Free Bond
Fund may be made on days on which the New York Stock Exchange and the Federal
Reserve wire system are open for business ("Business Days"). The minimum initial
investment is generally $1,000 and the minimum subsequent investment is
generally $100. For present and retired directors, officers, and employees (and
their spouses and children under the age of 21) of Union Bank of California, SEI
Financial Services Company and their affiliates, the minimum initial investment
is $250 and the minimum subsequent investment is $50. The Fund's initial and
subsequent minimum purchase amounts may be waived, in the Distributor's
discretion if purchases are made in connection with Individual Retirement
Accounts, Keoghs, payroll deduction plans, or 401(k) or similar programs or
accounts. Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
1:00 p.m., Pacific time (4:00 p.m., Eastern time), and the custodian receives
Federal funds before the close of business on the next Business Day. The
purchase price of Shares of a Fund is the net asset value next determined after
a purchase order is received and accepted by HighMark. The net asset value per
Share of a Fund is determined by dividing the total market value of a Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of a Fund. Net asset value per share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m.,
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Eastern time) on any Business Day. Purchases will be made in full and fractional
shares of HighMark calculated to three decimal places. HighMark reserves the
right to reject a purchase order when the Distributor determines that it is not
in the best interest of HighMark and/or its Shareholders to accept such order.
Shares of the California Intermediate Tax-Free Bond Fund are offered only to
residents of states in which the Shares are eligible for purchase.
Shareholders who desire to redeem shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on redemption will be made as
promptly as possible and, in any event, within seven calendar days after the
redemption order is received. The Fund reserves the right to make payment on
redemptions in securities rather than cash.
Neither HighMark's transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. HighMark and its
transfer agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures may include taping of telephone
conversations. If market conditions are extraordinarily active or other
extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Fiduciary Shares for Fiduciary Shares of another Fund on the
basis of the relative net asset value of the Fiduciary Shares exchanged.
Shareholders may also exchange Fiduciary Shares of a Fund for Retail Shares of
another Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per share plus the appropriate sales load.
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Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including participating organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in the California Intermediate Tax-Free
Bond Fund may do so by contacting the transfer agent at 1-800-734-2922.
Exchanges will be effected on any Business Day at the net asset value of the
Funds involved in the exchange next determined after the exchange request is
received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
DIVIDENDS
The net income of the California Intermediate Tax-Free Bond Fund is declared and
paid monthly as a dividend to Shareholders of record at the close of business on
the day of declaration. Net realized capital gains, if any, are distributed at
least annually to Shareholders of record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of the Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
TAXES
FEDERAL TAXATION
The California Intermediate Tax-Free Bond Fund intends to qualify for treatment
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and to distribute substantially all of its net investment
income and net realized capital gains, if any, so that the Fund is not required
to pay federal taxes on these amounts.
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Because all of the Fund's net investment income is expected to be derived from
interest, it is anticipated that no part of any distribution will be eligible
for the federal dividends received deduction for corporations. The Fund is not
managed to generate any long-term capital gains and, therefore, does not foresee
paying any significant "capital gains dividends" as described in the Code.
Exempt-interest dividends from the Fund are excludable from Shareholders' gross
income for federal income tax purposes. Such dividends may be taxable to
Shareholders under state or local law as ordinary income even though all or a
portion of the amounts may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such taxes. Shareholders are
advised to consult a tax advisor with respect to whether exempt-interest
dividends retain the exclusion if such Shareholder would be treated as a
"substantial user" or a "related person" to such user under the Code.
Under the Code, interest on indebtedness incurred or continued by a Shareholder
to purchase or carry Shares of the Fund is not deductible for federal income tax
purposes to the extent the Fund distributes exempt-interest dividends during the
Shareholder's taxable year.
Under the Code, if a Shareholder sells a Share of the Fund after holding it for
six months or less, any loss on the sale or exchange of such Share will be
disallowed to the extent of the amount of any exempt-interest dividends that the
Shareholder has received with respect to the Share that is sold.
In addition, any loss (not already disallowed as provided in the preceding
sentence) realized upon a taxable disposition of shares held for six months or
less will be treated as long-term, rather than short-term, to the extent of any
long-term capital gain distributions received by the shareholder with respect to
the shares.
The Fund may at times purchase California Municipal Securities at a discount
from the price at which they were originally issued. For federal income tax
purposes, some or all of this market discount will be included in the California
Tax-Free Money Market Fund's ordinary income and will be taxable to Shareholders
as such when it is distributed to them.
To the extent dividends paid to Shareholders are derived from taxable income
(for example, from interest on certificates of deposit or repurchase
agreements), or from long-term or short-term capital gains, such dividends will
be subject to federal income tax, whether such dividends are paid in the form of
cash or additional Shares.
Under the Code, dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included in alternative minimum
taxable income for the purpose of determining liability (if any) for the federal
alternative minimum tax. In addition, exempt-interest dividends will be included
in a corporation's "adjusted current earnings" for purposes of the alternative
minimum tax (except to the extent derived from interest on certain private
activity bonds issued after August 7, 1986, which interest would already be
included in alternative minimum taxable income as a specific item of tax
preference). Shareholders of the
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Fund receiving social security or railroad retirement benefits may be taxed on a
portion of those benefits as a result of receiving tax-exempt income (including
exempt-interest dividends distributed by the Fund).
Prior to purchasing Shares of the California Intermediate Tax-Free Bond Fund,
the impact of dividends or capital gain distributions that are expected to be
declared or have been declared, but not paid, should be carefully considered.
Dividends or capital gain distributions received after a purchase of Shares are
subject to federal income taxes, although in some circumstances, the dividends
or distributions may be, as an economic matter, a return of capital to the
Shareholder. A Shareholder should consult his or her advisor for specific advice
about the tax consequences to the Shareholder of investing in the Fund.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
CALIFORNIA TAXES
The Fund intends to qualify to pay dividends to Shareholders that are exempt
from California personal income tax ("California exempt-interest dividends").
The Fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of the Fund's taxable year, at least 50 percent of the
value of the Fund's total assets consists of obligations the interest on which
would be exempt from California personal income tax if the obligations were held
by an individual ("California Tax Exempt Obligations") and (2) the Fund
continues to qualify as a regulated investment company.
If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to Shareholders will be considered California exempt-interest
dividends (1) if they are designated as exempt-interest dividends by the Fund in
a written notice to Shareholders mailed within 60 days of the close of the
Fund's taxable year and (2) to the extent that they are derived from the
interest received by the Fund during the year on California Tax Exempt
Obligations (less related expenses). If the aggregate dividends so designated
exceed the amount that may be treated as California exempt-interest dividends,
only that percentage of each dividend distribution equal to the ratio of
aggregate California exempt-interest dividends to aggregate dividends so
designated will be treated as a California exempt-interest dividend. The Fund
will notify Shareholders of the amount of California exempt-interest dividends
each year.
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Corporations subject to California franchise tax that invest in the Fund
generally will not be entitled to exclude California exempt-interest dividends
from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends will be taxable to Shareholders at ordinary income tax
rates for California personal income tax purposes to the extent of the Fund's
earnings and profits.
Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of Shares of the Fund will not be deductible for California
personal income tax purposes if the Fund distributes California exempt-interest
dividends.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as they directly
govern the taxation of Shareholders subject to California personal income tax.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Fund transactions.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A., serves as the California Intermediate Tax-Free Bond Fund's investment
advisor. Subject to the general supervision of HighMark's Board of Trustees, the
Advisor manages the Fund in accordance with its investment objective and
policies, makes decisions with respect to and places orders for all purchases
and sales of the Fund's investment securities, and maintains the Fund's records
relating to such purchases and sales.
All investment decisions for the California Intermediate Tax-Free Bond Fund are
made by a team of investment professionals, all of whom take an active part in
the decision making process. The team leader for the Fund is Robert Bigelow. Mr.
Bigelow has been with Union Bank of California, and its predecessor, Union Bank
since June 1994. Mr. Bigelow served as a portfolio manager at City National Bank
from January, 1986 to June, 1994.
For the expenses assumed and services provided by the Advisor as the Fund's
investment advisor, Union Bank of California receives a fee from the California
Intermediate Tax-Free Bond Fund, computed daily and paid monthly, at the annual
rate of fifty one-hundredths of one percent (.50%) of the Fund's average daily
net assets. Depending on the size of the Fund, this fee may be higher than the
advisory fee paid by most mutual funds, although the Board of Trustees believes
it will be comparable to advisory fees paid by many funds having similar
objectives and policies. Union Bank of California may from time to time agree to
voluntarily reduce its advisory fee. While there can be no assurance that Union
Bank of California will choose to make such an agreement, any voluntary
reductions in Union Bank of California's
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advisory fee will lower the Fund's expenses, and thus increase the Fund's yield
and total return, during the period such voluntary reductions are in effect. As
of the date of this Prospectus, the California Intermediate Tax-Free Bond Fund
had not yet commenced operations in HighMark.
On April 1, 1996, The Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group, which, as of June
30, 1996, had approximately $13.4 billion of assets under management. The
Advisor, with a team of approximately 45 stock and bond research analysts,
portfolio managers and traders, has been providing investment management
services to individuals, institutions and large corporations since 1917.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the Fund's average daily net assets. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of the Fund's Fiduciary Shares.
Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of 0.15% of the average daily net assets of the Funds.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of the Fund, for
which it receives a fee paid by the Administrator at the annual rate of up to
0.05% of the Fund's average daily net assets. Union Bank of California has
voluntarily agreed to reduce this fee to 0.00%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
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THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Fiduciary Shares
of HighMark, for which services it receives a fee.
SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, each Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.00% of average
daily net assets.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor. Fiduciary Shares are not subject
to HighMark's Distribution Plan or a distribution fee.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Fund
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of the
Fund, for which it receives compensation from SEI Fund Resources, without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Fund.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
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CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the California Intermediate Tax-Free Bond Fund. The
custodian holds cash securities and other assets of HighMark as required by the
1940 Act.
Services performed by Union Bank of California, as the Fund's shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund, and the California Intermediate Tax-Free Bond Fund, had been
offered for sale in HighMark. Shares of each Fund are freely transferable, are
entitled to distributions from the assets of the Fund as declared by the Board
of Trustees, and, if HighMark were liquidated, would receive a pro rata share of
the net assets attributable to that Fund. Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Retail Shares of the California Intermediate Tax-Free Bond Fund,
interested persons may contact the Distributor for a prospectus at 1-800-
734-2922.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Fiduciary
Shares of the California Intermediate Tax-Free Bond Fund. Performance
information is computed separately for the Fund's Retail and Fiduciary Shares in
accordance with the formulas described below.
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The aggregate total return and average annual total return of the California
Intermediate Tax-Free Bond Fund may be quoted for the life of the Fund and for
ten-year, five-year and one-year periods, in each case through the most recent
calendar quarter. Aggregate total return is determined by calculating the change
in the value of a hypothetical $1,000 investment in the Fund over the applicable
period that would equate the initial amount invested to the ending redeemable
value of the investment. The ending redeemable value includes dividends and
capital gain distributions reinvested at net asset value. Average annual total
return is calculated by annualizing the Fund's aggregate total return over the
relevant number of years. The resulting percentage indicates the average
positive or negative investment results that an investor in the Fund would have
experienced on an annual basis from changes in Share price and reinvestment of
dividends and capital gain distributions.
The yield of the Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of the Fund is determined by dividing the income and
capital gains distributions, or where indicated the income distributions alone,
on a Share of the Fund over a twelve-month period by the per Share public
offering price of the Fund on the last day of the period.
Each Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. Certain Funds may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
All performance information presented for the Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in the Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan.
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HighMark is not required to hold regular annual meetings of Shareholders, but
may hold special meetings from time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
The California Intermediate Tax-Free Bond Fund invests in only the instruments
permitted by its individual investment objective and policies.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Debt Instruments secured by
company receivables, truck and auto loans, leases, and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such securities. Asset-backed securities entail
prepayment risk, which may vary depending on the type of asset, but is generally
less than the prepayment risk associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the Fixed Income Funds
may invest in other asset-backed securities that may be developed in the future.
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BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating
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categories by a NRSRO (e.g., at least A by S&P or A by Moody's) at the time of
investment, or, if not rated, determined by the Advisor to be of comparable
quality; (iv) general obligations issued by the U.S. Government and backed by
its full faith and credit, and obligations issued or guaranteed as to principal
and interest by agencies or instrumentalities of the U.S. Government (e.g.,
obligations issued by Farmers Home Administration, Government National Mortgage
Association, Federal Farm Credit Bank and Federal Housing Administration); (v)
receipts, including TRs, TIGRs and CATS; (vi) repurchase agreements involving
such obligations; (vii) loan participations issued by a bank in the United
States with assets exceeding $1 billion and for which the underlying loan is
issued by borrowers in whose obligations the Fund may invest; (viii) money
market funds and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether due to changes in interest
rates or prepayments of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of mortgage-related securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related security may decline when interest rates rise, the converse
is not necessarily true because in periods of declining interest rates the
mortgages underlying the securities are prone to prepayment which results in
amounts being available for reinvestment which are likely to be invested at a
lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can
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be given as to the return a Fund will receive when these amounts are reinvested.
As a consequence, mortgage-related securities may be a less effective means of
"locking in" interest rates than other types of debt securities having the same
stated maturity, may have less potential for capital appreciation and may be
considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining interest
rates may lead to prepayment of underlying mortgages, automobile sales contracts
or credit card receivables, the prices of mortgage-related and asset-backed
securities may not rise with a decline in interest rates. Mortgage-backed and
asset-backed securities and CMOs are extremely sensitive to the rate of
principal prepayment. Similarly, callable corporate bonds also present risk of
prepayment. During periods of falling interest rates, securities that can be
called or prepaid may decline in value relative to similar securities that are
not subject to call or prepayment.
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Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
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receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market
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may affect the value of the Rule 144A Securities. The Board of Trustees of the
Group has established guidelines and procedures to be utilized to determine the
liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, the Group's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
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U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest
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<PAGE> 481
and are typically sold at prices greatly discounted from par value. The return
on a zero-coupon obligation, when held to maturity, equals the difference
between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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<PAGE> 482
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUNDS
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Fund Resources &
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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<PAGE> 483
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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<PAGE> 484
[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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<PAGE> 485
CROSS REFERENCE SHEET
THE HIGHMARK CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Fund Description; Investment Objective;
Investment Policies & Fund Portfolio;
General Information--Description of
HighMark & Its Shares
5. Management of the Fund Service Arrangements
5A. Management's Discussion of Fund
Performance Inapplicable
6. Capital Stock and Other Securities Purchase and Redemption of Shares;
Exchange Privileges; Dividends; Federal
Taxation; Service Arrangements--
Administrator; Distributor; General
Information--Description of HighMark &
Its Shares; General Information--
Miscellaneous
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Exchange Privileges; Service
Arrangements-- Administrator;
Distributor
8. Redemption or Repurchase How to Redeem Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
-1-
<PAGE> 486
HIGHMARK FUNDS
CONVERTIBLE SECURITIES FUND
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers a convenient means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
HighMark's Convertible Securities Fund.
FIDUCIARY SHARES
HighMark's Fiduciary Shares are offered to the following investors: (i)
fiduciary, advisory, agency, custodial and other similar accounts maintained
with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA accounts
established with The Bank of California, N.A. and invested in any of HighMark's
Equity or Fixed Income Funds prior to June 20, 1994, which have remained
continuously open thereafter and which are not considered to be fiduciary
accounts; (iii) Shareholders who currently own Shares of HighMark's Equity or
Fixed Income Funds that were purchased prior to June 20, 1994 within an account
registered in their name with the Funds; and (iv) present and retired directors,
officers and employees (and their spouses and children under the age of 21) of
Union Bank of California, N.A., HighMark's current or former distributors or
their respective affiliated companies who currently own Shares of HighMark Funds
which were purchased before April 30, 1997.
This Prospectus sets forth concisely the information about HighMark and the
Convertible Securities Fund that a prospective investor should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference. A Statement of Additional Information dated the same date as
this Prospectus has been filed with the Securities and Exchange Commission and
is available without charge by writing the Distributor, SEI Financial Services
Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling
1-800-734-2922. The Statement of Additional Information is incorporated into
this Prospectus by reference. This Prospectus relates only to the Fiduciary
Shares of the Convertible Securities Fund. Interested persons who wish to obtain
a prospectus for the other Funds of HighMark may contact the Distributor at the
above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF
TOKYO-MITSUBISHI, LIMITED OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS.
HIGHMARK'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN
HIGHMARK INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
[_______________, 1997]
Fiduciary Shares
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<PAGE> 487
SUMMARY
HIGHMARK FUNDS ("HighMark") is an open-end, diversified, registered investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Fiduciary Shares of the HighMark Convertible Securities Fund (the "Convertible
Securities Fund" or the "Fund"). This summary is qualified in its entirety by
reference to the more detailed information provided elsewhere in the Prospectus
and in the Statement of Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund seeks a high level of current
income and capital appreciation by investing in convertible securities. (See
"INVESTMENT OBJECTIVE")
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund invests primarily in
convertible securities, including bonds, debentures, notes and preferred stocks
convertible into common stock. (See "INVESTMENT POLICIES")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUND? The investment
policies of the Fund entail certain risks and considerations of which an
investor should be aware. The market value of the Fund's fixed income
investments will change in response to interest rate changes and other factors.
During periods of falling interest rates, the value of outstanding fixed income
securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. The Fund may invest up to 35%
of its assets in convertible bonds rated lower than Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("S&P") and as
low as Caa by Moody's or CCC by S&P, which are lower-quality, higher-yielding,
high-risk debt securities. (See "Risk Factors")
ARE MY INVESTMENTS INSURED? HighMark's Shares are not federally insured by the
FDIC or any other government agency. Any guarantee by the U.S. Government, its
agencies or any instrumentalities of the securities in which any Fund invests
guarantees only the payment of principal and interest on the guaranteed
security, and does not guarantee the total return or value of the security or
total return or value of Shares of that Fund.
WHO IS THE ADVISOR? Pacific Alliance Capital Management, a division of Union
Bank of California, N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO IS THE SUB-ADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
Sub-Advisor to the Convertible Securities Fund. (See "The Sub-Advisor")
WHO IS THE ADMINISTRATOR? SEI Fund Resources serves as the Administrator of
HighMark. (See "The Administrator")
WHO IS THE CUSTODIAN? Union Bank of California, N.A., (the "Bank") serves as the
custodian of HighMark's assets. (See "The Custodian")
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<PAGE> 488
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
HighMark's Shares. (See "The Distributor")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is generally $1,000. A purchase order will be
effective if the Distributor receives an order prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time). Purchase orders for Shares will be executed at a per
Share price equal to the asset value next determined after the purchase order is
effective. Redemption orders must be placed prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) on any Business Day for the order to be effective that
day. (See "PURCHASE AND REDEMPTION OF SHARES")
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. (See "DIVIDENDS")
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<PAGE> 489
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY............................................................3
CONVERTIBLE SECURITIES FUND FEE TABLE..............................7
FUND DESCRIPTION...................................................9
INVESTMENT OBJECTIVE...............................................9
INVESTMENT POLICIES................................................9
GENERAL...........................................................10
Money Market Instruments.....................................10
Illiquid and Restricted Securities...........................10
Lending of Portfolio Securities..............................11
Other Investments............................................11
Risk Factors.................................................11
Risks Associated with Convertible Securities.................12
INVESTMENT LIMITATIONS............................................13
Portfolio Turnover...........................................13
PURCHASE AND REDEMPTION OF SHARES.................................14
EXCHANGE PRIVILEGES...............................................15
DIVIDENDS.........................................................16
FEDERAL TAXATION..................................................16
SERVICE ARRANGEMENTS..............................................17
The Advisor..................................................17
The Sub-Advisor..............................................18
Administrator................................................19
The Transfer Agent...........................................19
Distributor..................................................20
Banking Laws.................................................20
Custodian....................................................20
</TABLE>
-5-
<PAGE> 490
<TABLE>
<S> <C>
GENERAL INFORMATION.....................................................21
Description of HighMark & Its Shares...............................21
Performance Information............................................21
Miscellaneous......................................................22
DESCRIPTION OF PERMITTED INVESTMENTS....................................23
</TABLE>
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<PAGE> 491
CONVERTIBLE SECURITIES FUND FEE TABLE
<TABLE>
<CAPTION>
Convertible Securities Fund
---------------------------
Fiduciary
Shares
SHAREHOLDER TRANSACTION EXPENSES(a)
<S> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of offering price) 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, as applicable) 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0%
Exchange Fee(a) $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after voluntary reduction)(c) 0.59%
12b-1 Fees 0.00%
Other Expenses (after voluntary reduction)(d) 0.26%
Total Fund Operating Expenses (after voluntary reduction)(e) 0.85%
====
<FN>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Convertible Securities Fund
<S> <C> <C> <C> <C>
Fiduciary Shares $9 $27 $47 $105
</TABLE>
The purpose of the tables above is to assist an investor in the Convertible
Securities Fund in understanding the various costs and expenses that a
Shareholder will bear directly or indirectly. For a more complete discussion of
the Fund's annual operating expenses, see SERVICE ARRANGEMENTS below. THE
FOREGOING EXAMPLE SHOULD NOT BE
-7-
<PAGE> 492
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California and its affiliates)
making investments in the Convertible Securities Fund on behalf of their
customers may charge customers fees for services provided in connection
with the investment in, redemption of, and exchange of Shares. (See
PURCHASE AND REDEMPTION OF SHARES, EXCHANGE PRIVILEGES, and SERVICE
ARRANGEMENTS below)
(b) A wire redemption charge is deducted from the amount of a wire redemption
payment made at the request of a Shareholder.
(c) Absent voluntary fee waivers, MANAGEMENT FEES would be .60% for the
Fiduciary Shares of the Convertible Securities Fund.
(d) OTHER EXPENSES for the Convertible Securities Fund are based on the Fund's
estimated expenses for the current fiscal year. Absent voluntary fee
waivers, OTHER EXPENSES would be .53% for the Fiduciary Shares of the
Convertible Securities Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 1.13%
for the Fiduciary Shares of the Convertible Securities Fund.
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<PAGE> 493
FUND DESCRIPTION
HighMark Funds ("HighMark") is an open-end, diversified, registered investment
company that offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance Capital Management (the "Advisor"), a division of Union Bank of
California, N.A. Shareholders may purchase Shares of selected Funds through two
separate classes (the "Retail" and "Fiduciary" classes). These classes may have
different sales charges and other expenses, which may affect performance.
Information regarding HighMark's other Funds and other classes is contained in
separate prospectuses that may be obtained from HighMark's Distributor, SEI
Financial Services Company, at 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658, or by calling 1-800-734-2922.
For information concerning those investors who qualify to purchase Fiduciary
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Fiduciary Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVE
The Convertible Securities Fund seeks a high level of current income and capital
appreciation by investing in convertible securities.
The investment objective and certain of the investment limitations of the
Convertible Securities Fund may not be changed without a vote of the holders of
a majority of the outstanding Shares of the Fund (as defined under GENERAL
INFORMATION--Miscellaneous below). There can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES
Under normal market conditions, at least 65% of the Convertible Securities
Fund's assets will be invested in convertible securities consisting of bonds,
debentures, notes and preferred stocks each of which are convertible into common
stock. In general, a convertible security is a fixed-income security such as a
bond (which typically pays a fixed annual rate of interest) or preferred stock
(which typically pays a fixed dividend), that may be converted at a stated price
within a specified period of time into a specified number of shares of common
stock of the issuing company, or of a different company. A convertible security
may be subject to redemption by the issuer, but only after a particular date and
under certain circumstances (including a specified price) established upon
issue. If a convertible security held by the Fund is called for redemption, the
Fund could be required to tender it for redemption, convert it into the
underlying common stock, or sell it to a third party. Common stock received upon
conversion will be sold when, in the opinion of the Sub-Advisor, it is advisable
to do so.
Because of its conversion feature, the market value of convertible preferred
stock tends to move together with the market value of the underlying common
stock. As a result, the Fund's
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<PAGE> 494
selection of convertible securities is based, to a great extent, on the
potential for capital appreciation that may exist in the underlying common
stocks. The value of convertible securities is also affected by prevailing
interest rates, the credit quality of the issuer and any call provisions.
Investments in convertible securities generally entail less volatility than
investments in the common stocks of the same issuers. Nevertheless, it is the
fixed income component of these securities that is often deemed by the ratings
agencies to be high risk or speculative. The Fund may invest up to 35% of its
assets in convertible bonds rated lower than Baa by Moody's or BBB by S&P and as
low as Caa by Moody's or CCC by S&P, which are lower-quality, higher-yielding,
high-risk debt securities (commonly known as "junk bonds"). The Fund may also
invest in unrated convertible securities which, in the Sub-Advisor's opinion,
are of comparable quality to such rated securities. See "Risk Factors."
In the event that a security owned by the Fund is downgraded below the stated
ratings categories, the Advisor or Sub-Advisor will take appropriate action with
regard to the security.
The Fund may invest any remaining assets in common stocks; securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities;
corporate bonds rated Baa or better by Moody's or BBB or better by S&P
(investment grade bonds); shares of other investment companies with similar
investment objectives; high grade commercial paper; money market funds; money
market instruments and cash; floating and variable rate notes; repurchase
agreements; dollar-denominated securities of foreign issuers; and Standard and
Poor's Depositary Receipts ("SPDRs").
GENERAL
MONEY MARKET INSTRUMENTS
Under normal market conditions, the Fund may invest up to 35% of its total
assets in money market instruments. When market conditions indicate a temporary
"defensive" investment strategy as determined by the Advisor or Sub-Advisor, the
Fund may invest more than 35% of its total assets in money market instruments.
The Fund will not be pursuing its investment objective to the extent that a
substantial portion of its assets are invested in money market instruments.
ILLIQUID AND RESTRICTED SECURITIES
The Fund shall limit investment in illiquid securities to 15% or less of its net
assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
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<PAGE> 495
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities to broker-dealers, banks or other institutions. The Fund may lend
portfolio securities in an amount representing up to 33 1/3% of the value of the
Fund's total assets.
OTHER INVESTMENTS
The Fund may enter into repurchase agreements and reverse repurchase agreements.
The Fund may enter into forward commitments or purchase securities on a
"when-issued" basis. The Fund expects that commitments by it to enter into
forward commitments or purchase when-issued securities will not exceed 25% of
the value of the Fund's total assets under normal market conditions. The Fund
does not intend to purchase when-issued securities or forward commitments for
speculative or leveraging purposes but only for the purpose of acquiring
portfolio securities.
The Fund may invest up to 5% of its total assets in the securities of any one
registered investment company, but may not own more than 3% of the securities of
any one registered investment company or invest more than 10% of its assets in
the securities of other registered investment companies. In accordance with an
exemptive order issued to HighMark by the SEC, such other registered investment
company securities may include securities of a money market fund of HighMark,
and such companies may include registered investment companies for which the
Advisor or a Sub-Advisor to a Fund of HighMark, or an affiliate of such Advisor
or Sub-Advisor serves as investment advisor, administrator or distributor.
Because other registered investment companies employ an investment advisor, such
investment by the Fund may cause Shareholders to bear duplicative fees. The
Advisor will waive its fees attributable to the assets of the investing Fund
invested in a money market fund of HighMark, and, to the extent required by
applicable law, the Advisor will waive its fees attributable to the assets of
the Fund invested in any investment company. Some Funds are subject to
additional restrictions on investment in other investment companies. See
"INVESTMENT RESTRICTIONS" in the Statement of Additional Information.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
RISK FACTORS
In addition to credit risk which relates to the ability of an issuer to make
payments of principal and interest, all types of bonds are also subject to
market risk. Market risk relates to changes in a security's value as a result of
interest rate changes generally. An increase in interest rates will generally
reduce the value of the investments in the Fund and a decline in interest rates
will generally increase the value of those investments. Accordingly, the net
asset value of the Fund's shares will vary as a result of changes in the value
of the securities in the Fund's portfolio. Therefore, an investment in the Fund
may decline in value, resulting in a loss of principal. Because interest rates
vary, it is impossible to predict the income or yield of the Fund for any
particular period.
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<PAGE> 496
The Fund's shares will fluctuate in value with the value of the underlying
securities in its portfolio. Because of their fixed income features, however,
convertible securities are expected to fluctuate in value to a lesser degree
than the common stock into which they are convertible.
Changes by recognized rating agencies in the rating of any fixed income security
and in the ability of an issuer to make payments of interest and principal also
affect the value of these investments. Changes in the value of Fund securities
will not affect cash income derived from these securities, but will affect the
Fund's net asset value.
The Fund may invest in securities issued or guaranteed by foreign corporations
or foreign governments, their political subdivisions, agencies or
instrumentalities and obligations of supranational entities such as the World
Bank and the Asian Development Bank. Any investments in these securities will be
in accordance with a Fund's investment objective and policies, and are subject
to special risks, such as adverse political and economic developments, possible
seizure, nationalization or expropriation of foreign investments, less stringent
disclosure requirements, changes in foreign currency exchange rates, increased
costs associated with the conversion of foreign currency into U.S. dollars, the
possible establishment of exchange controls or taxation at the source or the
adoption of other foreign governmental restrictions. To the extent that the Fund
may invest in securities of foreign issuers that are not traded on any exchange,
there is a further risk that these securities may not be readily marketable. The
Convertible Securities Fund will not hold foreign currency for investment
purposes.
Securities rated BBB by S&P or Fitch or Baa by Moody's are considered investment
grade, but are deemed by these rating services to have some speculative
characteristics, and adverse economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case with higher grade bonds.
RISKS ASSOCIATED WITH CONVERTIBLE SECURITIES
Investments in lower-rated debt securities (i.e., securities rated lower than
BBB by S&P or Baa by Moody's), in which the Fund may invest, bear certain risks,
including the risk that such securities may be thinly traded, which can
adversely affect the price at which these securities can be sold and can result
in high transaction costs. Market quotations may not be available, and
therefore, judgment plays a greater role in valuing lower-rated debt securities
than securities for which more extensive quotations and last sale information
are available. Adverse publicity and changing investor perceptions may affect
the ability of outside pricing services to value lower-rated debt securities,
and the Fund's ability to dispose of these securities.
The market price of lower-rated debt securities may decline significantly in
periods of general economic difficulty which may follow periods of rising
interest rates. During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of lower-rated debt to meet their payment
obligation on these securities may be impaired.
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<PAGE> 497
The Fund may invest in securities which are rated as low as 'Caa' by Moody's or
'CCC' by S&P. Securities rated 'Caa' by Moody's are of poor standing and may be
in default or may present elements of danger with respect to principal or
interest. Debt rated 'CCC' by S&P is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. In
the event of adverse business, financial, and economic conditions, debt rated
'CCC' is not likely to have the capacity to repay principal.
INVESTMENT LIMITATIONS
The Fund may not:
1. Purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities) if as a result more than 5% of
the total assets of the Fund would be invested in the securities of such issuer.
This restriction applies to 75% of the Fund's assets.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities, and provided further, that
utilities as a group will not be considered to be one industry, and wholly-owned
subsidiaries organized to finance the operations of their parent companies will
be considered to be in the same industries as their parent companies.
3. Make loans, except that the Fund may (a) purchase or hold debt
instruments in accordance with its investment objective and policies, (b) enter
into repurchase agreements, and (c) engage in securities lending as described in
this Prospectus and in the Statement of Additional Information.
The foregoing percentages will apply at the time of the purchase of a
security. The investment limitations listed above are fundamental policies the
substance of which may not be changed without a vote of a majority of the
outstanding Shares of the Fund. Additional fundamental and non-fundamental
investment limitations are set forth in the Statement of Additional Information.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate be a factor preventing a sale or purchase
when the Advisor or Sub-Advisor believes investment considerations warrant. The
Fund's portfolio turnover rate may vary greatly from year to year as well as
within a particular year. High portfolio turnover rates generally will result in
correspondingly higher brokerage and other transactions costs to the Fund and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the Fund. See "Federal Taxation."
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PURCHASE AND REDEMPTION OF SHARES
Fiduciary Shares may be purchased at net asset value. Only the following
investors qualify to purchase the Convertible Securities Fund's Fiduciary
Shares: (i) fiduciary, advisory, agency, custodial and other similar accounts
maintained with Union Bank of California, N.A. or its affiliates; (ii) SelectIRA
accounts established with The Bank of California, N.A. and invested in any of
HighMark's Equity or Fixed Income Funds prior to June 20, 1994, which have
remained continuously open thereafter and which are not considered to be
fiduciary accounts; (iii) Shareholders who currently own Shares of HighMark's
Equity or Fixed Income Funds that were purchased prior to June 20, 1994 within
an account registered in their name with the Funds; and (iv) present and retired
directors, officers and employees (and their spouses and children under the age
of 21) of Union Bank of California, N.A., HighMark's current or former
distributors or their respective affiliated companies who currently own Shares
of HighMark Funds which were purchased before April 30, 1997.
Purchases and redemptions of Shares of the Convertible Securities Fund may be
made on days on which the New York Stock Exchange and the Federal Reserve wire
system are open for business ("Business Days"). The minimum initial investment
is generally $1,000 and the minimum subsequent investment is generally $100. For
present and retired directors, officers, and employees (and their spouses and
children under the age of 21) of Union Bank of California, SEI Financial
Services Company and their affiliates, the minimum initial investment is $250
and the minimum subsequent investment is $50. The Fund's initial and subsequent
minimum purchase amounts may be waived in the Distributor's discretion if
purchases are made in connection with Individual Retirement Accounts, Keoghs,
payroll deduction plans, or 401(k) or similar program accounts. Shareholders may
place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
1:00 p.m., Pacific time (4:00 p.m., Eastern time) and the custodian receives
Federal funds before the close of business on the next Business Day. The
purchase price of Shares of a Fund is the net asset value next determined after
a purchase order is received and accepted by HighMark. The net asset value per
Share of a Fund is determined by dividing the total market value of a Fund's
investments and other assets, less any liabilities, by the total number of
outstanding Shares of a Fund. Net asset value per Share is determined daily as
of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any Business Day.
Purchases will be made in full and fractional Shares of HighMark calculated to
three decimal places. HighMark reserves the right to reject a purchase order
when the Distributor determines that it is not in the best interest of HighMark
and/or its Shareholders to accept such order.
Shares of the Convertible Securities Fund are offered only to residents of
states in which the Shares are eligible for purchase.
Shareholders who desire to redeem shares of HighMark must place their redemption
orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on any
Business Day for the order to be accepted on that Business Day. The redemption
price is the net asset value of the Fund next determined after receipt by the
Distributor of the redemption order. Payment on
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redemption will be made as promptly as possible and, in any event, within seven
calendar days after the redemption order is received. The Fund reserves the
right to make payment on redemptions in securities rather than cash.
Neither HighMark's transfer agent nor HighMark will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. HighMark and its
transfer agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures may include taping of telephone
conversations. If market conditions are extraordinarily active or other
extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark & Its Shares,
certain of HighMark's Funds issue two classes of Shares (Retail Shares and
Fiduciary Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
Each Fund's Shares may be exchanged for Shares of the class of the various other
Funds of HighMark which the Shareholder qualifies to purchase directly so long
as the Shareholder maintains the applicable minimum account balance in each Fund
in which he or she owns Shares and satisfies the minimum initial and subsequent
purchase amounts of the Fund into which the Shares are exchanged. Shareholders
may exchange their Fiduciary Shares for Fiduciary Shares of another Fund on the
basis of the relative net asset value of the Fiduciary Shares exchanged.
Shareholders may also exchange Fiduciary Shares of a Fund for Retail Shares of
another Fund. Under such circumstances, the cost of the acquired Retail Shares
will be the net asset value per Share plus the appropriate sales load.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including participating organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
A Shareholder wishing to exchange Shares in the Convertible Securities Fund may
do so by contacting the transfer agent at 1-800-734-2922. Exchanges will be
effected on any Business Day at the net asset value of the Funds involved in the
exchange next determined after the exchange request is received by the transfer
agent.
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An exchange is considered to be a sale of Shares for federal income tax purposes
on which a Shareholder may realize a capital gain or loss. Exchange privileges
may be exercised only in those states where Shares of such other Funds of
HighMark may legally be sold. HighMark may materially amend or terminate the
exchange privileges described herein upon sixty days' notice.
DIVIDENDS
The net income of the Convertible Securities Fund is declared and paid monthly
as a dividend to Shareholders of record at the close of business on the day of
declaration. Net realized capital gains are distributed at least annually to
Shareholders of record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of the Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
FEDERAL TAXATION
The Convertible Securities Fund intends to qualify for treatment as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and to distribute substantially all of its net investment income and
net realized capital gains so that the Fund is not required to pay federal taxes
on these amounts.
Distributions of ordinary income and/or an excess of net short-term capital gain
over net long-term capital loss are treated for federal income tax purposes as
ordinary income to Shareholders. The 70 percent dividends received deduction for
corporations generally will apply to these distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction when received by the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. Distributions by the Fund
of the excess of net long-term capital gain over net short-term capital loss is
taxable to Shareholders as long-term capital gain in the year with respect to
which it is received, regardless of how long the Shareholder has held Shares of
the Fund. Such distributions are not eligible for the dividends received
deduction. If a Shareholder disposes of Shares in the Fund at a loss before
holding such Shares for longer than six months, such loss will be treated as a
long-term capital loss to the extent the Shareholder has received long-term
capital gain dividends on the Shares.
Prior to purchasing Shares of the Convertible Securities Fund, the impact of
dividends or capital gain distributions that are expected to be declared or have
been declared, but not paid, should be carefully considered. Dividends or
capital gain distributions received after a
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purchase of Shares are subject to federal income taxes, although in some
circumstances, the dividends or distributions may be, as an economic matter, a
return of capital to the Shareholder. A Shareholder should consult his or her
advisor for specific advice about the tax consequences to the Shareholder of
investing in the Fund.
Fund investments in foreign securities may be subject to withholding taxes at
the source on dividend or interest payments. In that case, the Fund's yield on
those securities would be decreased. The Fund does not expect to be eligible to
elect to permit shareholders to claim a credit or deduction on their income tax
return for their pro rata share of such taxes.
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Investments in an entity that qualifies as a "passive foreign investment
company" under the Code could subject the Fund to a U.S. federal income tax or
other charge on certain "excess distributions" received with respect to the
investment, and on the proceeds from disposition of the investment.
Additional information regarding federal taxes is contained in the Statement of
Additional Information. However, the foregoing and the material in the Statement
of Additional Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its Shareholders. In addition,
the foregoing discussion and the federal tax information in the Statement of
Additional Information are based on tax laws and regulations which are in effect
as of the date of this Prospectus; these laws and regulations may subsequently
change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
THE ADVISOR
Pacific Alliance Capital Management, a division of Union Bank of California,
N.A., serves as the Convertible Securities Fund's investment advisor. Subject to
the general supervision of HighMark's Board of Trustees, the Advisor manages the
Fund in accordance with its investment objective and policies, makes decisions
with respect to and places orders for all purchases and sales of the Fund's
investment securities, and maintains the Fund's records relating to such
purchases and sales.
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For the expenses assumed and services provided by the Advisor as the Fund's
investment advisor, Union Bank of California receives a fee from the Convertible
Securities Fund, computed daily and paid monthly, at the annual rate of sixty
one-hundredths of one percent (.60%) of the Fund's average daily net assets.
Depending on the size of the Fund, this fee may be higher than the advisory fee
paid by most mutual funds, although the Board of Trustees believes it will be
comparable to advisory fees paid by many funds having similar objectives and
policies. Union Bank of California may from time to time agree to voluntarily
reduce its advisory fee. While there can be no assurance that Union Bank of
California will choose to make such an agreement, any voluntary reductions in
Union Bank of California's advisory fee will lower the Fund's expenses, and thus
increase the Fund's yield and total return, during the period such voluntary
reductions are in effect. As of the date of this Prospectus, the Convertible
Securities Fund had not yet commenced operations.
On April 1, 1996, The Bank of California, N.A., HighMark's then investment
advisor, combined with Union Bank and the resulting bank changed its name to
Union Bank of California, N.A. At the same time, the banks' investment
management divisions were combined. Each of Union Bank and The Bank of
California, N.A. (or their predecessor banks) has been in banking since the
early 1900's and, historically, each has had significant investment functions
within its trust and investment division. UnionBanCal Corporation, the parent of
Union Bank of California, N.A., is a publicly held corporation, but is
principally held by The Bank of Tokyo-Mitsubishi, Ltd. As of September 30, 1996,
Union Bank of California and its subsidiaries had approximately $28.7 billion in
commercial assets. Pacific Alliance Capital Management is a division of Union
Bank of California's Trust and Investment Management Group, which, as of June
30, 1996, had approximately $13.4 billion of assets under management. The
Advisor, with a team of approximately 45 stock and bond research analysts,
portfolio managers and traders, has been providing investment management
services to individuals, institutions and large corporations since 1917.
THE SUB-ADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "Sub-Advisor") have
entered into an investment sub-advisory agreement relating to the Convertible
Securities Fund (the "Investment Sub-Advisory Agreement"). Under the Investment
Sub-Advisory Agreement, the Sub-Advisor makes the day-to-day investment
decisions for the assets of the Fund, subject to the supervision of, and
policies established by the Advisor and the Trustees of HighMark.
Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, and with offices at 100 Broadway, New York,
New York 10005, operates as a wholly-owned subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd. The Sub-Advisor was formed by the combination on April 1,
1996, of Bank of Tokyo Trust Company, a wholly-owned subsidiary of The Bank of
Tokyo, Ltd., and Mitsubishi Bank Trust Company of New York, a wholly-owned
subsidiary of The Mitsubishi Bank, Ltd. Bank of Tokyo Trust Company was the
surviving entity, and changed its name to Bank of Tokyo-Mitsubishi Trust
Company. Prior to the combination, sub-advisory services were provided by Bank
of Tokyo Trust Company. Bank of Tokyo Trust Company was established in 1955, and
has provided trust services since that time and management services since 1965.
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The Sub-Advisor serves as portfolio manager to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of June 30, 1996, Bank of
Tokyo-Mitsubishi Trust Company managed $700 million in individual portfolios and
collective funds. In addition, the Sub-Advisor also serves as the Sub-Advisor to
HighMark's Emerging Growth, Government Securities and Blue Chip Growth Funds.
The Sub-Advisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .30% of the average daily net
assets of the Convertible Securities Fund.
The day-to-day management of the Convertible Securities Fund's investments is
the responsibility of a team of investment professionals. Seth E. Shalov will be
the team leader for the Convertible Securities Fund. Mr. Shalov has been a
Senior Portfolio Manager with the Sub-Advisor and its predecessor, Bank of
Tokyo Trust Company since 1987.
ADMINISTRATOR
SEI Fund Resources (the "Administrator") and HighMark are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides HighMark with certain
management services, including all necessary office space, equipment, personnel
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .20% of the Fund's average daily net assets. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of the Fund's Fiduciary Shares.
Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of .18% of the average daily net assets of the Fund.
Pursuant to a separate agreement with the Administrator, Union Bank of
California, N.A. performs sub-administration services on behalf of the Fund, for
which it receives a fee paid by the Administrator at the annual rate of up to
0.05% of the Fund's average daily net assets. Union Bank of California has
voluntarily agreed to reduce this fee to 0.03%, but reserves the right to
terminate its waiver at any time in its sole discretion. A description of the
services performed by Union Bank of California pursuant to this Agreement is
contained in the Statement of Additional Information.
THE TRANSFER AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Fiduciary Shares
of HighMark, for which services it receives a fee.
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SHAREHOLDER SERVICE PLAN
To support the provision of Shareholder services to both classes of Shares,
HighMark has adopted a Shareholder Service Plan. A description of the services
performed by service providers pursuant to the Shareholder Service Plan is
contained in the Statement of Additional Information. In consideration of
services provided by any service provider, which may include Union Bank of
California, N.A., Bank of Tokyo-Mitsubishi, Ltd., or their respective
affiliates, the Fund may pay a fee at the rate of up to 0.25% of its average
daily net assets to such service provider. The service provider may waive such
fees at any time. Any such waiver is voluntary and may be terminated at any
time. Currently, such fees are being waived to the rate of 0.00% of average
daily net assets.
DISTRIBUTOR
SEI Financial Services Company (the "Distributor") and HighMark are parties to a
distribution agreement ("Distribution Agreement"). The Distribution Agreement is
renewable annually and may be terminated by the Distributor, by a majority vote
of the Disinterested Trustees or by a majority vote of the outstanding
securities of HighMark upon not more than 60 days written notice by either
party, or upon assignment by the Distributor. Fiduciary Shares are not subject
to HighMark's Distribution Plan or a distribution fee.
BANKING LAWS
Union Bank of California believes that it may perform the services for the Fund
contemplated by its investment advisory agreement with HighMark without a
violation of applicable banking laws and regulations. Union Bank of California
also believes that it may perform sub-administration services on behalf of the
Fund, for which it receives compensation from SEI Fund Resources, without a
violation of applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could change the manner in which Union Bank of
California or the Advisor could continue to perform such services for the Fund.
For a further discussion of applicable banking laws and regulations, see the
Statement of Additional Information.
CUSTODIAN
Union Bank of California also serves as the custodian and as a shareholder
servicing agent for the Convertible Securities Fund. The custodian holds cash
securities and other assets of HighMark as required by the 1940 Act.
Services performed by Union Bank of California, as the Fund's shareholder
servicing agent and custodian, as well as the basis of remuneration for such
services, are described in the Statement of Additional Information.
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GENERAL INFORMATION
DESCRIPTION OF HIGHMARK & ITS SHARES
HighMark was organized as a Massachusetts business trust on March 10, 1987, and
consists of sixteen series of Shares representing units of beneficial interest
in HighMark's Growth Fund, Income Equity Fund, Balanced Fund, Value Momentum
Fund, Blue Chip Growth Fund, Emerging Growth Fund, International Equity Fund,
Bond Fund, Intermediate-Term Bond Fund, Government Securities Fund, Convertible
Securities Fund, California Intermediate Tax-Free Bond Fund, Diversified Money
Market Fund, U.S. Government Obligations Money Market Fund, 100% U.S. Treasury
Obligations Money Market Fund, and California Tax-Free Money Market Fund. As of
the date hereof, no Shares of the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Convertible Securities Fund, the Government
Securities Fund, and the California Intermediate Tax-Free Bond Fund, had been
offered for sale in HighMark. Shares of each Fund are freely transferable, are
entitled to distributions from the assets of the Fund as declared by the Board
of Trustees, and, if HighMark were liquidated, would receive a pro rata share of
the net assets attributable to that Fund. Shares are without par value.
As noted above, pursuant to a Multiple Class Plan on file with the Securities
and Exchange Commission permitting the issuance and sale of two classes of
Shares in selected Funds, Shares of such Funds have been divided into two
classes, designated Retail Shares and Fiduciary Shares. For information
regarding the Retail Shares, interested persons may contact the Distributor for
a prospectus at 1-800-734-2922.
PERFORMANCE INFORMATION
From time to time, HighMark may advertise the aggregate total return, average
annual total return, yield and distribution rate with respect to the Fiduciary
Shares of the Convertible Securities Fund.
The aggregate total return and average annual total return of the Convertible
Securities Fund may be quoted for the life of the Fund and for ten-year,
five-year and one-year periods, in each case through the most recent calendar
quarter. Aggregate total return is determined by calculating the change in the
value of a hypothetical $1,000 investment in the Fund over the applicable period
that would equate the initial amount invested to the ending redeemable value of
the investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing the Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the average positive or
negative investment results that an investor in the Fund would have experienced
on an annual basis from changes in Share price and reinvestment of dividends and
capital gain distributions.
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The yield of the Fund is determined by annualizing the net investment income per
Share of the Fund during a specified thirty-day period and dividing that amount
by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of the Fund is determined by dividing the income and
capital gains distributions, or where indicated the income distributions alone,
on a Share of the Fund over a twelve-month period by the per Share public
offering price of the Fund on the last day of the period.
The Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may advertise performance that includes
results from periods in which the Fund's assets were managed in a non-registered
predecessor vehicle.
All performance information presented for the Fund is based on past performance
and does not predict future performance.
MISCELLANEOUS
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in the Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark will vote in the aggregate and not by series or
class except (i) as otherwise expressly required by law or when HighMark's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the Shareholders of a particular series or particular class, and
(ii) only Retail Shares will be entitled to vote on matters submitted to a
Shareholder vote relating to the Distribution Plan. HighMark is not required to
hold regular annual meetings of Shareholders, but may hold special meetings from
time to time.
HighMark's Trustees are elected by Shareholders, except that vacancies may be
filled by vote of the Board of Trustees. Trustees may be removed by the Board of
Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling toll free
1-800-734-2922.
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DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Funds.
The Convertible Securities Fund invests in only the instruments permitted by is
individual investment objective and policies.
AMERICAN DEPOSITARY RECEIPTS (ADRs) -- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
ASSET-BACKED SECURITIES (NON-MORTGAGE) -- Debt Instruments secured by
company receivables, truck and auto loans, leases, and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such securities. Asset-backed securities entail
prepayment risk, which may vary depending on the type of asset, but is generally
less than the prepayment risk associated with mortgage-backed securities.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to substantial prepayment
risk, which may reduce the overall return to certificate holders. Nevertheless,
principal prepayment rates tend not to vary as much in response to changes in
interest rates and the short-term nature of the underlying car loans or other
receivables tend to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the Fixed Income Funds
may invest in other asset-backed securities that may be developed in the future.
BANKERS' ACCEPTANCES -- Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT -- Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit 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.
COMMERCIAL PAPER -- Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
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CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK -- Convertible Bonds
are bonds convertible into a set number of shares of another form of security
(usually common stock) at a prestated price. Convertible bonds have
characteristics similar to both fixed-income and equity securities. Convertible
preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and
the liquidation of assets. Convertible preferred stock is preferred stock
exchangeable for a given number of common stock shares, and has characteristics
similar to both fixed-income and equity securities. Because of the conversion
feature, the market value of convertible bonds and convertible preferred stock
tend to move together with the market value of the underlying stock. As a
result, a Fund's selection of convertible bonds and convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible bonds and convertible
preferred stock is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES -- Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES -- Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS -- Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay
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<PAGE> 509
principal and interest when due, a Fund may encounter delays, expenses and risks
that are greater than those that would have been involved if the Fund had
purchased a direct obligation (such as commercial paper) of such borrower
because it may be necessary under the terms of the loan participation, for the
Fund to assert its rights against the borrower through the intermediary bank.
Moreover, under the terms of a loan participation, the purchasing Fund may be
regarded as a creditor of the intermediary bank (rather than of the underlying
corporate borrower), so that a Fund may also be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the bankruptcy or
insolvency of the corporate borrower, a loan participation may be subject to
certain defenses that can be asserted by such borrower as a result of improper
conduct by the issuing bank. The secondary market, if any, for these loan
participations is limited, and any such participation purchased by a Fund may be
regarded as illiquid.
LOWER-RATED, HIGHER-YIELDING, HIGH-RISK DEBT SECURITIES -- High-yield, high-risk
securities consist of securities rated Ba or lower by Moody's or BB or lower by
S&P. Lower-rated debt securities are considered speculative and involve greater
risk of loss than investment grade debt securities, and are more sensitive to
changes in the issuer's capacity to pay. For a description of the debt
securities ratings, see the "Appendix."
MONEY MARKET INSTRUMENTS -- Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TRs, TIGRs and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations issued by a bank in the United States
with assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose obligations the Fund may invest; (viii) money market funds
and (ix) foreign commercial paper.
Certain of the obligations in which a Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
MORTGAGE-BACKED SECURITIES -- Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgage-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means
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that both interest and principal payments (including prepayments) are passed
through monthly to the holder of the certificate. Each GNMA certificate
evidences an interest in a specific pool of mortgage loans insured by the
Federal Housing Administration or the Farmers Home Administration or guaranteed
by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Although payments on certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of such securities
is not secured and may fluctuate significantly because of changes in interest
rates and changes in prepayment levels. Thus, for example, if a Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether due to changes in interest
rates or prepayments of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of mortgage-related securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related security may decline when interest rates rise, the converse
is not necessarily true because in periods of declining interest rates the
mortgages underlying the securities are prone to prepayment which results in
amounts being available for reinvestment which are likely to be invested at a
lower interest rate. For this and other reasons, the stated maturity of a
mortgage-related security may be shortened by unscheduled prepayments on the
underlying mortgages and, accordingly, it is not possible to predict accurately
the security's return to a Fund. In addition, regular payments received on
mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested. As a consequence, mortgage-related securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity, may have less potential for capital
appreciation and may be considered riskier investments as a result.
Adjustable rate mortgage securities ("ARMS") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annual) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon
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rate and has a stated maturity or final distribution date. The principal and
interest payment on the underlying mortgages may be allocated among the classes
of CMOs in several ways. Typically, payments of principal, including any
prepayments, on the underlying mortgages would be applied to the classes in the
order of their respective stated maturities or final distribution dates, so that
no payment of principal will be made on CMOs of a class until all CMOs of other
classes having earlier stated maturities or final distribution dates have been
paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or is
collateralized by privately issued fixed rate or adjustable rate mortgages.
Securities such as zero-coupon obligations, mortgage-backed and asset-backed
securities, and collateralized mortgage obligations ("CMOs") will have greater
price volatility then other fixed-income obligations. Because declining interest
rates may lead to prepayment of underlying mortgages, automobile sales contracts
or credit card receivables, the prices of mortgage-related and asset-backed
securities may not rise with a decline in interest rates. Mortgage-backed and
asset-backed securities and CMOs are extremely sensitive to the rate of
principal prepayment. Similarly, callable corporate bonds also present risk of
prepayment. During periods of falling interest rates, securities that can be
called or prepaid may decline in value relative to similar securities that are
not subject to call or prepayment.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
MUNICIPAL FORWARDS -- Municipal Forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. As with forward commitments and when-issued securities, municipal forwards
are subject to market fluctuations due to changes, real or anticipated, in
market interest rates between the commitment date and the settlement date and
will have the effect of leveraging the Fund's assets. Municipal forwards may be
considered to be illiquid investments. The Fund will maintain liquid, high-grade
securities in a segregated account in an amount at least equal to the purchase
price of the municipal forward.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) certain private activity and industrial development bonds
issued by or on behalf of public authorities to obtain funds to provide for
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the construction, equipment, repair or improvement of privately operated
facilities. Municipal notes include general obligation notes, tax anticipation
notes, revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
OPTIONS -- Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, certain Funds may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction" -- the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
PARTICIPATION INTERESTS -- Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of particpations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying municipal securities.
RECEIPTS -- Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury
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Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"), and
"Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and CATS
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 securities. See also "FEDERAL TAXATION."
REPURCHASE AGREEMENTS -- Agreements whereby a Fund will acquire securities from
approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to a Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS -- A Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements, provided such action is
consistent with the Fund's investment objective and fundamental investment
restrictions; as a matter of non-fundamental policy, each Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, a Fund will sell portfolio securities to
financial institutions such as banks or to broker-dealers, and agree to
repurchase the securities at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of the Group has
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established guidelines and procedures to be utilized to determine the liquidity
of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES -- Securities purchased for delivery beyond the normal settlement
date at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When a Fund agrees to purchase when-issued securities or
enter into forward commitments, the Group's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a segregated account. A Fund will generally not pay for such securities and
no income will accrue on the securities until they are received. These
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Therefore, the purchase of
securities on a "when-issued" basis or forward commitments may increase the risk
of fluctuations in a Fund's net asset value.
SECURITIES LENDING -- During the time portfolio securities are on loan from a
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while a Fund will generally not have the right to vote
securities on loan, it will terminate the loan and regain the right to vote if
that is considered important with respect to the investment. While the lending
of securities may subject a Fund to certain risks, such as delays or an
inability to regain the securities in the event the borrower were to default on
its lending agreement or enter into bankruptcy, a Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE -- A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs) -- SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TAX-EXEMPT COMMERCIAL PAPER -- Commercial paper, which is commercial paper
issued by governments and political sub-divisions.
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TIME DEPOSITS -- Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES -- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS -- 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.
U.S. Government Securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when a Fund's average maturity is longer, under certain market conditions
the Fund may invest in short-term investments yielding lower current income
rather than investing in higher yielding longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS -- Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
YANKEE BONDS -- Dollar denominated securities issued by foreign-domiciled
issuers that obligate the issuer to pay the bondholder a specified sum of money,
usually semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational
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entities, such as the World Bank and European Investment Bank. Canadian bonds
are bonds issued by Canadian provinces.
ZERO-COUPON OBLIGATIONS -- Non-income producing securities evidencing ownership
of future interest and principal payments on bonds. These obligations pay no
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price.
For federal income tax purposes, the difference between the par value and the
original issue price (original issue discount) is included in the income of a
holder of a zero-coupon obligation over the term of the obligation even though
the interest is not paid until maturity. The amount included in income is
determined under a constant interest rate method. In addition, if an obligation
is purchased subsequent to its original issue, a holder such as the Income Funds
may elect to include market discount in income currently on a ratable accrual
method or a constant interest rate method. Market discount is the difference
between the obligation's "adjusted issue price" (the original issue price plus
original issue discount accrued to date) and the holder's purchase price. If no
such election is made, gain on the disposition of a market discount obligation
is treated as ordinary income (rather than capital gain) to the extent it does
not exceed the accrued market discount.
Zero-coupon obligations have greater price volatility than other fixed-income
obligations of similar maturity and such obligations will be purchased when the
yield spread, in light of the obligation's duration, is considered advantageous.
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HIGHMARK CONVERTIBLE SECURITIES FUND
INVESTMENT PORTFOLIO OF
HIGHMARK FUNDS
FOR FURTHER INFORMATION (INCLUDING CURRENT
YIELD, PURCHASE AND REDEMPTION INFORMATION),
CALL 1-800-734-2922
INVESTMENT ADVISOR
Pacific Alliance Capital Management,
a division of Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
SUB-ADVISOR
Bank of Tokyo-Mitsubishi Trust Company
1251 Avenue of the Americas
New York, New York 10116
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Financial Services Company
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, OH 45402
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HIGHMARK OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY HIGHMARK OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
NOT FDIC INSURED
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[HIGHMARK LOGO]
HIGHMARK FUNDS
TRS-17236(R12/95)
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CROSS REFERENCE SHEET
HIGHMARK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Form N-1A Part B Item Information Caption
- --------------------- -------------------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Additional Information--Description of Shares
13. Investment Objectives and Policies Investment Objectives and Policies; Additional Information
on Portfolio Instruments
14. Management of HighMark Management of HighMark
15. Control Persons and Principal
Holders of Securities Additional Information-- Miscellaneous
16. Investment Advisory and Other
Services Management of HighMark
17. Brokerage Allocation Management of HighMark-- Portfolio Transactions
18. Capital Stock and Other Securities Valuation; Additional Purchase and Redemption
Information; Management of HighMark-- Distributor; The
Distribution Plans; Additional Information
19. Purchase, Redemption and Valuation; Additional Purchase and Redemption
Pricing of Securities Being Information; Management of HighMark
Offered
20. Tax Status Additional Purchase and Redemption Information--
Additional Federal Tax Information; Additional Tax
Information Concerning the California Tax-Free
Money Market Fund and the California Intermediate
Tax-Free Bond Fund
21. Underwriters Management of HighMark -- Distributor
22. Calculation of Performance Data Additional Information -- Calculation of Performance Data
23. Financial Statements Independent Auditors' Report for HighMark Funds
for the Year Ended July 31, 1996/Financial
Statements for HighMark Funds for the Periods
Ended July 31, 1996
</TABLE>
<PAGE> 521
HIGHMARK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
[ ], 1997
This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectuses of the HighMark Equity Funds, the HighMark
Fixed Income Funds and the HighMark Money Market Funds, each of which is dated
[ ], 1997 (collectively, the "Prospectuses") and any supplements thereto. This
Statement of Additional Information is incorporated in its entirety into the
Prospectuses. Copies of the Prospectuses may be obtained by writing the
Distributor, SEI Financial Services Company, at 680 East Swedesford Road, Wayne,
Pennsylvania, 19087-1658, or by telephoning toll free 1-800-734-2922.
Capitalized terms used but not defined herein have the same meanings as set
forth in the Prospectuses.
<PAGE> 522
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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HIGHMARK FUNDS.................................................................................... 1
INVESTMENT OBJECTIVES AND POLICIES................................................................. 2
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS.................................................... 2
Bank Instruments.......................................................................... 2
Commercial Paper and Variable Amount Master Demand Notes.................................. 3
Loan Participations....................................................................... 3
Lending of Portfolio Securities........................................................... 4
Repurchase Agreements..................................................................... 4
Reverse Repurchase Agreements............................................................. 5
U.S. Government Obligations............................................................... 5
Mortgage-Related Securities............................................................... 6
Adjustable Rate Notes.................................................................... 7
Municipal Securities...................................................................... 8
Investments in California Municipal Securities by the California Tax-Free Money
Market Fund and the California Intermediate Tax-Free Bond Fund............................ 11
Puts .................................................................................. 14
Shares of Mutual Funds.................................................................... 14
When-Issued Securities and Forward Commitments........................................... 15
Zero-Coupon Securities.................................................................... 15
High Quality Investments with Regard to the Money Market Funds............................ 29
INVESTMENT RESTRICTIONS............................................................................ 31
Illiquid Securities....................................................................... 37
Voting Information........................................................................ 38
PORTFOLIO TURNOVER................................................................................. 38
VALUATION.......................................................................................... 39
Valuation of the Money Market Funds....................................................... 39
Valuation of the Equity Funds and the Fixed Income Funds.................................. 39
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................... 40
Additional Federal Tax Information........................................................ 40
Additional Tax Information Concerning The California Tax-Free Money
Market Fund and The California Intermediate Tax-Free Bond Fund................... 43
Federal Taxation.......................................................................... 43
</TABLE>
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<TABLE>
<S> <C>
California Taxation.................................................................................... 45
Foreign Taxes.......................................................................................... 46
MANAGEMENT OF HIGHMARK......................................................................................... 47
Trustees and Officers.................................................................................. 47
Investment Advisor.................................................................................... 51
The Sub-Advisors....................................................................................... 53
Portfolio Transactions................................................................................. 54
Glass-Steagall Act..................................................................................... 55
Administrator and Sub-Administrator.................................................................... 56
Shareholder Services Plan.............................................................................. 58
Expenses .............................................................................................. 59
Distributor............................................................................................ 60
The Distribution Plans................................................................................. 60
Transfer Agent and Custodian Services................................................................. 61
Auditors .............................................................................................. 62
Legal Counsel.......................................................................................... 62
ADDITIONAL INFORMATION.......................................................................................... 62
Description of Shares.................................................................................. 62
Shareholder and Trustee Liability...................................................................... 64
The Reorganization of the IRA Fund and HighMark....................................................... 65
Calculation of Performance Data........................................................................ 65
Miscellaneous.......................................................................................... 71
APPENDIX ....................................................................................................... 80
INDEPENDENT AUDITORS' REPORT FOR HIGHMARK FUNDS FOR
THE YEAR ENDED JULY 31, 1996........................................................................... 87
FINANCIAL STATEMENTS FOR HIGHMARK FUNDS FOR
THE PERIODS ENDED JULY 31, 1996........................................................................ 88
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
HIGHMARK FUNDS
HighMark Funds ("HighMark") is a diversified, open-end management
investment company. HighMark presently consists of sixteen series of Shares,
representing units of beneficial interest in the HighMark Growth Fund, the
HighMark Income Equity Fund, the HighMark Balanced Fund, the HighMark Value
Momentum Fund, the HighMark Blue Chip Growth Fund, the HighMark Emerging Growth
Fund, the HighMark International Equity Fund, the HighMark Bond Fund, the
HighMark Intermediate-Term Bond Fund, the HighMark Government Securities Fund,
the HighMark Convertible Securities Fund, the HighMark California Intermediate
Tax-Free Bond Fund, the HighMark Diversified Money Market Fund, the HighMark
U.S. Government Money Market Fund, the HighMark 100% U.S. Treasury Money Market
Fund, and the HighMark California Tax-Free Money Market Fund. As of the date
hereof, the HighMark Value Momentum Fund, the HighMark Blue Chip Growth Fund,
the HighMark Emerging Growth Fund, the HighMark International Equity Fund, the
HighMark Intermediate-Term Bond Fund, the HighMark Convertible Securities Fund,
the HighMark Government Securities Fund, and the HighMark California
Intermediate Tax-Free Bond Fund have not yet commenced operations in HighMark.
The HighMark Balanced Fund commenced operations on November 14, 1993 and the
HighMark Growth Fund commenced operations on November 18, 1993. The HighMark
Income Equity Fund and the HighMark Bond Fund commenced operations on June 23,
1988 as a result of the reorganization of the Income Equity Portfolio and the
Bond Portfolio, respectively, of the IRA Collective Investment Fund (the "IRA
Fund") described under "Additional Information - The Reorganization of the IRA
Fund and HighMark" below. The HighMark Diversified Money Market Fund, the
HighMark U.S. Government Money Market Fund and the 100% U.S. Treasury Money
Market Fund commenced operations on August 10, 1987. The HighMark California
Tax-Free Money Market Fund commenced operations on August 11, 1987.
As described in the Prospectuses, selected Funds of HighMark have been
divided into two classes of Shares (designated Retail Shares and Fiduciary
Shares) for purposes of HighMark's Distribution and Shareholder Services Plans
(the "Distribution Plans"), which Distribution Plans apply only to such Funds'
Retail Shares. Retail Shares and Fiduciary Shares are sometimes herein referred
to collectively as "Shares".
The Diversified Money Market Fund, the U.S. Government Money Market
Fund, the 100% U.S. Treasury Money Market Fund, and the California Tax-Free
Money Market Fund are sometimes herein referred to as the "Money Market Funds."
The Growth, Income Equity, Balanced, Value Momentum, Blue Chip Growth, Emerging
Growth, and International Equity Funds are sometimes referred to herein as the
"Equity Funds." The
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Bond, Intermediate-Term Bond, Government Securities, Convertible Securities, and
California Intermediate Tax-Free Bond Funds are sometimes referred to herein as
the "Fixed Income Funds." The Income Equity Portfolio and the Bond Portfolio of
the IRA Fund (which were reorganized into HighMark's Funds as described above)
are sometimes referred to herein as the "IRA Fund Portfolios."
Much of the information contained herein expands upon subjects
discussed in the Prospectuses for the respective Funds. No investment in Shares
of a Fund should be made without first reading that Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and
policies of each Fund of HighMark as set forth in the respective Prospectus for
that Fund.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
1. Bank Instruments. Consistent with its investment objective,
policies, and restrictions, each Fund (other than the U.S. Government Money
Market Fund, the 100% U.S. Treasury Money Market Fund, and the California
Tax-Free Money Market Fund) may invest in bankers' acceptances, certificates of
deposit, and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise that
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Investments in
bankers' acceptances will be limited to those guaranteed by domestic and foreign
banks having, at the time of investment, total assets of $1 billion or more (as
of the date of the institution's most recently published financial statements).
Certificates of deposit and time deposits represent funds deposited in
a commercial bank or a savings and loan association for a definite period of
time and earning a specified return.
Investments in certificates of deposit and time deposits may include
Eurodollar Certificates of Deposit, which are U.S. dollar denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States, Yankee Certificates of Deposit, which are
certificates of deposit issued by a U.S. branch of a foreign bank denominated in
U.S. dollars and held in the United States, Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar denominated deposits in a foreign branch of a U.S. bank or
a foreign bank, and Canadian Time Deposits ("CTDs"), which are U.S. dollar
denominated certificates of deposit issued by Canadian offices of major
Canadian banks. All investments in
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certificates of deposit and time deposits will be limited to those (a) of
domestic and foreignbanks and savings and loan associations which, at the time
of investment, have total assets of $1 billion or more (as of the date of the
institution's most recently published financial statements) or (b) the
principal amount of which is insured in full by the Federal Deposit Insurance
Corporation.
There is no limitation on the Diversified Money Market Fund's ability
to invest in domestic certificates of deposit , bankers' acceptances or other
bank instruments in connection with the Fund's fundamental investment
restriction governing concentration in the securities of one or more issuers
conducting their principal business activities in the same industry. For
purposes of this exception to the Fund's fundamental investment restriction,
domestic certificates of deposit and bankers' acceptances include those issued
by domestic branches of foreign banks to the extent permitted by the rules and
regulations of the Securities and Exchange Commission staff. These rules and
regulations currently permit U.S. branches of foreign banks to be considered
domestic banks if it can be demonstrated that they are subject to the same
regulation as U.S. banks.
2. Commercial Paper and Variable Amount Master Demand Notes. Consistent
with its investment objective, policies, and restrictions, each Fund (other than
the U.S. Government Money Market Fund and the 100% U.S. Treasury Money Market
Fund) may invest in commercial paper (including Section 4(2) commercial paper)
and variable amount master demand notes. Commercial paper consists of unsecured
promissory notes issued by corporations normally having maturities of 270 days
or less. These investments may include Canadian Commercial Paper, which is U.S.
dollar denominated commercial paper issued by a Canadian corporation or a
Canadian counterpart of a U.S. corporation, and Europaper, which is U.S. dollar
denominated commercial paper of a foreign issuer.
Variable amount master demand notes are unsecured demand notes that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate according to the terms of the instrument. Because master
demand notes are direct lending arrangements between a Fund and the issuer, they
are not normally traded. Although there is no secondary market in the notes, a
Fund may demand payment of principal and accrued interest at any time. A
variable amount master demand note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.
3. Loan Participations. As indicated in the Money Market Funds'
Prospectus, the Diversified Money Market Fund may invest in loan participations
pursuant to which the Fund acquires a portion of a bank or other lending
institution's interest in a secured or unsecured loan to a corporate borrower.
Although the Fund's ability to receive payments of principal and interest in
connection with a particular loan participation is primarily dependent on the
financial condition of the underlying borrower, the lending institution
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or bank may provide assistance in collecting interest and principal from the
borrower and in enforcing its rights against the borrower in the event of a
default. Loans in which the Fund may purchase loan participations may be made to
finance a variety of corporate purposes, but will not be made to finance highly
leveraged activities such as "leveraged buy-outs." Loan participations will be
subject to the Fund's non fundamental limitation governing investments in
"illiquid" securities. See "Investment Restrictions" below.
4. Lending of Portfolio Securities. In order to generate additional
income, each Fund (other than the California Tax-Free Money Market Fund) may
lend its portfolio securities to broker-dealers, banks or other institutions.
During the time portfolio securities are on loan from a Fund, the borrower will
pay the Fund any dividends or interest paid on the securities. In addition,
loans will be subject to termination by the Fund or the borrower at any time.
While the lending of securities may subject a Fund to certain risks, such as
delays or an inability to regain the securities in the event the borrower were
to default on its lending agreement or enter into bankruptcy, a Fund will
receive at least 100% collateral in the form of cash or U.S. Government
securities. This collateral will be valued daily by the lending agent, with
oversight by Pacific Alliance Capital Management (the "Advisor"), and, should
the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund. A Fund (other than the
California Tax-Free Money Market Fund) may lend portfolio securities in an
amount representing up to 331/3% of the value of the Fund's total assets.
5. Repurchase Agreements. Securities held by each Fund (other than the
100% U.S. Treasury Money Market Fund) may be subject to repurchase agreements.
As a matter of non fundamental policy, the California Tax-Free Money Market Fund
intends to limit investments in repurchase agreements to no more than 5% of the
value of its total assets.
Under the terms of a repurchase agreement, a Fund will deal with
financial institutions such as member banks of the Federal Deposit Insurance
Corporation having, at the time of investment, total assets of $100 million or
more and from registered broker-dealers that the Advisor deems creditworthy
under guidelines approved by HighMark's Board of Trustees. Under a repurchase
agreement, the seller agrees to repurchase the securities at a mutually
agreed-upon date and price, and the repurchase price will generally equal the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates, which may be more or less than the rate on the underlying
portfolio securities. The seller under a repurchase agreement will be required
to maintain the value of collateral held pursuant to the agreement at not less
than 102% of the repurchase price (including accrued interest) and the
Custodian, with oversight by the Advisor, will monitor the collateral's value
daily and initiate calls to request that collateral be restored to appropriate
levels. In addition, securities subject to repurchase agreements will be held in
a segregated custodial account.
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If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation would suffer a loss to the extent
that either the proceeds from a sale of the underlying portfolio securities were
less than the repurchase price under the agreement or the Fund's disposition of
the underlying securities was delayed pending court action. Additionally,
although there is no controlling legal precedent confirming that a Fund would be
entitled, as against a claim by the seller or its receiver or trustee in
bankruptcy, to retain the underlying securities, HighMark's Board of Trustees
believes that, under the regular procedures normally in effect for custody of a
Fund's securities subject to repurchase agreements and under federal laws, a
court of competent jurisdiction would rule in favor of the Fund if presented
with the question. Securities subject to repurchase agreements will be held by
HighMark's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
6. Reverse Repurchase Agreements. Each Fund (other than the 100% U.S.
Treasury Money Market Fund) may borrow funds for temporary purposes by entering
into reverse repurchase agreements, provided such action is consistent with the
Fund's investment objective and fundamental investment restrictions; as a matter
of non fundamental policy, each Fund intends to limit total borrowings under
reverse repurchase agreements to no more than 10% of the value of its total
assets. Pursuant to a reverse repurchase agreement, a Fund will sell portfolio
securities to financial institutions such as banks or to broker-dealers, and
agree to repurchase the securities at a mutually agreed-upon date and price. A
Fund intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high-quality debt securities consistent with the Fund's investment
objective having a value equal to 102% of the repurchase price (including
accrued interest), and will subsequently monitor the account to ensure that an
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
7. U.S. Government Obligations. With the exception of the 100% U.S.
Treasury Money Market Fund, which may invest only in direct U.S. Treasury
obligations, each Fund may, consistent with its investment objective, policies,
and restrictions, invest in obligations issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities. Obligations of certain agencies
and instrumentalities of the U.S. Government, such as those of the Government
National Mortgage Association and the Export-Import Bank of the United States,
are supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal National Mortgage Association, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Student
Loan Marketing Association, are supported by the discretionary authority of the
U.S. Government to purchase the agency's
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obligations; and still others, such as those of the Federal Farm Credit Banks or
the Federal Home Loan Mortgage Corporation, are supported only by the credit of
the instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law.
For information concerning mortgage-related securities issued by
certain agencies or instrumentalities of the U.S. Government, see
"Mortgage-Related Securities" below.
8. Mortgage-Related Securities. As indicated in the Money Market Funds'
Prospectus, the Diversified Money Market Fund and the U.S. Government Money
Market Fund may each invest in mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") representing GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes"). The Fixed Income Funds
and the Balanced Fund may also, consistent with each such Fund's investment
objective and policies, invest in Ginnie Maes and in mortgage-related securities
issued or guaranteed by the U.S. Government, its agencies, or its
instrumentalities or, those issued by nongovernmental entities. In addition, the
Fixed Income Funds and the Balanced Fund may invest in collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs").
Mortgage-related securities represent interests in pools of mortgage
loans assembled for sale to investors. Mortgage-related securities may be
assembled and sold by certain governmental agencies and may also be assembled
and sold by nongovernmental entities such as commercial banks, savings and loan
institutions, mortgage bankers, and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If a Fund purchases a mortgage-related security at
a premium, that portion may be lost if there is a decline in the market value of
the security, whether resulting from changes in interest rates or prepayments in
the underlying mortgage collateral. As with other interest-bearing securities,
the prices of mortgage-related securities are inversely affected by changes in
interest rates. However, although the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true because
in periods of declining interest rates the mortgages underlying the security are
prone to prepayment. For this and other reasons, a mortgage-related security's
stated maturity may be shortened by unscheduled prepayments on the underlying
mortgages and, therefore, it is not possible to predict accurately the
security's return to the Fund. In addition, regular payments received in respect
of mortgage-related securities include both interest and principal. No assurance
can be given as to the return a Fund will receive when these amounts are
reinvested.
There are a number of important differences both among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities themselves. As noted above, Ginnie Maes are issued by
GNMA, which is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban
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Development. Ginnie Maes are guaranteed as to the timely payment of principal
and interest by GNMA and GNMA's guarantee is backed by the full faith and credit
of the U.S. Treasury. In addition, Ginnie Maes are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under GNMA's
guarantee. Mortgage-related securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates
(also known as "Fannie Maes"), which are solely the obligations of the FNMA and
are not backed by or entitled to the full faith and credit of the U.S. Treasury.
The FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of principal and
interest by FNMA. Mortgage-related securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "PCs"). The FHLMC is a corporate
instrumentality of the U.S. Government, created pursuant to an Act of Congress,
which is owned entirely by the Federal Home Loan Banks. Freddie Macs are not
guaranteed by the U.S. Treasury or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the U.S. Government or of any Federal Home
Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which
is guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
CMOs in which the Fixed Income Funds and the Balanced Fund may invest
represent securities issued by a private corporation or a U.S. Government
instrumentality that are backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs are issued with a number of classes or series
that have different maturities and that may represent interests in some or all
of the interest or principal on the underlying collateral or a combination
thereof. CMOs of different classes are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. In the event of
sufficient early prepayments on such mortgages, the class or series of a CMO
first to mature generally will be retired prior to its maturity. Thus, the early
retirement of a particular class or series of a CMO held by a Fund would have
the same effect as the prepayment of mortgages underlying a mortgage-backed
pass-through security.
REMICs in which the Fixed Income Funds and the Balanced Fund may
invest are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities.
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9. Adjustable Rate Notes. Consistent with its investment objective,
policies, and restrictions, each Fund (other than the 100% U.S. Treasury Money
Market Fund) may invest in "adjustable rate notes," which include variable rate
notes and floating rate notes. For Money Market Fund purposes, a variable rate
note is one whose terms provide for the readjustment of its interest rate on set
dates and that, upon such readjustment, can reasonably be expected to have a
market value that approximates its amortized cost; the degree to which a
variable rate note's market value approximates its amortized cost subsequent to
readjustment will depend on the frequency of the readjustment of the note's
interest rate and the length of time that must elapse before the next
readjustment. A floating rate note is one whose terms provide for the
readjustment of its interest rate whenever a specified interest rate changes and
that, at any time, can reasonably be expected to have a market value that
approximates its amortized cost. Although there may be no active secondary
market with respect to a particular variable or floating rate note purchased by
a Fund, the Fund may seek to resell the note at any time to a third party. The
absence of an active secondary market, however, could make it difficult for the
Fund to dispose of a variable or floating rate note in the event the issuer of
the note defaulted on its payment obligations and the Fund could, as a result or
for other reasons, suffer a loss to the extent of the default. Variable or
floating rate notes may be secured by bank letters of credit. A demand
instrument with a demand notice period exceeding seven days may be considered
illiquid if there is no secondary market for such security. Such security will
be subject to a Fund's non fundamental 15% (10% in the case of the Money Market
Funds) limitation governing investments in "illiquid" securities, unless such
notes are subject to a demand feature that will permit the Fund to receive
payment of the principal within seven days of the Fund's demand. See "Investment
Restrictions" below.
Maturities for variable and adjustable rate notes held in the Money
Market Funds will be calculated in compliance with the provisions of Rule 2a-7,
as it may be amended from time to time.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
not more than thirty days' notice or at specified intervals, not exceeding 397
days and upon not more than thirty days' notice.
10. Municipal Securities. As defined in the Prospectuses, under normal
market conditions, at least 80% of the total assets of the California Tax-Free
Money Market Fund and 80% of the total assets of the California Intermediate
Tax-Free Bond Fund will be invested in Municipal Securities, the interest on
which is both excluded from gross income for federal income tax and California
personal income tax purposes and not treated as a preference item for
individuals for purposes of the federal alternative minimum tax. The California
Intermediate Tax-Free Bond Fund invests in Municipal Securities of varying
maturities, which are rated in one of the four highest rating categories by at
least one nationally recognized statistical organization ("NRSRO") or are
determined by the Advisor to be of comparable quality. The California Tax-Free
Money Market Fund
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invests only in Municipal Securities with remaining maturities of 397 days or
less, and which, at the time of purchase, possess the highest short-term rating
from at least one NRSRO or are determined by the Advisor to be of comparable
quality.
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and public entities. Private activity bonds that are issued
by or on behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Securities if the interest
paid thereon is (i) excluded from gross income for federal income tax purposes
and (ii) not treated as a preference item for individuals for purposes of the
federal alternative minimum tax.
As described in the Prospectuses, the two principal classifications of
Municipal Securities consist of "general obligation" and "revenue" issues. In
general, only general obligation bonds are backed by the full faith and credit
and general taxing power of the issuer. There are, of course, variations in the
quality of Municipal Securities, both within a particular classification and
between classifications, and the yields on Municipal Securities depend upon a
variety of factors, including general market conditions, the financial condition
of the issuer (or other entity whose financial resources are supporting the
Municipal Securities), general conditions of the municipal bond market, the size
of a particular offering, the maturity of the obligation and the rating(s) of
the issue. In this regard, it should be emphasized that the ratings of any NRSRO
are general and are not absolute standards of quality; Municipal Securities with
the same maturity, interest rate and rating(s) may have different yields while
Municipal Securities of the same maturity and interest rate with a different
rating(s) may have the same yield.
An issuer's obligations with respect to its Municipal Securities are
subject to the provisions of bankruptcy, insolvency, and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, that may be enacted by Congress or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon the enforcement of such obligations or upon the ability of
municipalities to levy taxes or otherwise raise revenues. Certain of the
Municipal Securities may be revenue securities and dependent on the flow of
revenue, generally in the form of fees and charges. The power or ability of an
issuer to meet its obligations for the payment of interest on and principal of
its Municipal Securities may be materially adversely affected by litigation or
other conditions, including a decline in property value or a destruction of
uninsured property due to natural disasters.
In addition, in accordance with its investment objective, each Fund may
invest in private activity bonds, which may constitute Municipal Securities
depending upon the federal income tax treatment of such bonds. Such bonds are
usually revenue bonds because the source of payment and security for such bonds
is the financial resources of the private entity
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involved; the full faith and credit and the taxing power of the issuer in normal
circumstances will not be pledged. The payment obligations of the private entity
also will be subject to bankruptcy and similar debtor's rights, as well as other
exceptions similar to those described above. Moreover, the Funds may invest in
obligations secured in whole or in part by a mortgage or deed of trust on real
property located in California that are subject to the "anti-deficiency"
legislation discussed below.
The Funds may also invest indirectly in Municipal Securities by
purchasing the shares of tax-exempt money market mutual funds. Such investments
will be made solely for the purpose of investing short-term cash on a temporary
tax-exempt basis and only in those funds with respect to which the Advisor
believes with a high degree of certainty that redemption can be effected within
seven days of demand. Additional limitations on investments by the Funds in the
shares of other tax-exempt money market mutual funds are set forth under
"Investment Restrictions" below.
Certain Municipal Securities in the Funds may be obligations that are
payable solely from the revenues of health care institutions, although the
obligations may be secured by real or personal property of such institutions.
Certain provisions under federal and California law may adversely affect such
revenues and, consequently, payment on those Municipal Securities.
Certain Municipal Securities in which the Funds may invest may be
obligations that are secured in whole or in part by a mortgage or deed of trust
on real property. California has certain statutory provisions that limit the
remedies of a creditor secured by a mortgage or deed of trust. Two of the
provisions limit a creditor's right to obtain a deficiency judgment, one
limitation being based on the method of foreclosure and the other on the type of
debt secured. A third statutory provision, commonly known as the "single action"
rule, has two aspects, an "affirmative defense aspect" and a "sanction aspect."
The "affirmative defense" aspect limits creditors secured by real property to a
single legal action for recovery of their debt, and that single action must be a
judicial foreclosure action against their real property security. Under the
"sanction" aspect, if the real estate-secured creditor proceeds by legal action
other than judicial foreclosure, the creditor loses its lien on the real
property security and, in some instances, the right to recover its debt. Another
statutory provision gives the debtor the right to redeem the real property from
any judicial foreclosure sale.
Upon the default under a mortgage or deed of trust with respect to
California real property, a creditor's nonjudicial foreclosure rights under the
power of sale contained in the mortgage or deed of trust are subject to certain
procedural requirements whereby the effective minimum period for foreclosing on
a mortgage or deed of trust is generally four to five months after the initial
default and such foreclosure could be further delayed by bankruptcy proceedings
initiated by the debtor. Such time delays in collections could disrupt the flow
of revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
Following a creditor's non-judicial foreclosure under
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a power of sale, no deficiency judgment is available. This limitation, however,
does not apply to bonds authorized or permitted to be issued by the Commissioner
of Corporations, or which are made by a public utility subject to the Public
Utilities Act.
Certain Municipal Securities in the Funds may be obligations that
finance the acquisition of mortgages for low and moderate income mortgagors.
These obligations may be payable solely from revenues derived from home
mortgages and are subject to California's statutory limitations applicable to
obligations secured by real property, as described above. Under California
anti-deficiency legislation, there is no personal recourse against a mortgagor
of a dwelling of no more than four units, at least one of which is occupied by
such a mortgagor, where the dwelling has been purchased with the loan that is
secured by the mortgage, regardless of whether the creditor chooses judicial or
nonjudicial foreclosure. In the event that this purchase money anti-deficiency
rule applies to a loan secured by a mortgage or deed of trust, and the value of
the property subject to that mortgage or deed of trust has been substantially
reduced because of market forces or by an earthquake or other event for which
the mortgagor or trustor carried no insurance, upon default, the issuer holding
that loan nevertheless would be entitled to collect no more on its loan than it
could obtain from the foreclosure sale of the property.
Legislation has been introduced from time to time regarding the
California state personal income tax status of interest paid on Municipal
Securities issued by the State of California and its local governments and held
by investment companies such as the California Tax-Free Money Market Fund and
the California Intermediate Tax-Free Bond Fund. The Funds can not predict what
legislation relating to Municipal Securities, if any, may be proposed in the
future or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially adversely affect the availability of
Municipal Securities generally, as well as the availability of Municipal
Securities issued by the State of California and its local governments
specifically, for investment by the Funds and the liquidity and value of their
portfolios. In such an event, each Fund would re-evaluate its investment
objective and policies and consider changes in its structure or possible
dissolution. See "Investments in California Municipal Securities by the
California Tax-Free Money Market Fund and the California Intermediate Tax-Free
Bond Fund" below.
11. Investments in California Municipal Securities by the California
Tax-Free Money Market Fund and the California Intermediate Tax-Free Bond Fund.
The following information is a general summary intended to give a recent
historical description, and is not a discussion of any specific factors that may
affect any particular issuer of California Municipal Securities. The information
is not intended to indicate continuing or future trends in the condition,
financial or otherwise, of California.
Because each Fund expects to invest substantially all of its assets in
California Municipal Securities, it will be susceptible to a number of complex
factors affecting the issuers of California Municipal Securities, including
national and local political, economic, social,
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environmental, and regulatory policies and conditions. The Funds cannot predict
whether or to what extent such factors or other factors may affect the issuers
of California Municipal Securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities to pay
interest on, or principal of, such securities. The creditworthiness of
obligations issued by a local California issuer may be unrelated to the
creditworthiness of obligations issued by the State of California, and there is
no responsibility on the part of the State of California to make payments on
such local obligations.
From mid-1990 to late 1993, California suffered the most severe
recession in the State since the 1930's, with significant job losses
(particularly in the aerospace, other manufacturing, services and construction
sectors). The greatest effects of the recession were felt in Southern
California. While a steady recovery has been underway since 1994, pre-recession
employment levels are not expected to be reached until later in the decade.
The recession severely affected State revenues while the State's
health, welfare and education costs were increasing. The State's ability to
raise revenues and reduce expenditures to the extent necessary to balance the
budget for any year depends upon numerous factors, including economic conditions
in the State and the nation, the accuracy of the State's revenue predictions, as
well as the impact of budgetary restrictions imposed by voter-passed
initiatives.
During the recession that began in 1990, the State depleted its
available cash resources and became increasingly dependent on external
borrowings to meet its cash needs. For over a decade, California has issued
revenue anticipation notes (which must be issued and repaid during the same
fiscal year) to fund its operating budget during the fiscal year. Beginning in
1992, the State expanded its external borrowing to include revenue anticipation
warrants (which can be issued and redeemed in different fiscal years). The State
was severely criticized by the major credit rating agencies for the State's
reliance upon such external borrowings during the recession. In 1996, the State
fully repaid $4 billion of revenue anticipation warrants issued in 1994. The
State anticipates that it will not need to use such "cross-year" borrowing
during the 1996-97 fiscal year. It is not presently possible, however, to
determine the extent to which California will issue additional revenue
anticipation warrants, short-term interest-bearing notes or other instruments in
future fiscal years.
Certain of the securities in the California Tax-Free Money Market Fund
and the California Intermediate Tax-Free Bond Fund may be obligations of issuers
that rely in whole or in part, directly or indirectly, on ad valorem real
property taxes as a source of revenue. Article XIII A of the California
Constitution, adopted by the voters in 1978, limits ad valorem taxes on real
property, and restricts the ability of taxing entities to increase real property
and other taxes. Constitutional challenges to Article XIII A to date have been
unsuccessful.
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Article XIII B of the California Constitution limits significantly
spending by state government and by "local governments". Article XIII B
generally limits the amount of the appropriations of the State and of local
governments to the amount of appropriations of the entity for the prior year,
adjusted for changes in the cost of living, population, and the services that
the government entity is financially responsible for providing. To the extent
that the"proceeds of taxes" of the State or a local government exceed its
"appropriations limit," the excess revenues must be rebated. One of the
exclusions from these limitations for any entity of government is the debt
service costs of bonds existing or legally authorized as of January 1, 1979 or
on bonded indebtedness thereafter approved by the voters. Although Article XIII
B states that it shall not "be construed to impair the ability of the state or
of any local government to meet its obligations with respect to existing or
future bonded indebtedness," concern has been expressed with respect to the
combined effect of such constitutionally imposed spending limits on the ability
of California state and local governments to utilize bond financing.
Article XIII B was modified substantially by Propositions 98 and 111 of
1988 and 1990, respectively. These initiatives changed the State's Article XIII
B appropriations limit to require that the State set aside a prudent reserve
fund for public education, and guarantee a minimum level of State funding for
public elementary and secondary schools as well as community colleges. Such
guaranteed spending is often cited as one of the causes of the State's recurring
budget problems.
The effect of Article XIII A, Article XIII B and other constitutional
and statutory changes and of budget developments on the ability of California
issuers to pay interest and principal on their obligations remains unclear, and
may depend on whether a particular bond is a general obligation or limited
obligation bond (limited obligation bonds being generally less affected).
There is no assurance that any California issuer will make full or
timely payments of principal or interest or remain solvent. For example, in
December 1994, Orange County filed for bankruptcy. In June 1995, Orange County
negotiated a rollover of its short-term debt originally due at that time; the
major rating agencies considered the rollover a default. The Orange County
bankruptcy and such default have had a serious effect upon the market for
California municipal obligations.
Reductions in federal funding may adversely affect the State and
municipal economies. Welfare reform enacted in 1996 is expected to result in the
loss of approximately $6.8 billion in federal assistance available to the State
over the next six years; $5.8 billion of this amount relates to assistance for
resident noncitizens.
In addition, it is impossible to predict the time, magnitude, or
location of a natural catastrophe, such as 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
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four-county area. The possibility exists that another such earthquake could
create a major dislocation of the California economy.
The Funds' concentration in California Municipal Securities provides a
greater level of risk than funds that are diversified across numerous states and
municipal entities.
12. Puts. The California Tax-Free Money Market Fund and the California
Intermediate Tax-Free Bond Fund may acquire "puts" with respect to the Municipal
Securities held in their respective portfolios. A put is a right to sell a
specified security (or securities) within a specified period of time at a
specified exercise price. These Funds may sell, transfer, or assign a put only
in conjunction with the sale, transfer, or assignment of the underlying security
or securities.
The amount payable to a Fund upon its exercise of a "put" is normally
(i) the Fund's acquisition cost of the securities (excluding any accrued
interest that the Fund paid on the acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
Puts may be acquired by a Fund to facilitate the liquidity of the
Fund's portfolio assets. Puts may also be used to facilitate the reinvestment of
a Fund's assets at a rate of return more favorable than that of the underlying
security. Under certain circumstances, puts may be used to shorten the maturity
of underlying adjustable rate notes for purposes of calculating the remaining
maturity of those securities and the dollar-weighted average portfolio maturity
of the California Tax-Free Money Market Fund's assets pursuant to Rule 2a-7
under the 1940 Act.
The California Tax-Free Money Market Fund and the California
Intermediate Tax-Free Bond Fund will generally acquire puts only where the puts
are available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a Fund may pay for puts either separately in
cash or by paying a higher price for portfolio securities that are acquired
subject to the puts (thus reducing the yield to maturity otherwise available for
the same securities).
13. Shares of Mutual Funds. Each of the California Tax-Free Money
Market Fund, the Fixed Income Funds and the Equity Funds may invest up to 5% of
its total assets in the shares of any one investment company, but may not own
more than 3% of the securities of any one registered investment company or
invest more than 10% of its assets in the securities of other investment
companies. In accordance with an exemptive order issued to HighMark by the
Securities and Exchange Commission, such other registered investment companies
securities may include shares of a money market fund of HighMark, and may
include registered investment companies for which the Advisor or Sub-Advisor to
a Fund of HighMark, or an affiliate of such Advisor or Sub-Advisor,
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serves as investment advisor, administrator or distributor or provides other
services. Because other investment companies employ an investment advisor, such
investment by a Fund may cause Shareholders to bear duplicative fees. The
Advisor will waive its advisory fees attributable to the assets of the investing
Fund invested in a money market fund of HighMark, and, to the extent required by
applicable law, the Advisor will waive its fees attributable to the assets of
the Fund invested in any investment company. Additional restrictions on the
Fund's investments in the securities of a money market mutual fund are set forth
under "Investment Restrictions" below.
Investments by the California Tax-Free Money Market Fund in the shares
of other tax-exempt money market mutual funds are described under "Municipal
Securities" above.
14. When-Issued Securities and Forward Commitments. Each Fund may enter
into forward commitments or purchase securities on a "when-issued" basis, which
means that the securities will be purchased for delivery beyond the normal
settlement date at a stated price and yield and thereby involve the risk that
the yield obtained in the transaction will be less than that available in the
market when delivery takes place. A Fund will generally not pay for such
securities and no interest accrues on the securities until they are received by
the Fund. These securities are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest rates. Therefore,
the purchase of securities on a "when-issued" basis may increase the risk of
fluctuations in a Fund's net asset value.
When a Fund agrees to purchase securities on a "when-issued" basis or
enter into forward commitments, HighMark's custodian will be instructed to set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the custodian will set aside portfolio
securities to satisfy the purchase commitment, and in such a case, the Fund may
be required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment.
The Funds expect that commitments to enter into forward commitments or
purchase "when-issued" securities will not exceed 25% of the value of their
respective total assets under normal market conditions; in the event any Fund
exceeded this 25% threshold, the Fund's liquidity and the Advisor's ability to
manage it might be adversely affected. In addition, the Funds do not intend to
purchase "when-issued" securities or enter into forward commitments for
speculative or leveraging purposes but only in furtherance of such Fund's
investment objective.
15. Zero-Coupon Securities. Consistent with its objectives, a Fund may
invest in zero-coupon securities, which are debt securities that do not pay
interest, but instead are issued at a deep discount from par. The value of the
security increases over time to reflect the interest accreted. The value of
these securities may fluctuate more than similar securities that are issued at
par and pay interest periodically. Although these securities pay no interest to
holders
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prior to maturity, interest on these securities is reported as income to the
Fund and distributed to its shareholders. These distributions must be made from
the Fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. The Fund will not be able to purchase additional income producing
securities with cash used to make such distributions and its current income
ultimately may be reduced as a result
16. Options (Puts and Calls) on Securities. Each Equity Fund may buy
and sell options (puts and calls), and write call options on a covered basis.
17. Covered Call Writing. Each Equity Fund may write covered call
options from time to time on such portion of its assets, without limit, as the
Advisor determines is appropriate in seeking to obtain its investment objective.
A Fund will not engage in option writing strategies for speculative purposes. A
call option gives the purchaser of such option the right to buy, and the writer,
in this case the Fund, has the obligation to sell the underlying security at the
exercise price during the option period. The advantage to the Fund of writing
covered calls is that the Fund receives a premium which is additional income.
However, if the value of the security rises, the Fund may not fully participate
in the market appreciation.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold,
which requires the writer to deliver the underlying security against payment of
the exercise price. This obligation is terminated upon the expiration of the
option period or at such earlier time in which the writer effects a closing
purchase transaction. A closing purchase transaction is one in which a Fund,
when obligated as a writer of an option, terminates its obligation by purchasing
an option of the same series as the option previously written. A closing
purchase transaction cannot be effected with respect to an option once the
option writer has received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security, or to enable the
Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Fund may realize a net
gain or loss from a closing purchase transaction, depending upon whether the net
amount of the original premium received on the call option is more or less than
the cost of effecting the closing purchase transaction. Any loss incurred in a
closing purchase transaction may be partially or entirely offset by the premium
received from a sale of a different call option on the same underlying security.
Such a loss may also be wholly or partially offset by unrealized appreciation in
the market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
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If a call option expires unexercised, the Fund will realize a short
term capital gain in the amount of the premium on the option, less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security, and the proceeds of the sale of the security plus the amount of the
premium on the option, less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means
that the Fund will own the underlying security subject to a call option at all
times during the option period or will own the right to acquire the underlying
security at a price equal to or below the option's strike price. Unless a
closing purchase transaction is effected the Fund would be required to continue
to hold a security which it might otherwise wish to sell, or deliver a security
it would want to hold. Options written by the Fund will normally have expiration
dates between one and nine months from the date written. The exercise price of a
call option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
18. Purchasing Call Options. The Equity Funds may purchase call options
to hedge against an increase in the price of securities that the Fund wants
ultimately to buy. Such hedge protection is provided during the life of the call
option since the Fund, as holder of the call option, is able to buy the
underlying security at the exercise price regardless of any increase in the
underlying security's market price. In order for a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs. These costs will
reduce any profit the Fund might have realized had it bought the underlying
security at the time it purchased the call option. The Funds may sell, exercise
or close out positions as the Advisor deems appropriate.
19. Purchasing Put Options. Each Equity Fund may purchase put options
to protect its portfolio holdings in an underlying security against a decline in
market value. Such hedge protection is provided during the life of the put
option since the Fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. For a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, a Fund will reduce any profit it might otherwise have realized
from
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appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
20. Options in Stock Indices. The Equity Funds may engage in options
on stock indices. A stock index assigns relative values to the common stock
included in the index with the index fluctuating with changes in the market
values of the underlying common stock.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return of the
premium received, to make delivery of this amount. Gain or loss to a Fund on
transactions in stock index options will depend on price movements in the stock
market generally (or in a particular industry or segment of the market) rather
than price movements of individual securities.
As with stock options, a Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock
so included. Some stock index options are based on a broad market index, such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower market index such as the Standard & Poor's 100. Indices are also based
on an industry or market segment such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options on stock indices are currently
traded on the following exchanges among others: The Chicago Board Options
Exchange, New York Stock Exchange, American Stock Exchange and London Stock
Exchange.
A Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the Fund's portfolio securities. Since a Fund's portfolio will not
duplicate the components of an index, the correlation will not be exact.
Consequently, a Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
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possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging instrument.
A Fund will enter into an option position only if there appears to be a
liquid secondary market for such options.
A Fund will not engage in transactions in options on stock indices for
speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets. The aggregate premium paid on all options on stock indices will not
exceed 20% of a Fund's total assets.
21. Risk Factors in Options Transactions. The successful use of
options strategies depends on the ability of the Advisor or, where applicable,
the Sub-Advisor to forecast interest rate and market movements correctly.
When it purchases an option, a Fund runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction with respect
to the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, a Fund
will lose part or all of its investment in the option. This contrasts with an
investment by a Fund in the underlying securities, since the Fund may continue
to hold its investment in those securities notwithstanding the lack of a change
in price of those securities.
The effective use of options also depends on a Fund's ability to
terminate option positions at times when the Advisor or, where applicable, the
Sub-Advisor deems it desirable to do so. Although a Fund will take an option
position only if its Advisor or, where applicable, the Sub-Advisor believes
there is liquid secondary market for the option, there is no assurance that a
Fund will be able to effect closing transactions at any particular time or at an
acceptable price.
If a secondary trading market in options were to become unavailable, a
Fund could no longer engage in closing transactions. Lack of investor interest
might adversely affect the liquidity of the market for particular options or
series of options. A marketplace may discontinue trading of a particular option
or options generally. In addition, a market could become temporarily unavailable
if unusual events such as volume in excess of trading or clearing capability,
were to interrupt normal market operations. A marketplace may at times find it
necessary to impose restrictions on particular types of options transactions,
which may limit a Fund's ability to realize its profits or limit its losses.
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Disruptions in the markets for securities underlying options purchased
or sold by a Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, a Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with losses if trading in the security reopens at a
substantially different price. In addition, the Options Clearing Corporation
(OCC) or other options markets, such as the London Options Clearing House, may
impose exercise restrictions. If a prohibition on exercise is imposed at the
time when trading in the option has also been halted, a Fund as purchaser or
writer of an option will be locked into its position until one of the two
restrictions has been lifted. If a prohibition on exercise remains in effect
until an option owned by a Fund has expired, the Fund could lose the entire
value of its option.
22. Futures Contracts on Securities and Related Otpions. A Fund may
invest in futures and related options based on any type of security or index
traded on U.S. or foreign exchanges, or over the counter as long as the
underlying security or the securities represented by the future or index are
permitted investments of the Fund. Futures and options can be combined with each
other in order to adjust the risk and return parameters of a Fund.
23. Futures Contracts on Securities. A Fund will enter into futures
contracts on securities only when, in compliance with the SEC's requirements,
cash or equivalents equal in value to the securities' value (less any applicable
margin deposits) have been deposited in a segregated account of the Fund's
custodian.
A futures contract sale creates an obligation by the seller to deliver
the type of instrument called for in the contract in a specified delivery month
for a stated price. A futures contract purchase creates an obligation by the
purchaser to take delivery of the type of instrument called for in the contract
in a specified delivery month at a stated price. The specific instruments
delivered or taken at settlement date are not determined until on or near that
date. The determination is made in accordance with the rules of the exchanges on
which the futures contract was made. Futures contracts are traded in the United
States only on the commodity exchange or boards of trade, known as "contract
markets," approved for such trading by the Commodity Futures Trading Commission
(CFTC), and must be executed through a futures commission merchant or brokerage
firm which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument with the same
delivery date. If the price of the initial sale of the futures contract exceeds
the price of the offsetting purchase, the seller is paid the
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difference and realizes a gain. Similarly, the closing out of a futures contract
purchase is effected by the purchaser's entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the purchaser realizes
a gain, and if the purchase price exceeds the offsetting sale price, the
purchaser realizes a loss.
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract, although
the Fund is required to deposit with its custodian in a segregated account in
the name of the futures broker an amount of cash and/or U.S. Government
securities. This amount is known as "initial margin." The nature of initial
margin in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the Fund to finance the transactions. Rather, initial margin is in the
nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Futures contracts also involve
brokerage costs.
Subsequent payments, called "variation margin," to and from the broker
(or the custodian) are made on a daily basis as the price of the underlying
security fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking to market."
A Fund may elect to close some or all of its futures positions at any
time prior to their expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position then currently held by the Fund. A Fund
may close its positions by taking opposite positions which will operate to
terminate the Fund's position in the futures contracts. Final determinations of
variation margin are then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. Such closing
transactions involve additional commission costs.
24. Options on Securities' Futures Contracts. A Fund will enter into
written options on securities' futures contracts only when in compliance with
the SEC's requirements, cash or equivalents equal in value to the securities'
value (less any applicable margin deposits) have been deposited in a segregated
account of the Fund's custodian. A Fund may purchase and write call and put
options on the futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions. A
Fund may use such options on futures contracts in lieu of writing options
directly on the underlying securities or purchasing and selling the underlying
futures contracts. Such options generally operate in the same manner as options
purchased or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his or her position by selling or purchasing an offsetting option.
There is no guarantee that such closing transactions can be effected.
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A Fund will be required to deposit initial margin and maintenance
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Aggregate
initial margin deposits for futures contracts (including futures contracts on
securities, indices and currency) and premiums paid for related options may not
exceed 5% of a Fund's total assets.
25. Risk of Transactions in Securities' Futures Contracts and Related
Options. Successful use of securities' futures contracts by a Fund is subject to
the ability of the Advisor or, where applicable, the Sub-Advisor to predict
correctly movements in the direction of interest rates and other factors
affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to a Fund when the purchase
or sale of a futures contract would not, such as when there is no movement in
the price of the hedged investments. The writing of an option on a futures
contract involves risks similar to those risks relating to the sale of futures
contracts.
There is no assurance that higher than anticipated trading activity or
other unforeseen events will not, at times, render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.
To reduce or eliminate a hedge position held by a Fund, the Fund may
seek to close out a position. The ability to establish and close out positions
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or continue to exist for a
particular futures contract. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain contracts or options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange (or in the class or series of contracts or
options) would cease to exist, although outstanding contracts or options on the
exchange that had
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been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
26. Index Futures Contracts. A Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective, and may purchase and sell options on such index
futures contracts. A Fund will not enter into any index futures contract for the
purpose of speculation, and will only enter into contracts traded on securities
exchanges with standardized maturity dates.
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 index value at the
close of trading of the contracts and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made; generally contracts are closed out prior to the expiration date of the
contract. No price is paid upon entering into index futures contracts. When a
Fund purchases or sells an index futures contract, it is required to make an
initial margin deposit in the name of the futures broker and to make variation
margin deposits as the value of the contract fluctuates, similar to the deposits
made with respect to futures contracts on securities. Positions in index futures
contracts may be closed only on an exchange or board of trade providing a
secondary market for such index futures contracts. The value of the contract
usually will vary in direct proportion to the total face value.
A Fund's ability to effectively utilize index futures contracts depends
on several factors. First, it is possible that there will not be a perfect price
correlation between the index futures contracts and their underlying index.
Second, it is possible that a lack of liquidity for index futures contracts
could exist in the secondary market, resulting in the Fund's inability to close
a futures position prior to its maturity date. Third, the purchase of an index
futures contract involves the risk that the Fund could lose more than the
original margin deposit required to initiate a futures transaction. In order to
avoid leveraging and related risks, when a Fund purchases an index futures
contract, it will collateralize its position by depositing an amount of cash or
cash equivalents, equal to the market value of the index futures positions held,
less margin deposits, in a segregated account with the Fund's custodian.
Collateral equal to the current market value of the index futures position will
be maintained only a daily basis.
The extent to which a Fund may enter into transactions involving index
futures contracts may be limited by the Internal Revenue Code's requirements for
qualification as a regulated investment company and the Funds' intention to
qualify as such.
27. Options on Index Futures Contracts. Options on index futures
contracts are similar to options on securities except that options on index
futures contracts gives the purchaser the right, in return for the premium paid,
to assume a position in an index
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futures contract (a long position if the option is a call and a short position
if the option is a put), at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing level of the index on which the future is based on the expiration date.
Purchasers of options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
28. U.S. Dollar Denominated Obligations of Securities of Foreign
Issuers. Certain of the Funds may invest in U.S. dollar denominated obligations
of securities of foreign issuers. Permissible investments may consist of
obligations of foreign branches of U.S. banks and foreign or domestic branches
of foreign banks, including European Certificates of Deposit, European Time
Deposits, Canadian Time Deposits and Yankee Certificates of Deposits, and
investments in Canadian Commercial Paper, foreign securities and Europaper. In
addition, the Equity Funds, the Government Securities Fund and Convertible
Securities Fund may invest in American Depositary Receipts. These instruments
may subject the Fund to investment risks that differ in some respects from those
related to investments in obligations of U.S. domestic issuers. Such risks
include future adverse political and economic developments, the possible
imposition of withholding taxes on interest or other income, possible seizure,
nationalization, or expropriation of foreign deposits, the possible
establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches of U.S. banks and
foreign banks may be subject to less stringent reserve requirements than those
applicable to domestic branches of U.S. banks.
29. Foreign Currency Transactions. Under normal market conditions, the
International Equity Fund may engage in foreign currency exchange transactions
to project against uncertainty in the level of future exchange rates. The
International Equity Fund expects to engage in foreign currency exchange
transactions in connection with the purchase and sale of portfolio securities
("transaction hedging"), and to protect the value of specific portfolio
positions ("position hedging"). The Fund may purchase or sell a foreign currency
on a spot (or cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in that foreign
currency,
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and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase or sell foreign currency futures
contracts ("futures contracts"). The Fund may also purchase domestic and foreign
exchange-listed and over-the-counter call and put options on foreign currencies
and futures contracts. Hedging transactions involve costs and may result in
losses, and the Fund's ability to engage in hedging and related options
transactions may be limited by tax considerations.
30. Transaction Hedging. When it engages in transaction hedging, the
International Equity Fund enters into foreign currency transactions with respect
to specific receivables or payables of the International Equity Fund generally
arising in connection with the purchase or sale of its portfolio securities. The
International Equity Fund will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging, the Fund will attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Although there is no current intention to do so, the International
Equity Fund reserves the right to purchase and sell foreign currency futures
contracts which are traded in the United States and are subject to regulation by
the CFTC.
For transaction hedging purposes the International Equity Fund may also
purchase exchange-listed call and put options on foreign currency futures
contracts and on foreign currencies. A put option on a futures contract gives
the International Equity Fund the right to assume a short position in the
futures contract until expiration of the option. A put option on currency gives
the International Equity Fund the right to sell a currency at an exercise price
until the expiration of the option. A call option on a futures contract gives
the Fund the right to assume a long position in the futures contract until the
expiration of the option. A call option on currency gives the Fund the right to
purchase a currency at the exercise price until the expiration of the option.
31. Position Hedging. When it engages in position hedging, the
International Equity Fund enters into foreign currency exchange transactions to
protect against a decline in the values of the foreign currencies in which its
portfolio securities are denominated (or an increase in the value of currency
for securities which the Sub-Advisor expects to purchase, when the Fund holds
cash or short-term investments). In connection with the position hedging, the
Fund may purchase or sell foreign currency forward contracts or foreign currency
on a spot basis.
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The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the dates the currency exchange transactions are entered into
and the dates they mature.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward contract or
futures contract. Accordingly, it may be necessary for the International Equity
Fund to purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security or securities
being hedged is less than the amount of foreign currency the Fund is obligated
to deliver and if a decision is made to sell the security or securities and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the portfolio
security or securities if the market value of such security or securities
exceeds the amount of foreign currency the International Equity Fund is
obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the International Equity Fund owns or
expects to purchase or sell. They simply establish a rate of exchange which one
can achieve at some future point in time. Additionally, although these
techniques tend to minimize the risk of loss due to a decline in the value of
the hedged currency, they tend to limit any potential gain which might result
from the increase in the value of such currency.
32. Currency Forward and Futures Contracts. A forward contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract as agreed by the
parties, at a price set at the time of the contract. In the case of a cancelable
forward contract, the holder has the unilateral right to cancel the contract at
maturity by paying a specified fee. Forward contracts are trades in the
interbank markets conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
A futures contract is a standardized contract for the future delivery
of a specified amount of a foreign currency at a future date at a price set at
the time of the contract. Futures contracts are designed by and traded on
exchanges. The Fund would enter into futures contracts solely for hedging or
other appropriate risk management purposes as defined in the controlling
regulations.
Forward contracts differ from futures contracts in certain respects.
For example, the maturity date of a forward contract may be any fixed number of
days from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month. Forward contracts may be in any amounts
agreed upon by the parties rather
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than predetermined amounts. Also, forward contracts are traded directly between
currency traders so that no intermediary is required. A forward contract
generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market in such contracts.
Although the Fund intends to purchase or sell futures contracts only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures position and, in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin, as described below.
33. General Characteristics of Currency Futures Contracts. When the
Fund purchases or sells a futures contract, it is required to deposit with its
custodian an amount of cash or U.S. Treasury bills up to 5% of the amount of the
futures contract. This amount is known as "initial margin." The nature of
initial margin is different from that of margin in security transactions in that
it does not involve borrowing money to finance transactions. Rather, initial
margin is similar to a performance bond or good faith deposit that is returned
to the International Equity Fund upon termination of the contract, assuming the
Fund satisfies its contractual obligation.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin," and are made as the value of the underlying futures contract
fluctuates. For example, when the Fund sells a futures contract and the price of
the underlying currency rises above the delivery price, the International Equity
Fund's position declines in value. The Fund then pays a broker a variation
margin payment equal to the difference between the delivery price of the futures
contract and the market price of the currency underlying the futures contract.
Conversely, if the price of the underlying currency falls below the delivery
price of the contract, the Fund's futures position increases in value. The
broker then must make a variation margin payment equal to the difference between
the delivery price of the futures contract and the market price of the currency
underlying the futures contract.
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When the International Equity Fund terminates a position in a futures
contract, a final determination of variation margin is made, additional cash is
paid by or to the International Equity Fund, and the International Equity Fund
realizes a loss or gain. Such closing transactions involve additional commission
costs.
34. Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when the Fund's Sub-Advisor believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies, and there is no regulatory requirement that quotations available
through dealer or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market, and thus may not reflect relatively
smaller transactions (less than $1 million), where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock market.
35. Foreign Currency Conversion. Although foreign exchange dealers do
not charge a fee for currency conversion, the do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to an
International Equity Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
36. Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs are
interests in a unit investment trust ("UIT") that may be obtained from the UIT
or purchased in the secondary market as SPDRs are listed on the American Stock
Exchange.
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The UIT will issue SPDRs 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 Standard & Poor's 500 Composite Stock Price Index (the "S&P
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 S&P Index and the net
asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the portfolio must accumulate enough SPDRs to reconstitute a
Creation Unit. The liquidity of small holdings of SPDRs, 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 SPDRs is derived and based upon the securities held by the
UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stock, with the exception that the pricing mechanism for SPDRs is based on a
basket of stocks. Disruptions in the markets for the securities underlying SPDRs
purchased or sold by the Portfolio could result in losses on SPDRs. Trading in
SPDRs involves risks similar to those risks, described above under "Options,"
involved in the writing of options on securities.
37. High Yield Securities
The Convertible Securities Fund may invest in lower rated 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 interest 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 the 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.
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The high yield market is relatively new and its growth has paralleled a
long period of economic expansion and an increase in merger, acquisition and
leveraged buyout activity. 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 Convertible Securities Fund 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 Convertible Securities
Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on
payment expectations. If an issuer calls an obligation for redemption, the
Convertible Securities Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. If the
Convertible Securities 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 Convertible Securities Fund's investment portfolio
and increasing the exposure of the Convertible Securities Fund to the risks of
high yield securities.
The Convertible Securities Fund may choose, at its expense or in
conjunction with others, to pursue litigation or otherwise exercise its rights
as a security holder to seek to protect the interest of security holders if it
determines this to be in the interest of the Convertible Securities Fund's
Shareholders.
38. High Quality Investments with Regard to the Money Market Funds. As
noted in the Prospectuses for the Money Market Funds, each such Fund may invest
only in obligations determined by the Advisor to present minimal credit risks
under guidelines adopted by HighMark's Board of Trustees.
With regard to the Diversified Money Market Fund and the California
Tax-Free Money Market Fund, investments will be limited to "Eligible Securities"
that (i) in the case of the Diversified Money Market Fund, include those
obligations that, at the time of purchase, possess the highest short-term rating
from at least one NRSRO (the Diversified Money Market Fund may also invest up to
5% of its net assets in obligations that, at the time of purchase, possess one
of the two highest short-term ratings from at least one NRSRO, and in
obligations that do not possess a short-term rating (i.e., are unrated) but are
determined by the Advisor to be of comparable quality to the rated instruments
eligible for purchase by the Fund under guidelines adopted by the Board of
Trustees) and
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<PAGE> 554
(ii) in the case of the California Tax-Free Money Market Fund, include those
obligations that, at the time of purchase, possess one of the two highest
short-term ratings by at least one NRSRO or do not possess a short-term rating
(i.e., are unrated) but are determined by the Advisor to be of comparable
quality to the rated obligations eligible for purchase by the Fund under
guidelines adopted by the Board of Trustees.
A security subject to a tender or demand feature will be considered an
Eligible Security only if both the demand feature and the underlying security
possess a high quality rating or, if such do not possess a rating, are
determined by the Advisor to be of comparable quality; provided, however, that
where the demand feature would be readily exercisable in the event of a default
in payment of principal or interest on the underlying security, the obligation
may be acquired based on the rating possessed by the demand feature or, if the
demand feature does not possess a rating, a determination of comparable quality
by the Advisor. In applying the above-described investment policies, a security
that has not received a short-term rating will be deemed to possess the rating
assigned to an outstanding class of the issuer's short-term debt obligations if
determined by the Advisor to be comparable in priority and security to the
obligation selected for purchase by the Fund, or, if not available, the issuer's
long-term obligations, but only in accordance with the requirements of Rule
2a-7. A security that at the time of issuance had a maturity exceeding 397 days
but, at the time of purchase, has a remaining maturity of 397 days or less, is
considered an Eligible Security if it possesses a long-term rating, within the
two highest rating categories.
Eligible Securities include First Tier Securities and Second Tier
Securities. First Tier Securities include those that possess at least one rating
in the highest category and, if the securities do not possess a rating, those
that are determined to be of comparable quality by the Advisor pursuant to
guidelines adopted by the Board of Trustees. Second Tier Securities are all
other Eligible Securities.
The Diversified Money Market Fund will not invest more than 5% of its
total assets in the First Tier Securities of any one issuer, except that the
Fund may invest up to 25% of its total assets in First Tier Securities of a
single issuer for a period of up to three business days. (This three day "safe
harbor" provision will not be applicable to the California Tax-Free Money Market
Fund, because single state funds are specifically excluded from this Rule 2a-7
provision.) In addition, the Diversified Money Market Fund may not invest more
than 5% of its total assets in Second Tier Securities, with investments in the
Second Tier Securities of any one issuer further limited to the greater of 1% of
the Fund's total assets or $1.0 million. If a percentage limitation is satisfied
at the time of purchase, a later increase in such percentage resulting from a
change in the Diversified Money Market Fund's net asset value or a subsequent
change in a security's qualification as a First Tier or Second Tier Security
will not constitute a violation of the limitation. In addition, there is no
limit on the percentage of the Diversified Money Market Fund's assets that may
be invested in obligations issued or guaranteed by the U.S.
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<PAGE> 555
Government, its agencies, or instrumentalities and repurchase agreements fully
collateralized by such obligations.
Under the guidelines adopted by HighMark's Board of Trustees, in
accordance with Rule 2a-7 under the Investment Company Act of 1940 (the "1940
Act"), when in the best interests of the Shareholders, the Advisor may be
required to promptly take appropriate action with respect to an obligation held
in a Fund's portfolio in the event of certain developments that indicate a
diminishment of the instrument's credit quality, such as where an NRSRO
downgrades an obligation below the second highest rating category, or in the
event of a default relating to the financial condition of the issuer.
The Appendix to this Statement of Additional Information identifies
each NRSRO that may be utilized by the Advisor with regard to portfolio
investments for the Funds and provides a description of relevant ratings
assigned by each such NRSRO. A rating by a NRSRO may be utilized only where the
NRSRO is neither controlling, controlled by, or under common control with the
issuer of, or any issuer, guarantor, or provider of credit support for, the
instrument.
Illiquid Securities. Each Fund has adopted a non-fundamental policy
(which may be changed without shareholder approval) prohibiting the Fund from
investing more than 15% (in the case of each of the Money Market Funds, not more
than 10%) of its total assets in "illiquid" securities, which include securities
with legal or contractual restrictions on resale or for which no readily
available market exists but exclude such securities if resalable pursuant to
Rule 144A under the Securities Act ("Rule 144A Securities"). Pursuant to this
policy, the Funds may purchase Rule 144A Securities only in accordance with
liquidity guidelines established by the Board of Trustees of HighMark and only
if the investment would be permitted under applicable state securities laws.
Restricted Securities. Each Fund has adopted a nonfundamental policy
(which may be changed without Shareholder approval) prohibiting the Fund from
investing more than 25% of its total assets in restricted securities. Restricted
securities are securities that may not be sold to the public without
registration under the Securities Act of 1933 ("1933 Act"). Restricted
Securities may be liquid or illiquid. The Advisor will determine the liquidity
of restricted securities in accordance with guidelines established by HighMark's
Board of Trustees. Restricted securities purchased by the Funds may include Rule
144A securities and commercial paper issued in reliance upon the "private
placement" exemption from registration under Section 4(2) of the 1933 Act
(whether or not such paper is a Rule 144A security).
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INVESTMENT RESTRICTIONS
Unless otherwise indicated, the following investment restrictions are
fundamental and, as such, may be changed with respect to a particular Fund only
by a vote of a majority of the outstanding Shares of that Fund (as defined
below). Except with respect to a Fund's restriction governing the borrowing of
money, if a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in asset
value will not constitute a violation of the restriction.
100% U.S. Treasury Money Market Fund
The 100% U.S. Treasury Money Market Fund may not purchase
securities other than short-term obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the
U.S. Treasury.
Each of the Growth Fund, the Income Equity Fund, the Balanced Fund, the Bond
Fund, the Diversified Money Market Fund, the U.S. Government Money Market Fund,
and the 100% U.S. Treasury Money Market Fund may not:
1. Purchase securities on margin (except that, with respect to
the Growth Fund, the Income Equity Fund, the Balanced Fund and the Bond
Fund only, such Funds may make margin payments in connection with
transactions in options and financial and currency futures contracts),
sell securities short, participate on a joint or joint and several
basis in any securities trading account, or underwrite the securities
of other issuers, except to the extent that a Fund may be deemed to be
an underwriter under certain securities laws in the disposition of
"restricted securities" acquired in accordance with the investment
objectives and policies of such Fund;
2. Purchase or sell commodities, commodity contracts
(excluding, with respect to the Growth Fund, the Income Equity Fund,
the Balanced Fund, and the Bond Fund , options and financial and
currency futures contracts), oil, gas or mineral exploration leases or
development programs, or real estate (although investments by the
Growth Fund, the Income Equity Fund, the Balanced Fund, the Bond Fund,
and the Diversified Money Market Fund in marketable securities of
companies engaged in such activities and investments by the Growth
Fund, the Income Equity Fund, the Balanced Fund, and the Bond Fund in
securities secured by real estate or interests therein, are not hereby
precluded to the extent the investment is appropriate to such Fund's
investment objective and policies);
3. Invest in any issuer for purposes of exercising control or
management;
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4. Purchase or retain securities of any issuer if the officers or
Trustees of HighMark or the officers or directors of its investment
advisor owning beneficially more than one-half of 1% of the securities
of such issuer together own beneficially more than 5% of such
securities;
5. Borrow money or issue senior securities, except that a Fund
may borrow from banks or enter into reverse repurchase agreements for
temporary emergency purposes in amounts up to 10% of the value of its
total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets, except in connection with permissible
borrowings and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the Fund's total assets at the
time of its borrowing. A Fund will not invest in additional securities
until all its borrowings (including reverse repurchase agreements)
have been repaid. For purposes of this restriction, the deposit of
securities and other collateral arrangements with respect to options
and financial and currency futures contracts, and payments of initial
and variation margin in connection therewith, are not considered a
pledge of a Fund's assets; and
The Diversified Money Market Fund, the U.S. Government Money Market Fund and
the 100% U.S. Treasury Money Market Fund may not:
1. Buy common stocks or voting securities, or state, municipal or
private activity bonds;
2. Invest in securities of other investment companies, except as
they may be acquired as part of a merger, consolidation,
reorganization, or acquisition of assets;
3. Write or purchase put or call options; or
4. Invest more than 10% of total assets in the securities of
issuers that together with any predecessors have a record of less than
three years' continuous operation.
The Growth Fund, the Income Equity Fund, the Balanced Fund, and the Bond Fund
may not:
1. Invest in securities of other investment companies except as
they may be acquired as part of a merger, consolidation,
reorganization, or acquisition of assets, provided, however, that each
of the Funds may purchase securities of a money market fund, if,
immediately after such purchase, the acquiring Fund does not own in
the aggregate (i) more than 3% of the acquired
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<PAGE> 558
company's outstanding voting securities, (ii) securities issued by the
acquired company having an aggregate value in excess of 5% of the
value of the total assets of the acquiring Fund, or (iii) securities
issued by the acquired company and all other investment companies
(other than treasury stock of the acquiring Fund) having an aggregate
value in excess of 10% of the value of the acquiring Fund's total
assets; and
The California Tax-Free Money Market Fund may not:
1. Purchase or sell real estate; provided, however, that the Fund
may, to the extent appropriate to its investment objective, purchase
Municipal Securities secured by real estate or interests therein or
securities issued by companies investing in real estate or interests
therein;
2. Purchase securities on margin, make short sales of securities
or maintain a short position;
3. Underwrite the securities of other issuers;
4. Purchase securities of companies for the purpose of exercising
control or management;
5. Invest in private activity bonds where the payment of
principal and interest are the responsibility of a company (including
its predecessors) with less than three years of continuous operation;
6. Purchase or sell commodities or commodity contracts, or invest
in oil, gas or mineral exploration leases or development programs;
provided, however, the Fund may, to the extent appropriate to the
Fund's investment objective, purchase publicly traded obligations of
companies engaging in whole or in part in such activities;
7. Acquire any other investment company or investment company
security except in connection with a merger, consolidation,
reorganization or acquisition of assets;
8. Borrow money or issue senior securities, except that the Fund
may borrow from banks or enter into reverse repurchase agreements for
temporary emergency purposes in amounts up to 10% of the value of its
total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets, except in connection with permissible
borrowings and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the
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Fund's total assets at the time of its borrowing. The Fund will not
invest in additional securities until all its borrowings (including
reverse repurchase agreements) have been repaid;
9. Write or sell puts, calls, straddles, spreads, or combinations
thereof, except that the Fund may acquire puts with respect to
Municipal Securities in its portfolio and sell the puts in conjunction
with a sale of the underlying Municipal Securities;
10. Acquire a put, if, immediately after the acquisition, more
than 5% of the total amortized cost value of the Fund's assets would
be subject to puts from the same institution (except that (i) up to
25% of the value of the Fund's total assets may be subject to puts
without regard to the 5% limitation and (ii) the 5% limitation is
inapplicable to puts that, by their terms, would be readily
exercisable in the event of a default in payment of principal or
interest on the underlying securities). In applying the
above-described limitation, the Fund will aggregate securities subject
to puts from any one institution with the Fund's investments, if any,
in securities issued or guaranteed by that institution. In addition,
for the purpose of this investment restriction and investment
restriction No. 11 below, a put will be considered to be from the
party to whom the Fund will look for payment of the exercise price;
11. Acquire a put that, by its terms, would be readily
exercisable in the event of a default in payment of principal and
interest on the underlying security or securities if, immediately
after the acquisition, the amortized cost value of the security or
securities underlying the put, when aggregated with the amortized cost
value of any other securities issued or guaranteed by the issuer of
the put, would exceed 10% of the total amortized cost value of the
Fund's assets; and
12. Invest in securities of other investment companies except as
they may be acquired as part of a merger, consolidation,
reorganization, or acquisition of assets, provided, however, that the
Fund may purchase securities of a tax-exempt money market fund if,
immediately after such purchase, the acquiring Fund does not own in
the aggregate (i) more than 3% of the acquired company's outstanding
voting securities, (ii) securities issued by the acquired company
having an aggregate value in excess of 5% of the value of the total
assets of the acquiring Fund, or (iii) securities issued by the
acquired company and all other investment companies (other than
treasury stock of the acquiring Fund) having an aggregate value in
excess of 10% of the value of the acquiring Fund's total assets.
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Each of the Value Momentum Fund, the Blue Chip Growth Fund, the Emerging Growth
Fund, the International Equity Fund, the Intermediate-Term Bond Fund, the
Government Securities Fund, the Convertible Securities Fund, and the California
Intermediate Tax-Free Bond Fund:
1. May purchase securities of any issuer only when consistent
with the maintenance of its status as a diversified company
under the Investment Company Act of 1940, or the rules or
regulations thereunder, as such statute, rules or regulations
may be amended from time to time.
2. May not concentrate investments in a particular industry or
group of industries, or within any one state (except that the
limitation as to investments in any one state or its political
subdivision shall not apply to the California Intermediate
Tax-Free Bond Fund), as concentration is defined under the
Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be
amended from time to time.
3. May issue senior securities to the extent permitted by the
Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be
amended from time to time.
4. May lend or borrow money to the extent permitted by the
Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be
amended from time to time.
5. May purchase or sell commodities, commodities contracts,
futures contracts, or real estate to the extent permitted by
the Investment Company Act of 1940, or the rules or
regulations thereunder, as such statute, rules or regulations
may be amended from time to time.
6. May underwrite securities to the extent permitted by the
Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be
amended from time to time.
7. May pledge, mortgage or hypothecate any of its assets to the
extent permitted by the Investment Company Act of 1940, or the
rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
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The fundamental limitations of the Value Momentum Fund, the
Blue Chip Growth Fund, the Emerging Growth Fund, the International
Equity Fund, the International Equity Fund, the Intermediate-Term Bond
Fund, the Government Securities Fund, the Convertible Securities Fund,
and the California Intermediate Tax-Free Bond Fund have been adopted to
avoid wherever possible the necessity of shareholder meetings
otherwise required by the 1940 Act. This recognizes the need to react
quickly to changes in the law or new investment opportunities in the
securities markets and the cost and time involved in obtaining
shareholder approvals for diversely held investment companies.
However, the Funds also have adopted nonfundamental limitations, set
forth below, which in some instances may be more restrictive than
their fundamental limitations. Any changes in a Fund's nonfundamental
limitations will be communicated to the Fund's shareholders prior to
effectiveness.
1940 Act Restrictions. Under the 1940 Act, and the rules,
regulations and interpretations thereunder, a "diversified company," as
to 75% of its totals assets, may not purchase securities of any issuer
(other than obligations of, or guaranteed by, the U.S. Government, its
agencies or its instrumentalities) if, as a result, more than 5% of the
value of its total assets would be invested in the securities of such
issuer or more than 10% of the issuer's voting securities would be held
by the fund. "Concentration" is generally interpreted under the 1940
Act to be investing more than 25% of net assets in an industry or group
of industries. The 1940 Act limits the ability of investment companies
to borrow and lend money and to underwrite securities. The 1940 Act
currently prohibits an open-end fund from issuing senior securities, as
defined in the 1940 Act, except under very limited circumstances.
The following investment limitations of the Value Momentum Fund, the Blue Chip
Growth Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Government Securities Fund, the Convertible
Securities Fund, and the California Intermediate Tax-Free Bond Fund are
nonfundamental policies. Each Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer.
This limitation applies to only 75% of a Fund's assets.
2. Invest in companies for the purpose of exercising control.
3. Borrow money, except for temporary or emergency purposes and then
only in an amount not exceeding one-third of the value of total
assets and except that a Fund may borrow from banks or enter into
reverse repurchase
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agreements for temporary emergency purposes in amounts up to 10%
of the value of its total assets at the time of such borrowing.
To the extent that such borrowing exceeds 5% of the value of the
Fund's assets, asset coverage of at least 300% is required. In
the event that such asset coverage shall at any time fall below
300%, the Fund shall, within three days thereafter or such longer
period as the Securities and Exchange Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to
such an extent that the asset coverage of such borrowing shall be
at least 300%. This borrowing provision is included solely to
facilitate the orderly sale of portfolio securities to
accommodate heavy redemption requests if they should occur and is
not for investment purposes. All borrowings will be repaid before
making additional investments and any interest paid on such
borrowings will reduce income.
4. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to
exceed 10% of total assets taken at current value at the time of
the incurrence of such loan, except as permitted with respect to
securities lending.
5. Purchase or sell real estate, real estate limited partnership
interest, commodities or commodities contracts (except that the
Government Securities Fund, the Blue Chip Growth Fund, the
Emerging Growth Fund, the International Equity Fund, the Value
Momentum Fund, the Intermediate-Term Bond Fund and the California
Intermediate Tax-Free Bond Fund may invest in futures contracts
and options on futures contracts, as disclosed in the
prospectuses) and interest in a pool of securities that are
secured by interests in real estate. However, subject to their
permitted investments, any Fund may invest in companies which
invest in real estate, commodities or commodities contracts.
6. Make short sales of securities, maintain a short position or
purchase securities on margin, except that HighMark may obtain
short-term credits as necessary for the clearance of security
transactions.
7. Act as an underwriter of securities of other issuers except as it
may be deemed an underwriter in selling a Fund security.
8. Issue senior securities (as defined in the Investment Company Act
of 1940) except in connection with permitted borrowings as
described above or as permitted by rule, regulation or order of
the Securities and Exchange Commission.
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9. Purchase or retain securities of an issuer if, to the knowledge
of HighMark, an officer, trustee, partner or director of HighMark
or the Advisor or Sub-Advisors of HighMark owns beneficially
more than 1/2 or 1% of the shares or securities or such issuer
and all such officers, trustees, partners and directors owning
more than 1/2 or 1% of such shares or securities together own
more than 5% of such shares or securities.
10. Invest in interest in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
Voting Information. As used in this Statement of Additional
Information, a "vote of a majority of the outstanding Shares" of HighMark or a
particular Fund or a particular Class of Shares of HighMark or a Fund means the
affirmative vote of the lesser of (a) more than 50% of the outstanding Shares of
HighMark or such Fund or such Class, or (b) 67% or more of the Shares of
HighMark or such Fund or such Class present at a meeting at which the holders of
more than 50% of the outstanding Shares of HighMark or such Fund or such Class
are represented in person or by proxy.
PORTFOLIO TURNOVER
A Fund's turnover rate is calculated by dividing the lesser of a Fund's
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities. The calculation excludes all securities whose
maturities at the time of acquisition were one year or less. Thus, for
regulatory purposes, the portfolio turnover rate with respect to each of the
Money Market Funds was zero percent from the commencement of their respective
operations to July 31, 1996, and is expected to remain zero percent. For
HighMark's fiscal year ended July 31, 1996, the portfolio turnover rate of the
Growth Fund was 78.58%, for the Income Equity Fund was 41.51%, for the Balanced
Fund was [12.84%] for the equity portion of its portfolio and [_____%] for the
fixed income portion of its portfolio, and for the Bond Fund was 20.88%. For
HighMark's fiscal year ended July 31, 1995, the portfolio turnover rate of the
Growth Fund was 67.91%, for the Income Equity Fund was 36.64%, for the Balanced
Fund was [20.70%] for the equity portion of its portfolio and [_____%] for the
fixed income portion of its portfolio, and for the Bond Fund was 36.20%. It is
currently estimated that the rate of portfolio turnover for each of the Value
Momentum, Blue Chip Growth, Emerging Growth, International Equity,
Intermediate-Term Bond, Government Securities, Convertible Securities and
California Intermediate Tax-Free Bond Funds will not exceed 100%. The portfolio
turnover rate may vary greatly from year to year as well as within a particular
year, and may also be affected by cash requirements for redemption of Shares
and, in the case of the California Tax-Free Money Market Fund, by requirements
that enable them to receive certain favorable tax treatment.
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<PAGE> 564
VALUATION
As disclosed in the Prospectuses, each Fund's net asset value per share
for purposes of pricing purchase and redemption orders is determined by the
administrator as of 1:00 p.m., Pacific Time (4:00 p.m. Eastern Time) (and 10:00
a.m. Pacific Time (1:00 p.m. Eastern Time) in the case of the Money Market
Funds) on days on which both the New York Stock Exchange and the Federal Reserve
wire system are open for business ("Business Days").
Valuation of the Money Market Funds
The Money Market Funds have elected to use the amortized cost method of
valuation pursuant to Rule 2a-7 under the 1940 Act. The amortized cost method
involves valuing an instrument at its cost initially and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. This
method may result in periods during which value, as determined by amortized
cost, is higher or lower than the price a Fund would receive if it sold the
instrument. The value of securities in a Fund can be expected to vary inversely
with changes in prevailing interest rates.
HighMark's Board of Trustees has undertaken to establish procedures
reasonably designed, taking into account current market conditions and a Fund's
investment objective, to stabilize the net asset value per Share of each Money
Market Fund for purposes of sales and redemptions at $l.00. These procedures
include review by the Trustees, at such intervals as they deem appropriate, to
determine the extent, if any, to which the net asset value per Share of each
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one-half of one percent, Rule 2a-7
requires that the Board promptly consider what action, if any, should be
initiated. If the Trustees believe that the extent of any deviation from a
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, the Trustees will take such
steps as they consider appropriate to eliminate or reduce to the extent
reasonably practicable any such dilution or unfair results. These steps may
include selling portfolio instruments prior to maturity, shortening the average
portfolio maturity of a Fund, withholding or reducing dividends, reducing the
number of a Fund's outstanding Shares without monetary consideration, or
utilizing a net asset value per Share based on available market quotations.
Valuation of the Equity Funds and the Fixed Income Funds
Except as noted below, investments by the Equity Funds and the Fixed
Income Funds in securities traded on a national exchange (or exchanges) are
valued based upon their last sale price on the principal exchange on which such
securities are traded. With regard to each such Fund, securities the principal
market for which is not a securities exchange are valued based upon the latest
bid price in such principal market. Securities and other assets for which
market quotations are not readily available are valued at their fair value as
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determined in good faith under consistently applied procedures established by
and under the general supervision of HighMark's Board of Trustees. With the
exception of short-term securities as described below, the value of each Fund's
investments may be based on valuations provided by a pricing service. Short-term
securities (i.e., securities with remaining maturities of 60 days or less) may
be valued at amortized cost, which approximates current value.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchases and redemptions of shares of the Funds may be made on days
on which both the New York Stock Exchange and the Federal Reserve wire systems
are open for business.
It is currently HighMark's policy to pay redemptions in cash. HighMark
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of securities held by the Funds other
than the Money Market Funds in lieu of cash. Shareholders may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. However, a Shareholder will at all times be entitled to aggregate
cash redemptions from all Funds of HighMark during any 90-day period of up to
the lesser of $250,000 or 1% of HighMark's net assets.
HighMark reserves the right to suspend the right of redemption and/or
to postpone the date of payment upon redemption for any period on which trading
on the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the Securities and Exchange Commission by rule or
regulation) as a result of which disposal or valuation of the Fund's securities
is not reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted. HighMark also reserves the right to
suspend sales of Shares of the Funds for any period.
If a Fund holds portfolio securities listed on foreign exchanges which
trade on Saturdays or other customary United States national business holidays,
the portfolio will trade and the net assets of the Fund's redeemable securities
may be significantly affected on days when the investor has no access to the
Fund.
Additional Federal Tax Information
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order so to qualify and to qualify for the special tax treatment
accorded regulated investment companies and their Shareholders, a Fund must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale of stock, securities, and foreign currencies, or other income (including
but not
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limited to gains from options, futures, or forward contracts) derived with
respect to its business of investing in such stock, securities, or currencies;
(b) derive less than 30% of its gross income from the sale or other disposition
of certain assets (including stocks and securities) held for less than three
months; (c) each year distribute at least 90% of its dividends, interest
(including tax-exempt interest), certain other income and the excess, if any, of
its net short-term capital gains over its net long-term capital losses; and (d)
diversify its holdings so that, at the end of each fiscal quarter (i) at least
50% of the market value of the Fund's assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies,
and other securities, limited in respect of any one issuer to a value not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any one issuer or of two
or more issuers that the Fund controls and that are engaged in the same,
similar, or related trades or businesses. The 30% of gross income test described
above may restrict a Fund's ability to sell certain assets held (or considered
under Code rules to have been held) for less than three months.
If a Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends (including capital gain
dividends). If a Fund failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Fund would be subject to
tax on its taxable income at corporate rates, and all distributions from
earnings and profits, including any distributions of net tax-exempt income and
net long-term capital gains, would be taxable to shareholders as ordinary
income.
If a Fund fails to distribute in a calendar year substantially all of
its ordinary income for the year and substantially all its capital gain net
income for the one-year period ending October 31 of the year (and any retained
amount from the prior calendar year), the Fund will be subject to a
non-deductible 4% excise tax on the undistributed amounts.
Any dividend declared by a Fund to Shareholders of record on a date in
October, November or December generally is deemed to have been received by its
Shareholders on December 31 of such year (and paid by the Fund on or before such
time) provided that the dividend actually is paid during January of the
following year.
If a Fund engages in hedging transactions, including hedging
transactions in options, futures contracts, and straddles, or other similar
transactions, it will be subject to special tax rules (including mark-to-market,
straddle, wash sale, and short sale rules), the effect of which may be to
accelerate income to the Fund, defer losses to the Fund, cause adjustments in
the holding periods of the Fund's securities, or convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.
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Under the 30% of gross income test described above, a Fund will be
restricted in selling assets held or considered to have been held for less than
three months, and in engaging in certain hedging transactions (including hedging
transactions in options and futures) that in some circumstances could cause
certain Fund assets to be treated as held for less than three months.
Certain of a Fund's hedging activities (including its transactions, if
any, in foreign currencies or foreign currency-denominated instruments) are
likely to produce a difference between its book income and its taxable income.
If a Fund's book income exceeds its taxable income, the distribution (if any) of
such excess will be treated as (i) a dividend to the extent of the Fund's
remaining earnings and profits (including earnings and profits arising from
tax-exempt income), (ii) thereafter as a return of capital to the extent of the
recipient's basis in the shares, and (iii) thereafter as gain from the sale or
exchange of a capital asset. If the Fund's book income is less than its taxable
income, the Fund could be required to make distributions exceeding book income
to qualify as a regulated investment company that is accorded special tax
treatment.
If a Fund makes a distribution in excess of its current and accumulated
"earnings and profits" in any taxable year, the excess distribution will be
treated as a return of capital to the extent of a Shareholder's tax basis in
Fund shares, and thereafter as capital gain. A return of capital is not taxable,
but it reduces the Shareholder's tax basis in the shares, thus reducing any loss
or increasing any gain on a subsequent taxable disposition of those shares.
A Fund's investment in securities issued at a discount and certain
other obligations will (and investments in securities purchased at a discount
may) require the Fund to accrue and distribute income not yet received. In order
to generate sufficient cash to make the requisite distributions, a Fund may be
required to sell securities in its portfolio that it otherwise would have
continued to hold.
The Funds will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends and other distributions paid
to any Shareholder who has provided either an incorrect tax identification
number or no number at all, or who is subject to withholding by the Internal
Revenue Service for failure to properly include on his or her tax return
payments of interest or dividends.
The foregoing discussion and the one below regarding the California
Tax-Free Money Market Fund and the California Intermediate Tax-Free Bond Fund
under "Federal Taxation" is only a summary of some of the important Federal tax
considerations generally affecting purchasers of the Funds' Shares. No attempt
has been made to present a detailed explanation of the Federal income tax
treatment of the Funds, and this discussion is not
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<PAGE> 568
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of the Funds' Shares are urged to consult their tax advisors with
specific reference to their own tax situation. Foreign Shareholders should
consult their tax advisors regarding the U.S. and foreign tax consequences of an
investment in the Funds. In addition, this discussion is based on tax laws and
regulations that are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative, judicial
or administrative action, and such changes may be retroactive.
Additional Tax Information Concerning The California Tax-Free Money Market Fund
and The California Intermediate Tax-Free Bond Fund
Federal Taxation. As indicated in their respective Prospectuses, the
California Tax-Free Money Market Fund and the California Intermediate Tax-Free
Bond Fund are designed to provide individual Shareholders with current
tax-exempt interest income. None of these Funds is intended to constitute a
balanced investment program or is designed for investors seeking capital
appreciation. Nor are the California Tax-Free Money Market Fund or the
California Intermediate Tax-Free Bond Fund designed for investors seeking
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Funds may not be suitable for tax-exempt institutions and may not be
suitable for retirement plans qualified under Section 401 of the Code, H.R. 10
plans, and individual retirement accounts because such plans and accounts are
generally tax-exempt and, therefore, would not gain any additional benefit from
the Funds' dividends being tax-exempt, and such dividends would ultimately be
taxable to the beneficiaries when distributed to them.
The Code permits a regulated investment company that invests at least
50% of its total assets in tax-free Municipal Securities to pass through to its
investors, tax-free, net Municipal Securities interest income to the extent such
interest would be exempt if earned directly. Because the California Tax-Free
Money Market Fund and the California Intermediate Tax-Free Bond Fund intend to
be qualified to pay such exempt-interest dividends, these Funds will be limited
in their ability to enter into taxable transactions, such as forward
commitments, repurchase agreements, securities lending transactions, financial
futures and options contracts on financial futures, tax-exempt bond indices and
other assets. The policy of the California Tax-Free Money Market Fund and the
California Intermediate Tax-Free Bond Fund is to pay each year as dividends
substantially all of such Fund's Municipal Securities interest income net of
certain deductions. An exempt-interest dividend is any dividend or part thereof
derived from interest excludable from gross income and designated as an
exempt-interest dividend in a written notice mailed to Shareholders after the
close of such Fund's taxable year, but the aggregate of such dividends may not
exceed the net Municipal Securities interest received by the Fund during the
taxable year. In the case of each of the California Tax-Free Money Market Fund
and the California Intermediate Tax-Free Bond Fund the percentage of the
dividends paid for any taxable year that qualifies as federal exempt-interest
dividends will be the same for all Shareholders receiving dividends during such
year, regardless of the period for which the Shares were held.
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Exempt-interest dividends may be treated by Shareholders of the
California Tax-Free Money Market Fund and the California Intermediate Tax-Free
Bond Fund as items of interest excludable from their gross income under Section
103(a) of the Code. However, each such Shareholder is advised to consult his or
her tax advisor with respect to whether exempt-interest dividends would retain
the exclusion under Section 103(a) if such Shareholder were treated as a
"substantial user" or a "related person" to such user under Section 147(a) with
respect to facilities financed through any of the tax-exempt obligations held by
the California Tax-Free Money Market Fund and the California Intermediate
Tax-Free Bond Fund.
The California Tax-Free Money Market Fund and the California
Intermediate Tax-Free Bond Fund will distribute substantially all of any
investment company taxable income for each taxable year. In general, a Fund's
investment company taxable income will be its taxable income subject to certain
adjustments and excluding the excess of any net long-term capital gains for the
taxable year over the net short-term capital loss, if any, for such year.
Distributions of such income will be taxable to Shareholders as ordinary income.
The dividends-received deduction for corporations is not expected to apply to
such distributions.
Distribution of the excess of the California Tax-Free Money Market
Fund's and the California Intermediate Tax-Free Bond Fund's net long-term
capital gain (if any) over its net short-term capital loss will be taxable to
the Fund's Shareholders as a long-term capital gain in the year in which
received, regardless of how long a time the Shareholder held the Fund's Shares
and such distributions will not be eligible for the dividends received
deduction. If a Shareholder disposes of Shares in a Fund at a loss before
holding such Shares for longer than six months, such loss will be treated as a
long-term capital loss to the extent the Shareholder has received a capital gain
dividend on the Shares.
Shareholders receiving social security or railroad retirement benefits
may be taxed on a portion of those benefits as a result of receiving tax-exempt
income (including exempt-interest dividends distributed by the Fund).
Like the other Funds, if for any taxable year the California Tax-Free
Money Market Fund or the California Intermediate Tax-Free Bond Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of such Fund's taxable income will be subject to tax at regular corporate
rates (without any deduction for distributions to Shareholders), and Municipal
Securities interest income, although not taxable to the California Tax-Free
Money Market Fund or the California Intermediate Tax-Free Bond Fund would be
taxable to Shareholders when distributed as dividends.
Depending upon the extent of its activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
California Tax-Free Money Market Fund and the California Intermediate Tax-Free
Bond Fund may be subject to the tax laws of such
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states or localities. For a summary of certain California tax considerations
affecting the California Tax-Free Money Market Fund and the California
Intermediate Tax-Free Bond Fund, see "California Taxation" below.
As indicated in their Prospectuses, the California Tax-Free Money
Market Fund and the California Intermediate Tax-Free Bond Fund may acquire
rights regarding specified portfolio securities under puts. See "Investment
Objectives and Policies - Additional Information on Portfolio Instruments -
Puts" in this Statement of Additional Information. The policy of each Fund is to
limit its acquisition of puts to those under which the Fund will be treated for
Federal income tax purposes as the owner of the Municipal Securities acquired
subject to the put and the interest on such Municipal Securities will be
tax-exempt to the Fund. There is currently no guidance available from the
Internal Revenue Service that definitively establishes the tax consequences that
may result from the acquisition of many of the types of puts that the California
Tax-Free Money Market Fund or the California Intermediate Tax-Free Bond Fund
could acquire under the 1940 Act. Therefore, although they will only acquire a
put after concluding that it will have the tax consequences described above, the
Internal Revenue Service could reach a different conclusion from that of the
relevant Fund.
California Taxation. Under existing California law, if the California
Tax-Free Money Market Fund and the California Intermediate Tax-Free Bond Fund
continue to qualify for the special federal income tax treatment afforded
regulated investment companies and if at the end of each quarter of each such
Fund's taxable year at least 50% of the value of that Fund's assets consists of
obligations that, if held by an individual, would pay interest exempt from
California taxation ("California Exempt-Interest Securities"), Shareholders of
that Fund will be able to exclude from income, for California personal income
tax purposes, "California exempt-interest dividends" received from that Fund
during that taxable year. A "California exempt-interest dividend" is any
dividend or portion thereof of the California Tax-Free Money Market Fund or the
California Intermediate Tax-Free Bond Fund not exceeding the interest received
by the Fund during the taxable year on obligations that, if held by an
individual, would pay interest exempt from California taxation (less direct and
allocated expenses, which includes amortization of acquisition premium) and so
designated by written notice to Shareholders within 60 days after the close of
that taxable year.
Distributions, other than of "California exempt-interest dividends," by
the California Tax-Free Money Market Fund and the California Intermediate
Tax-Free Bond Fund to California residents will be subject to California
personal income taxation. Gains realized by California residents from a
redemption or sale of Shares of the California Tax-Free Money Market Fund and
the California Intermediate Tax-Free Bond Fund will also be subject to
California personal income taxation. In general, California nonresidents, other
than certain dealers, will not be subject to California personal income taxation
on distributions by, or on gains from the redemption or sale of, Shares of the
California Tax-Free Money Market Fund and the California Intermediate Tax-Free
Bond Fund unless those Shares have acquired a California "business situs." (Such
California nonresidents may, however, be subject to other
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state or local income taxes on such distributions or gains, depending on their
residence.) Short-term capital losses realized by shareholders from a redemption
of shares of the California Tax-Free Money Market Fund and the California
Intermediate Tax-Free Bond Fund within six months from the date of their
purchase will not be allowed for California personal income tax purposes to the
extent of any tax-exempt dividends received with respect to such Shares during
such period. No deduction will be allowed for California personal income tax
purposes for interest on indebtedness incurred or continued in order to purchase
or carry Shares of the California Tax-Free Money Market Fund and the California
Intermediate Tax-Free Bond Fund for any taxable year of a Shareholder during
which the Fund distributes "California exempt-interest dividends."
A statement setting forth the amount of "California exempt-interest
dividends" distributed during each calendar year will be sent to Shareholders
annually.
The foregoing is only a summary of some of the important California
personal income tax considerations generally affecting the Shareholders of the
California Tax-Free Money Market Fund and the California Intermediate Tax-Free
Bond Fund. This summary does not describe the California tax treatment of the
California Tax-Free Money Market Fund and the California Intermediate Tax-Free
Bond Fund, in addition, no attempt has been made to present a detailed
explanation of the California personal income tax treatment of the Fund's
Shareholders. Accordingly, this discussion is not intended as a substitute for
careful planning. Further, "California exempt-interest dividends" are excludable
from income for California personal income tax purposes only. Any dividends paid
to Shareholders subject to California corporate franchise tax will be taxed as
ordinary dividends to such Shareholders, notwithstanding that all or a portion
of such dividends is exempt from California personal income tax. Accordingly,
potential investors in the California Tax-Free Money Market Fund and the
California Intermediate Tax-Free Bond Fund including, in particular, corporate
investors which may be subject to either California franchise tax or California
corporate income tax, should consult their tax advisors with respect to the
application of such taxes to the receipt of Fund dividends and as to their own
California tax situation, in general.
Foreign Taxes
Dividends and interest received by a Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on the Fund's securities. Tax conventions between
certain countries and the United States may reduce or eliminate these taxes.
Foreign countries generally do not impose taxes on capital gains with respect to
investments by foreign investors. If a Fund meets the Distribution Requirement
and if more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible to file an election with the Internal Revenue Service that will enable
Shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign and U.S. possessions income taxes paid by the Fund.
Pursuant to the election, the
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<PAGE> 572
Fund will treat those taxes as dividends paid to its Shareholders. Each
Shareholder willbe required to include a proportionate share of those taxes in
gross income as income received from a foreign source and must treat the amount
so included as if the Shareholder had paid the foreign tax directly. The
Shareholder may then either deduct the taxes deemed paid by him or her in
computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against the Shareholder's
federal income tax. If a Fund makes the election, it will report annually to its
Shareholders the respective amounts per share of the Fund's income from sources
within, and taxes paid to, foreign countries and U.S. possessions.
MANAGEMENT OF HIGHMARK
Trustees and Officers
Overall responsibility for management of each Fund rests with the
Trustees of HighMark, who are elected by HighMark's Shareholders. There are
currently five Trustees, four of whom are not "interested persons" of HighMark
within the meaning of that term under the 1940 Act.
The Trustees, in turn, elect the officers of HighMark to supervise
actively its day-to-day operations.
The Trustees and officers of HighMark, their addresses and principal
occupations during the past five years are set forth below.
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name and Address With HighMark During Past 5 Years
- ---------------- ------------- -------------------
<S> <C> <C>
Stephen G. Mintos* Chairman of the Board, Trustee and Employee, and prior to
3435 Stelzer Road President October 1993 a limited
Columbus, OH 43219 partner, BISYS Fund
Services.
Thomas L. Braje Trustee Retired October, 1996.
1000 Alfred Nobel Drive Prior to October 1996,
Hercules, CA 94547 Vice President and Chief
Financial Officer of Bio
Rad Laboratories, Inc.
</TABLE>
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<PAGE> 573
<TABLE>
<S> <C> <C>
David A. Goldfarb Trustee Partner, Goldfarb &
111 Pine Street Simens, Certified Public
18th Floor Accountants.
San Francisco, CA 94111
Joseph C. Jaeger Trustee Senior Vice President and
100 First Street Chief Financial Officer,
San Francisco, CA 94105 Delta Dental Plan of
California.
Frederick J. Long Trustee President and Chief
520 Pike Street Executive Officer,
20th Floor Pettit-Morry Co. and
Seattle, WA 98101 Acordia Northwest Inc.
(each an insurance
brokerage firm).
J. David Huber Vice President From June, 1994, Senior
3435 Stelzer Road Vice President, Business
Columbus, OH 43219 Development; from December 1993
to June 1994, Managing Director
of Business Development; from
June, 1993 to December, 1993,
Managing Director of Sales
Management Services of BISYS Fund
Services Limited Partnership;
from June, 1987 to June, 1993,
Managing Director of Client
Services of BISYS Fund Services.
</TABLE>
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<PAGE> 574
<TABLE>
<S> <C> <C>
Irimga McKay Vice President From July 1993 to present,
1230 Columbia Street Senior Vice President of
Suite 500 Client Services, BISYS
San Diego, CA 92101 Fund Services, Inc.; from
November 1988 to July 1993,
First Vice President of
Concord Holding Corporation
(now BISYS Fund Services, Inc.)
Cynthia L. Lindsey Vice President Employee, BISYS Fund
3435 Stelzer Road Services.
Columbus, OH 43219
George O. Martinez Secretary From March 1995 to
3435 Stelzer Road present, Senior Vice
Columbus, OH 43219 President and Director
of Legal and Compliance
Services, BISYS Fund
Services, Inc.; from
June 1989-March 1995,
Vice President and
Associate General
Counsel, Alliance
Capital Management.
Mark E. Nagle Treasurer From September 1995 to
present, Senior Vice
President of Accounting
Services, BISYS Fund
Services, Inc.; from
1993 to September 1995,
Senior Vice President,
Fidelity Institutional
Retirement Services;
from 1981 to 1993,
Fidelity Accounting &
Custody Services.
</TABLE>
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<PAGE> 575
<TABLE>
<S> <C> <C>
Alaina V. Metz Assistant Secretary From June, 1995 to
3435 Stelzer Road present, Chief
Columbus, OH 43219 Administrator,
Administration and
Regulatory Services,
BISYS Fund Services,
Inc.; from May, 1989
to June, 1995,
Supervisor, Mutual
Fund Legal Department,
Alliance Capital
Management.
Michael Sakala Assistant Treasurer From April 1996 to
3435 Stelzer Road present, Associate
Columbus, OH 43219 Director, Accounting
Services, BISYS Fund
Services, Inc.; from April
1994 to April 1996, Head
of Fund Administration,
Banque Paribas, Luxembourg;
from May 1989 to April
1994, Accounting Manager,
Fidelity Investments.
<FN>
* Mr. Mintos is considered to be an "interested person" of HighMark as
defined in the 1940 Act.
</TABLE>
The Trustees of HighMark receive quarterly retainer fees and fees and
expenses for each meeting of the Board of Trustees attended. No employee,
officer or stockholder of BISYS Fund Services, BISYS Fund Services, Inc. and/or
BISYS Fund Services Ohio, Inc. ("BISYS Fund Services Ohio") receives any
compensation directly from HighMark for serving as a Trustee and/or officer.
BISYS Fund Services receives administration, servicing and distribution fees
from each of HighMark's Funds. See "Manager and Administrator" and "Distributor"
below. Messrs. Mintos, Huber, Martinez, Nagle and Sakala, Ms. Lindsey, Ms. Metz
and Ms. McKay are employees of BISYS Fund Services. As described under "Transfer
Agent, Custodian, and Fund Accounting Services" below, BISYS Fund Services Ohio
receives fees from each of HighMark's Funds for acting as transfer agent and
fund accountant. Messrs. Huber and Mintos are each officers of BISYS Fund
Services Ohio. While BISYS Fund Services Ohio is a distinct legal entity from
BISYS Fund Services, BISYS Fund Services Ohio is considered to be an affiliated
person of BISYS Fund Services under the 1940 Act due to, among other things, the
fact that BISYS Fund Services Ohio and BISYS Fund Services are both controlled
by the same ultimate parent company, The BISYS Group, Inc.
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<PAGE> 576
During the fiscal year ended July 31, 1996, fees paid to the
disinterested Trustees for their services as Trustees aggregated $36,000. For
the disinterested Trustees, the following table sets forth information
concerning fees paid and retirement benefits accrued during the fiscal year
ended July 31, 1996:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Annual Total Compensation
Trustee Compensation Retirement Benefits Upon from Fund
from Group Benefits Accrued Retirement Complex Paid to
as Trustees
Part of Fund
Expenses
------- ------------ ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Thomas L. Braje $9,000 None None $9,000
David A. Goldfarb $9,000 None None $9,000
Joseph C. Jaeger $9,000 None None $9,000
Frederick J. Long $9,000 None None $9,000
</TABLE>
Investment Advisor
Investment advisory and management services are provided to each of
HighMark's Funds by Pacific Alliance Capital Management, formerly MERUS-UCA
Capital Management (the "Advisor"), pursuant to an investment advisory agreement
between Union Bank of California and HighMark dated as of April 1, 1996 (the
"Investment Advisory Agreement"). Union Bank of California serves as custodian
for each of HighMark's Funds. See "Transfer Agent, Custodian and Fund Accounting
Services" below. Union Bank of California also serves as sub-administrator to
each of HighMark's Funds pursuant to an agreement with SEI Fund Resources. See
"Manager and Administrator" below.
Unless sooner terminated, the Investment Advisory Agreement will
continue in effect as to each particular Fund from year to year if such
continuance is approved at least annually by HighMark's Board of Trustees or by
vote of a majority of the outstanding Shares of such Fund (as defined under
General Information - Miscellaneous in the Prospectuses), and a majority of the
Trustees who are not parties to the Investment Advisory Agreement or interested
persons (as defined in the 1940 Act) of any party to the Investment Advisory
Agreement by votes cast in person at a meeting called for such purpose. The
Investment Advisory Agreement is terminable as to a particular Fund at any time
on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding Shares of that Fund, or by Union Bank of California.
The Investment Advisory Agreement terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Union Bank of
California will not be liable for any error of judgment or mistake of law or for
any loss suffered by HighMark in connection with the Advisor's services under
the Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part
-53-
<PAGE> 577
of the Advisor in the performance of its duties, or from reckless disregard by
the Advisor of its duties and obligations thereunder.
On April 1, 1996, the Bank of California, N.A., HighMark's
then-investment advisor, combined with Union Bank and the resulting bank changed
its name to Union Bank of California, N.A. At the same time, the banks'
investment management divisions were combined. Each of the Bank of California
and Union Bank (or its predecessor bank) has been in banking since the early
1900's, and historically, each has had significant investment functions within
its trust and investment division. Union Bank of California, N.A. is a
subsidiary of UnionBanCal Corporation, a publicly traded corporation, a majority
of the shares of which are owned by Bank of Tokyo - Mitsubishi, Limited.
For the services provided and expenses assumed by the Advisor pursuant
to the Investment Advisory Agreement, Union Bank of California is entitled to
receive fees from each Fund as described in that Fund's Prospectus. For the
fiscal year ended July 31, 1996, Union Bank of California received the following
investment advisory fees: $180,047 from the Growth Fund (an additional $182,161
in fees were voluntarily reduced); $1,722,014 from the Income Equity Fund (an
additional $33,207 in fees were voluntarily reduced); $187,523 from the Balanced
Fund (an additional $160,670 in fees were voluntarily reduced); $277,708 from
the Bond Fund (an additional $256,561 in fees were voluntarily reduced);
$1,590,719 from the Diversified Money Market Fund; $944,226 from the U.S.
Government Money Market Fund; $1,203,300 from the 100% U.S. Treasury Money
Market Obligations Fund; and $352,464 from the California Tax Free Money Market
Fund (an additional $265,714 in fees were voluntarily reduced). Because the
Value Momentum Fund, the Blue Chip Growth Fund, the Emerging Growth Fund, the
International Equity Fund, the Intermediate-Term Bond Fund, the Government
Securities Fund, the Convertible Securities Fund and the California Intermediate
Tax-Free Bond Fund had not commenced operations in HighMark as of July 31, 1996,
they paid no investment advisory fees during such fiscal year.
For the fiscal year ended July 31, 1995, the Bank of California
received the following investment advisory fees: $37,349 from the Growth Fund
(an additional $158,716 in fees were voluntarily reduced); $1,419,062 from the
Income Equity Fund (an additional $11,439 in fees were voluntarily reduced);
$83,790 from the Balanced Fund (an additional $168,408 in fees were voluntarily
reduced); $271,150 from the Bond Fund (an additional $250,310 in fees were
voluntarily reduced); $1,429,494 from the Diversified Money Market Fund;
$729,094 from the U.S. Government Money Market Fund; $920,611 from the 100% U.S.
Treasury Money Market Fund; and $267,095 from the California Tax Free Money
Market Fund (an additional $326,450 in fees were voluntarily reduced).
For the fiscal year ended July 31, 1994, the Bank of California
received the following investment advisory fees: $0 from the Growth Fund (an
additional $63,330 in fees were voluntarily reduced); $1,216,590 from the Income
Equity Fund (an additional $40,330 in fees
-54-
<PAGE> 578
were voluntarily reduced); $47,972 from the Balanced Fund (an additional
$112,239 in fees were voluntarily reduced); $268,520 from the Bond Fund (an
additional $249,371 in fees were voluntarily reduced); $1,471,655 from the
Diversified Money Market Fund; $825,406 from the U.S. Government Money Market
Fund; $833,971 from the 100% U.S. Treasury Money Market Fund; and $316,744 from
the California Tax-Free Money Market Fund (an additional $387,133 in fees were
voluntarily reduced).
The Sub-Advisors
The Advisor and Bank of Tokyo-Mitsubishi Trust Company have entered
into a sub-advisory agreement which relates to the Emerging Growth, Blue Chip
Growth, Convertible Securities and Government Securities Funds. The Advisor and
Tokyo-Mitsubishi Asset Management (UK) Ltd. have entered into a sub-advisory
agreement which relates to the International Equity Fund (the Bank of
Tokyo-Mitsubishi Trust Company, together with Tokyo-Mitsubishi Asset Management
(UK) Ltd., are hereafter collectively, the "Sub-Advisors").
Under its sub-advisory agreement, Bank of Tokyo-Mitsubishi Trust
Company is entitled to a fee which is calculated daily and paid monthly at an
annual rate of .20% of the average daily net assets of the Government Securities
Fund, .30% of the average daily net assets of the Blue Chip Growth Fund and
Convertible Securities Fund and .50% of the average daily net assets of the
Emerging Growth Fund. Such fee is paid by the Advisor, and Bank of
Tokyo-Mitsubishi Trust Company receives no fees directly from a Fund. Because
the Government Securities Fund, the Blue Chip Growth Fund, the Convertible
Securities Fund and the Emerging Growth Fund had not commenced operations as of
July 31, 1996, Bank of Tokyo-Mitsubishi Trust Company received no sub-advisory
fees.
Bank of Tokyo-Mitsubishi Trust Company operates as a subsidiary of The
Bank of Tokyo-Mitsubishi, Ltd. Bank of Tokyo-Mitsubishi Trust Company was
established in 1955 and has been providing asset management services since 1965.
Under its sub-advisory agreement, Tokyo-Mitsubishi Asset Management
(UK), Ltd. is entitled to a fee which is calculated daily and paid monthly at an
annual rate of .30% of the average daily net assets of the International Equity
Fund. Such a fee is paid by the Advisor, and Tokyo-Mitsubishi Asset Management
(UK), Ltd. receives no fees directly from the International Equity Fund. Because
the International Equity Fund had not commenced operations as of July 31, 1996,
Tokyo-Mitsubishi Asset Management (UK), Ltd. received no sub-advisory fees.
Tokyo-Mitsubishi Asset Management (UK), Ltd. operates as a subsidiary
of The Bank of Tokyo-Mitsubishi, Ltd. Tokyo-Mitsubishi Asset Management (UK),
Ltd was established in 1989.
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<PAGE> 579
Portfolio Transactions
Pursuant to the Investment Advisory Agreement, the Advisor determines,
subject to the general supervision of the Board of Trustees of HighMark and in
accordance with each Fund's investment objective and restrictions, which
securities are to be purchased and sold by a Fund, and which brokers are to be
eligible to execute its portfolio transactions. Purchases and sales of portfolio
securities for the Bond Fund, the Intermediate-Term Bond Fund, the Government
Securities Fund, the Convertible Securities Fund, the California Intermediate
Tax-Free Bond Fund, the Diversified Money Market Fund, the U.S. Government Money
Market Fund, the 100% U.S. Treasury Money Market Fund and the California
Tax-Free Money Market Fund usually are principal transactions in which portfolio
securities are normally purchased directly from the issuer or from an
underwriter or market maker for the securities. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and purchases from dealers serving as market makers may include
the spread between the bid and asked price. Securities purchased by the Growth
Fund, the Income Equity Fund, the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund and the International Equity Fund will generally
involve the payment of a brokerage fee. Portfolio transactions for the Balanced
Fund may be principal transactions or involve the payment of brokerage
commissions. While the Advisor generally seeks competitive spreads or
commissions on behalf of each of the Funds, HighMark may not necessarily pay the
lowest spread or commission available on each transaction, for reasons discussed
below.
Allocation of transactions, including their frequency, to various
dealers is determined by the Advisor or the Sub-Advisors in their best judgment
and in a manner deemed fair and reasonable to Shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Advisor or the Sub-Advisors may receive orders for
transactions by HighMark. Information so received is in addition to and not in
lieu of services required to be performed by the Advisor or the Sub-Advisors and
does not reduce the advisory fees payable to Union Bank of California by
HighMark. Such information may be useful to the Advisor or the Sub-Advisors in
serving both HighMark and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to the Advisor in carrying out its obligations to HighMark.
Upon adoption by the Board of Trustees of certain procedures pursuant
to Rule 17e-1 under the Investment Company Act, HighMark may execute portfolio
transactions involving the payment of a brokerage fee through Union Bank of
California, SEI Financial Services Company, and their affiliates in accordance
with such procedures. HighMark will not acquire portfolio securities issued by,
make savings deposits in, or enter repurchase or reverse repurchase agreements
with, Union Bank of California, or their affiliates, and will not give
-56-
<PAGE> 580
preference to correspondents of Union Bank of California with respect to such
securities, savings deposits, repurchase agreements and reverse repurchase
agreements.
Investment decisions for each Fund of HighMark are made independently
from those for the other Funds or any other investment company or account
managed by the Advisor, the Sub-Advisors or Union Bank of California. However,
any such other investment company or account may invest in the same securities
as HighMark. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and another Fund, investment
company or account, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner that the Advisor or the
Sub-Advisors and Union Bank of California believe to be equitable to the Fund(s)
and such other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained by a Fund. To the extent permitted by law, the Advisor,
or the Sub-Advisors and Union Bank of California may aggregate the securities to
be sold or purchased for a Fund with those to be sold or purchased for the other
Funds or for other investment companies or accounts in order to obtain best
execution. As provided in the Investment Advisory Agreement and the Sub-Advisory
Agreements, in making investment recommendations for HighMark, the Advisor or
the Sub-Advisors will not inquire or take into consideration whether an issuer
of securities proposed for purchase or sale by HighMark is a customer of the
Advisor, the Sub-Advisors or Union Bank of California, their parent or its
subsidiaries or affiliates and, in dealing with its commercial customers, the
Advisor, the Sub-Advisors and Union Bank of California, their parent,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by HighMark.
The following brokerage commissions were paid in the fiscal year ended
July 31, 1996: $104,127 by the Growth Fund, $318,261 by the Income Equity Fund,
and $13,043 by the Balanced Fund. The following brokerage commissions were paid
in the fiscal year ended July 31, 1995: $57,798 by the Growth Fund, $257,339 by
the Income Equity Fund, and $10,757 by the Balanced Fund. The following
brokerage commissions were paid in the fiscal year ended July 31, 1994: $49,878
by the Growth Fund; $212,350 by the Income Equity Fund; and $30,025 by the
Balanced Fund.
Glass-Steagall Act
In 1971, the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a mutual fund for
the collective investment of managing agency accounts. Subsequently, the Board
of Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
-57-
<PAGE> 581
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment advisor, transfer
agent, and custodian to such an investment company. In 1981, the United States
Supreme Court held in Board of Governorsof the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisors to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complies with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisors to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Union Bank of California believes that the Advisor and the Sub-Advisors
possess the legal authority to perform the services for the Funds contemplated
by the Investment Advisory Agreement and the Sub-Advisory Agreements and
described in the Prospectuses and this Statement of Additional Information and
has so represented in the Investment Advisory Agreement and the Sub-Advisory
Agreements. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations could prevent or restrict the Advisor from continuing to perform
such services for HighMark. Depending upon the nature of any changes in the
services that could be provided by the Advisor, or the Sub-Advisors, the Board
of Trustees of HighMark would review HighMark's relationship with the Advisor
and the Sub-Advisors and consider taking all action necessary in the
circumstances.
Should further legislative, judicial or administrative action prohibit
or restrict the activities of Union Bank of California, its affiliates, and its
correspondent banks in connection with Customer purchases of Shares of HighMark,
such Banks might be required to alter materially or discontinue the services
offered by them to Customers. It is not anticipated, however, that any change in
HighMark's method of operations would affect its net asset value per Share or
result in financial losses to any Customer. Administrator and Sub-Administrator
SEI Fund Resources (the "Administrator") serves as administrator to
each of HighMark's Funds pursuant to the administration agreement dated as of
February 15, 1997 between HighMark and the Administrator (the "Administration
Agreement").
SEI Fund Resources is a Delaware business trust whose sole beneficiary
is SEI Financial Management Corporation. SEI Financial Management Corporation, a
wholly owned subsidiary of SEI Corporation ("SEI"), was organized as a Delaware
corporation in 1969 and has its principal business offices at 680 East
Swedesford Road, Wayne,
-58-
<PAGE> 582
Pennsylvania 19087-1658. SEI and its subsidiaries are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information
services to financial institutions, institutional investors and money managers.
The Administrator and its affiliates also serve as administrator to the
following other institutional mutual funds: SEI Daily Income Trust, SEI Liquid
Asset Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI International Trust, SEI
Institutional Managed Trust, 1784(R) Funds, The Advisors' Inner Circle Fund, The
Pillar Funds, CUFund, STI Classic Funds, CoreFunds, Inc., First American Funds,
Inc., First American Investment Funds, Inc., The Arbor Fund, Marquis Funds(R),
Morgan Grenfell Investment Trust, The PBHG Funds, Inc., The Achievement Funds
Trust, Bishop Street Funds, CrestFunds, Inc., STI Classic Variable Trust,
Monitor Funds, FMB Funds, Inc., Turner Funds, ARK Funds, SEI Asset Allocation
Trust, and SEI Institutional Investments Trust.
Pursuant to the Administration Agreement, the Administrator provides
the Group with administrative services, regulatory reporting, fund accounting
and related portfolio accounting services, all necessary office space,
equipment, personnel, compensation and facilities for handling the affairs of
the Group. As described below, the Administrator has delegated part of its
responsibilities under the Administration Agreement to Union Bank of California,
N.A.
Through the fiscal year ended July 31, 1996 BISYS Fund Services Limited
Partnership d/b/a BISYS Fund Services ("BISYS Fund Services") served as
HighMark's administrator. For its services as administrator and expenses assumed
pursuant to the administration agreement between BISYS Fund Services and
HighMark, BISYS Fund Services received a fee from each Fund as described in that
Fund's Prospectus. For the fiscal year ended July 31, 1996, BISYS Fund Services
earned the following administration fees: $72,337 from the Growth Fund; $520,671
from the Income Equity Fund; $69,581 from the Balanced Fund; $80,226 from the
Bond Fund (an additional $43,205 in fees were voluntarily reduced); $795,393
from the Diversified Money Market Fund; $472,171 from the U.S. Government Money
Market Fund; $601,680 from the 100% U.S. Treasury Money Market Fund; and
$231,814 from the California Tax-Free Money Market Fund (an additional $77,275
in fees were voluntarily reduced). Because the Value Momentum Fund, the Blue
Chip Growth Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Government Securities Fund, the Convertible
Securities Fund and the California Intermediate Tax-Free Bond Fund had not
commenced operations as of July 31, 1996, they paid no administration fees
during such fiscal year.
For the fiscal year ended July 31, 1995, BISYS Fund Services earned the
following administration fees: $23,444 from the Growth Fund (an additional
$15,769 in fees were voluntarily reduced); $423,500 from the Income Equity Fund;
$50,440 from the Balanced Fund; $78,332 from the Bond Fund (an additional
$42,155 in fees were voluntarily reduced); $71,474 from the Diversified Money
Market Fund; $364,547 from the U.S. Government Money Market Fund; $460,306 from
the 100% U.S. Treasury Money Market Fund; and
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<PAGE> 583
$222,580 from the California Tax-Free Money Market Fund (an additional $74,193
in fees were voluntarily reduced).
For the fiscal year ended July 31, 1994, BISYS Fund Services earned the
following administration fees: $0 from the Growth Fund (an additional $12,666 in
fees were voluntarily reduced); $349,213 from the Income Equity Fund (an
additional $16,429 in fees were voluntarily reduced); $24,823 from the Balanced
Fund (an additional $7,219 in fees were voluntarily reduced); $77,570 from the
Bond Fund (an additional $41,725 in fees were voluntarily reduced); $735,828
from the Diversified Money Market Fund; $412,703 from the U.S. Government Money
Market Fund; $416,985 from the 100% U.S. Treasury Money Market Fund; and
$263,954 from the California Tax-Free Money Market Fund (an additional $87,985
in fees were voluntarily reduced).
The Administration Agreement became effective on February 15, 1997,
unless sooner terminated as provided in the Administration Agreement (and as
described below), the Administration Agreement, as amended, will continue in
effect until July 31, 1999. The Administration Agreement thereafter shall be
renewed automatically for successive annual terms. The Administration Agreement
is terminable at any time with respect to a particular Fund or HighMark as a
whole by either party without penalty for any reason upon 90 days' written
notice by the party effecting such termination to the other party.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
HighMark in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
the Administrator of its obligations and duties thereunder.
The Administration Agreement permits the Administrator to subcontract
its services thereunder, provided that the Administrator will not be relieved of
its obligations under the Administration Agreement by the appointment of a
subcontractor and the Administrator shall be responsible to HighMark for all
acts of the subcontractor as if such acts were its own, except for losses
suffered by any Fund resulting from willful misfeasance, bad faith or gross
negligence by the subcontractor in the performance of its duties or for reckless
disregard by it of its obligations and duties. Pursuant to a sub-administration
agreement between the Administrator and Union Bank of California, N.A., Union
Bank of California, N.A. will perform services which may include clerical,
bookkeeping, accounting, stenographic and administrative services, for which it
will receive a fee, paid by the Administrator, at the annual rate of up to 0.05%
of each Fund's average daily net assets.
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Shareholder Services Plan
HighMark has adopted a Shareholder Services Plan (the "Services Plan")
pursuant to which a Fund is authorized to pay compensation to financial
institutions (each a "Service Provider"), which may include Bank of
Tokyo-Mitsubishi, Ltd., Union Bank of California, N.A., or their respective
affiliates, that agree to provide certain shareholder support services for their
customers or account holders (collectively, "customers") who are the beneficial
or record owners of Shares of a Fund. In consideration for such services, a
Service Provider is compensated by a Fund at a maximum annual rate of up to
0.25% of the average daily net asset value of Shares of a Fund.
The servicing agreements adopted under the Services Plan (the
"Servicing Agreements") require the Service Provider receiving such compensation
to perform certain shareholder support services as set forth in the Servicing
Agreements with respect to the beneficial or record owners of Shares of a Fund.
As authorized by the Services Plan, HighMark may enter into a Servicing
Agreement with a Service Provider pursuant to which the Service Provider has
agreed to provide certain shareholder support services in connection with Shares
of one or more of HighMark's Funds. Such shareholder support services may
include, but are not limited to, (i) maintaining Shareholder accounts; (ii)
providing information periodically to Shareholders showing their positions in
Shares; (iii) arranging for bank wires; (iv) responding to Shareholder inquiries
relating to the services performed by the Service Provider; (v) responding to
inquiries from Shareholders concerning their investments in Shares; (vi)
forwarding Shareholder communications from HighMark (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Shareholders; (vii) processing purchase,
exchange and redemption requests from Shareholders and placing such orders with
HighMark or its service providers; (viii) assisting Shareholders in changing
dividend options, account designations, and addresses; (ix) providing
subaccounting with respect to Shares beneficially owned by Shareholders; (x)
processing dividend payments from HighMark on behalf of the Shareholders; and
(xi) providing such other similar services as HighMark may reasonably request to
the extent that the service provider is permitted to do so under applicable laws
or regulations.
Expenses
HighMark's service providers bear all expenses in connection with the
performance of their respective services, except that each Fund will bear the
following expenses relating to its operations: taxes, interest, brokerage fees
and commissions, if any, fees and travel expenses of Trustees who are not
partners, officers, directors, shareholders or employees of Union Bank of
California, SEI Fund Resources or SEI Financial Services Company, Securities and
Exchange Commission fees and state fees and expenses, certain insurance
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premiums, outside and, to the extent authorized by HighMark, inside auditing and
legal fees and expenses, fees charged by rating agencies in having the Fund's
Shares rated, advisory and administration fees, fees and reasonable
out-of-pocket expenses of the custodian and transfer agent, expenses incurred
for pricing securities owned by the Fund, costs of maintenance of corporate
existence, typesetting and printing prospectuses for regulatory purposes and for
distribution to current Shareholders, costs and expenses of Shareholders' and
Trustees' reports and meetings and any extraordinary expenses.
Distributor
SEI Financial Services Company (the "Distributor"), a wholly-owned
subsidiary of SEI, serves as distributor to HighMark's Funds pursuant to the
distribution agreement dated February 15, 1997 between HighMark and the
Distributor (the "Distribution Agreement").
Unless terminated, the Distribution Agreement will continue in effect
until July 31, 1999 and from year to year thereafter if approved at least
annually (i) by HighMark's Board of Trustees or by the vote of a majority of the
outstanding Shares of HighMark, and (ii) by the vote of a majority of the
Trustees of HighMark who are not parties to the Distribution Agreement or
interested persons (as defined in the 1940 Act) of any party to the Distribution
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement is terminable without penalty, on not less
than sixty days' notice by HighMark's Board of Trustees, by vote of a majority
of the outstanding voting securities of HighMark or by the Distributor. The
Distribution Agreement terminates in the event of its assignment, as defined in
the 1940 Act.
The Distribution Plans. The operation and the 0.25% fee payable under
HighMark's Distribution Plans to which the Retail Shares of HighMark's Funds are
presently subject are described in each such Fund's Prospectus under "SERVICE
ARRANGEMENTS -The Distribution Plan." Through the fiscal year ended July 31,
1996, BISYS Fund Services served as HighMark's distributor. For the fiscal year
ended July 31, 1996, BISYS Fund Services received in respect of the sale of
Retail Shares distribution fees of: $236 in respect of the Growth Fund; $1,166
in respect of the Income Equity Fund, $87 in respect of the Balanced Fund, $183
in respect of the Bond Fund, $672 in respect of the Diversified Money Market
Fund, $14,879 in respect of the U.S. Government Money Market Fund, $0 in respect
of the 100% U.S. Treasury Money Market Fund, and $0 in respect of the California
Tax-Free Money Market Fund. Because the Value Momentum Fund, the Blue Chip
Growth Fund, the Emerging Growth Fund, the International Equity Fund, the
Intermediate-Term Bond Fund, the Government Securities Fund, the Convertible
Securities Fund and the California Intermediate Tax-Free Bond Fund had not
commenced operations as of July 31, 1996, they paid no distribution fees during
such fiscal year.
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For the fiscal year ended July 31, 1995, BISYS Fund Services received
in respect of the sale of Retail Shares distribution fees of: $0 in respect of
the Growth Fund; $0 in respect of the Income Equity Fund, $0 in respect of the
Balanced Fund, $0 in respect of the Bond Fund, $1,054 in respect of the
Diversified Money Market Fund, $1,701 in respect of the U.S. Government Money
Market Fund, $0 in respect of the 100% U.S. Treasury Money Market Fund, and $0
in respect of the California Tax-Free Money Market Fund.
For the fiscal year ended July 31, 1994, BISYS Fund Services received
$1,598.65 in distribution fees in respect of the Retail Shares of the
Diversified Money Market Fund. No other distribution fees were paid during such
fiscal year.
In accordance with Rule 12b-1 under the 1940 Act, the Distribution
Plans may be terminated with respect to any Fund by a vote of a majority of the
Independent Trustees, or by a vote of a majority of the outstanding Retail
Shares of that Fund. The Distribution Plans may be amended by vote of HighMark's
Board of Trustees, including a majority of the Independent Trustees, cast in
person at a meeting called for such purpose, except that any change in a
Distribution Plan that would materially increase the distribution fee with
respect to a Fund requires the approval of that Fund's Retail Shareholders.
HighMark's Board of Trustees will review on a quarterly and annual basis written
reports of the amounts received and expended under the Distribution Plans
(including amounts expended by the Distributor to Participating Organizations
pursuant to the Servicing Agreements entered into under the Distribution Plans)
indicating the purposes for which such expenditures were made.
Each Distribution Plan provides that it will continue in effect with
respect to each Fund for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a majority of the
Independent Trustees and (ii) by the vote of the entire Board of Trustees, cast
in person at a meeting called for such purpose. For so long as each of the
Distribution Plans remains in effect, the selection and nomination of those
trustees who are not interested persons of HighMark (as defined in the 1940 Act)
shall be committed to the discretion of such disinterested persons.
Transfer Agent and Custodian Services
State Street Bank and Trust Company performs transfer agency services
for HighMark's Funds pursuant to a transfer agency and shareholder service
agreement with HighMark dated as of February 15, 1997 (the "Transfer Agency
Agreement"). As each Fund's transfer agent, State Street Bank and Trust Company
processes purchases and redemptions of each Fund's Shares and maintains each
Fund's Shareholder transfer and accounting records, such as the history of
purchases, redemptions, dividend distributions, and similar transactions in a
Shareholders's account.
Under the Transfer Agency Agreement, HighMark has agreed to pay State
Street Bank and Trust Company annual fees at the rate of $18,000 per Retail
class/per Fund. The Distributor has agreed to pay State Street Bank and Trust
Company annual fees at
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the rate of $15,000 per Fiduciary class/per Fund. In addition, there will be an
annual account maintenance fee of $25.00 per account and IRA Custodial fees
totalling $15.00 per account, as well as out-of-pocket expenses as defined in
the Transfer Agency Agreement. HighMark intends to charge transfer agency fees
across the HighMark Funds as a whole. State Street Bank and Trust Company may
periodically voluntarily reduce all or a portion of its transfer agency fee with
respect to a Fund to increase the Fund's net income available for distribution
as dividends.
Union Bank of California, N.A. serves as custodian to HighMark's Funds
pursuant to a custodian agreement with HighMark dated as of December 23, 1991,
as amended (the "Custodian Agreement"). Under the Custodian Agreement, Union
Bank of California's responsibilities include safeguarding and controlling each
Fund's cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on each Fund's investments.
Under the Custodian Agreement, HighMark has agreed to pay Union Bank of
California a domestic custodian fee with respect to each Fund at an annual rate
of .01% of the Fund's average daily net assets, with an annual minimum fee of
$2,500 per Fund, plus certain transaction fees. Union Bank of California is also
entitled to be reimbursed by HighMark for its reasonable out-of-pocket expenses
incurred in the performance of its duties under the Custodian Agreement. Global
custody fees shall be determined on a transaction basis. Union Bank of
California may periodically voluntarily reduce all or a portion of its custodian
fee with respect to a Fund to increase the Fund's net income available for
distribution as dividends.
Auditors
The financial statements of HighMark for the period ended July 31,
1996, appearing in this Statement of Additional Information have been audited by
Deloitte & Touche LLP, independent accountants, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report and on
the authority of such firm as experts in auditing and accounting.
Legal Counsel
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, are counsel to HighMark and will pass upon the legality
of the Shares offered hereby.
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ADDITIONAL INFORMATION
Description of Shares
HighMark is a Massachusetts business trust. HighMark's Declaration of
Trust was originally filed with the Secretary of State of The Commonwealth of
Massachusetts on March 10, 1987. The Declaration of Trust, as amended,
authorizes the Board of Trustees to issue an unlimited number of Shares, which
are units of beneficial interest, without par value. HighMark's Declaration of
Trust, as amended, further authorizes the Board of Trustees to establish one or
more series of Shares of HighMark, and to classify or reclassify the Shares of
any series into one or more classes by setting or changing in any one or more
respects the preferences, designations, conversion or other rights,
restrictions, limitations as to dividends, conditions of redemption,
qualifications or other terms applicable to the Shares of such class, subject to
those matters expressly provided for in the Declaration of Trust, as amended,
with respect to the Shares of each series of HighMark. HighMark presently
consists of sixteen series of Shares, representing units of beneficial interest
in the Growth Fund, the Income Equity Fund, the Balanced Fund, the Value
Momentum Fund, the Blue Chip Growth Fund, the Emerging Growth Fund, the
International Equity Fund, the Bond Fund, the Intermediate-Term Bond Fund, the
Government Securities Fund, the Convertible Securities Fund, the California
Intermediate Tax-Free Bond Fund, the Diversified Money Market Fund, the U.S.
Government Money Market Fund, the 100% U.S. Treasury Money Market Fund, and the
California Tax-Free Money Market Fund. As described in the Prospectuses,
selected Funds have been divided into two classes of Shares, designated Retail
Shares and Fiduciary Shares.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the Prospectuses and this
Statement of Additional Information, HighMark's Shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of HighMark,
Shareholders of a Fund are entitled to receive the assets available for
distribution belonging to that Fund, and a proportionate distribution, based
upon the relative asset values of the respective Funds, of any general assets
not belonging to any particular Fund that are available for distribution. Upon
liquidation or dissolution of HighMark, Retail and Fiduciary shareholders are
entitled to receive the net assets of the Fund attributable to each class.
As used in the Prospectuses and in this Statement of Additional
Information, "assets belonging to a Fund" means the consideration received by
HighMark upon the issuance or sale of Shares in that Fund, together with all
income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange, or liquidation of such
investments, and any funds or payments derived from any reinvestment of such
proceeds, and any general assets of HighMark not readily identified as belonging
to a particular Fund that are allocated to that Fund by HighMark's Board of
Trustees. Such allocations of
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general assets may be made in any manner deemed fair and equitable, and it is
anticipated that the Board of Trustees will use the relative net asset values of
the respective Funds at the time of allocation. Assets belonging to a particular
Fund are charged with the direct liabilities and expenses of that Fund, and with
a share of the general liabilities and expenses of HighMark not readily
identified as belonging to a particular Fund that are allocated to that Fund in
proportion to the relative net asset values of the respective Funds at the time
of allocation. The timing of allocations of general assets and general
liabilities and expenses of HighMark to particular Funds will be determined by
the Board of Trustees and will be in accordance with generally accepted
accounting principles. Determinations by the Board of Trustees as to the timing
of the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular Fund are
conclusive.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as HighMark shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding Shares of each
Fund affected by the matter. For purposes of determining whether the approval of
a majority of the outstanding Shares of a Fund will be required in connection
with a matter, a Fund will be deemed to be affected by a matter unless it is
clear that the interests of each Fund in the matter are identical, or that the
matter does not affect any interest of the Fund.
Under Rule 18f-2, the approval of an investment advisory agreement or
any change in fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding Shares of
such Fund. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
Shareholders of HighMark voting without regard to series.
Although not governed by Rule 18f-2, Retail Shares of a Fund have
exclusive voting rights with respect to matters pertaining to the Fund's
Distribution Plan.
Shareholder and Trustee Liability
Under Massachusetts law, holders of units of interest in a business
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. However, HighMark's Declaration of Trust, as
amended, provides that Shareholders shall not be subject to any personal
liability for the obligations of HighMark, and that every written agreement,
obligation, instrument, or undertaking made by HighMark shall contain a
provision to the effect that the Shareholders are not personally liable
thereunder. The Declaration of Trust, as amended, provides for indemnification
out of the trust property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust, as amended, also provides that HighMark shall, upon request, assume the
defense of any claim made against any Shareholder for any act or
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obligation of HighMark, and shall satisfy any judgment thereon. Thus, the risk
of a Shareholder incurring financial loss on account of Shareholder liability is
limited to circumstances in which HighMark itself would be unable to meet its
obligations.
The Declaration of Trust, as amended, states further that no Trustee,
officer, or agent of HighMark shall be personally liable in connection with the
administration or preservation of the assets of the trust or the conduct of
HighMark's business, nor shall any Trustee, officer, or agent be personally
liable to any person for any action or failure to act except for his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties.
The Declaration of Trust, as amended, also provides that all persons
having any claim against the Trustees or HighMark shall look solely to the
assets of the trust for payment.
The Reorganization of the IRA Fund and HighMark
As of June 23, 1988, pursuant to an Agreement and Plan of
Reorganization between the IRA Fund, HighMark, and the Bank of California,
substantially all of the assets of the IRA Fund's Income Equity Portfolio, and
Bond Portfolio were transferred to HighMark's Income Equity Fund, and Bond Fund,
respectively, in exchange for such Fund's Shares, and substantially all of the
assets of the IRA Fund's Short Term Portfolio were transferred to one or more of
HighMark's Money Market Funds in exchange for Shares of such Money Market Fund
or Funds. Prior to June 23, 1988, the aggregate total return and average annual
total return of the Bond Fund and Income Equity Fund reflect the aggregate total
return and average annual total return of the IRA Fund Bond Portfolio and the
IRA Fund Income Equity Portfolio, respectively. The IRA Fund Bond Portfolio and
the IRA Fund Income Equity Portfolio both received investment advice from the
same division of the Bank of California now known as Pacific Alliance Capital
Management and had investment objectives, policies and restrictions
substantially similar to those of the Bond Fund and the Income Equity Fund,
respectively. However, potential investors should be aware that both the nature
and amount of fees and expenses of the IRA Fund Bond Portfolio and the Bond Fund
and those of the IRA Fund Income Equity Portfolio and the Income Equity Fund
differ.
Calculation of Performance Data
From time to time, articles relating to the performance, rankings, and
other investment characteristics of mutual funds and their investment advisors,
including HighMark's Funds and the Advisor, may appear in national, regional,
and local publications. In particular, some publications may publish their own
rankings or performance reviews of mutual funds and their investment advisors,
including HighMark's Funds and the Advisor. Various mutual fund or market
indices may also serve as a basis for comparison of the performance of
HighMark's Funds with other mutual funds or mutual fund portfolios with
comparable investment objectives and policies. In addition to the indices
prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, references
to or reprints from the following publications may be used in HighMark's
promotional literature: IBC/Donoghue's Money
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Fund Report, Ibbotson Associates of Chicago, MorningStar, Lipper Analytical
Services, Inc., CDA/Wiesenberger Investment Company Services, SEI Financial
Services, Callan Associates, Wilshire Associates, MONEY Magazine, Pension and
Investment Age, Forbes Magazine, Business Week, American Banker, Fortune
Magazine, Institutional Investor, Barron's National Business & Financial Weekly,
The Wall Street Journal, New York Times, San Francisco Chronicle and Examiner,
Los Angeles Times, U.S.A. Today, Sacramento Bee, Seattle Times, Seattle Daily
Journal of Commerce, Seattle Post/Intelligence, Seattle Business Journal, Tacoma
New Tribune, Bellevue Journal-American, The Oregonian, Puget Sound Business
Journal, Portland Chamber of Commerce and Portland Daily Journal of
Commerce/Portland Business Today. Shareholders may call toll free 1-800-433-6884
for current information concerning the performance of each of HighMark's Funds.
From time to time, the Funds may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of compounding and the benefits of dollar-cost averaging); (2)
discussions of general economic trends; (3) presentations of statistical data to
supplement such discussions; (4) descriptions of past or anticipated portfolio
holdings for one or more of the Funds within HighMark; (5) descriptions of
investment strategies for one or more of the Funds; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, insured bank products, annuities, qualified retirement plans and
individual stocks and bonds), which may or may not include the Funds; (7)
comparisons of investment products (including the Funds) with relevant market or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) testimonials
describing the experience of persons that have invested in one or more of the
Funds. The Funds may also include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results in such communications.
Such performance examples will be based on an express set of assumptions and are
not indicative of the performance of any of the Funds. In addition, the
California Tax-Free Fund may include charts comparing various tax-free yields
versus taxable yield equivalents at different income levels.
Based on the seven-day period ended July 31, 1996 (the "base period"
for the Diversified Money Market Fund, the U.S. Government Money Market Fund,
the 100% U.S. Treasury Money Market Fund, and the California Tax -Free Money
Market Fund), the yield of the Diversified Money Market Fund's Retail Shares and
Fiduciary Shares was 4.76% and 4.76%, respectively, and the effective yield of
the Fund's Retail Shares and Fiduciary Shares was 4.87% and 4.87%, respectively;
the yield of the U.S. Government Money Market Fund's Retail Shares and Fiduciary
Shares was 4.60% and 4.61%, respectively, and the effective yield of the Fund's
Retail Shares and Fiduciary Shares was 4.71% and 4.72%, respectively; the yield
of the 100% U.S. Treasury Money Market Fund's Retail Shares and Fiduciary Shares
was 4.46% and 4.46% respectively, and the effective yield of the Fund's Retail
Shares and Fiduciary Shares was 4.56% and 4.56% respectively; and the yield of
the California Tax-Free Money Market Fund's Retail Shares
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and Fiduciary Shares was 2.71% and 2.71% respectively, and the effective yield
of the Fund's Retail Shares and Fiduciary Shares was 2.75% and 2.75%,
respectively. The yield of each Fund's Retail Shares and Fiduciary Shares,
respectively, was computed by determining the percentage net change, excluding
capital changes, in the value of an investment in one Share of the Class over
the base period, and multiplying the net change by 365/7 (or approximately 52
weeks). The effective yield of each Fund's Retail Shares and Fiduciary Shares,
respectively, represents a compounding of the yield of the Class by adding 1 to
the number representing the percentage change in value of the investment during
the base period, raising that sum to a power equal to 365/7, and subtracting 1
from the result.
Based on the thirty-day period ended July 31, 1996, the yield of the
Diversified Money Market Fund's Retail Shares and Fiduciary Shares was 4.73% and
4.73% respectively, and the effective yield of the Fund's Retail Shares and
Fiduciary Shares was 4.83% and 4.83%, respectively; the yield of the U.S.
Government Money Market Fund's Retail Shares and Fiduciary Shares was 4.59% and
4.60%, respectively, and the effective yield of the Fund's Retail Shares and
Fiduciary Shares was 4.69% and 4.70%, respectively; the yield of the 100% U.S.
Treasury Money Market Fund's Retail Shares and Fiduciary Shares was 4.47% and
4.47%, respectively, and the effective yield of the Fund's Retail Shares and
Fiduciary Shares was 4.56% and 4.56%, respectively; and the yield of the
California Tax- Free Money Market Fund's Retail Shares and Fiduciary Shares was
2.31% and 2.31%, respectively, and the effective yield of the Fund's Retail
Shares and Fiduciary Shares was 2.33% and 2.33%, respectively. The yield of each
Fund's Retail Shares and Fiduciary Shares, respectively, was computed by
determining the percentage net change, excluding capital changes, in the value
of an investment in one Share of the Class over the thirty-day period, and
multiplying the net change by 365/30 (or approximately twelve months). The
effective yield of each Fund's Retail Shares and Fiduciary Shares, respectively,
represents a compounding of the yield of the Class by adding 1 to the number
representing the percentage change in value of the investment during the
thirty-day period, raising that sum to a power equal to 365/30, and subtracting
1 from the result.
Based on the seven-day period ended July 31, 1996, the tax-equivalent
yield of the California Tax-Free Money Market Fund's Retail Shares and Fiduciary
Shares was 4.49% and 4.49% respectively (using a federal income tax rate of
39.6%), and 5.49% and 5.49% respectively (using a federal income tax rate of
39.6% and a California personal income tax rate of 11%), and the tax-equivalent
effective yield of the Fund's Retail Shares and Fiduciary Shares was 4.55% and
4.55%, respectively (using a federal income tax rate of 39.6%), and 5.57% and
5.57%, respectively (using a federal income tax rate of 39.6% and a California
personal income tax rate of 11%).
Based on the thirty-day period ended July 31, 1996, the tax-equivalent
yield of the California Tax-Free Money Market Fund's Retail Shares and Fiduciary
Shares was 3.82% and 3.82%, respectively (using a federal income tax rate of
39.6%), and 4.68% and 4.68%, respectively (using a federal income tax rate of
39.6% and a California personal income tax
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rate of 11%), and the tax-equivalent effective yield of the Fund's Retail Shares
and Fiduciary Shares was 3.86% and 3.86%, respectively (using a federal income
tax rate of 39.6%), and 4.72% and 4.72%, respectively (using a federal income
tax rate of 39.6% and a California personal income tax rate of 11%).
The tax-equivalent yield of the Retail Shares and Fiduciary Shares,
respectively, of the California Tax-Free Fund was computed by dividing that
portion of the yield of the Class that is tax-exempt by 1 minus the stated
income tax rate (or rates) and adding the product to that portion, if any, of
the yield of the Class that is not tax-exempt. The tax-equivalent effective
yield of the Fund's Retail Shares and Fiduciary Shares, respectively, was
computed by dividing that portion of the effective yield of the Class which is
tax-exempt by 1 minus the stated income tax rate (or rates) and adding to that
portion, if any, of the effective yield of the Class that is not tax-exempt.
For the year ended July 31, 1996, the one-year average annual total
return of the Diversified Money Market Fund Retail and Fiduciary shares was
5.01%, of the U.S. Government Money Market Fund Retail and Fiduciary shares was
4.86% and 4.88%, respectively, of the 100% U.S. Treasury Money Market Fund
Retail and Fiduciary shares was 4.74%, and of the California Tax-Free Money
Market Fund Retail and Fiduciary shares was 2.91%.
For the period ended July 31, 1996, the five-year average annual total
return of the Diversified Money Market Fund's Retail and Fiduciary shares was
4.00%; of the U.S. Government Money Market Fund's Retail and Fiduciary shares
was 3.88%; of the 100% U.S. Treasury Money Market Fund's Retail and Fiduciary
shares was 3.78%; and of the California Tax-Free Money Market Fund's Retail and
Fiduciary shares was 2.68%.
For the period from August 10, 1987 (the date on which the Diversified
Money Market Fund, the U.S. Government Money Market Fund and the 100% U.S.
Treasury Money Market Fund commenced operations) through July 31, 1996, the
average annual total return of the Diversified Money Market Fund Retail and
Fiduciary shares, the U.S. Government Money Market Fund Retail and Fiduciary
shares and the 100% U.S. Treasury Money Market Fund Retail and Fiduciary shares
was 5.66%, 5.48% and 5.38%, respectively. For the period from August 11, 1987
(the date on which the California Tax-Free Money Market Fund commenced
operations) through July 31, 1996, the average annual total return of the
California Tax-Free Money Market Fund Retail and Fiduciary shares was 3.69%.
Prior to June 23, 1988 (the date on which the Income Equity Fund and
the Bond Fund commenced operations as a result of the reorganization involving
the IRA Fund Income Equity Portfolio and the IRA Fund Bond Portfolio,
respectively, as described under "Additional Information - The Reorganization of
the IRA Fund and HighMark" above), the total return
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and average annual total return of the Income Equity Fund and the Bond Fund
reflects the total return and average annual total return of the IRA Fund Income
Equity Portfolio, and the IRA Fund Bond Portfolio, respectively. Each IRA Fund
Portfolio received investment advice from the same division of the Bank of
California now known as Pacific Alliance Capital Management and had
substantially similar investment objectives, policies, and restrictions of the
Fund into which it was reorganized. However, potential investors in the Income
Equity Fund, and the Bond Fund should be aware that both the nature and amount
of fees and expenses of the IRA Fund Income Equity Portfolio, and the IRA Fund
Bond Portfolio differ from the Fund into which the respective IRA Fund
Portfolios were reorganized. See "Management of HighMark Investment Advisor" and
the Statements of Operations in the Financial Statements with respect to the
Income Equity Fund, and the Bond Fund and the IRA Fund Income Equity Portfolio,
and the IRA Fund Bond Portfolio for the applicable period ended July 31, 1989
and June 22, 1988 contained in this Statement of Additional Information.
Each Equity Fund and Fixed Income Fund offered a single class of shares
throughout the periods shown below. The performance figures relating to the
Retail Shares have been adjusted, however, to give effect to the sales charge
and distribution fee to which the Retail Shares are subject. Because only Retail
Shares bear the expense of the fee, if any, under the Distribution Plan and a
sales charge, total return and yield relating to a Fund's Retail Shares will be
lower than that relating to the Funds' Fiduciary Shares.
For the one year period ended July 31, 1996, the average annual total
return of the Retail and Fiduciary Shares of the Income Equity Fund was 12.93%
(18.21% without a load) and 18.25%, respectively, and of the Bond Fund was 1.79%
(4.95% without a load) and 4.81%, respectively. For the five-year period ended
July 31, 1996, the average annual total return of the Retail and Fiduciary
Shares of the Income Equity Fund was 11.99% (13.02% without a load) and 12.98%,
respectively, and of the Bond Fund was 6.15% (6.80% without a load) and 6.95%,
respectively. For the ten year period ended July 31, 1996, the average annual
total return of the Retail and Fiduciary Shares of the Income Equity Fund was
12.17% (13.02% without a load) and 12.66%, respectively. For the ten year period
ended July 31, 1996, the average annual total return of the Retail and Fiduciary
Shares of the Bond Fund was 6.71% (7.03% without a load) and 7.10%,
respectively.
For the one year period ended July 31, 1996, the average annual total
return of the Retail and Fiduciary Shares of the Growth Fund was 7.80% (12.88%
without a load) and 12.72%, respectively and of the Retail and Fiduciary Shares
of the Balanced Fund was 5.93% (10.94% without a load) and 11.06% respectively.
For the period beginning November 18, 1993 (commencement of operations)
and ending July 31, 1996, the average annual total return of the Retail Shares
and Fiduciary Shares of the Growth Fund was 10.97% (12.87% without a load) and
12.81%, respectively.
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<PAGE> 595
For the period beginning November 14, 1993 (commencement of operations)
and ending July 31, 1996, the aggregate total return of the Retail Shares and
Fiduciary Shares of the Balanced Fund was 7.66% (9.49% without a load) and
9.75%, respectively.
Each Fund's respective average annual total return and/or aggregate
total return was calculated by determining the change in the value of a
hypothetical $1,000 investment in the Fund over the applicable period
(utilizing, when appropriate, performance information from the applicable IRA
Fund Portfolio prior to June 23, 1988) that would equate the initial amount
invested to the ending redeemable value of the investment; in the case of the
average annual total return, this amount (representing the Fund's total return)
was then averaged over the relevant number of years. The ending redeemable value
includes dividends and capital gain distributions reinvested at net asset value.
The resulting percentages indicate the positive or negative investment results
that an investor would have experienced from changes in Share price and
reinvestment of dividends and capital gains distributions.
For the thirty-day period ended July 31, 1996, the yield for the Retail
and Fiduciary Shares of the Growth Fund was 0.74% (0.77% without a load) and
0.77%, respectively; for the Retail and Fiduciary Shares of the Income Equity
Fund was 2.86% (2.99% without a load) and 2.80%, respectively; for the Retail
and Fiduciary Shares of the Balanced Fund was 3.41% (3.57% without a load) and
3.57%, respectively; and for the Retail and Fiduciary Shares of the Bond Fund
was 5.90% (6.08% without a load) and 6.08%, respectively. The Fund's "yield"
(referred to as "standardized yield") for a given 30-day period for a class of
shares is calculated using the following formula set forth in rules adopted by
the Commission that apply to all funds that quote yields:
Standardized Yield = 2 [( a-b + 1)to the 6th power - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of that class outstanding during
the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day of
the period, adjusted for undistributed net investment income.
The standardized yield of a class of shares for a 30-day period may
differ from its yield for any other period. The Commission formula assumes that
the standardized yield for a 30-day period occurs at a constant rate for a
six-month period and is annualized at the end of the six-month period. This
standardized yield is not based on actual distributions paid by the Fund to
shareholders in the 30-day period, but is a hypothetical yield based upon the
net investment income from the Fund's portfolio investments calculated for that
period. Because
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<PAGE> 596
each class of shares is subject to different expenses, it is likely that the
standardized yields of the Fund classes of shares will differ.
For the one year period ended July 31, 1996, the distribution rate
(including capital gains and excluding a sales charge) of the Income Equity Fund
was 7.57% for Retail Shares and 7.58% for Fiduciary Shares and of the Bond Fund
was 6.37% for Retail Shares and 6.32% for Fiduciary Shares. For the one year
period ended July 31, 1996, the distribution rate (excluding capital gains and a
sales charge) of the Income Equity Fund was 2.94% for the Retail and Fiduciary
Shares, and of the Bond Fund was 6.37 for the Retail Shares and 6.32% for the
Fiduciary Shares. For the one year period ended July 31, 1996, the distribution
rate (including capital gains and a sales load) of the Income Equity Fund was
7.23% and of the Bond Fund was 6.18%. For the one year period ended July 31,
1996 the distribution rate (excluding capital gains and including a load) of the
Income Equity Fund was 2.80% and of the Bond Fund was 6.18%. The distribution
rate for each Fund is determined by dividing the income distributions and, where
the distribution rate includes capital gains distributions, capital gains
distributions on a Share of the Fund over a twelve-month period by the per Share
net asset value of the Fund on the last day of the period and annualized in the
case of Funds which have not had a full year of results.
All performance information presented is based on past performance and
does not predict future performance. No performance information is presented for
the Value Momentum, Blue Chip Growth, Emerging Growth, International Equity,
Intermediate-Term Bond, Government Securities, Convertible Securities and
California Intermediate Tax-Free Bond Funds because they had not commenced
operations as of the date of this Statement of Additional Information.
Miscellaneous
HighMark is not required to hold meetings of Shareholders for the
purpose of electing Trustees except that (i) HighMark is required to hold a
Shareholders' meeting for the election of Trustees at such time as less than a
majority of the Trustees holding office have been elected by Shareholders and
(ii) if, as a result of a vacancy on the Board of Trustees, less than two-thirds
of the Trustees holding office have been elected by the Shareholders, that
vacancy may be filled only by a vote of the Shareholders. In addition, Trustees
may be removed from office by a written consent signed by the holders of Shares
representing two-thirds of the outstanding Shares of HighMark at a meeting duly
called for the purpose, which meeting shall be held upon the written request of
the holders of Shares representing not less than 10% of the outstanding Shares
of HighMark. Upon written request by the holders of Shares representing 1% of
the outstanding Shares of HighMark stating that such Shareholders wish to
communicate with the other Shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee,
HighMark will provide a list of Shareholders or disseminate appropriate
materials (at the expense of the
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<PAGE> 597
requesting Shareholders). Except as set forth above, the Trustees may continue
to hold office and may appoint successor Trustees.
HighMark is registered with the Securities and Exchange Commission as
a management investment company. Such registration does not involve supervision
by the Securities and Exchange Commission of the management or policies of
HighMark.
The Prospectuses and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission. Copies of such information may be
obtained from the Securities and Exchange Commission upon payment of the
prescribed fee.
The 1996 Annual Report to Shareholders of HighMark is incorporated
herein by reference. This Report includes audited financial statements for the
fiscal year ended July 31, 1996. Upon the incorporation by reference herein of
such Annual Report, the opinion in such Annual Report of independent accountants
is incorporated herein by reference and such Annual Report's financial
statements are incorporated by reference herein in reliance upon the authority
of such accountants as experts in auditing and accounting.
The Prospectuses and this Statement of Additional Information are not
an offering of the securities herein described in any state in which such
offering may not lawfully be made.
No salesperson, dealer, or other person is authorized to give any
information or make any representation other than those contained in the
Prospectuses and this Statement of Additional Information.
As of November 22, 1996, HighMark believes that the trustees and
officers of HighMark, as a group, owned less than one percent of the Shares of
any Fund of HighMark. As of November 22, 1996, HighMark believes that Union Bank
of California was the shareholder of record of 87.57% of the Fiduciary Shares of
the Growth Fund, 73.24% of the Fiduciary Shares of the Income Equity Fund,
97.91% of the Fiduciary Shares of the Balanced Fund, 88.27% of the Fiduciary
Shares of the Bond Fund, 93.46% of the Fiduciary Shares of the U.S. Government
Money Market Fund, 98.42%of the Fiduciary Shares of the Diversified Money Market
Fund, 95.03% of the Fiduciary Shares of the 100% U.S. Treasury Money Market Fund
and substantially all of the Fiduciary Shares of the California Tax-Free Money
Market Fund. As of November 22, 1996, HighMark believes that Union Bank of
California had voting power with respect to 61.00% of the Growth Fund Fiduciary
Shares, 43.30% of the Income Equity Fund Fiduciary Shares, 38.89% of the
Balanced Fund Fiduciary Shares, 47.51% of the Bond Fund Fiduciary Shares, 15.46%
of the Diversified Money Market Fund Fiduciary Shares, 19.96% of the 100% U.S.
Treasury Money Market Fund Fiduciary Shares, and 18.12% of the California
Tax-Free Money Market Fund Fiduciary Shares.
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<PAGE> 598
The table below indicates each additional person known by HighMark to
own beneficially 5% or more of the Shares of the following Funds of HighMark as
of November 22, 1996:
<TABLE>
<CAPTION>
5% or More Beneficial Owners
----------------------------
Percent of
Beneficial
Name and Address Ownership
- ---------------- ---------
Growth Fund
-----------
Retail Shares
-------------
<S> <C>
National Financial Services 7.67%
Corporation for the Exclusive
Benefit of Our Customers and
Bill S. Tsutagawa
Yuriko Tsutagawa
2242 Valley Rd.
Oceanside, CA 92056
National Financial Services 5.55%
Corporation for the Exclusive
Benefit of Our Customers and
IRA of John A. Dito
550 S. Hope St. 2000
Los Angeles, CA 90071
National Financial Services 5.92%
Corporation for the Exclusive
Benefit of Our Customers and
Douglas S. Querin
4228 SW Selling Court
Portland, OR 97221
National Financial Services 7.31%
Corporation for the Exclusive
Benefit of Our Customers and
IRA of John A. Dito
550 S. Hope St. 2000
Los Angeles, CA 90071
</TABLE>
-75-
<PAGE> 599
<TABLE>
<S> <C> <C>
Fiduciary Shares
----------------
Union Bank of California, N.A. 32.39%
Capital Accumulation Plan
400 California St.
San Francisco, CA 94104
Union Bank of California N.A. 17.51%
Personal Retirement Options Plan
400 California St.
San Francisco, CA 94104
Income Equity Fund
------------------
Retail Shares
-------------
National Financial Services 9.76%
Corporation for the Exclusive
Benefit of Our Customers and
Richard W. Killion
c/o Killion Industries
2811 La Mirada Dr.
Vista, CA 92083
Fiduciary Shares
----------------
Union Bank of California N.A. 18.07%
Capital Accumulation Plan
400 California St.
San Francisco, CA 94104
Union Bank of California N.A. 8.57%
Personal Retirement Options Plan
400 California St.
San Francisco, CA 94104
Balanced Fund
-------------
Retail Shares
-------------
National Financial Services 7.75%
</TABLE>
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<PAGE> 600
<TABLE>
<S> <C> <C>
Corporation for the Exclusive
Benefit of Our Customers and
Rosalind Fahmy
2691 Pocatello
Rolland Heights, CA 91748
National Financial Services 44.99%
Corporation for the Exclusive
Benefit of Our Customers and
John F. Roach
587 Perugia Way
Los Angeles, CA 90077
National Financial Services 5.53%
Corporation for the Exclusive
Benefit of Our Customers and
Yoko Fujii, Trustee
Tadashi Yoko Fujii
1405 Lamont Ave.
Thousand Oaks, CA 91362
Fiduciary Shares
----------------
Union Bank of California N.A. 25.13%
Capital Accumulation Plan
400 California St.
San Francisco, CA 94104
Union Bank of California N.A. 12.45%
Personal Retirement Options Plan
400 California St.
San Francisco, CA 94104
EBT/Employee Benefits 6.63%
Accounting
Attn: Joyce Carroll
475 Sansome Street, 12th Floor
San Francisco, CA 94111
</TABLE>
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<PAGE> 601
<TABLE>
<S> <C> <C>
Bond Fund
---------
Retail Shares
-------------
National Financial Services 22.01%
Corporation for the Exclusive
Benefit of Our Customers and
Mildred Walsh
Stephanie McGowan
3701 E. Valley St.
Seattle, WA 98112
National Financial Services 6.00%
Corporation for the Exclusive
Benefit of Our Customers and
Union Bank of California, Cust.
IRA of Charles L. Masingill
2218 Windward Lane
Newport, CA 92660
National Financial Services 5.50%
Corporation for the Exclusive
Benefit of Our Customers and
Wallace Allred
Norma Allred
2250 N. Broadway, No. 48
Escondido, CA 92026
National Financial Services 5.88%
Corporation for the Exclusive
Benefit of Our Customers and
Union Bank of California, Cust.
IRA of James Harris
1212 Christian Valley Rd.
Auburn, CA 95602
</TABLE>
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<PAGE> 602
<TABLE>
<S> <C> <C>
National Financial Services 7.64%
Corporation for the Exclusive
Benefit of Our Customers and
Union Bank of California, Cust.
Frederick V. Betts
800 Financial Center
1215 Fourth Ave.
Seattle, WA 98161
National Financial Services 5.52%
Corporation for the Exclusive
Benefit of Our Customers and
Marla J. Arata
7801 Oakmont Drive
Modesto, CA 95356
National Financial Services Corporation 5.63%
for the Exclusive Benefit of Our Customers and
C. Dan Hunter
Irene W. Hunter
9335 N.E. 30th Street
Bellevue, WA 98004
Fiduciary Shares
----------------
Union Bank of California N.A. 11.88%
Capital Accumulation Plan
400 California St.
San Francisco, CA 94104
Union Bank of California N.A. 5.88%
Personal Retirement Options Plan
400 California St.
San Francisco, CA 94104
</TABLE>
-79-
<PAGE> 603
<TABLE>
<S> <C> <C>
Diversified Money Market Fund
-----------------------------
Retail Shares
-------------
National Financial Services 95.89%
Corporation for the Exclusive
Benefit of Our Customers
Church Street Station
P.O. Box 3908
New York, NY 10008-3908
Fiduciary Shares
----------------
Oregon Laborers Employers Trust 5.14%
Gary Case, Plan Administrator
2929 N.W. 31st Street
Portland, OR 97210
U.S. Government Money Market Fund
---------------------------------
Retail Shares
-------------
National Financial Services 89.26%
Corporation for the Exclusive
Benefit of Our Customers
Church Street Station
P.O. Box 3908
New York, NY 10008-3908
Fiduciary Shares
----------------
Spitzel/Anderson Escrow 8.21%
3700 Wilshire Blvd. #820
Los Angeles, CA 90010
The Macneal-Schwendler Corp. 5.99%
815 Colorado Blvd.
Los Angeles, CA 90041
</TABLE>
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<PAGE> 604
<TABLE>
<S> <C> <C>
Joseph A. Brislin 14.61%
6825 S.W. Sandburg Street
Tigard, OR 97223
100% U.S. Treasury Money Market Fund
------------------------------------
Retail Shares
-------------
National Financial Services 98.98%
Corporation for the Exclusive
Benefit of Our Customers
Church Street Station
P.O. Box 3908
New York, NY 10008-3908
Fiduciary Shares
----------------
EBT/Employee Benefits Accounting 5.70%
Attn: Joyce Carroll
475 Sansome Street, 12th Floor
San Francisco, CA 94111
California Tax-Free Money Market Fund
-------------------------------------
Retail Shares
-------------
National Financial Services 94.81%
Corporation for the Exclusive
Benefit of Our Customers
Church Street Station
P.O. Box 3908
New York, NY 10008-3908
</TABLE>
-81-
<PAGE> 605
<TABLE>
<S> <C> <C>
Fiduciary Shares
----------------
Charles and Mary Page 5.28%
Revocable Trust
501 Via Casitas - #225
Kenfield, CA 94904
<FN>
No person other than Union Bank of California and the beneficial owners
listed above own as of record more than 5% of the Fiduciary or Retail Shares of
a Fund.
</TABLE>
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<PAGE> 606
APPENDIX
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Advisor with regard to portfolio
investments for the Funds include Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited and its affiliate, IBCA Inc.
(collectively, "IBCA"), and Thomson BankWatch, Inc. ("Thomson"). Set forth below
is a description of the relevant ratings of each such NRSRO. The NRSROs that may
be utilized by the Advisor and the description of each NRSRO's ratings is as of
the date of this Statement of Additional Information, and may subsequently
change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal
bonds)
Description of the four highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2, and 3) in each rating category to indicate
the security's ranking within the category):
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." 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
are generally 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 risk 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 and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment some time 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.
-83-
<PAGE> 607
- -Description of the four highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
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 debt in this
category than in higher rated categories.
Description of the four highest long-term debt ratings by Duff:
AAA Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. AA Risk
is modest but may vary slightly from time to time A- because
of economic conditions.
A+ Protection factors are average but adequate. However, A risk
factors are more variable and greater in periods A- of
economic stress.
BBB Below average protection factors. Still considered sufficient
for prudent investment.
Description of the four highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA Bonds 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 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
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<PAGE> 608
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
issues is generally rated "F-1+."
A Bonds 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 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 thee 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.
IBCA's description of its four highest long-term debt ratings:
AAA Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial such that adverse changes in
business, economic or financial conditions are unlikely to
increase investment risk significantly.
AA Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business,
economic, or financial conditions may increase investment risk
albeit not very significantly.
A Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest
is strong, although adverse changes in business, economic or
financial conditions may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal
and interest is adequate, although adverse changes in
business, economic or financial conditions are more likely to
lead to increased investment risk than for obligations in
higher categories.
Thomson's description of its four highest long-term debt ratings (Thomson may
include a plus (+) or minus (-) designation to indicate where within the
respective category the issue is placed):
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<PAGE> 609
AAA The highest category: indicates ability to repay principal and
interest on a timely basis is very high.
AA The second highest category: indicates a superior ability to
repay principal and interest on a timely basis with limited
incremental risk versus issues rated in the highest category.
A The third highest category: indicates the ability to repay
principal and interest is strong. Issues rated "A" could be
more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
BBB Lowest investment grade category: indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB"
are, however, more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions)
have a superior capacity for repayment of senior
short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by many of the
following characteristics:
- 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.
- Well-established access to a range of financial
markets and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions)
have a strong capacity for repayment of senior
short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more
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<PAGE> 610
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have
extremely strong safety characteristics are denoted with a plus
sign (+).
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
Duff's description of its three highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors
are very small.
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<PAGE> 611
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Duff 3 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Fitch's description of its three highest short-term debt ratings:
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 assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
or F-1 ratings.
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.
IBCA's description of its three highest short-term debt ratings:
A+ Obligations supported by the highest capacity for timely
repayment.
A1 Obligations supported by a very strong capacity for timely
repayment.
A2 Obligations supported by a strong capacity for timely
repayment, although such capacity may be susceptible
to adverse changes in business, economic or financial
conditions.
Thomson's description of its three highest short-term ratings:
TBW-1 The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a
timely basis.
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<PAGE> 612
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and
external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is
considered adequate.
SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
-89-
<PAGE> 613
INDEPENDENT AUDITORS' REPORT FOR HIGHMARK FUNDS FOR
THE YEAR ENDED JULY 31, 1996
-90-
<PAGE> 614
FINANCIAL STATEMENTS FOR HIGHMARK FUNDS FOR
THE PERIODS ENDED JULY 31, 1996
-91-
<PAGE> 615
[LOGO]
REPORT OF INDEPENDENT AUDITORS'
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
THE HIGHMARK GROUP
We have audited the accompanying statements of assets and liabilities including
the schedules of portfolio investments of The HighMark Group (the "Funds"),
including Diversified Obligations Fund, U.S. Government Obligations Fund, 100%
U.S. Treasury Obligations Fund, California Tax-Free Fund, Bond Fund, Income
Equity Fund, Balanced Fund, and Growth Fund, as of July 31, 1996, the related
statements of operations, statements of changes in net assets and the financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements based on our audits. The
financial highlights for the other years presented and the statement of changes
in net assets for the year ended July 31, 1995 were audited by other auditors
whose report, dated September 22, 1995, expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1996 by correspondence with the Funds' custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Funds at July 31, 1996, the results of
their operations, the changes in their net assets, and the financial highlights
for the year then ended, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
September 13, 1996
LOGO
24
<PAGE> 616
[LOGO]
STATEMENTS OF ASSETS AND LIABILITIES
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
100% U.S.
DIVERSIFIED U.S. GOVERNMENT TREASURY CALIFORNIA
OBLIGATIONS OBLIGATIONS OBLIGATIONS TAX-FREE
FUND FUND FUND FUND
----------- --------------- ----------- -----------
<C> <C> <C> <C>
ASSETS:
Investments in securities, at amortized cost............ $ 413,900 $ 188,438 $ 274,306 $ 148,504
Repurchase agreements, at cost.......................... 21,502 39,183 -- --
-------- -------- -------- --------
Total Investments..................................... 435,402 227,621 274,306 148,504
Cash.................................................... 3 16 -- 897
Interest receivable..................................... 2,256 557 910 432
Receivable from brokers for investments sold............ -- -- -- 2,500
Prepaid expenses and other assets....................... 14 17 12 10
-------- -------- -------- --------
Total Assets........................................ 437,675 228,211 275,228 152,343
-------- -------- -------- --------
LIABILITIES:
Distributions payable................................... 1,690 863 1,088 287
Payable to brokers for investments purchased............ 5,000 -- -- --
Accrued expenses and other payables:
Investment advisory fees.............................. 143 76 98 31
Administration fees................................... 19 10 12 5
Shareholder services fees............................. 1 1 1 1
Custodian, accounting and transfer agent fees......... 26 26 13 14
Other................................................. 69 38 53 26
-------- -------- -------- --------
Total Liabilities................................... 6,948 1,014 1,265 364
-------- -------- -------- --------
NET ASSETS:
Capital................................................. 431,097 227,373 273,958 152,028
Accumulated undistributed net realized gains (losses) on
investment transactions............................... (370) (176) 5 (49)
-------- -------- -------- --------
Net Assets.......................................... $ 430,727 $ 227,197 $ 273,963 $ 151,979
======== ======== ======== ========
Net Assets
Investor.............................................. $ 185,952 $ 75,714 $ 100,623 $ 53,627
Fiduciary............................................. 244,775 151,483 173,340 98,352
-------- -------- -------- --------
Total............................................... $ 430,727 $ 227,197 $ 273,963 $ 151,979
======== ======== ======== ========
Outstanding units of beneficial interest (shares)
Investor.............................................. 186,031 75,727 100,626 53,639
Fiduciary............................................. 245,066 151,646 173,332 98,389
-------- -------- -------- --------
Total............................................... 431,097 227,373 273,958 152,028
======== ======== ======== ========
Net asset value -- offering and redemption price per
share
Investor.............................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
Fiduciary............................................. 1.00 1.00 1.00 1.00
======== ======== ======== ========
</TABLE>
See notes to financial statements.
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25
<PAGE> 617
[LOGO]
STATEMENTS OF ASSETS AND LIABILITIES
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
INCOME
BOND EQUITY
FUND FUND
-------- ---------
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $59,354 and $232,422,
respectively)............................................................... $ 58,799 $ 266,771
Repurchase agreements, at cost................................................ 2,237 4,858
------- --------
Total Investments......................................................... 61,036 271,629
Interest and dividends receivable............................................. 912 796
Receivable from brokers for investments sold.................................. -- 2,930
Prepaid expenses and other assets............................................. 2 6
------- --------
Total Assets.............................................................. 61,950 275,361
------- --------
LIABILITIES:
Distributions payable......................................................... 319 586
Payable for capital shares redeemed........................................... 42 --
Payable to brokers for investments purchased.................................. -- 1,726
Accrued expenses and other payables:
Investment advisory fees.................................................... 23 154
Administration fees......................................................... 2 12
Custodian, accounting and transfer agent fees............................... 15 21
Other....................................................................... 18 59
------- --------
Total Liabilities......................................................... 419 2,558
------- --------
NET ASSETS:
Capital....................................................................... 65,254 223,480
Net unrealized appreciation (depreciation) on investments..................... (555) 34,349
Undistributed net investment income........................................... 32 --
Accumulated undistributed net realized gains (losses) on investment
transactions................................................................ (3,200) 14,974
------- --------
Net Assets................................................................ $ 61,531 272,803
======= ========
Net Assets
Investor.................................................................... $ 1,157 $ 10,143
Fiduciary................................................................... 60,374 262,660
------- --------
Total..................................................................... $ 61,531 $ 272,803
======= ========
Outstanding units of beneficial interest (shares)
Investor.................................................................... 114 710
Fiduciary................................................................... 5,900 18,413
------- --------
Total..................................................................... 6,014 19,123
======= ========
Net asset value
Investor -- redemption price per share...................................... $ 10.15 $ 14.29
Fiduciary -- offering and redemption price per share........................ 10.23 14.27
======= ========
Maximum Sales Charge (Investor Shares)........................................ 3.00% 4.50%
======= ========
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net asset value
adjusted to nearest cent) per share (Investor Shares)....................... $ 10.46 $ 14.96
======= ========
</TABLE>
See notes to financial statements.
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26
<PAGE> 618
[LOGO]
STATEMENTS OF ASSETS AND LIABILITIES
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
BALANCED GROWTH
FUND FUND
-------- -------
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $32,159 and $39,610,
respectively).................................................................. $36,273 $43,527
Repurchase agreements, at cost................................................... 3,787 900
--------- ---------
Total Investments............................................................ 40,060 44,427
Interest and dividends receivable................................................ 278 55
Receivable from brokers for investments sold..................................... -- 216
Prepaid expenses................................................................. 9 5
--------- ---------
Total Assets................................................................. 40,347 44,703
--------- ---------
LIABILITIES:
Distributions payable............................................................ 118 28
Payable to brokers for investments purchased..................................... -- 301
Accrued expenses and other payables:
Investment advisory fees....................................................... 20 21
Administration fees............................................................ 2 2
Custodian, accounting and transfer agent fees.................................. 5 5
Other.......................................................................... 6 8
--------- ---------
Total Liabilities............................................................ 151 365
--------- ---------
NET ASSETS:
Capital.......................................................................... 35,830 38,047
Net unrealized appreciation on investments....................................... 4,114 3,917
Undistributed net investment income.............................................. 1 --
Accumulated undistributed net realized gains on investment transactions.......... 251 2,374
--------- ---------
Net Assets................................................................... $40,196 $44,338
========= =========
Net Assets
Investor....................................................................... $ 694 $ 2,843
Fiduciary...................................................................... 39,502 41,495
--------- ---------
Total........................................................................ $40,196 $44,338
========= =========
Outstanding units of beneficial interest (shares)
Investor....................................................................... 60 226
Fiduciary...................................................................... 3,392 3,300
--------- ---------
Total........................................................................ 3,452 3,526
========= =========
Net asset value
Investor -- redemption price per share......................................... $ 11.56 $ 12.60
Fiduciary -- offering and redemption price per share........................... 11.64 12.58
========= =========
Maximum Sales Charge (Investor Shares)........................................... 4.50% 4.50%
========= =========
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net asset value
adjusted to nearest cent) per share (Investor Shares).......................... $ 12.10 $ 13.19
========= =========
</TABLE>
See notes to financial statements.
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27
<PAGE> 619
[LOGO]
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
U.S. 100% U.S.
DIVERSIFIED GOVERNMENT TREASURY CALIFORNIA
OBLIGATIONS OBLIGATIONS OBLIGATIONS TAX-FREE
FUND FUND FUND FUND
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income.................................. $22,468 $ 13,070 $16,193 $5,301
------- ------- ------- ------
Total Income................................. 22,468 13,070 16,193 5,301
------- ------- ------- ------
EXPENSES:
Investment advisory fees......................... 1,591 944 1,203 618
Administration fees.............................. 795 472 602 309
Distribution fees (Investor shares).............. 396 194 267 122
Shareholder services fees........................ 994 590 752 386
Custodian and accounting fees.................... 264 181 177 121
Legal and audit fees............................. 63 37 52 29
Trustees' fees and expenses...................... 11 7 9 5
Transfer agent fees.............................. 89 44 50 47
Registration and filing fees..................... 47 16 28 5
Printing costs................................... 51 69 42 23
Other............................................ 13 7 9 4
------- ------- ------- ------
Total Expenses............................... 4,314 2,561 3,191 1,669
Expenses voluntarily reduced..................... (1,327) (739) (978) (824)
------- ------- ------- ------
Net Expenses................................. 2,987 1,822 2,213 845
------- ------- ------- ------
Net Investment Income............................ 19,481 11,248 13,980 4,456
------- ------- ------- ------
REALIZED GAINS ON INVESTMENTS:
Net realized gains (losses) on investments....... 16 15 (51) --
------- ------- ------- ------
Change in net assets resulting from operations... $19,497 $ 11,263 $13,929 $4,456
======= ======= ======= ======
</TABLE>
See notes to financial statements.
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28
<PAGE> 620
[LOGO]
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
INCOME
BOND EQUITY
FUND FUND
------ ---------
<S> <C> <C>
INVESTMENT INCOME:
Interest income...................................................... $4,316 $ 425
Dividend income...................................................... -- 9,943
------ -------
Total Income....................................................... 4,316 10,368
------ -------
EXPENSES:
Investment advisory fees............................................. 534 1,755
Administration fees.................................................. 123 521
Distribution fees (Investor shares).................................. 2 20
Shareholder services fees............................................ 154 651
Custodian and accounting fees........................................ 85 174
Legal and audit fees................................................. 10 44
Trustees' fees and expenses.......................................... 2 7
Transfer agent fees.................................................. 54 106
Registration and filing fees......................................... 6 19
Printing costs....................................................... 22 47
Other................................................................ 3 8
------ -------
Total Expenses................................................... 995 3,352
Expenses voluntarily reduced......................................... (445) (666)
------ -------
Total expenses before expense reimbursements..................... 550 2,686
Expense reimbursements........................................... -- --
------ -------
Net Expenses..................................................... 550 2,686
------ -------
Net Investment Income................................................ 3,766 7,682
------ -------
REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on investment transactions............... (369) 19,384
Net change in unrealized appreciation (depreciation) on
investments........................................................ (465) 13,911
------ -------
Net realized/unrealized gains (losses) on investments................ (834) 33,295
------ -------
Change in net assets resulting from operations....................... $2,932 $ 40,977
====== =======
</TABLE>
See notes to financial statements.
LOGO
29
<PAGE> 621
LOGO
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
BALANCED GROWTH
FUND FUND
-------- ------
<S> <C> <C>
INVESTMENT INCOME:
Interest income........................................................ $ 996 $ 82
Dividend income........................................................ 549 607
------ ------
Total Income......................................................... 1,545 689
------ ------
EXPENSES:
Investment advisory fees............................................... 348 362
Administration fees.................................................... 70 72
Distribution fees (Investor shares).................................... 2 5
Shareholder services fees.............................................. 87 90
Custodian and accounting fees.......................................... 64 78
Legal and audit fees................................................... 6 6
Trustees' fees and expenses............................................ 1 1
Transfer agent fees.................................................... 33 42
Registration and filing fees........................................... 3 4
Printing costs......................................................... 6 6
Other.................................................................. 1 2
------ ------
Total Expenses..................................................... 621 668
Expenses voluntarily reduced........................................... (293) (333 )
------ ------
Total expenses before expense reimbursements....................... 328 335
Expense reimbursements............................................. -- --
------ ------
Net Expenses....................................................... 328 335
------ ------
Net Investment Income.................................................. 1,217 354
------ ------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment transactions.......................... 446 3,272
Net change in unrealized appreciation on investments................... 1,716 155
------ ------
Net realized/unrealized gains on investments........................... 2,162 3,427
------ ------
Change in net assets resulting from operations......................... $3,379 $3,781
====== ======
</TABLE>
See notes to financial statements.
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30
<PAGE> 622
LOGO
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
DIVERSIFIED U.S. GOVERNMENT
OBLIGATIONS FUND OBLIGATIONS FUND
-------------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.......................... $ 19,481 $ 17,476 $ 11,248 $ 8,697
Net realized gains (losses) on investment
transactions................................. 16 (29) 15 34
----------- ----------- ----------- -----------
Change in net assets resulting from operations... 19,497 17,447 11,263 8,731
----------- ----------- ----------- -----------
DISTRIBUTIONS TO INVESTOR SHAREHOLDERS:
From net investment income..................... (7,738) (5,516) (3,707) (2,084)
DISTRIBUTIONS TO FIDUCIARY SHAREHOLDERS:
From net investment income..................... (11,743) (11,960) (7,541) (6,613)
----------- ----------- ----------- -----------
Change in net assets from shareholder
distributions.................................. (19,481) (17,476) (11,248) (8,697)
----------- ----------- ----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued.................... 1,943,043 1,562,243 1,933,728 1,760,626
Dividends reinvested........................... 7,326 4,915 3,487 1,950
Cost of shares redeemed........................ (1,918,325) (1,473,121) (1,918,254) (1,740,538)
----------- ----------- ----------- -----------
Change in net assets from share transactions..... 32,044 94,037 18,961 22,038
----------- ----------- ----------- -----------
Change in net assets............................. 32,060 94,008 18,976 22,072
NET ASSETS:
Beginning of period............................ 398,667 304,659 208,221 186,149
----------- ----------- ----------- -----------
End of period.................................. $ 430,727 $ 398,667 $ 227,197 $ 208,221
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
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31
<PAGE> 623
LOGO
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
100% U.S. TREASURY CALIFORNIA
OBLIGATIONS FUND TAX-FREE FUND
----------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income........... $ 13,980 $ 10,640 $ 4,456 $ 4,619
Net realized gains (losses) on
investment transactions....... (51) 57 -- (23)
---------- --------- --------- ---------
Change in net assets resulting
from operations................. 13,929 10,697 4,456 4,596
---------- --------- --------- ---------
DISTRIBUTIONS TO INVESTOR
SHAREHOLDERS:
From net investment income...... (4,948) (2,706) (1,404) (1,089)
DISTRIBUTIONS TO FIDUCIARY
SHAREHOLDERS:
From net investment income...... (9,032) (7,934) (3,052) (3,530)
---------- --------- --------- ---------
Change in net assets from
shareholder distributions....... (13,980) (10,640) (4,456) (4,619)
---------- --------- --------- ---------
CAPITAL TRANSACTIONS:
Proceeds from shares issued..... 1,004,680 736,668 343,893 354,814
Dividends reinvested............ 4,571 2,106 1,425 1,035
Cost of shares redeemed......... (1,014,501) (659,445) (339,625) (356,054)
---------- --------- --------- ---------
Change in net assets from share
transactions.................... (5,250) 79,329 5,693 (205)
---------- --------- --------- ---------
Change in net assets.............. (5,301) 79,386 5,693 (228)
NET ASSETS:
Beginning of period............. 279,264 199,878 146,286 146,514
---------- --------- --------- ---------
End of period................... $ 273,963 $ 279,264 $ 151,979 $ 146,286
========== ========= ========= =========
</TABLE>
See notes to financial statements.
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32
<PAGE> 624
LOGO
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
BOND FUND INCOME EQUITY FUND
---------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income............ $ 3,766 $ 3,824 $ 7,682 $ 7,595
Net realized gains (losses) on
investment transactions........ (369) (1,512) 19,384 8,944
Net change in unrealized
appreciation (depreciation) on
investments.................... (465) 3,052 13,911 17,456
-------- -------- -------- --------
Change in net assets resulting from
operations....................... 2,932 5,364 40,977 33,995
-------- -------- -------- --------
DISTRIBUTIONS TO INVESTOR
SHAREHOLDERS:
From net investment income....... (63) (18) (239) (43)
From net realized gains on
investments.................... (1) -- (277) (16)
DISTRIBUTIONS TO FIDUCIARY
SHAREHOLDERS:
From net investment income....... (3,703) (3,806) (7,443) (7,552)
From net realized gains on
investments.................... (32) -- (11,279) (7,309)
-------- -------- -------- --------
Change in net assets from
shareholder distributions........ (3,799) (3,824) (19,238) (14,920)
-------- -------- -------- --------
CAPITAL TRANSACTIONS:
Proceeds from shares issued...... 15,630 11,393 63,282 36,043
Dividends reinvested............. 3,043 3,125 17,495 13,535
Cost of shares redeemed.......... (16,591) (19,934) (54,919) (56,799)
-------- -------- -------- --------
Change in net assets from share
transactions..................... 2,082 (5,416) 25,858 (7,221)
-------- -------- -------- --------
Change in net assets............... 1,215 (3,876) 47,597 11,854
NET ASSETS:
Beginning of period.............. 60,316 64,192 225,206 213,352
-------- -------- -------- --------
End of period.................... $ 61,531 $ 60,316 $272,803 $225,206
======== ======== ======== ========
</TABLE>
See notes to financial statements.
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33
<PAGE> 625
LOGO
STATEMENTS OF CHANGES IN NET ASSETS
Amounts in Thousands
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
---------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income............ $ 1,217 $ 992 $ 354 $ 272
Net realized gains on investment
transactions................... 446 21 3,272 915
Net change in unrealized
appreciation on investments.... 1,716 2,804 155 3,752
------- ------- ------- -------
Change in net assets resulting from
operations....................... 3,379 3,817 3,781 4,939
------- ------- ------- -------
DISTRIBUTIONS TO INVESTOR
SHAREHOLDERS:
From net investment income....... (23) (3) (21) (5)
From net realized gains on
investments.................... -- -- (94) (3)
DISTRIBUTIONS TO FIDUCIARY
SHAREHOLDERS:
From net investment income....... (1,194) (989) (333) (267)
From net realized gains on
investments.................... (2) -- (1,566) (240)
------- ------- ------- -------
Change in net assets from
shareholder distributions........ (1,219) (992) (2,014) (515)
------- ------- ------- -------
CAPITAL TRANSACTIONS:
Proceeds from shares issued...... 15,840 10,356 19,239 9,727
Dividends reinvested............. 1,172 986 1,965 503
Cost of shares redeemed.......... (9,404) (9,590) (4,947) (3,594)
------- ------- ------- -------
Change in net assets from share
transactions..................... 7,608 1,752 16,257 6,636
------- ------- ------- -------
Change in net assets............... 9,768 4,577 18,024 11,060
NET ASSETS:
Beginning of period.............. 30,428 25,851 26,314 15,254
------- ------- ------- -------
End of period.................... $ 40,196 $ 30,428 $ 44,338 $ 26,314
======= ======= ======= =======
</TABLE>
See notes to financial statements.
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34
<PAGE> 626
LOGO DIVERSIFIED OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT (23.4%):
Euro Certificates of Deposit (3.7%):
$ 5,000 Abbey National Treasury
Services, 5.72%, 9/11/96... $ 5,000
6,000 Abbey National Treasury
Services, 5.22%, 3/4/97 5,983
5,000 Bayerische Vereinsbank,
5.49%, 11/13/96 5,001
--------
15,984
--------
Yankee Certificates of Deposit (19.7%):
10,000 ABN-AMRO Bank N.V., 5.53%,
3/18/97.................... 9,996
5,000 Commerzbank, 5.66%, 4/24/97.. 4,997
10,000 Dresdner Bank, 5.05%,
2/26/97.................... 9,999
10,000 Deutsche Bank, 5.57%,
3/31/97.................... 10,001
5,000 Rabobank Nederland N.V.,
5.82% 8/14/96.............. 5,000
10,000 Sanwa Bank Ltd., 5.62%,
10/16/96................... 10,002
10,000 Society Generale, 5.65%,
4/1/97..................... 9,993
5,000 Society Generale, 5.80%,
4/15/97.................... 5,002
10,000 Sumitomo Bank Ltd., 5.48%,
8/26/96.................... 10,000
5,000 Sumitomo Bank Ltd., 5.46%,
9/3/96..................... 5,000
5,000 Sumitomo Bank Ltd., 6.01%,
10/30/96................... 5,000
--------
84,990
--------
Total Certificates of Deposit 100,974
--------
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------
<S> <C> <C> <C>
COMMERCIAL PAPER/MASTER DEMAND NOTES (67.5%):
Automotive (6.9%):
$ 5,000 Daimler-Benz North America
Corp., 5.35%, 1/6/97....... $ 4,876
5,000 Daimler-Benz North America
Corp., 5.53%, 1/13/97...... 4,873
5,000 Ford Motor Credit Corp.,
5.27%, 8/13/96............. 4,991
10,000 Ford Motor Credit Corp.,
5.34%, 8/15/96............. 9,979
5,000 Ford Motor Credit Corp.,
5.42%, 9/6/96.............. 4,973
--------
29,692
--------
Banking (9.2%):
5,000 ANZ (De) Inc., 5.38%,
9/10/96.................... 4,970
5,000 ANZ (De) Inc., 5.40%,
9/9/96..................... 4,971
5,000 ANZ (De) Inc., 5.47%,
10/9/96.................... 4,948
5,000 Abbey National North America
Inc., 5.54%, 9/25/96....... 4,958
5,000 Abbey National North America
Inc., 5.40%, 12/4/96....... 4,906
5,000 Commerzbank U.S. Finance
Inc., 5.35%, 8/8/96........ 4,995
5,000 Den Danske Corporation Inc.,
5.38%, 8/6/96.............. 4,996
5,000 Den Danske Corporation Inc.,
5.42%, 10/1/96............. 4,954
--------
39,698
--------
</TABLE>
Continued
LOGO
35
<PAGE> 627
LOGO
DIVERSIFIED OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMERCIAL PAPER/MASTER DEMAND NOTES,
CONTINUED:
Business Credit Institutions (21.9%):
$10,000 Alpha Finance Corp., 5.48%,
10/11/96................... $ 9,892
10,000 Assets Securitization
Cooperative Corp., 5.37%,
8/5/96..................... 9,994
5,000 Assets Securitization
Cooperative Corp., 5.40%,
9/17/96.................... 4,965
5,000 Beta Finance Inc., 5.53%,
1/3/97..................... 4,881
10,000 Ciesco, L.P., 5.26%,
8/16/96.................... 9,978
5,000 Ciesco, L.P., 5.32%,
9/9/96..................... 4,971
5,200 Corporate Receivables Corp.,
5.35%, 8/22/96............. 5,184
10,000 Corporate Receivables Corp.,
5.40%, 9/12/96............. 9,937
5,000 Corporate Receivables Corp.,
5.42%, 10/8/96............. 4,949
5,000 CXC, Inc., 5.38%, 8/1/96..... 5,000
10,000 CXC, Inc., 5.40%, 9/3/96..... 9,950
5,000 Falcon Asset Securitization
Corp., 5.40%, 8/19/96...... 4,986
5,000 Falcon Asset Securitization
Corp., 5.55%, 1/21/97...... 4,867
5,000 Jet Funding Corp., 5.50%,
9/30/96.................... 4,954
---------
94,508
---------
Electronic & Electrical--General (4.6%):
10,000 Panasonic Finance Inc.,
5.38%, 9/9/96.............. 9,942
10,000 Panasonic Finance Inc.,
5.34%, 9/17/96............. 9,930
---------
19,872
---------
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
COMMERCIAL PAPER/MASTER DEMAND NOTES,
CONTINUED:
Insurance (1.2%):
$ 5,000 TransAmerica Corp., 5.36%,
8/9/96..................... $ 4,994
---------
Mining (1.1%):
5,000 RTZ America Inc., 5.30%,
8/22/96.................... 4,985
---------
Multiple Industry (6.9%):
10,000 BTR Dunlop Finance Inc.,
5.37%, 8/7/96.............. 9,991
5,000 BTR Dunlop Finance Inc.,
5.27%, 8/26/96............. 4,982
5,000 BTR Dunlop Finance Inc.,
5.40%, 9/16/96............. 4,965
10,000 General Electric Capital
Corp., 5.29%, 9/5/96....... 9,949
---------
29,887
---------
Retail (3.5%):
5,000 J.C. Penney Funding Corp.,
5.38%, 8/7/96.............. 4,996
10,000 J.C. Penney Funding Corp.,
5.34%, 8/29/96............. 9,958
---------
14,954
---------
Technology (1.7%):
7,200 Hewlett Packard Co., 5.29%,
8/27/96.................... 7,172
---------
Tobacco & Tobacco Products (1.2%):
5,000 B.A.T. Capital Corp., 5.33%,
8/16/96.................... 4,989
---------
</TABLE>
Continued
LOGO
36
<PAGE> 628
LOGO
DIVERSIFIED OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
COMMERCIAL PAPER/MASTER DEMAND NOTES,
CONTINUED:
Trading Company (3.5%):
$10,000 Cargill Financial Services
Corp. 5.33%, 8/16/96....... $ 9,978
5,000 Cargill Inc., 5.35%,
8/2/96..................... 4,999
---------
14,977
---------
Telecommunications (3.5%):
10,000 AT&T Corp., 5.30%, 8/8/96.... 9,990
5,000 AT&T Corp., 5.42%, 9/18/96... 4,964
---------
14,954
---------
Utility (2.3%):
10,000 National Rural Utilities
Co-op. Finance Corp.,
5.37%, 8/9/96.............. 9,988
---------
Total Commercial Paper / Master Demand
Notes 290,670
---------
MEDIUM TERM NOTES/CORPORATE BONDS (2.9%):
Banking (2.3%):
10,000 Sanwa Business Credit Corp.,
5.56%, 12/4/96 *........... 10,000
---------
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
Manufacturing--Consumer Goods (0.6%):
$ 2,500 Gillette Co., 4.75%,
8/15/96.................... $ 2,499
---------
Total Medium Term Notes/Corporate Bonds
12,499
---------
U.S. TREASURY BILLS (2.3%):
10,000 4.62%, 2/6/97................ 9,757
---------
Total U.S. Treasury Bills 9,757
---------
Total Investments, at value 413,900
---------
REPURCHASE AGREEMENTS (5.0%);
21,502 C.S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 18,006
U.S. Treasury Bonds, 8.75%,
8/15/20, market value
$21,970)................... 21,502
---------
Total Repurchase Agreements 21,502
---------
Total $435,402 (a)
==========
</TABLE>
- ------------
Percentages indicated are based on net assets of $430,727.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity arrangements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of market
interest rates. The rate reflected on the Schedule of Portfolio Investments is
the rate in effect on July 31, 1996.
See notes to financial statements.
LOGO
37
<PAGE> 629
LOGO
U.S. GOVERNMENT OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ------------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. TREASURY BILLS (4.3%):
$10,000 4.62%, 2/6/97................ $ 9,757
--------
Total U.S. Treasury Bills 9,757
--------
U.S. GOVERNMENT AGENCIES (78.6%):
Federal Home Loan Bank:
7,500 Discount note, 5.32%,
8/14/96.................... 7,486
5,000 Discount note, 5.22%,
8/20/96.................... 4,986
5,000 Discount note, 5.31%,
9/25/96.................... 4,959
5,000 Discount note, 5.19%,
10/15/96................... 4,946
5,000 Discount note, 5.37%,
11/1/96.................... 4,931
5,000 Discount note, 5.25%,
11/4/96.................... 4,931
5,000 Discount note, 5.19%,
1/14/97.................... 4,881
5,000 Discount note, 5.21%,
1/21/97.................... 4,875
4,610 5.26%, 1/29/97............... 4,610
Federal Home Loan Mortgage Corp.:
5,000 Discount note, 5.34%,
9/16/96.................... 4,966
Federal National Mortgage Assoc.:
5,000 Discount note, 5.30%,
8/1/96..................... 5,000
5,000 Discount note, 5.25%,
8/15/96.................... 4,990
5,000 Discount note, 5.24%,
8/21/96.................... 4,985
5,000 Discount note, 5.33%,
9/9/96..................... 4,971
5,000 Discount note, 5.35%,
9/10/96.................... 4,970
5,000 Discount note, 5.34%,
9/11/96.................... 4,970
10,000 Discount note, 5.27%,
9/17/96.................... 9,931
5,000 Discount note, 5.26%,
9/23/96.................... 4,961
5,540 Discount note, 5.30%,
9/24/96.................... 5,496
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ------------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Federal National Mortgage Assoc., continued:
$ 5,000 Discount note, 5.38%,
10/15/96................... $ 4,944
5,000 Discount note, 5.29%,
12/6/96.................... 4,907
6,940 7.60%, 1/10/97............... 6,999
20,000 5.30%, 5/5/97 *.............. 19,987
Overseas Private Investment Corp.:
20,000 5.40%, 1/15/09 *............. 20,000
Student Loan Marketing Assoc.:
10,000 5.57%, 9/23/96 *............. 9,999
10,000 5.49%, 7/18/97 *............. 10,000
--------
Total U.S. Government Agencies 178,681
--------
Total Investments, at value 188,438
--------
REPURCHASE AGREEMENTS (17.2%):
39,183 C. S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 32,811
U.S. Treasury Bonds,
8.75%, 8/15/20, market
value--$40,034).............. 39,183
--------
Total Repurchase Agreements 39,183
--------
Total $227,621 (a)
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $227,197.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of market
interest rates. The rate reflected on the Schedule of Portfolio Investments is
the rate in effect at July 31, 1996.
See notes to financial statements.
LOGO
38
<PAGE> 630
LOGO 100% U.S. TREASURY OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. TREASURY BILLS (85.5%):
$ 1,355 4.99%, 8/1/96*............... $ 1,355
15,000 5.00%, 8/8/96*............... 14,985
2,303 5.01%, 8/8/96*............... 2,301
2,226 5.02%, 8/8/96*............... 2,224
5,000 5.03%, 8/8/96*............... 4,995
5,000 5.04%, 8/8/96*............... 4,995
10,192 4.96%, 8/15/96*.............. 10,172
7,425 5.01%, 8/15/96*.............. 7,411
5,000 5.03%, 8/15/96*.............. 4,990
2,777 5.04%, 8/15/96*.............. 2,772
1,067 4.95%, 8/22/96*.............. 1,064
10,000 4.98%, 8/22/96*.............. 9,971
10,000 5.02%, 8/22/96*.............. 9,971
2,000 5.48%, 8/22/96*.............. 1,993
2,500 5.50%, 8/22/96*.............. 2,492
4,744 4.98%, 8/29/96*.............. 4,725
10,000 5.05%, 8/29/96*.............. 9,961
2,023 5.04%, 9/5/96*............... 2,013
312 5.06%, 9/5/96*............... 310
4,572 5.07%, 9/5/96*............... 4,550
865 5.08%, 9/5/96*............... 861
15,000 5.10%, 9/5/96*............... 14,925
3,640 5.04%, 9/12/96*.............. 3,618
892 5.07%, 9/12/96*.............. 887
5,000 5.10%, 9/12/96*.............. 4,970
7,703 5.11%, 9/12/96*.............. 7,657
5,225 5.12%, 9/12/96*.............. 5,193
385 5.07%, 9/19/96*.............. 382
6,651 5.09%, 9/19/96*.............. 6,605
5,410 5.11%, 9/19/96*.............. 5,373
4,828 5.13%, 9/19/96*.............. $ 4,794
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------- ----------------------------- ---------
<S> <C> <C> <C>
U.S. TREASURY BILLS, CONTINUED:
$ 5,936 5.14%, 9/19/96*.............. 5,895
5,000 5.04%, 10/3/96*.............. 4,956
1,227 5.09%, 10/3/96*.............. 1,216
3,162 5.11%, 10/3/96*.............. 3,134
3,077 5.11%, 10/10/96*............. 3,046
5,000 5.15%, 10/10/96*............. 4,950
5,000 5.05%, 10/17/96*............. 4,946
2,034 5.09%, 10/17/96*............. 2,012
7,639 5.11%, 10/17/96*............. 7,556
4,000 5.07%, 10/24/96*............. 3,953
5,000 5.12%, 10/24/96*............. 4,940
5,000 5.34%, 1/9/97*............... 4,881
5,000 5.24%, 1/23/97*.............. 4,873
5,000 4.91%, 2/6/97*............... 4,871
5,000 5.11%, 2/6/97*............... 4,866
5,000 5.16%, 4/3/97*............... 4,825
5,000 5.32%, 4/3/97*............... 4,819
--------
Total U.S. Treasury Bills 234,254
--------
U.S. TREASURY NOTES (12.8%):
10,000 7.25%, 8/31/96............... 10,013
10,000 7.25%, 8/31/96............... 10,011
10,000 6.63%, 3/31/97............... 10,072
5,000 6.50%, 4/30/97............... 5,031
--------
Total U.S. Treasury Notes 35,127
--------
U.S. TREASURY STRIPS (1.8%):
5,000 5.12%, 11/15/96*............. 4,925
--------
Total U.S. Treasury Strips 4,925
--------
Total $274,306 (a)
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $273,963.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Discount yield at date of purchase.
See notes to financial statements.
LOGO
39
<PAGE> 631
LOGO
CALIFORNIA TAX-FREE FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- --------- ----------------------------------------------------------------------------------- ---------
<C> <S> <C>
MUNICIPAL SECURITIES $(90.1%):
California (90.1%)
$ 5,025 Contra Costa County, Park Regency, Series 1992, 3.70%, 8/1/32, AMT*................ $ 5,025
2,500 Department of Water Resources, 3.35%, 11/29/96..................................... 2,500
3,300 Health Facilities Authority, Enloe Memorial Hospital, 3.00%, 1/1/16*............... 3,300
6,800 Health Facilities Authority, Memorial Health Services, 3.25%, 10/1/24*............. 6,800
6,600 Health Finance Authority, Catholic Healthcare West, 3.25%, 7/1/05*................. 6,600
900 Health Finance Authority, Catholic Healthcare West, 3.25%, 7/1/09*................. 900
6,900 Health Finance Authority, Kaiser Permanente Series, 3.25%, 5/1/28*................. 6,900
1,700 Health Finance Authority, Pooled Program, Series 1990 A, 3.40%, 9/1/20*............ 1,700
2,400 Health Finance Authority, Pooled Program, Series B, 3.40%, 10/1/10*................ 2,400
1,200 Health Finance Authority, Santa Barbara Cottage, 3.25%, 9/1/15*.................... 1,200
1,000 Health Finance Authority, Santa Barbara Cottage, Series B, 3.25%, 9/1/05*.......... 1,000
1,200 Kern County Public Facilities, Project Series B, 3.35%, 8/1/06*.................... 1,200
1,700 Lancaster Multi-Family Housing, Westwood Park Apartments, 3.40%, 12/1/07*.......... 1,700
6,800 Los Angeles County Metro Transportation Authority, Union Station Gateway Project, 6,800
3.25%, 7/2/25*...................................................................
4,700 Los Angeles County Transportation, 3.40%, 7/1/12*.................................. 4,700
700 Los Angeles Multi-Family Housing, Crescent Gardens, 3.40%, 7/1/14*................. 700
3,700 Los Angeles Multi-Family Housing, Series K, 3.25%, 7/1/10*......................... 3,700
7,500 Los Angeles Multi-Family Housing, Southpark Apartment Project, 3.55%, 12/1/05*..... 7,500
3,700 Metropolitan Water District of Southern California, 3.25%, 6/1/23.................. 3,700
2,800 Oxnard Housing Authority, Seawood Apartments Project, 3.65%, 12/1/20, AMT*......... 2,800
7,200 Pollution Control Finance Authority, Burney Forest 1988, 3.70%, 9/1/20, AMT*....... 7,200
1,900 Pollution Control Finance Authority, Delano Project 1989, 3.65%, 8/1/19, AMT*...... 1,900
2,310 Pollution Control Finance Authority, Delano Project 1990, 3.65%, 8/1/19, AMT*...... 2,310
3,000 Pollution Control Finance Authority, Delano Project 1991, 3.65%, 8/1/19, AMT*...... 3,000
2,600 Pollution Control Finance Authority, Honey Lake Power Project, Series 88, 3.65%,
9/1/18, AMT...................................................................... 2,600
1,700 Pollution Control Finance Authority, North County Recycling Center, Series B,
3.40%, 7/1/17*................................................................... 1,700
500 Pollution Control Finance Authority, Pacific Gas & Electric, Series 88C, 3.35%,
8/15/96.......................................................................... 500
</TABLE>
Continued
LOGO
40
<PAGE> 632
LOGO
CALIFORNIA TAX-FREE FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
--------
<C> <S> <C>
MUNICIPAL SECURITIES, CONTINUED:
California, continued:
$ 3,200 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.55%, $ 3,200
9/24/96..........................................................................
1,000 Pollution Control Finance Authority, Southern California Edison, Series 85D, 3.35%, 1,000
9/10/96..........................................................................
2,600 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.55%, 2,600
9/6/96...........................................................................
500 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.60%, 500
1/15/97..........................................................................
1,550 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.15%, 1,550
8/1/96...........................................................................
500 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.20%, 500
9/10/96..........................................................................
4,000 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.35%, 4,000
10/1/96..........................................................................
1,200 Pollution Control Finance Authority, Southern California Edison, Series 85C, 3.45%, 1,200
11/14/96.........................................................................
1,100 Pollution Control Finance Authority, Southern California Edison, Series 86A, 3.40%, 1,100
2/28/08*.........................................................................
1,400 Pollution Control Finance Authority, Southern California Edison, Series 86B, 3.40%, 1,400
2/28/08*.........................................................................
2,000 Pollution Control Finance Authority, Southern California Edison, Series 86C, 3.40%, 2,000
2/28/08..........................................................................
2,200 Pollution Control Finance Authority, Southern California Edison, Series 86D, 3.40%, 2,200
2/28/08..........................................................................
2,200 Sacramento County Multi-Family Housing Authority, River Oaks Apartments, 3.55%, 2,200
9/15/07*.........................................................................
5,000 San Bernardino County, TRANs, 4.50%, 6/30/97....................................... 5,027
500 San Jose, Multi-Family Housing, Somerset Park, 3.55%, 11/1/17, AMT*................ 500
2,900 SCAPPA, Revenue, 91 Refunding Series, 3.40%, 7/1/19*............................... 2,900
3,000 State of California, Tax Exempt Commercial Paper, 3.10%, 8/7/96.................... 3,000
1,000 State of California, Tax Exempt Commercial Paper, 3.35%, 11/14/96.................. 1,000
2,000 State of California, Tax Exempt Commercial Paper, 3.55%, 9/13/96................... 2,000
6,865 Statewide Community Development Authority, Series 95A, 3.45%, 5/15/25*............. 6,866
900 Vacaville Multi-Family Housing, The Sycamores Apartments, 3.40%, 4/1/05*........... 900
1,000 Walnut Creek Multi-Family Housing, Creekside Drive Apartments, 3.40%, 4/1/07*...... 1,000
--------
Total Municipal Securities 136,978
--------
</TABLE>
Continued
LOGO
41
<PAGE> 633
LOGO CALIFORNIA TAX-FREE FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- --------- ----------------------------------------------------------------------------------- ---------
INVESTMENT COMPANIES $(7.6%):
<C> <S> <C>
5,214 Goldman Sachs California Tax-Exempt Money Market Fund.............................. $ 5,214
6,312 Provident California Money Market Fund............................................. 6,312
--------
Total Investment Companies 11,526
--------
Total $148,504 (a)
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $151,979.
<TABLE>
<C> <S>
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of credit or other credit and/or
liquidity agreements. The interest rate, which will change periodically, is based upon bank prime rates or an
index of market interest rates. The rate reflected on the Schedule of Portfolio Investments is the rate in
effect at July 31, 1996.
AMT Alternative Minimum Tax Paper
TRANs Tax Revenue Anticipation Notes
</TABLE>
See notes to financial statements.
LOGO
42
<PAGE> 634
LOGO BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
ASSET BACKED SECURITIES (17.4%):
$ 374 Advanta Mortgage Loan Trust,
7.90%, 3/25/07............... $ 375
1,000 Carco Auto Loan Master Trust,
Series 1994-2, 7.88%,
8/15/97...................... 1,018
860 Carco Auto Loan Master Trust,
Series 1991-3,
7.88%,3/15/98................ 869
1,125 Contimortgage Home Equity Loan
Trust, 8.09%, 9/15/09........ 1,144
1,000 Contimortgage Home Equity Loan
Trust, 8.05%, 7/15/12........ 1,016
1,200 EQCC Home Equity Loan Trust,
7.80%, 12/15/10.............. 1,196
1,250 Green Tree Financial Corp.,
6.80%, 1/15/26............... 1,221
500 MBNA Credit Card, 7.25%,
6/15/99...................... 502
738 Mid State Trust 4, 8.33%,
4/1/30....................... 765
531 Premier Auto Receivable Trust,
4.90%, 10/15/98.............. 525
1,000 Standard Credit Card Master
Trust, 4.65%, 3/7/99......... 987
600 UCFC Home Equity Loan, 7.78%,
12/10/06..................... 608
496 UFSB Grantor Trust, 5.08%,
5/15/00...................... 489
-------
Total Asset Backed Securities 10,715
-------
COLLATERALIZED MORTGAGE OBLIGATIONS (14.4%):
Bear Stearns Secured Investors:
500 7.50%, 1/20/99................. 504
Country Wide Mortgage:
1,021 6.75%, 3/25/08................. 995
Federal Home Loan Mortgage Corp.:
1,500 6.25%, 1/15/24................. 1,347
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS, CONTINUED:
Federal National Mortgage Assoc.:
$ 2,000 6.20%, 9/25/02................. $ 1,928
1,500 6.50%, 3/25/13................. 1,421
GE Capital Mortgage Service, Inc.:
1,850 6.50%, 1/25/24................. 1,740
Residential Funding Mortgage:
950 6.75%, 11/25/07................ 910
-------
Total Collateralized Mortgage Obligations 8,845
-------
CORPORATE BONDS (24.7%):
Automotive (3.9%):
2,290 General Motors Acceptance
Corp., 8.00%, 10/1/99........ 2,364
-------
Banking (5.2%):
1,785 Bank of America, 6.00%,
7/15/97...................... 1,779
600 Citicorp, 6.75%, 8/15/05....... 572
900 U.S. Bancorp, 6.75%,
10/15/05..................... 858
-------
3,209
-------
Computer Hardware (1.4%):
800 IBM Corp., 8.38%, 11/1/19...... 861
-------
Financial Services (1.0%):
650 Golden West Financial, 6.70%,
7/1/02....................... 634
-------
Governments (Foreign) (2.7%):
825 Hydro-Quebec, 8.05, 7/7/24..... 869
785 Norske Hydro, 7.75, 6/15/23.... 786
-------
1,655
-------
Industrial Goods & Services (1.3%):
860 Caterpillar Tractor Co., 6.00%,
5/1/07....................... 772
-------
Retail Stores (5.8%):
980 J.C. Penney Inc., 6.00%,
5/1/06....................... 883
900 Sears Roebuck Co., 9.25%,
8/1/97....................... 925
</TABLE>
Continued
LOGO
43
<PAGE> 635
LOGO BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
Amounts in Thousands
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
CORPORATE BONDS, CONTINUED:
Retail Stores, continued:
$ 1,850 Wal-Mart Stores, 6.38,
3/1/03....................... $ 1,785
-------
3,593
-------
Telecommunications (3.4%):
1,500 Bell Atlantic-Maryland, 8.00%,
10/15/29..................... 1,581
500 New England Telephone &
Telegraph, 7.88%, 11/15/29... 524
-------
2,105
-------
Total Corporate Bonds 15,193
-------
U.S. GOVERNMENT AGENCIES (19.6%):
Federal Home Loan Bank:
300 8.38%, 10/25/99................ 315
Federal National Mortgage Assoc.:
1,000 9.05%, 4/10/00................. 1,074
1,750 5.45%, 10/10/03................ 1,610
1,625 6.50%, 3/1/24, Pool # 276510... 1,526
1,659 8.50%, 5/1/25, Pool # 303300... 1,696
1,018 6.50%, 5/1/26, Pool # 342718... 950
Government National Mortgage Association:
1,836 6.50%, 6/15/23, Pool #
354601....................... 1,717
616 6.50%, 12/15/23, Pool #
369270....................... 574
823 7.50%, 1/15/24, Pool #
352844....................... 811
157 7.50%, 1/15/24, Pool #
360285....................... 154
34 7.50%, 1/15/24, Pool #
362734....................... 34
299 7.50%, 1/15/24, Pool #
368677....................... 294
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Government National Mortgage Assoc., continued:
$ 371 7.50%, 2/15/24, Pool #
353297....................... $ 366
70 7.50%, 2/15/24, Pool #
336245....................... 69
906 7.00%, 4/15/24, Pool #
392055....................... 869
-------
Total U.S. Government Agencies 12,059
-------
U.S. TREASURY BONDS (16.4%):
1,500 10.38%, 11/15/12............... 1,894
2,500 7.25%, 5/15/16................. 2,546
2,360 8.75%, 8/15/20................. 2,804
2,800 7.13%, 2/15/23................. 2,813
-------
Total U.S. Treasury Bonds 10,057
-------
U.S. TREASURY NOTES (3.1%):
1,000 8.13%, 2/15/98................. 1,029
430 9.00%, 5/15/98................. 450
420 8.50%, 11/15/00................ 451
-------
Total U.S. Treasury Notes 1,930
-------
Total Investments, at value 58,799
-------
REPURCHASE AGREEMENTS (3.6%):
2,237 C.S. First Boston Corp., 5.62%,
8/1/96 (Collateralized by
2,046 U.S. Treasury Bonds,
8.75%, 11/15/08, market
value--$2,287)............... 2,237
-------
Total Repurchase Agreements 2,237
-------
Total (Cost--$61,591)(a) $61,036
=======
</TABLE>
- ------------
Percentages indicated are based on net assets of $61,531.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation............................................ $ 816
Unrealized depreciation............................................ (1,371)
------
Net unrealized depreciation........................................ $ (555)
======
</TABLE>
See notes to financial statements.
LOGO
44
<PAGE> 636
LOGO INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS (97.8%):
Aerospace (2.0%):
153,100 B.F. Goodrich Co........... $ 5,550
--------
Banks (12.7%):
213,650 Banc One Corp.............. 7,398
82,200 BankAmerica Corp........... 6,555
122,800 Fleet Financial Group,
Inc...................... 4,973
77,900 J. P. Morgan & Co.......... 6,699
82,700 National City Corp......... 2,864
95,050 U.S. Bancorp............... 3,256
64,700 Wachovia Corp.............. 2,863
--------
34,608
--------
Beverages (2.0%):
72,000 Anheuser-Busch Co.......... 5,382
--------
Business Equipment & Services (0.6%):
34,600 Pitney Bowes, Inc.......... 1,678
--------
Chemicals-Petroleum & Inorganic (2.1%):
77,200 Dow Chemical Co............ 5,742
--------
Chemicals-Specialty (1.8%):
55,200 Betz Labs, Inc............. 2,505
83,500 Witco Corp................. 2,421
--------
4,926
--------
Commercial Goods & Services (1.2%):
87,000 National Services
Industries, Inc.......... 3,317
--------
Consumer Goods & Services (1.2%):
36,600 Clorox Co.................. 3,326
--------
Cosmetics & Toiletries (0.9%):
56,300 International Flavors &
Fragrances, Inc.......... 2,407
--------
Electrical Equipment (1.0%):
70,800 Thomas & Betts Corp........ 2,584
--------
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Environmental Services (0.3%):
37,700 Browning-Ferris Industries,
Inc...................... $ 844
--------
Financial Services (3.2%):
105,100 American General Corp...... 3,652
33,800 Beneficial Corp............ 1,825
106,700 Federal National Mortgage
Assoc.................... 3,388
--------
8,865
--------
Food & Related (2.6%):
94,300 General Mills, Inc......... 5,116
63,150 H.J. Heinz Co.............. 2,092
--------
7,208
--------
Forest & Paper Products (4.8%):
43,700 Georgia-Pacific Corp....... 3,267
92,470 International Paper Co..... 3,502
154,700 Weyerhaeuser Co............ 6,459
--------
13,228
--------
Health Care (5.9%):
77,000 Bristol-Myers Squibb Co.... 6,670
102,000 Pharmacia & Upjohn Co...... 4,208
48,800 SmithKline Beecham PLC
ADR...................... 2,623
44,100 Warner-Lambert Co.......... 2,403
--------
15,904
--------
Insurance-Life (0.8%):
45,125 Jefferson Pilot Corp....... 2,369
--------
Insurance-Multiline (1.8%):
53,600 Marsh & McLennan Cos.,
Inc...................... 4,857
--------
</TABLE>
Continued
LOGO
45
<PAGE> 637
LOGO
INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Insurance-Property & Casualty (3.1%):
42,500 Lincoln National Corp...... $ 1,812
78,300 SAFECO Corp................ 2,696
70,800 St. Paul Cos., Inc......... 3,664
--------
8,172
--------
Machinery & Equipment (1.2%):
80,900 Cooper Industries, Inc..... 3,185
--------
Medical Equipment & Supplies (0.6%):
39,000 Baxter International,
Inc...................... 1,623
--------
Motor Vehicle Parts (0.9%):
58,500 Genuine Parts Co........... 2,479
--------
Motor Vehicles (0.9%):
86,600 Chrysler Corp.............. 2,457
--------
Multiple Industry (3.1%):
43,300 General Electric Co........ 3,567
76,000 Minnesota Mining &
Manufacturing Co......... 4,940
--------
8,507
Petroleum-Domestic (4.5%):
73,200 Atlantic Richfield Co...... 8,491
83,400 Dresser Industries Inc..... 2,252
41,700 Phillips Petroleum Co...... 1,647
--------
12,390
--------
Petroleum-Internationals (7.3%):
95,300 Amoco Corp................. 6,373
58,300 Chevron Corp............... 3,374
52,300 Exxon Corp................. 4,302
68,500 Texaco, Inc................ 5,822
--------
19,871
--------
Publishing (0.9%):
61,400 McGraw-Hill, Inc........... 2,395
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------- ------------------------------- -------
COMMON STOCKS, CONTINUED:
Railroad (0.5%):
20,500 Union Pacific Corp......... $ 1,404
--------
Retail-General Merchandise (4.1%):
173,100 J.C. Penney, Inc........... 8,612
59,000 May Department Stores
Co....................... 2,647
--------
11,259
--------
Telecommunications (7.2%):
25,600 Ameritech Corp............. 1,421
67,300 Bell Atlantic Corp......... 3,979
63,400 BellSouth Corp............. 2,599
118,500 GTE Corp................... 4,888
91,300 Nynex Corp................. 4,097
86,170 U.S. West, Inc............. 2,618
--------
19,602
--------
Tobacco (6.5%):
94,500 American Brands, Inc....... 4,300
85,400 Phillip Morris Cos.,
Inc...................... 8,935
139,400 UST, Inc................... 4,635
--------
17,870
--------
Utilities-Electric (8.3%):
123,400 Baltimore Gas & Electric
Co....................... 3,178
115,400 Central & South West
Corp..................... 3,087
36,600 Dominion Resources......... 1,377
72,500 Florida Progress Corp...... 2,429
70,000 PacifiCorp................. 1,461
118,900 Teco Energy, Inc........... 2,764
102,400 Texas Utilities Co......... 4,301
147,200 Wisconsin Energy Corp...... 3,919
--------
22,516
--------
</TABLE>
Continued
LOGO
46
<PAGE> 638
LOGO
INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Gas & Pipeline (3.8%):
128,200 Consolidated Natural Gas
Co....................... $ 6,458
44,100 Nicor, Inc................. 1,251
51,500 Tenneco, Inc............... 2,537
--------
10,246
--------
Total Common Stocks 266,771
--------
Total Investments, at value 266,771
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
REPURCHASE AGREEMENTS (1.8%):
$4,857,527 C. S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 3,888
U.S. Treasury Bonds,
10.38%, 11/15/12, market
value--$4,961)........... $ 4,858
--------
Total Repurchase Agreements 4,858
--------
Total (Cost--$237,280)(a) $271,629
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $272,803.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of
approximately $64 (amount in thousands). Cost for federal income tax
purposes differs from value by net unrealized appreciation of securities as
follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $ 38,217
Unrealized depreciation.......................................... (3,932)
--------
Net unrealized appreciation...................................... $ 34,285
=======
</TABLE>
ADR -- American Depository Receipt
PLC -- Public Limited Company
See notes to financial statements.
LOGO
47
<PAGE> 639
LOGO
BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
ASSET BACKED SECURITIES (4.0%)
$ 205,000 Carco Auto Loan Master
Trust, Series 1994-2,
7.88%, 3/15/98........... $ 207
190,000 Carco Auto Loan Master
Trust, Series 1991-3,
7.88%, 8/15/97........... 194
200,000 Contimortgage Home Equity
Loan Trust, 8.09%,
9/15/09.................. 203
200,000 Contimortgage Home Equity
Loan Trust, 7.44%,
9/15/12.................. 197
250,000 Green Tree Financial Corp.,
6.80%, 1/15/26........... 244
400,000 Standard Credit Card
MasterTrust, 4.65%,
3/7/99................... 395
165,324 UFSB Grantor Trust, 5.08%,
5/15/00.................. 163
--------
Total Asset Backed Securities 1,603
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.3%):
86,516 Country Wide Mortgage,
6.75%, 3/25/08........... 84
500,000 Federal Home Loan Mortgage
Corp., 6.25%, 1/15/24.... 449
250,000 GE Capital Mortgage
Service, Inc., 1994-1,
6.50%, 1/25/24........... 235
175,000 Residential Funding
Mortgage, 6.75%,
11/25/07................. 168
--------
Total Collateralized Mortgage Obligations
936
--------
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS (52.6%):
Aerospace (0.5%):
5,800 B.F. Goodrich Co........... $ 210
--------
Air Transportation (0.4%):
1,300 Federal Express Corp.
(b)...................... 101
2,200 Southwest Airlines Co...... 55
--------
156
--------
Banks (3.9%):
2,970 Banc One Corp.............. 103
4,800 BankAmerica Corp........... 383
3,300 Chase Manhattan Corp....... 229
8,000 Fleet Financial Group,
Inc...................... 324
1,300 J.P. Morgan & Co........... 112
3,300 National City Corp......... 114
6,000 Norwest Corp............... 213
2,400 Wachovia Corp.............. 106
--------
1,584
--------
Beverages (2.5%):
6,200 Anheuser-Busch Co.......... 463
5,600 Coca-Cola Co............... 263
8,200 PepsiCo, Inc............... 259
--------
985
--------
Building Materials (0.4%):
5,600 Masco Corp................. 156
--------
Business Equipment & Services (0.6%):
1,900 Dun & Bradstreet Corp...... 109
2,800 Pitney Bowes, Inc.......... 136
--------
245
--------
</TABLE>
Continued
LOGO
48
<PAGE> 640
LOGO
BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Chemicals--Petroleum & Inorganic (0.9%):
1,400 Dow Chemical Co............ $ 104
1,400 duPont, (E.I.) de Nemours
Co....................... 113
5,000 Monsanto Corp.............. 156
--------
373
--------
Chemicals--Specialty (0.3%):
3,000 Betz Labs, Inc............. 136
--------
Commercial Goods & Services (0.3%):
3,000 National Services
Industries, Inc.......... 114
--------
Computers--Main & Mini (0.5%):
2,000 International Business
Machines Corp............ 216
--------
Computers (0.3%):
2,800 Seagate Technology, Inc.
(b)...................... 136
--------
Computer Software (1.0%):
1,900 Electronic Data Systems
Corp. (b)................ 101
1,300 Microsoft Corp. (b)........ 153
2,400 Shared Medical Systems
Corp..................... 132
--------
386
--------
Construction Materials (0.3%):
3,700 Fleetwood Enterprises,
Inc...................... 112
--------
Cosmetics & Toiletries (0.8%):
2,900 Colgate-Palmolive Co....... 228
2,600 International Flavors &
Fragrances, Inc.......... 111
--------
339
--------
Defense (0.7%):
5,400 Raytheon Co................ 262
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
COMMON STOCKS, CONTINUED:
Electrical Equipment (4.5%):
7,600 AMP, Inc................... $ 294
2,600 Duracell International,
Inc...................... 117
2,500 Emerson Electric Co........ 211
7,700 General Electric Co........ 634
5,600 Intel Corp................. 421
3,300 Thomas & Betts Corp........ 120
--------
1,797
--------
Electronics (0.6%):
4,800 Motorola, Inc.............. 259
--------
Electronic Instruments (0.4%):
4,100 Texas Instruments, Inc..... 177
--------
Environmental Services (0.3%):
6,000 Browning-Ferris Industries,
Inc...................... 134
--------
Financial Services (1.2%):
6,600 American General Corp...... 230
7,600 Federal National Mortgage
Assoc.................... 241
--------
471
--------
Food & Related (1.6%):
3,700 General Mills, Inc......... 201
6,450 H. J. Heinz Co............. 213
1,500 Hershey Foods Corp......... 123
1,700 Ralston-Purina Co.......... 107
--------
644
--------
Forest & Paper Products (1.4%):
2,700 Georgia Pacific Corp....... 202
2,200 International Paper Co..... 83
</TABLE>
Continued
LOGO
49
<PAGE> 641
LOGO
BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Forest & Paper Products, continued:
1,500 Kimberly Clark Corp........ $ 114
4,000 Weyerhaeuser Co............ 167
--------
566
--------
Health Care--General (1.1%):
2,500 Bristol-Myers Squibb Co.... 217
5,000 Johnson & Johnson.......... 239
--------
456
--------
Hospital Supply & Management (0.5%):
4,100 Columbia/HCA Healthcare
Corp..................... 210
--------
Household--General Products (0.4%):
6,100 Rubbermaid, Inc............ 175
--------
Insurance--Life (0.3%):
2,250 Jefferson Pilot Corp....... 118
--------
Insurance--Multiline (0.9%):
1,761 Allstate Corp.............. 79
3,300 Marsh & McLennan
Cos., Inc................ 299
--------
378
--------
Insurance--Property & Casualty (1.0%):
1,500 General Re Corp............ 220
2,100 Hartford Steam Boiler
Inspection & Insurance
Co....................... 92
1,900 St. Paul Cos., Inc......... 98
--------
410
--------
Machinery & Equipment (0.5%):
4,300 Snap-On, Inc............... 191
--------
Manufacturing (0.7%):
500 Imation Corp. (b).......... 11
2,700 Ingersoll-Rand Co.......... 115
2,500 Service Corp.
International............ 138
--------
264
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
COMMON STOCKS, CONTINUED:
Medical Equipment & Supplies (0.5%):
5,000 Baxter International,
Inc...................... $ 208
--------
Motor Vehicle Parts (0.3%):
2,400 Genuine Parts Co........... 102
--------
Motor Vehicles (0.5%):
5,900 Ford Motor Co.............. 192
--------
Multiple Industry (1.8%):
10,800 Corning, Inc............... 398
5,000 Minnesota Mining &
Manufacturing Co......... 325
--------
723
--------
Petroleum--Domestic (1.2%):
1,900 Atlantic Richfield Co...... 220
6,700 Phillips Petroleum Co...... 265
--------
485
--------
Petroleum--Internationals (3.2%):
4,600 Amoco Corp................. 308
5,600 Chevron Corp............... 324
2,700 Exxon Corp................. 222
2,000 Mobil Corp................. 221
2,400 Texaco, Inc................ 204
--------
1,279
--------
Petroleum--Services (0.9%):
9,300 Baker Hughes, Inc.......... 273
2,000 Halliburton Co............. 104
--------
377
--------
</TABLE>
Continued
LOGO
50
<PAGE> 642
LOGO
BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Pharmaceuticals (2.3%):
2,600 Abbott Laboratories........ $ 114
3,800 Merck & Co., Inc........... 244
3,300 Pfizer, Inc................ 231
1,800 Schering-Plough Corp....... 99
4,600 Warner Lambert Co.......... 251
--------
939
--------
Photographic Equipment (0.3%):
1,600 Eastman Kodak Co........... 120
--------
Publishing (0.6%):
3,500 Gannett Co., Inc........... 230
--------
Railroad (1.0%):
3,100 Burlington Northern Santa
Fe....................... 245
2,100 Union Pacific Corp......... 144
--------
389
--------
Restaurants (0.2%):
6,800 Brinker International,
Inc. (b)................. 89
--------
Retail--General Merchandise (1.3%):
4,400 J.C. Penney, Inc........... 219
2,800 Sears Roebuck & Co......... 115
6,900 Wal-Mart Stores, Inc....... 165
--------
499
--------
Retail--Specialty Stores (0.5%):
5,500 Albany International, Class
A........................ 102
2,200 Home Depot, Inc............ 111
--------
213
--------
Tobacco (1.2%):
2,500 Phillip Morris Cos.,
Inc...................... 262
6,200 UST, Inc................... 206
--------
468
--------
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
COMMON STOCKS, CONTINUED:
Tools (0.3%):
3,800 Stanley Works.............. $ 108
--------
Toys (0.3%):
4,250 Mattel, Inc................ 105
--------
Utilities--Electric (2.5%):
4,600 FPL Group, Inc............. 209
9,500 PacifiCorp................. 198
9,000 Potomac Electric Power
Co. (b).................. 217
6,500 Public Service Enterprise
Group, Inc............... 170
5,100 Texas Utilities Co......... 214
--------
1,008
--------
Utilities--Gas & Pipeline (0.9%):
2,600 Consolidated Natural Gas
Co....................... 131
4,100 Pacific Enterprises........ 121
1,900 Tenneco, Inc............... 94
--------
346
--------
Utilities--Telephone (4.0%):
11,400 AirTouch Communications,
Inc. (b)................. 313
3,800 Ameritech Corp............. 211
4,500 AT&T Corp.................. 235
5,000 BellSouth Corp............. 205
2,100 DSC Communications
Corp. (b)................ 63
5,700 GTE Corp................... 235
400 Lucent Technologies,
Inc...................... 15
3,500 MCI Telecommunications
Corp..................... 86
</TABLE>
Continued
LOGO
51
<PAGE> 643
LOGO
BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Telephone, continued:
4,000 Network Equipment
Technologies, Inc. (b)... $ 53
6,100 U.S. West, Inc............. 185
--------
1,601
--------
Total Common Stocks 21,141
--------
CORPORATE BONDS (6.8%):
Automotive (1.6%):
$ 300,000 Ford Capital, 9.38%,
1/1/98................... 312
305,000 General Motors Acceptance
Corp., 8.00%, 10/1/99.... 315
--------
627
--------
Banking (1.1%):
215,000 Bank of America, 6.00%,
7/15/97.................. 214
100,000 Citicorp, 6.75%, 8/15/05... 96
150,000 U.S. Bancorp, 6.75%,
10/15/05................. 143
--------
453
--------
Beverages (0.2%):
95,000 Bass America, Inc., 6.75%,
8/1/99................... 95
--------
Computer Hardware (0.5%):
200,000 IBM Corp., 8.38%,11/1/19... 215
--------
Financial Services (0.2%):
100,000 Golden West Financial
Corp., 6.70%, 7/1/02..... 97
--------
Governments (Foreign) (0.8%):
$ 100,000 Hydro-Quebec, 8.05%,
7/7/24................... 106
215,000 Norske Hydro, 7.75%,
6/15/23.................. 215
--------
321
--------
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
CORPORATE BONDS, CONTINUED:
Industrial Goods & Services (0.5%):
205,000 Caterpillar Tractor Co.,
6.00%, 5/1/07............ $ 184
--------
Retail Stores (1.1%):
100,000 J.C. Penney, Inc., 6.00%,
5/1/06................... 90
150,000 Sears Roebuck Co., 9.25%,
8/1/97................... 154
200,000 Wal-Mart Stores, Inc.,
6.38%, 3/1/03............ 193
--------
437
--------
Telecommunications (0.8%):
175,000 Bell Atlantic Maryland,
8.00%,10/15/29........... 184
125,000 New England Telephone &
Telegraph Co., 7.88%,
11/15/29................. 131
--------
315
--------
Total Corporate Bonds 2,744
--------
U.S. GOVERNMENT AGENCIES (10.2%):
Federal National Mortgage Assoc.:
1,350,000 5.45%, 10/10/03............ 1,242
316,003 6.50%, 3/1/24, Pool
#276510.................. 297
999,999 8.00%, 7/1/26.............. 1,006
</TABLE>
Continued
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52
<PAGE> 644
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BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Government National Mortgage Assoc.
$ 95,076 6.50%, 2/15/24, Pool
#388599.................. $ 88
484,019 7.50%, 5/15/24, Pool
#386494.................. 476
1,016,375 7.00%, 2/15/26............. 972
--------
Total U.S. Government Agencies 4,081
--------
U.S. TREASURY BONDS (6.3%):
1,150,000 7.25%, 5/15/16............. 1,171
205,000 8.75%, 8/15/20............. 244
1,125,000 7.13%, 2/15/23............. 1,130
--------
Total U.S. Treasury Bonds 2,545
--------
U.S. TREASURY NOTES (8.0%):
200,000 8.13%, 2/15/98............. 206
1,000,000 8.25%, 7/15/98............. 1,037
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- --------------------------- --------
<S> <C> <C> <C>
U.S. TREASURY NOTES, CONTINUED:
$1,000,000 5.50%, 4/15/00............. $ 969
500,000 8.50%, 11/15/00............ 536
500,000 5.88%, 2/15/04............. 475
--------
Total U.S. Treasury Notes 3,223
--------
Total Investments, at value 36,273
--------
REPURCHASE AGREEMENTS (9.4%):
3,786,776 C.S. First Boston Corp.,
Repurchase Agreement,
5.62%, 8/1/96
(Collateralized by 3,033
U.S. Treasury Bonds,
10.38%, 11/15/12 , market
value $3,870)............ 3,787
--------
Total Repurchase Agreements 3,787
--------
Total (Cost--$35,946)(a) $ 40,060
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $40,196.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of
approximately $14 (amount in thousands). Cost for federal income tax
purposes differs from value by net unrealized appreciation of securities as
follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $ 4,702
Unrealized depreciation.......................................... (602)
--------
Net unrealized appreciation...................................... $ 4,100
=======
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements.
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53
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GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS (98.2%):
Aerospace (2.0%):
24,565 B.F. Goodrich................ $ 890
--------
Banks (8.4%):
10,365 BankAmerica Corp............. 827
3,280 Barnett Banks, Inc........... 201
16,030 Chase Manhattan.............. 1,114
16,830 Fleet Financial Group,
Inc........................ 681
3,825 Wells Fargo & Co............. 891
--------
3,714
--------
Beverages (5.4%):
8,985 Anheuser-Busch Co............ 672
19,215 Coca-Cola Co................. 901
26,390 PepsiCo, Inc................. 834
--------
2,407
--------
Business Equipment & Services (0.3%):
9,080 OfficeMax, Inc. (b).......... 120
--------
Capital Equipment (0.5%):
3,240 Illinois Tool Works.......... 209
--------
Chemicals--Petroleum & Inorganic (0.4%):
3,750 Hercules, Inc................ 188
--------
Computers--Main & Mini (4.0%):
9,610 Ceridan Corp. (b)............ 418
14,660 Hewlett Packard Co........... 645
4,375 International Business
Machines................... 472
4,685 Silicon Graphics, Inc. (b)... 110
2,140 Sun Microsystems, Inc. (b)... 117
--------
1,762
--------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Computer Software (10.6%):
2,885 Automatic Data Processing,
Inc........................ $ 114
17,005 Cisco Systems (b)............ 880
11,888 Computer Associates
International, Inc......... 605
3,355 Computer Sciences (b)........ 228
17,770 Electronic Data Systems
Corp. (b).................. 940
11,588 First Data Corp.............. 899
3,705 Microsoft Corp. (b).......... 437
10,045 Oracle Systems Corp. (b)..... 393
5,350 Parametric Technology Corp.
(b)........................ 223
--------
4,719
--------
Computers (2.0%):
5,840 Digital Equipment (b)........ 207
14,390 Seagate Technology (b)....... 696
--------
903
--------
Consumer Goods & Services (1.6%):
21,715 Xilinx, Inc. (b)............. 703
--------
Cosmetics & Toiletries (4.1%):
4,720 Avon Products................ 208
5,485 Colgate-Palmolive Co......... 430
15,360 Gillette Co.................. 977
5,110 Ingersoll-Rand Co............ 218
--------
1,833
--------
Durable Goods (0.6%):
15,870 Coleman, Inc. (b)............ 282
--------
Electronics (0.6%):
5,170 Motorola, Inc................ 279
--------
</TABLE>
Continued
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54
<PAGE> 646
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GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Electrical Equipment (6.5%):
5,480 AMP, Inc..................... $ 212
10,640 Duracell International,
Inc........................ 480
11,860 General Electric Co.......... 977
13,275 Intel Corp................... 997
14,810 National Semiconductor
Corp. (b).................. 209
--------
2,875
--------
Electronic Components (0.2%):
3,245 Applied Materials, Inc.
(b)........................ 77
--------
Electronic Instruments (0.4%):
4,220 Texas Instruments, Inc....... 183
--------
Entertainment (0.8%):
7,080 Circus Circus Enterprises,
Inc. (b)................... 217
6,715 Harrah's Entertainment (b)... 148
--------
365
--------
Financial Services (7.2%):
14,835 American Express Co.......... 649
5,745 Federal Home Loan Mortgage
Corp....................... 484
30,635 Federal National Mortgage
Assoc...................... 973
1,405 Household International,
Inc........................ 105
10,926 Mutual Risk Management
Ltd........................ 307
15,935 Travelers Corp. (b).......... 673
--------
3,191
--------
Food & Related (1.6%):
2,550 General Mills, Inc........... 138
2,950 Hershey Foods................ 242
5,397 Ralston-Purina Co............ 339
--------
719
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
COMMON STOCKS, CONTINUED:
Forest & Paper Products (1.1%):
5,605 Albany International Corp.,
Class A.................... $ 104
1,220 Georgia Pacific Corp......... 91
2,340 International Paper Co....... 89
5,280 Weyerhaeuser Co.............. 220
--------
504
--------
Healthcare--Drugs (8.1%):
4,962 Abbott Laboratories.......... 218
3,820 American Home Products
Corp....................... 217
8,501 Amgen, Inc. (b).............. 464
7,240 Merck & Co................... 465
9,090 Pfizer, Inc.................. 635
15,850 Pharmacia & Upjohn Co........ 654
11,240 Schering Plough Corp......... 620
6,270 Warner-Lambert Co............ 342
--------
3,615
--------
Healthcare--General (2.0%):
18,230 Johnson & Johnson............ 870
--------
Hospital Supply & Management (0.5%):
4,081 Columbia/HCA Healthcare
Corp....................... 209
--------
Hotel Management & Related Services (0.4%):
7,392 Promus Hotel Corp. (b)....... 202
--------
Household-General Products (0.5%):
2,270 Proctor & Gamble Co.......... 203
--------
Insurance--Multiline (0.5%):
2,547 Allstate Corp................ 114
1,400 Marsh & McLennan Cos.,
Inc........................ 127
--------
241
--------
</TABLE>
Continued
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55
<PAGE> 647
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GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Insurance--Property & Casualty (2.3%):
5,955 American International Group,
Inc........................ $ 560
1,560 General Re Corp.............. 229
2,985 MBIA, Inc.................... 226
--------
1,015
--------
Leisure Time Industry (2.2%):
17,405 The Walt Disney Co........... 968
--------
Machinery & Equipment (0.4%):
5,275 Deere & Co................... 189
--------
Manufacturing (1.1%):
8,480 Service Corp.
International.............. 468
--------
Medical Equipment & Supplies (1.3%):
6,469 Chiron Corp. (b)............. 569
--------
Petroleum--Internationals (2.1%):
7,515 Amoco Corp................... 503
5,305 Exxon Corp................... 436
--------
939
--------
Petroleum--Services (1.3%):
4,835 Baker Hughes, Inc............ 142
3,655 Dresser Industries Inc....... 99
4,520 Halliburton Co............... 236
1,215 Schlumberger Ltd............. 97
--------
574
--------
Pharmaceuticals (2.0%):
17,370 ALZA Corp., Class A (b)...... 430
4,900 Astra AB, Class A (b)........ 207
4,500 SmithKline Beecham
PLC-ADR.................... 242
--------
879
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
COMMON STOCKS, CONTINUED:
Publishing (2.0%):
13,535 Gannett Co., Inc............. $ 888
--------
Restaurants (2.5%):
23,720 McDonald's Corp.............. 1,100
--------
Retail--Food Stores (0.8%):
9,425 Safeway, Inc. (b)............ 339
--------
Retail--General Merchandise (1.5%):
11,480 Price/Costco, Inc. (b)....... 235
10,625 Sears Roebuck & Co........... 436
--------
671
--------
Retail--Speciality Stores (1.4%):
8,190 Home Depot, Inc.............. 414
7,215 Toys R Us (b)................ 190
--------
604
--------
Telecommunications (1.3%):
12,585 Airtouch (b)................. 346
6,555 Lucent Technologies, Inc..... 243
--------
589
--------
Telecommunications--Equipment (0.2%):
5,115 Network Equipment
Technologies (b)........... 68
--------
Tobacco (2.3%):
8,700 Phillip Morris Cos., Inc..... 910
3,105 UST.......................... 103
--------
1,013
--------
Toys (1.4%):
25,040 Mattel, Inc.................. 620
--------
Utilities--Gas & Pipeline (0.3%):
2,305 Tenneco, Inc................. 114
--------
</TABLE>
Continued
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56
<PAGE> 648
LOGO
GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JULY 31, 1996
(Amounts in Thousands, Except for Shares or Principal Amount)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ------
<S> <C> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Telephone (1.5%):
3,550 Ameritech Corp............... $ 197
5,260 AT&T Corp.................... 274
4,500 GTE Corp..................... 186
--------
657
--------
Total Common Stocks 43,527
--------
Total Investments, at value 43,527
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------- ---------
REPURCHASE AGREEMENTS (2.0%):
$ 899,983 C. S. First Boston Corp.,
5.62%, 8/1/96
(Collateralized by 825 U.S.
Treasury Bonds, 8.75%,
11/15/08, market
value--$922)............... $ 900
--------
Total Repurchase Agreements 900
--------
Total (Cost -- $40,510)(a) $ 44,427
========
</TABLE>
- ------------
Percentages indicated are based on net assets of $44,338.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of
approximately $208 (amount in thousands). Cost for federal income tax
purposes differs from value by net unrealized appreciation of securities as
follows (amounts in thousands):
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $ 5,175
Unrealized depreciation.......................................... (1,466)
--------
Net unrealized appreciation...................................... $ 3,709
=======
</TABLE>
(b) Represents non-income producing securities.
ADR -- American Depository Receipt
PLC -- Public Limited Company
See notes to financial statements.
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57
<PAGE> 649
LOGO
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
1. ORGANIZATION:
The HighMark Group (the "Group") was organized on March 10, 1987 and is
registered under the Investment Company Act of 1940 as amended (the "1940
Act"), as a diversified, open-end investment company established as a
Massachusetts business trust.
The Group is authorized to issue an unlimited number of shares which are
units of beneficial interest without par value. The Group presently offers
shares in the Diversified Obligations Fund, the U.S. Government Obligations
Fund, the 100% U.S. Treasury Obligations Fund, the California Tax-Free Fund,
the Bond Fund, the Income Equity Fund, the Balanced Fund, and the Growth
Fund (collectively, "the Funds" and individually, "a Fund"). Sales of
shares may be made to customers of Union Bank of California, NA ("Union
Bank of California") and to its affiliates, to all accounts of its
correspondent banks, to institutional investors, and to the general public.
MERUS-UCA Capital Management, ("MERUS-UCA"), a division of Union Bank of
California, serves as investment adviser to the Group.
The investment objective of the Diversified Obligations Fund, the U.S.
Government Obligations Fund, and the 100% U.S. Treasury Obligations Fund is
to seek current income with liquidity and stability of principal. The
Diversified Obligations Fund invests in obligations issued or guaranteed by
the U.S. Government, its agencies, or instrumentalities, and additionally
invests in other high-quality money market instruments and other unrated
instruments deemed to be of comparable high quality by the investment
adviser pursuant to guidelines established by the Group's Board of Trustees.
Some of the obligations and money market instruments in which the
Diversified Obligations Fund invests may be subject to repurchase
agreements. The U.S. Government Obligations Fund invests in obligations
issued or guaranteed by the U.S. Treasury, and additionally invests in
obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government. Some of the obligations in which the U.S. Government
Obligations Fund invests may be subject to repurchase agreements. The 100%
U.S. Treasury Obligations Fund invests exclusively in direct U.S. Treasury
obligations guaranteed as to timely payment of principal and interest by the
full faith and credit of the U.S. Treasury. The California Tax-Free Fund's
investment objective is to seek as high a level of current interest income
free from federal income tax and California personal income tax as is
consistent with the preservation of capital and relative stability of
principal. The California Tax-Free Fund invests primarily in bonds and
notes issued by or on behalf of states (primarily, in the case of the
California Tax-Free Fund, the State of California), territories and
possessions of the United States, and the District of Columbia and their
respective authorities, agencies, instrumentalities and political
sub-divisions ("Municipal Securities"). The investment objective of the
Bond Fund is to seek current income through investments in long-term,
fixed-income securities.
Continued
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58
<PAGE> 650
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
The investment objective of the Income Equity Fund is to seek investments
in equity securities that provide current income through the regular
payment of dividends, with the goal that the Fund will have a high current
yield and a low level of price volatility. Opportunities for long-term
growth of asset value is a secondary consideration. The primary investment
objective of the Balanced Fund is to seek total return. Conservation of
capital is a secondary objective. The investment objective of the Growth
Fund is to seek investments in equity securities that provide opportunity
for long-term capital appreciation. The production of current income is an
incidental objective. There can, however, be no assurance that any of the
funds' investment objectives will be achieved.
On December 1, 1990, the Diversified Obligations Fund, the U.S. Government
Obligations Fund, the 100% U.S. Treasury Obligations Fund, and the
California Tax-Free Fund (collectively, "the money market funds")
commenced offering Class A Shares and designated existing shares as Class B
Shares. As of June 20, 1994, Class A and Class B Shares were designated as
"Investor" and "Fiduciary" Shares, respectively. On June 20, 1994, the Bond
Fund, the Income Equity Fund, the Balanced Fund, and the Growth Fund
(collectively, "the variable net asset value funds") commenced offering
Investor Shares and designated existing shares as Fiduciary Shares.
Investor and Fiduciary Shares represent interests in the same portfolio
investments of a Fund and are identical in all respects except that
Investor Shares bear the expense, if any, of the distribution fee under the
Group's Distribution Plan (the "Distribution Plan"), which will cause the
Investor Shares to have a higher expense ratio and to pay lower dividends
than Fiduciary Shares. Investor Shares have certain exclusive voting rights
with respect to the Distribution Plan.
In addition, Investor Shares of the variable net asset value funds are
subject to initial sales charges imposed at the time of purchase, in
accordance with the Funds' prospectuses.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Group in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The preparation
of financial statements requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Continued
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59
<PAGE> 651
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
SECURITIES VALUATION:
Investments in the money market funds are valued at either amortized cost,
which approximates market value, or at original cost, which when combined
with accrued interest, approximates market value. Under the amortized cost
valuation method, discount or premium is amortized on a constant basis to
the maturity of the security. In addition, the money market funds may not a)
purchase any instrument with a remaining maturity greater than thirteen
months unless such investment is subject to a demand feature, or b) maintain
a dollar weighted average portfolio maturity which exceeds 90 days.
Investments in common stocks and preferred stocks, corporate notes,
commercial paper, and U.S. Government securities of the variable net asset
value funds are valued at their market values determined on the basis of the
mean of the latest available bid prices in the principal market (closing
sales prices if the principal market is an exchange) in which such
securities are normally traded. Investments in investment companies are
valued at their net asset values as reported by such companies. Securities,
including restricted securities, for which market quotations are not readily
available, are valued at fair market value under the supervision of the
Fund's Board of Trustees. The differences between cost and market values of
investments held by the variable net asset value funds are reflected as
either unrealized appreciation or depreciation.
SECURITIES TRANSACTIONS AND RELATED INCOME:
Securities transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable for the money market funds, the pro
rata amortization of premium. The Funds accrete discounts of securities on
the same basis for both financial reporting and federal income tax purposes,
with the applicable portion of market discount recognized as ordinary income
upon disposition or maturity. Dividend income is recorded on the ex-dividend
date. Gains or losses realized on sales of securities are determined by
comparing the identified cost of the security lot sold with the net sales
proceeds.
REPURCHASE AGREEMENTS:
The Funds may enter into repurchase agreements with financial institutions,
such as banks and broker-dealers, which MERUS-UCA deems creditworthy under
guidelines approved by the Group's Board of Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed-upon
date and price. The repurchase price generally equals the price paid by a
Fund plus interest negotiated on the basis of current short-term rates,
which may be more or less than the rate on the underlying portfolio
securities. The seller, under a repurchase agreement, is required to pledge
securities as collateral pursuant to the agreement at not less than 102% of
the repurchase price (including accrued interest). Securities subject to
repurchase agreements are held by the Funds' custodian in
Continued
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60
<PAGE> 652
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income are declared daily and paid monthly
for the money market funds. Distributions from net investment income are
declared and paid monthly for the variable net asset value funds.
Distributable net realized capital gains, if any, are declared and
distributed at least annually for each of the Funds.
Distributions from net investment income and from net realized capital gains
are determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
primarily due to differing treatments for expiring capital loss
carryforwards and deferrals of certain losses for income tax purposes.
FEDERAL INCOME TAXES:
It is the policy of each of the Funds to continue to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or substantially
all, federal income taxes. Accordingly, no provision for federal income tax
is required.
OTHER:
Expenses that are directly related to one of the Funds are charged directly
to that Fund and are allocated to each class of shares based on the relative
net assets of each class. Other operating expenses of the Group are prorated
to the Funds on the basis of relative net assets.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended July 31, 1996 are as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Bond Fund..................................................... $ 12,838,463 $ 12,390,087
Income Equity Fund............................................ $120,339,920 $104,047,894
Balanced Fund................................................. $ 11,733,334 $ 4,060,963
Growth Fund................................................... $ 42,228,828 $ 27,423,180
</TABLE>
Continued
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61
<PAGE> 653
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for the Group for the years ended July 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS
DIVERSIFIED OBLIGATIONS FUND FUND
------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- -------------
Amounts in Thousands
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares issued............................... $ 1,099,638 $ 646,263 $ 712,337 $ 394,176
Dividends reinvested...................................... 7,260 4,895 3,476 1,948
Shares redeemed........................................... (1,049,143) (598,685) (688,578) (371,715)
------------- ------------- ------------- -------------
Change in net assets from Investor Share transactions..... $ 57,755 $ 52,473 $ 27,235 $ 24,409
============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares issued............................... $ 843,405 $ 915,980 $ 1,221,391 $ 1,366,450
Dividends reinvested...................................... 66 20 11 2
Shares redeemed........................................... (869,182) (874,436) (1,229,676) (1,368,823)
------------- ------------- ------------- -------------
Change in net assets from Fiduciary Share transactions.... $ (25,711) $ 41,564 $ (8,274) $ (2,371)
============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued.................................................... 1,099,638 646,263 712,337 394,176
Reinvested................................................ 7,260 4,895 3,476 1,948
Redeemed.................................................. (1,049,143) (598,685) (688,578) (371,715)
------------- ------------- ------------- -------------
Change in Investor Shares................................. 57,755 52,473 27,235 24,409
============ ============ ============ ============
FIDUCIARY SHARES:
Issued.................................................... 843,405 915,980 1,221,391 1,366,450
Reinvested................................................ 66 20 11 2
Redeemed.................................................. (869,182) (874,436) (1,229,676) (1,368,823)
------------- ------------- ------------- -------------
Change in Fiduciary Shares................................ (25,711) 41,564 (8,274) (2,371)
============ ============ ============ ============
</TABLE>
Continued
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62
<PAGE> 654
LOGO
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
<TABLE>
<CAPTION>
100% U.S. TREASURY CALIFORNIA
OBLIGATIONS FUND TAX-FREE FUND
------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- -------------
Amounts in Thousands
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares
issued..................... $ 463,343 $ 310,873 $ 120,369 $ 99,160
Dividends reinvested......... 4,526 2,090 1,419 1,027
Shares redeemed.............. (455,887) (263,475) (108,705) (91,159)
------------- ------------- ------------- -------------
Change in net assets from
Investor Share
transactions............... $ 11,982 $ 49,488 $ 13,083 $ 9,028
============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares
issued..................... $ 541,337 $ 425,795 $ 223,524 $ 255,654
Dividends reinvested......... 45 16 6 8
Shares redeemed.............. (558,614) (395,970) (230,920) (264,895)
------------- ------------- ------------- -------------
Change in net assets from
Fiduciary Share
transactions............... $ (17,232) $ 29,841 $ (7,390) $ (9,233)
============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued....................... 463,343 310,873 120,369 99,160
Reinvested................... 4,526 2,090 1,419 1,027
Redeemed..................... (455,887) (263,475) (108,705) (91,159)
------------- ------------- ------------- -------------
Change in Investor Shares.... 11,982 49,488 13,083 9,028
============ ============ ============ ============
FIDUCIARY SHARES:
Issued....................... 541,337 425,795 223,524 255,654
Reinvested................... 45 16 6 8
Redeemed..................... (558,614) (395,970) (230,920) (264,895)
------------- ------------- ------------- -------------
Change in Fiduciary Shares... (17,232) 29,841 (7,390) (9,233)
============ ============ ============ ============
</TABLE>
Continued
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63
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
<TABLE>
<CAPTION>
BOND FUND INCOME EQUITY FUND
------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares
issued..................... $ 754 $ 626 $ 10,342 $ 4,131
Dividends reinvested......... 60 14 501 52
Shares redeemed.............. (177) (113) (5,008) (506)
------------- ------------- ------------- -------------
Change in net assets from
Investor Share
transactions............... $ 637 $ 527 $ 5,835 $ 3,677
============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares
issued..................... $ 14,876 $ 10,767 $ 52,940 $ 31,913
Dividends reinvested......... 2,983 3,111 16,994 13,482
Shares redeemed.............. (16,414) (19,821) (49,911) (56,293)
------------- ------------- ------------- -------------
Change in net assets from
Fiduciary Share
transactions............... $ 1,445 $ (5,943) $ 20,023 $ (10,898)
============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued....................... 71 63 721 331
Reinvested................... 6 1 35 5
Redeemed..................... (17) (11) (344) (40)
------------- ------------- ------------- -------------
Change in Investor Shares.... 60 53 412 296
============ ============ ============ ============
FIDUCIARY SHARES:
Issued....................... 1,421 1,074 3,719 2,625
Reinvested................... 284 311 1,200 1,154
Redeemed..................... (1,563) (1,974) (3,529) (4,658)
------------- ------------- ------------- -------------
Change in Fiduciary Shares... 142 (589) 1,390 (879)
============ ============ ============ ============
</TABLE>
Continued
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64
<PAGE> 656
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
------------- ------------- ------------- -------------
Amounts in Thousands
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR SHARES:
Proceeds from shares
issued..................... $ 526 $ 480 $ 1,796 $ 1,230
Dividends reinvested......... 22 2 107 5
Shares redeemed.............. (358) (20) (370) (144)
------------- ------------- ------------- -------------
Change in net assets from
Investor Share
transactions............... $ 190 $ 462 $ 1,533 $ 1,091
============ ============ ============ ============
FIDUCIARY SHARES:
Proceeds from shares
issued..................... $ 15,314 $ 9,876 $ 17,443 $ 8,497
Dividends reinvested......... 1,150 984 1,858 498
Shares redeemed.............. (9,046) (9,570) (4,577) (3,450)
------------- ------------- ------------- -------------
Change in net assets from
Fiduciary Share
transactions............... $ 7,418 $ 1,290 $ 14,724 $ 5,545
============ ============ ============ ============
SHARE TRANSACTIONS:
INVESTOR SHARES:
Issued....................... 46 45 143 115
Reinvested................... 2 -- 9 1
Redeemed..................... (31) (2) (29) (13)
------------- ------------- ------------- -------------
Change in Investor Shares.... 17 43 123 103
============ ============ ============ ============
FIDUCIARY SHARES:
Issued....................... 1,321 976 1,397 836
Reinvested................... 100 99 154 50
Redeemed..................... (789) (964) (365) (334)
------------- ------------- ------------- -------------
Change in Fiduciary Shares... 632 111 1,186 552
============ ============ ============ ============
</TABLE>
Continued
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65
<PAGE> 657
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
5. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Group by MERUS-UCA. Under
the terms of the investment advisory agreement, Union Bank of California, of
which MERUS-UCA is a division, is entitled to receive fees based on a
percentage of the average net assets of each of the Funds. Union Bank of
California also serves as custodian, sub-transfer agent and
sub-administrator for the Group.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
an Ohio Limited Partnership, and BISYS Fund Services Ohio, Inc. ("BISYS
Ohio") are subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Group as administrator. Such officers and trustees are paid no
fees directly by the Funds for serving as officers and trustees of the
Group. Under the terms of the administration agreement, BISYS' fees are
computed daily as a percentage of the average net assets of the Funds. BISYS
also serves as the Group's distributor. As distributor, BISYS is entitled to
receive fees from the Funds for providing distribution services. For the
year ended July 31, 1996, BISYS received $212,765 for commissions earned on
sales of shares of the Group's variable net asset value funds, of which
$23,664 was reallowed to affiliated parties. BISYS Ohio, serves the Group as
transfer agent and mutual fund accountant. Transfer agent fees are computed
on a sliding scale, based upon the number of shareholders.
The Group has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act pursuant to which each Fund may pay the Distributor as compensation
for its services in connection with the Distribution Plan a distribution
fee, computed daily and paid monthly, at a maximum annual rate of
twenty-five one-hundredths of one percent (0.25%) of the average daily net
assets attributable to the Funds' Investor Shares. A Fund's Fiduciary Shares
are not subject to the Distribution Plan or a distribution fee. The
Distributor has agreed to voluntarily reduce payments to be received
pursuant to the Distribution Plan with respect to a money market fund to the
extent necessary to ensure that such payments do not exceed the income
attributable to such Fund's shares on any day.
The Group has also adopted a Shareholder Services Plan permitting payment of
compensation to financial institutions that agree to provide certain
administrative support services for their customers who are Fund
shareholders. Each Fund has entered into a specific arrangement with BISYS
for the provision of such services and reimburses BISYS for its cost of
providing these services, subject to a maximum annual rate of twenty-five
one-hundredths of one percent (0.25%) of each Fund's average daily net
assets.
Fees may be voluntarily reduced or reimbursed to assist the Funds in
maintaining competitive expense ratios. Such fees are permanently waived.
Continued
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66
<PAGE> 658
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
Information regarding these transactions is as follows for the year ended
July 31, 1996: (amounts in thousands)
<TABLE>
<CAPTION>
DIVERSIFIED U.S. GOVERNMENT 100% U.S. TREASURY
OBLIGATIONS FUND OBLIGATIONS FUND OBLIGATIONS FUND
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee (percentage of
average net assets)................ 0.40% 1st $500 million 0.40% 1st $500 million 0.40% 1st $500 million
0.35% next $500 million 0.35% next $500 million 0.35% next $500 million
0.30% remaining 0.30% remaining 0.30% remaining
ADMINISTRATION FEES:
Annual fee (percentage of
average net assets)................ 0.20% 0.20% 0.20%
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary
fee reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 395 $ 179 $ 267
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary
fee reductions (percentage of
average net assets)................ 0.25% 0.25% 0.25%
Voluntary fee reductions............. $ 932 $ 560 $ 711
CUSTODIAN FEES: (percentage of
average net assets) 0.02% (minimum $2,500) 0.02% (minimum $2,500) 0.02% (minimum $2,500)
ACCOUNTING FEES: (percentage of
average net assets) 0.03% (minimum $40,000) 0.03% (minimum $40,000) 0.03% (minimum $40,000)
</TABLE>
Continued
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67
<PAGE> 659
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
<TABLE>
<CAPTION>
CALIFORNIA
TAX-FREE FUND
-----------------------
<S> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........................... 0.40% 1st $500 million
0.35% next $500 million
0.30% remaining
Voluntary fee reductions....................................... $ 266
ADMINISTRATION FEES:
Annual fee (percentage of average net assets).................. 0.20%
Voluntary fee reductions....................................... $ 77
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary fee reductions
(percentage of average net assets)........................... 0.25%
Voluntary fee reductions....................................... $ 122
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........................... 0.25%
Voluntary fee reductions....................................... $ 359
CUSTODIAN FEES: (percentage of average net assets) 0.02% (minimum $2,500)
ACCOUNTING FEES: (percentage of average net assets) 0.03% (minimum $40,000)
</TABLE>
Continued
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68
<PAGE> 660
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
<TABLE>
<CAPTION>
BOND FUND INCOME EQUITY FUND
----------------------- -----------------------
<S> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 1.00% 1st $40 million 1.00% 1st $40 million
0.60% remaining 0.60% remaining
Voluntary fee reductions............. $ 257 $ 33
ADMINISTRATION FEES:
Annual fee (percentage of
average net assets)................ 0.20% 0.20%
Voluntary fee reductions............. $ 43 --
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25%
Voluntary fee reductions............. $ 2 $ 20
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25%
Voluntary fee reductions............. $ 143 $ 613
CUSTODIAN FEES: (percentage of
average net assets) 0.02% (minimum $2,500) 0.02% (minimum $2,500)
Voluntary fee reductions
ACCOUNTING FEES: (percentage of
average net assets) 0.03% (minimum $40,000) 0.03% (minimum $40,000)
</TABLE>
Continued
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69
<PAGE> 661
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
----------------------- -----------------------
<S> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 1.00% 1st $40 million 1.00% 1st $40 million
0.60% remaining 0.60% remaining
Voluntary fee reductions............. $ 161 $ 182
ADMINISTRATION FEES:
Annual fee (percentage of
average net assets)................ 0.20% 0.20%
Voluntary fee reductions............. -- --
DISTRIBUTION FEES (INVESTOR SHARES):
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25%
Voluntary fee reductions............. $ 2 $ 5
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)................ 0.25% 0.25%
Voluntary fee reductions............. $ 82 $ 87
CUSTODIAN FEES: (percentage of
average net assets) 0.02% (minimum $2,500) 0.02% (minimum $2,500)
Voluntary fee reductions............. $ 29 $ 40
ACCOUNTING FEES: (percentage of
average net assets) 0.03% (minimum $40,000) 0.03% (minimum $40,000)
Voluntary fee reductions............. $ 19 $ 19
</TABLE>
Continued
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70
<PAGE> 662
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
6. CONCENTRATION OF CREDIT RISK:
The California Tax-Free Fund invests substantially all of its assets in a
diversified portfolio of tax-exempt debt obligations primarily consisting of
securities issued by the State of California, its municipalities, counties,
and other taxing districts. The issuers' abilities to meet their obligations
may be affected by domestic and foreign or California economic, regional and
political developments.
At July 31, 1996, The California Tax-Free Fund had the following
concentrations by industry sector (as a percentage of total investments):
<TABLE>
<CAPTION>
TAX-EXEMPT CALIFORNIA
INDUSTRY CLASS TAX-FREE FUND
--------------------------------------------------------------------- -------------
<S> <C>
Utilities -- Electric................................................ 23.2%
Housing.............................................................. 22.1%
Hospitals............................................................ 20.7%
Pollution Control.................................................... 10.6%
Governments.......................................................... 8.2%
Money Markets........................................................ 7.8%
Utilities -- Water & Sewer........................................... 4.2%
Transportation & Shipping............................................ 3.2%
------
100.0%
</TABLE>
7. ELIGIBLE DISTRIBUTIONS (UNAUDITED):
The Group designates the following eligible distributions for the dividends
received deduction for corporations for the Fund's taxable year ended July
31, 1996:
<TABLE>
<CAPTION>
INCOME BALANCED GROWTH
EQUITY FUND FUND FUND
----------- -------- ------
<S> <C> <C> <C>
Dividend Income (in thousands)...... $ 9.943 $ 549 $ 607
Dividend Income Per Share........... $ 0.402 $0.142 $0.107
</TABLE>
Continued
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71
<PAGE> 663
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
8. EXEMPT-INTEREST INCOME DESIGNATION (UNAUDITED):
The Group designates the following exempt-interest dividends for the Fund's
taxable year ended July 31, 1996.
<TABLE>
<CAPTION>
CALIFORNIA
TAX-FREE FUND
-------------
<S> <C>
Exempt-interest dividends........................... $ 5.255
Exempt-interest dividends per share................. 0.028
</TABLE>
The following information indicates by state the percentage of income earned
by the California Tax-Free Fund for the year ended July 31, 1996:
<TABLE>
<CAPTION>
CALIFORNIA
TAX-FREE FUND
-------------
<S> <C>
Alaska..............................................
Arizona.............................................
California.......................................... 100.0%
Colorado............................................
Florida.............................................
Hawaii..............................................
Illinois............................................
Indiana.............................................
Kentucky............................................
Louisiana...........................................
Michigan............................................
Minnesota...........................................
Missouri............................................
Nevada..............................................
New Mexico..........................................
New York............................................
Oregon..............................................
Pennsylvania........................................
Rhode Island........................................
Texas...............................................
Utah................................................
Virginia............................................
Wyoming.............................................
Other Territories...................................
------
100.0%
==============
</TABLE>
Continued
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72
<PAGE> 664
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1996
For the year ended July 31, 1996, 16.9% of the income earned by the
California Tax-Free Fund may be subject to the alternative minimum tax.
For California residents, 100.0% of the income earned by the California
Tax-Free Fund for the year ended July 31, 1996 is designated as tax-exempt
income.
The following information indicates by type the percentage of income earned
by the 100% U.S. Treasury Obligations Fund for the year ended July 31, 1996:
<TABLE>
<CAPTION>
100% U.S. TREASURY
TYPE OBLIGATIONS FUND
---------------------------------------------------------------- ------------------
<S> <C>
Federal obligations (such as U.S. Treasury bills, notes,
bonds)........................................................ 100.0%
===================
</TABLE>
For California residents, the 100% U.S. Treasury Obligations Fund met the
quarterly diversification tests for each fiscal quarter ended during the
year ended July 31, 1996. In addition, for California residents, 100% of the
income earned by the 100% U.S. Treasury Obligations Fund for the year ended
July 31, 1996 is designated as tax-exempt income.
Please consult your tax advisor for the proper treatment of the information
reflected in Notes 7 and 8.
9. FEDERAL INCOME TAXES:
For federal income tax purposes, the following funds have capital loss
carryforwards as of July 31, 1996, which are available to offset future
capital gains, if any:
<TABLE>
<CAPTION>
AMOUNT EXPIRES
---------- -------
<S> <C> <C>
Diversified Obligations Fund................................. $ 341,422 2001
29,246 2002
U.S. Government Obligations Fund............................. 174,662 2001
100% U.S. Treasury Obligations Fund.......................... 6,637 2004
California Tax-Free Fund..................................... 24,741 2002
22,777 2003
13,234 2003
Bond Fund.................................................... 2,766,351 2003
54,397 2004
</TABLE>
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73
<PAGE> 665
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DIVERSIFIED OBLIGATIONS FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.049 0.049 0.049 0.049 0.028 0.028 0.027 0.027 0.043 0.043
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.049) (0.049 ) (0.049) (0.049 ) (0.028) (0.028 ) (0.027) (0.027 ) (0.043) (0.043 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 5.01% 5.01% 4.99% 4.99% 2.88% 2.88% 2.75% 2.75% 4.41% 4.41%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at
end of
period
(000)...... $185,952 $244,775 $128,191 $270,476 $ 75,725 $228,934 $ 77,589 $254,034 $ 17,600 $337,485
Ratio of
expenses to
average net
assets..... 0.75% 0.75% 0.74% 0.74% 0.74% 0.74% 0.72% 0.72% 0.72% 0.72%
Ratio of net
investment
income to
average net
assets..... 4.89% 4.91% 4.92% 4.88% 2.83% 2.83% 2.72% 2.72% 4.34% 4.34%
Ratio of
expenses to
average net
assets*.... 1.23% 0.99% 1.23% 0.98% 1.14% 0.89% 0.79% 0.73% 0.97% 0.72%
Ratio of net
investment
income to
average net
assets*.... 4.41% 4.67% 4.43% 4.64% 2.42% 2.67% 2.65% 2.71% 4.09% 4.34%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
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74
<PAGE> 666
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U.S. GOVERNMENT OBLIGATIONS FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.048 0.048 0.048 0.048 0.027 0.027 0.027 0.027 0.042 0.042
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.048) (0.048 ) (0.048) (0.048 ) (0.027) (0.027 ) (0.027) (0.027 ) (0.042) (0.042 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 4.86% 4.88% 4.86% 4.87% 2.74% 2.74% 2.72% 2.72% 4.25% 4.25%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at
end of
period
(000)...... $ 75,714 $151,483 $ 48,474 $159,747 $ 24,055 $162,094 $ 37,332 $166,182 $ 12,527 $ 94,252
Ratio of
expenses to
average net
assets..... 0.79% 0.77% 0.78% 0.78% 0.77% 0.78% 0.71% 0.71% 0.73% 0.73%
Ratio of net
investment
income to
average net
assets..... 4.77% 4.76% 4.82% 4.76% 2.63% 2.70% 2.67% 2.67% 4.15% 4.15%
Ratio of
expenses to
average net
assets*.... 1.26% 1.00% 1.27% 1.02% 1.17% 0.94% 0.79% 0.74% 0.99% 0.74%
Ratio of net
investment
income to
average net
assets*.... 4.30% 4.53% 4.33% 4.52% 2.23% 2.54% 2.59% 2.65% 3.89% 4.14%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
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75
<PAGE> 667
LOGO
100% U.S. TREASURY OBLIGATIONS FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.046 0.046 0.046 0.046 0.026 0.026 0.026 0.026 0.040 0.040
Net realized
and
unrealized
gains on
investments... -- -- -- -- -- -- -- -- 0.001 0.001
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total from
Investment
Activities.. 0.046 0.046 0.046 0.046 0.026 0.026 0.026 0.026 0.041 0.041
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.046) (0.046 ) (0.046) (0.046 ) (0.026) (0.026 ) (0.026) (0.026 ) (0.040) (0.040 )
From net
investment
income..... -- -- -- -- -- -- -- -- (0.001) (0.001 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total
Distributions... (0.046) (0.046 ) (0.046) (0.046 ) (0.026) (0.026 ) (0.026) (0.026 ) (0.041) (0.041 )
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 4.74% 4.74% 4.69% 4.69% 2.68% 2.68% 2.64% 2.64% 4.18% 4.18%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at
end of
period
(000)...... $100,623 $173,340 $ 88,660 $190,604 $ 39,157 $160,721 $ 32,629 $191,946 $ 11,551 $219,451
Ratio of
expenses to
average net
assets..... 0.74% 0.74% 0.73% 0.73% 0.74% 0.74% 0.67% 0.67% 0.65% 0.65%
Ratio of net
investment
income to
average net
assets..... 4.64% 4.64% 4.68% 4.60% 2.68% 2.63% 2.60% 2.60% 3.99% 3.99%
Ratio of
expenses to
average net
assets*.... 1.23% 0.97% 1.22% 0.97% 1.15% 0.90% 0.75% 0.72% 0.97% 0.72%
Ratio of net
investment
income to
average net
assets*.... 4.15% 4.41% 4.19% 4.36% 2.27% 2.48% 2.52% 2.55% 3.67% 3.92%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
LOGO
76
<PAGE> 668
LOGO
CALIFORNIA TAX-FREE FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
INVESTMENT
ACTIVITIES
Net
investment
income..... 0.029 0.029 0.031 0.031 0.020 0.020 0.021 0.021 0.032 0.032
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
DISTRIBUTIONS
From net
investment
income..... (0.029) (0.029 ) (0.031) (0.031 ) (0.020) (0.020 ) (0.021) (0.021 ) (0.032) (0.032 )
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
NET ASSET
VALUE, END OF
PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== =========== ========== =========== ========== =========== ========== ===========
Total
Return....... 2.91% 2.91% 3.16% 3.16% 1.99% 1.99% 2.13% 2.13% 3.20% 3.20%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at
end of
period
(000)...... $ 53,627 $ 98,352 $ 40,544 $105,742 $ 31,521 $114,993 $ 44,410 $142,939 $ 4,609 $116,062
Ratio of
expenses to
average net
assets..... 0.55% 0.55% 0.50% 0.50% 0.50% 0.50% 0.44% 0.44% 0.54% 0.54%
Ratio of net
investment
income to
average net
assets..... 2.89% 2.88% 3.14% 3.11% 1.96% 1.96% 2.08% 2.08% 3.15% 3.15%
Ratio of
expenses to
average net
assets*.... 1.25% 1.00% 1.26% 1.01% 1.18% 0.93% 0.79% 0.73% 0.99% 0.74%
Ratio of net
investment
income to
average net
assets*.... 2.19% 2.43% 2.38% 2.60% 1.28% 1.53% 1.73% 1.78% 2.70% 2.95%
</TABLE>
- ---------------
*During the period, certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements.
LOGO
77
<PAGE> 669
LOGO
BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, YEAR
1994 TO ENDED
YEAR ENDED YEAR ENDED JULY 31, JULY 31, YEAR ENDED JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A)(B) 1994(B)
---------------------- ---------------------- ---------- --------- -------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY 1993 1992
-------- --------- -------- --------- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $10.29 $ 10.38 $10.04 $ 10.11 $10.12 $ 11.13 $ 11.02 $ 10.29
-------- --------- -------- --------- ---------- --------- ------- -------
INVESTMENT ACTIVITIES
Net investment
income............... 0.69 0.66 0.66 0.64 0.07 0.63 0.70 0.67
Net realized and
unrealized gains
(losses) on
investments.......... (0.18) (0.16) 0.23 0.27 (0.05) (0.97) 0.35 0.77
-------- --------- -------- --------- ---------- --------- ------- -------
Total from Investment
Activities......... 0.51 0.50 0.89 0.91 0.02 (0.34) 1.05 1.44
-------- --------- -------- --------- ---------- --------- ------- -------
DISTRIBUTIONS
From net investment
income............... (0.65) (0.65) (0.64) (0.64) (0.10) (0.63) (0.70) (0.67)
From net realized
gains................ -- -- -- -- -- (0.01) (0.24) (0.04)
In excess of net
realized gains....... -- -- -- -- -- (0.04) -- --
-------- --------- -------- --------- ---------- --------- ------- -------
Total
Distributions...... (0.65) (0.65) (0.64) (0.64) (0.10) (0.68) (0.94) (0.71)
-------- --------- -------- --------- ---------- --------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $10.15 $ 10.23 $10.29 $ 10.38 $10.04 $ 10.11 $ 11.13 $ 11.02
========= =========== ========= =========== =============== =========== ======== ========
Total Return (excludes
sales charges)......... 4.95% 4.81% 9.29% 9.43% (3.81)%(c) (3.14)% 10.07% 14.43%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at end of
period (000)......... $1,157 $60,374 $ 558 $59,758 $ 7 $64,185 $33,279 $21,651
Ratio of expenses to
average net assets... 0.89% 0.89% 0.92% 0.92% 0.99%(d) 0.86% 0.93% 0.91%
Ratio of net investment
income to average net
assets............... 6.10% 6.10% 6.29% 6.35% 5.77%(d) 6.11% 6.41% 6.23%
Ratio of expenses to
average net
assets*.............. 1.85% 1.61% 1.89% 1.64% 2.96%(d) 1.37% 1.55% 1.55%
Ratio of net investment
income to average net
assets*.............. 5.14% 5.38% 5.32% 5.62% 3.80%(d) 5.60% 5.79% 5.59%
Portfolio turnover..... 20.65%(e) 20.88%(e) 36.20%(e) 36.20%(e) 44.33%(e) 44.33%(e) 58.81% 79.56%
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) Period from commencement of operations.
(b) On June 20, 1994, the Bond Fund commenced offering Investor Shares and designated existing shares as Fiduciary Shares.
(c) Represents total return for the Fiduciary shares for the period from August 1, 1993 to June 19, 1994 plus the total return
for the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
*During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
78
<PAGE> 670
LOGO
INCOME EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, YEAR
1994 TO ENDED
YEAR ENDED YEAR ENDED JULY 31, JULY 31, YEAR ENDED JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A)(B) 1994(B)
----------------------- ---------------------- ---------- --------- --------------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY 1993 1992
-------- --------- -------- --------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $ 13.03 $ 13.00 $11.92 $ 11.92 $11.85 $ 12.13 $ 11.42 $ 10.22
-------- --------- -------- --------- ---------- --------- -------- -------
INVESTMENT ACTIVITIES
Net investment
income............. 0.42 0.42 0.42 0.44 0.04 0.39 0.38 0.40
Net realized and
unrealized gains on
investments........ 1.92 1.93 1.55 1.50 0.08 0.12 0.71 1.20
-------- --------- -------- --------- ---------- --------- -------- -------
Total from
Investment
Activities....... 2.34 2.35 1.97 1.94 0.12 0.51 1.09 1.60
-------- --------- -------- --------- ---------- --------- -------- -------
DISTRIBUTIONS
From net investment
income............. (0.42 ) (0.42 ) (0.44) (0.44 ) (0.05) (0.39 ) (0.38) (0.40)
From net realized
gains.............. (0.66 ) (0.66 ) (0.42) (0.42 ) -- (0.33 ) -- --
-------- --------- -------- --------- ---------- --------- -------- -------
Total
Distributions.... (1.08 ) (1.08 ) (0.86) (0.86 ) (0.05) (0.72 ) (0.38) (0.40)
-------- --------- -------- --------- ---------- --------- -------- -------
NET ASSET VALUE, END
OF PERIOD............ $ 14.29 $ 14.27 $13.03 $ 13.00 $11.92 $ 11.92 $ 12.13 $ 11.42
========= =========== ========= =========== =============== =========== ========== ========
Total Return (excludes
sales charges)....... 18.21 % 18.25 % 17.52% 17.26 % 4.23%(c) 4.23 % 9.75% 16.04%
RATIOS/SUPPLEMENTARY
DATA:
Net Assets at end of
period (000)....... $10,143 $262,660 $3,881 $221,325 $ 24 $213,328 $104,840 $74,478
Ratio of expenses to
average net
assets............. 1.03 % 1.03 % 1.06% 1.06 % 1.10%(d) 1.06 % 1.15% 1.16%
Ratio of net
investment income
to average net
assets............. 2.89 % 2.95 % 3.06% 3.59 % 0.93%(d) 3.29 % 3.27% 3.76%
Ratio of expenses to
average net
assets*............ 1.51 % 1.27 % 1.55% 1.30 % 1.33%(d) 1.10 % 1.21% 1.29%
Ratio of net
investment income
to average net
assets*............ 2.41 % 2.71 % 2.57% 3.34 % 0.71%(d) 3.24 % 3.22% 3.64%
Portfolio turnover... 41.51 %(e) 41.51 %(e) 36.64%(e) 36.64 %(e) 33.82%(e) 33.82 %(e) 29.58% 23.05%
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) Period from commencement of operations.
(b) On June 20, 1994, the Income Equity Fund commenced offering Investor Shares and designated existing shares as Fiduciary
Shares.
(c) Represents total return for the Fiduciary Shares for the period from August 1, 1993 to June 19, 1994 plus the total return
for the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
*During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
79
<PAGE> 671
LOGO
BALANCED FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, NOVEMBER 14,
1994 TO 1993 TO
YEAR ENDED YEAR ENDED JULY 31, JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A) 1994(A)
---------------------- ---------------------- --------- ------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $10.79 $ 10.85 $ 9.71 $ 9.76 $ 9.71 $ 10.00
-------- --------- -------- --------- --------- ------------
INVESTMENT ACTIVITIES
Net investment income....................... 0.40 0.40 0.43 0.39 -- 0.26
Net realized and unrealized gains (losses)
on investments............................ 0.77 0.79 1.04 1.09 0.06 (0.24)
-------- --------- -------- --------- --------- ------------
Total from Investment Activities.......... 1.17 1.19 1.47 1.48 0.06 0.02
-------- --------- -------- --------- --------- ------------
DISTRIBUTIONS
From net investment income.................. (0.40) (0.40) (0.39) (0.39) (0.06) (0.26)
-------- --------- -------- --------- --------- ------------
NET ASSET VALUE, END OF PERIOD............... $11.56 $ 11.64 $10.79 $ 10.85 $ 9.71 $ 9.76(e)
========= =========== ========= =========== ========== ============
Total Return (excludes sales charges)........ 10.94% 11.06% 15.60% 15.62% (0.25)%(b) (0.26)%(e)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........... $ 694 $39,502 $ 467 $29,961 -- $ 25,851
Ratio of expenses to average net assets..... 0.94% 0.94% 0.90% 0.89% -- 0.87%(c)
Ratio of net investment income to average
net assets................................ 3.48% 3.49% 3.78% 3.93% -- 3.77%(c)
Ratio of expenses to average net assets*.... 2.03% 1.78% 2.05% 1.80% -- 1.79%(c)
Ratio of net investment income to average
net assets*............................... 2.39% 2.65% 2.63% 3.02% -- 2.85%(c)
Portfolio turnover (d)...................... 12.84% 12.84% 20.70% 20.70% 44.14% 44.14%
- ---------------
(a) Period from commencement of operations. On June 20, 1994, the Balanced Fund commenced offering Investor Shares and designated
existing shares as Fiduciary Shares.
(b) Represents total return for the Fiduciary Shares from commencement of operations to June 19, 1994 plus the total return for
the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
(e) Not annualized.
*During the period, certain fees were voluntarily reduced. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
80
<PAGE> 672
LOGO
GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 20, NOVEMBER 18,
1994 TO 1993 TO
YEAR ENDED YEAR ENDED JULY 31, JULY 31,
JULY 31, 1996 JULY 31, 1995 1994(A) 1994(A)
---------------------- ---------------------- --------- ------------
INVESTOR FIDUCIARY INVESTOR FIDUCIARY INVESTOR FIDUCIARY
-------- --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $11.87 $ 11.87 $ 9.77 $ 9.76 $ 9.74 $ 10.00
-------- --------- -------- --------- --------- ------------
INVESTMENT ACTIVITIES
Net investment income....................... 0.11 0.12 0.15 0.15 -- 0.05
Net realized and unrealized gains (losses)
on investments............................ 1.38 1.35 2.25 2.26 0.04 (0.24)
-------- --------- -------- --------- --------- ------------
Total from Investment Activities.......... 1.49 1.47 2.40 2.41 0.04 (0.19)
-------- --------- -------- --------- --------- ------------
DISTRIBUTIONS
From net investment income.................. (0.12) (0.12) (0.15) (0.15) (0.01) (0.05)
From net realized gains..................... (0.64) (0.64) (0.15) (0.15) -- --
-------- --------- -------- --------- --------- ------------
Total Distributions....................... (0.76) (0.76) (0.30) (0.30) (0.01) (0.05)
-------- --------- -------- --------- --------- ------------
NET ASSET VALUE, END OF PERIOD............... $12.60 $ 12.58 11.87 $ 11.87 $ 9.77 $ 9.76
========= =========== ========= =========== ========== ============
Total Return (excludes sales charges)........ 12.88% 12.72% 25.10% 25.23% (1.77)%(b) (1.87)%(e)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........... $2,843 $41,495 $1,218 $25,096 -- $ 15,254
Ratio of expenses to average net assets..... 0.93% 0.93% 0.84% 0.79% -- 0.77%(c)
Ratio of net investment income to average
net assets................................ 0.96% 0.98% 1.17% 1.40% -- 0.86%(c)
Ratio of expenses to average net assets*.... 1.91% 1.67% 2.11% 1.92% -- 2.61%(c)
Ratio of net investment income (loss) to
average net assets*....................... (0.02)% 0.23% (0.10)% 0.26% -- (0.98)%(c)
Portfolio turnover (d)...................... 78.58% 78.58% 67.91% 67.91% 123.26% 123.26%
- ---------------
<FN>
(a) Period from commencement of operations. On June 20, 1994, the Growth Fund commenced offering Investor Shares and designated
existing shares as Fiduciary Shares.
(b) Represents total return for the Fiduciary Shares from commencement of operations to June 19, 1994 plus the total return for
the Investor Shares for the period from June 20, 1994 to July 31, 1994.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
(e) Not annualized.
*During the period, certain fees were voluntarily reduced. In addition, certain expenses were reimbursed. If such voluntary
fee reductions and expense reimbursements had not occurred, the ratios would have been as indicated.
</TABLE>
See notes to financial statements.
LOGO
81
<PAGE> 1
EXHIBIT (17)(c)
Prospectuses and Statement of Additional Information for Stepstone Funds
dated May 26, 1996
<PAGE> 2
STEPSTONE FUNDS
CALIFORNIA TAX FREE MONEY MARKET FUND
Institutional Class
SUPPLEMENT DATED AUGUST 27, 1996
TO THE PROSPECTUS DATED MAY 28, 1996.
THIS SUPPLEMENT TO THE PROSPECTUS CONTAINS NEW AND ADDITIONAL INFORMATION
BEYOND THAT CONTAINED IN THE PROSPECTUS AND SHOULD BE RETAINED AND READ IN
CONJUNCTION WITH SUCH PROSPECTUS.
Certain language was inadvertently deleted from the text of Investment
Limitation No. 2 on page 8 of the Stepstone California Tax Free Money Market
Fund Prospectus dated May 28, 1996. Investment Limitation No. 2 should read as
follows:
The California Tax Free Money Market Fund may not purchase securities
of any issuer (except securities issued or guaranteed by the United
States, its agencies or instrumentalities) and repurchase agreements
involving such securities if as a result more than 5% of the total
assets of the Fund would be invested in the securities of such issuer.
This limitation applies to 75% of the Fund's assets.
___________________________________________________________________
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 3
STEPSTONE FUNDS
CALIFORNIA TAX FREE MONEY MARKET FUND
Investment Class
SUPPLEMENT DATED AUGUST 27, 1996
TO THE PROSPECTUS DATED MAY 28, 1996.
THIS SUPPLEMENT TO THE PROSPECTUS CONTAINS NEW AND ADDITIONAL INFORMATION
BEYOND THAT CONTAINED IN THE PROSPECTUS AND SHOULD BE RETAINED AND READ IN
CONJUNCTION WITH SUCH PROSPECTUS.
Certain language was inadvertently deleted from the text of Investment
Limitation No. 2 on page 8 of the Stepstone California Tax Free Money Market
Fund Prospectus dated May 28, 1996. Investment Limitation No. 2 should read as
follows:
The California Tax Free Money Market Fund may not purchase securities
of any issuer (except securities issued or guaranteed by the United
States, its agencies or instrumentalities) and repurchase agreements
involving such securities if as a result more than 5% of the total
assets of the Fund would be invested in the securities of such issuer.
This limitation applies to 75% of the Fund's assets.
___________________________________________________________________
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 4
STEPSTONE FUNDS
SUPPLEMENT DATED NOVEMBER 14, 1996 TO THE PROSPECTUS DATED MAY 28, 1996
This supplement provides new and additional information beyond that contained
in the Prospectus and should be retained and read in conjunction with such
Prospectus.
Effective October 31, 1996, MERUS-UCA Capital Management, the adviser to the
Stepstone Funds (the "Trust"), has changed its name to Pacific Alliance Capital
Management ("Pacific Alliance"). Pacific Alliance remains a division of Union
Bank of California, N.A.
---------------------------------------------------
On October 17, 1996, the Board of Trustees of the Trust met and unanimously
approved an Agreement and Plan of Reorganization (the "Plan") between the Trust
and the HighMark Group of Funds ("HighMark"). Pacific Alliance serves as
adviser to both the Trust and HighMark. Under the Plan, the Trust will
transfer the assets of certain portfolios to corresponding HighMark portfolios
in return for assumption by each such HighMark portfolio of the stated
liabilities of the Trust portfolio and the issuance of the shares of the
appropriate class of the HighMark portfolio. Each portfolio of the Trust will
distribute to HighMark shares received and thereafter be liquidated.
A Special Meeting of the Shareholders (the "Meeting") of the Trust's portfolios
has been called for the spring of 1997, at which Meeting the Trust's
Shareholders will be asked to approve the Plan and the proposed reorganization.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 5
STEPSTONE FUNDS
Supplement dated November 25, 1996
to the Prospectuses dated May 28, 1996
This supplement provides new and additional information beyond that
contained in the Prospectus and should be retained and read in conjunction with
such Prospectus.
On April 1, 1996, Union Bank and The Bank of California, N.A.
combined to form Union Bank of California, N.A. Pacific Alliance Capital
Management ("Pacific Alliance") (formerly, MERUS-UCA Capital Management), a
division of Union Bank of California, N.A., currently serves as investment
adviser to the Stepstone Funds and the HighMark Group of Funds ("HighMark").
As a result of this combination, Pacific Alliance proposed to the
Stepstone Funds' Board of Trustees a combination of the Stepstone Funds'
portfolios with those of HighMark. On October 17, 1996, the Board of Trustees of
the Stepstone Funds met and unanimously approved an Agreement and Plan of
Reorganization (the "Plan") between the Stepstone Funds and HighMark. Under the
Plan, certain of the Stepstone Funds will be reorganized into corresponding
HighMark portfolios. This reorganization would be accomplished by transferring a
fund's assets and liabilities to its corresponding HighMark fund in exchange for
shares of the HighMark fund. The HighMark shares would then be distributed to
the shareholders of each of the Stepstone portfolios and current shareholders of
the Stepstone fund would become shareholders of the HighMark fund.
A special meeting of Shareholders (the "Meeting") for each of the
Stepstone Funds will be called for the Spring of 1997 for the purpose of
approving the Plan and the proposed reorganization. Additional information will
be forwarded to Shareholders as soon as it is available.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 6
STEPSTONE FUNDS
INVESTMENT CLASS
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
LIMITED MATURITY GOVERNMENT FUND
INTERMEDIATE-TERM BOND FUND
GOVERNMENT SECURITIES FUND
BALANCED FUND
VALUE MOMENTUM FUND
GROWTH EQUITY FUND
EMERGING GROWTH FUND
SUPPLEMENT DATED JANUARY 1, 1997 TO THE PROSPECTUSES DATED MAY 28, 1996
THIS SUPPLEMENT PROVIDES NEW AND ADDITIONAL INFORMATION BEYOND THAT CONTAINED
IN THE PROSPECTUSES AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH SUCH
PROSPECTUS.
The Board of Trustees of Stepstone Funds has determined that it is in the best
interests of the Limited Maturity Government Fund (the "Fund") and its
shareholders that the Fund be closed to new investors and thereafter be
liquidated. Accordingly, effective January 10, 1997, the Fund will be closed to
new investors, and effective February 26, 1997, the Fund will liquidate and
distribute the net liquidation proceeds to shareholders. All distributions made
by the Fund that are currently being reinvested in Fund shares will continue to
be reinvested in Fund shares until the Fund is liquidated.
---------------
Effective January 1, 1997, the WAIVER OF SALES LOAD section in the prospectuses
should be replaced with the following:
WAIVER OF SALES LOAD. No sales charge is imposed on Investment Class
shares of the Fund; (i) issued in plans of reorganization, such as
mergers, asset acquisitions and exchange offers, to which the Trust is a
party; (ii) sold to dealers or brokers that have a sales agreement with
the Distributor, for their own account or for retirement plans for their
employees or sold to employees (or their spouses) of dealers or brokers
that certify to the Distributor at the time of purchase that such
purchase is for their own account (or for the benefit of such employees'
minor children); (iii) in aggregate purchases of $1 million or more by
tax-exempt organizations enumerated in Section 501(c) of the Code, or
employee benefit plans created under Sections 401 403(b) or 457 of the
Code; (iv) sold to employees and families of the Advisor and its
affiliates; (v) sold to fiduciary accounts of the Advisor and its
affiliates; (vi) purchased with proceeds from the recent redemption of
shares of a mutual fund with similar investment objectives and policies
for which a sales charge was paid; (vii) purchased by investment
advisors or financial planners regulated by a federal or state
governmental authority who are purchasing shares for their own account
or for an account for which they are authorized to
<PAGE> 7
make investment decisions (i.e., a discretionary account) and who charge
a management, consulting or other fee for their services, and clients of
such investment advisors or financial planners who place trades for
their own accounts if the accounts are linked to the master account of
such investment advisor or financial planner on the books and records of
a broker or agent; and (viii) sold to purchasers of Investment Class
Shares of the Growth Equity Fund that are sponsors of other investment
companies that are unit investment trusts for deposit by such sponsors
into such unit investment trusts, and to purchases of Investment Class
Shares of the Growth Equity Fund that are holders of such unit
investment trusts that invest distributions from such investment trusts
in Investment Class Shares of the Growth Equity Fund.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 8
STEPSTONE FUNDS
INSTITUTIONAL CLASS
LIMITED MATURITY GOVERNMENT FUND
SUPPLEMENT DATED JANUARY 1, 1997 TO THE PROSPECTUS DATED MAY 28, 1996
THIS SUPPLEMENT PROVIDES NEW AND ADDITIONAL INFORMATION BEYOND THAT CONTAINED
IN THE PROSPECTUSES AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH SUCH
PROSPECTUS.
The Board of Trustees of Stepstone Funds has determined that it is in the best
interests of the Limited Maturity Government Fund (the "Fund") and its
shareholders that the Fund be closed to new investors and thereafter be
liquidated. Accordingly, effective January 10, 1997, the Fund will be closed to
new investors, and effective February 26, 1997, the Fund will liquidate and
distribute the net liquidation proceeds to shareholders. All distributions made
by the Fund that are currently being reinvested in Fund shares will continue to
be reinvested in Fund shares until the Fund is liquidated.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 9
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient means of
investing in professionally managed portfolios of securities. This Prospectus
relates to the Trust's:
INTERNATIONAL EQUITY FUND
INSTITUTIONAL CLASS SHARES
The Trust's Institutional Class Shares are offered to institutional investors,
including UNION BANK OF CALIFORNIA, N.A. and BANK OF TOKYO-MITSUBISHI TRUST
COMPANY, their affiliates and correspondents for the investment of their own
funds or funds for which they act in a fiduciary, agency or custodial capacity.
This Prospectus sets forth concisely the information about the Trust and the
Fund that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI
TRUST COMPANY OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. THE TRUST'S SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INSTITUTIONAL CLASS
<PAGE> 10
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Institutional Class shares of the INTERNATIONAL EQUITY FUND (the "Fund"). This
summary is qualified in its entirety by reference to the more detailed
information provided elsewhere in the Prospectus and in the Statement of
Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? THE INTERNATIONAL EQUITY FUND seeks to
provide long-term capital appreciation by investing primarily in a diversified
portfolio of equity securities of non-U.S. issuers. See "Investment Objective."
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund invests primarily in equity
securities (common stocks, securities convertible into common stocks, preferred
stocks, warrants and rights to purchase common stock) of non-U.S. issuers. See
"Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of the Fund entail certain risks and considerations of which an
investor should be aware. The Fund may purchase common stocks and other equity
securities that are volatile and may fluctuate in value more than other types of
investments. In addition, the Fund will invest in securities of foreign
companies that involve special risks and considerations not typically associated
with investing in U.S. companies. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies
or any instrumentalities of the securities in which any Fund invests guarantees
only the payment of principal and interest on the guaranteed security, and does
not guarantee the yield or value of the security or yield or value of shares of
that Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Trust. See "The Advisor."
WHO IS THE SUBADVISOR? Tokyo - Mitsubishi Asset Management (U.K.), Ltd. serves
as the SubAdvisor to the Fund. See "The SubAdvisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust . See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? SEI Financial Management Corporation
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Institutional and Cash Sweep Class shares of the Trust and for the
Investment Class shares of the Convertible Securities, Government Securities,
Emerging Growth, Blue Chip Growth and International Equity Funds. See
"Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment in the Trust is $2,000. A purchase order will be
effective if the Distributor receives an order prior to 4:00 p.m., Eastern time
and the Custodian receives Federal funds before the close of business on the
next Business Day. The purchase price is the net asset value next determined
after a purchase order is received and accepted by the Trust. Redemption orders
must be placed prior to 4:00 p.m., Eastern time on any Business Day for the
order to be accepted that day. See "Purchase and Redemption of Shares."
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is periodically declared and paid as a
dividend to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. See "Dividends."
<PAGE> 11
3
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY
FUND
- --------------------------------------------------------------------------------------------------------
<S> <C>
Advisory Fees (After Fee Waivers)(1)................................................... .85%
Other Expenses(2)...................................................................... .41%
- --------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers)(3)........................................ 1.26%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Advisor has agreed to waive a portion of its fee. Fee waivers are
voluntary and may be terminated at anytime in the Advisor's sole discretion.
Absent this voluntary fee waiver, the Advisor's fee would be .95%.
(2) "Other Expenses" reflects estimates for the current fiscal year.
(3) "Total Operating Expenses" have been restated to reflect current fees and
fee waivers. Absent fee waivers, "Total Operating Expenses" would have been
1.36% for the Fund.
EXAMPLE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% return and (2) redemption at the end
of each time period.
International Equity Fund......................................... $13 $40 $ 69 $ 152
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF THE FUND AND SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Fund. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Fund which
are subject to the same expenses, except that Investment Class shares are
subject to sales charges and distribution expenses. Additional information may
be found under "The Administrator", "The Advisor" and "The SubAdvisor."
<PAGE> 12
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
-------------------------
NET REALIZED
NET AND DISTRIBUTIONS NET
ASSET UNREALIZED ---------------------- NET ASSET ASSETS, RATIO
VALUE, NET GAIN (LOSS) NET VALUE, END OF OF EXPENSES
BEGINNING INVESTMENT ON INVESTMENT CAPITAL END TOTAL PERIOD TO AVERAGE
OF PERIOD INCOME INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- --------------------------
INTERNATIONAL EQUITY FUND
- --------------------------
FOR THE YEARS ENDED JANUARY 31,:
1996(1) 33.51 0.447 4.084 (0.446) (0.105) 37.49 13.56% 44,188 1.16%
<CAPTION>
RATIO OF RATIO OF NET
EXPENSES RATIO OF NET INVESTMENT INCOME
TO AVERAGE INVESTMENT TO AVERAGE
NET ASSETS INCOME NET ASSETS PORTFOLIO
EXCLUDING TO AVERAGE EXCLUDING TURNOVER
FEE WAIVERS NET ASSETS FEE WAIVERS RATE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------
- -----------------------------
INTERNATIONAL EQUITY FUND
- -----------------------------
FOR THE YEARS ENDED JANUARY 31,:
1996(1) 1.36% 1.31% 1.11% 21%
</TABLE>
(1) Commenced operations on 2/1/95
<PAGE> 13
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in distribution costs, voting rights and dividends.
Except for these differences among the classes, each share of each fund
represents an equal proportionate interest in that fund. This Prospectus relates
to the Institutional Class shares of the Trust's International Equity Fund (the
"Fund") Information regarding the Trust's other funds is contained in separate
prospectuses that may be obtained from the Trust's Distributor, SEI Financial
Services Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVE
THE INTERNATIONAL EQUITY FUND seeks to provide long-term capital appreciation by
investing primarily in a diversified portfolio of equity securities of non-U.S.
issuers.
There can be no assurance that the Fund's investment objective will be met.
INVESTMENT POLICIES
Under normal market circumstances, at least 65% of the Fund's assets will be
invested in the following equity securities of non-U.S. issuers: common stocks,
securities convertible into common stocks, preferred stocks, warrants and rights
to purchase common stock. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in securities of issuers organized under
the laws of at least five countries other than the United States that are
included in the Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE Index").(1)
Countries may be over- or under-weighted in comparison to the EAFE Index based
upon the Advisor's and SubAdvisor's view of forecasted rates of returns.
Regional and individual country weightings, therefore, may vary from the EAFE
Index benchmark. The Advisors and SubAdvisors will select individual securities
for the Fund on the basis of their undervaluation in relation to other
securities. The Fund expects its investments to emphasize companies with market
capitalizations in excess of $100,000,000.
The Fund will typically invest in equity securities listed on recognized foreign
exchanges, but may also invest up to 15% of its total assets in securities
traded in over-the-counter markets. Equity securities of non-U.S. issuers may
also be purchased in the form of sponsored or unsponsored American Depositary
Receipts ("ADRs") and sponsored or unsponsored European Depositary Receipts
("EDRs").
The Fund may enter into forward foreign currency contracts as a hedge against
possible variations in foreign exchange rates. A forward foreign currency
contract is a commitment to purchase or sell a specified currency at a specified
date, at a specified price. The Fund may enter into forward foreign currency
contracts to hedge a specific security transaction or to hedge a portfolio
position. These contracts may be bought and sold to protect the Fund, to some
degree, against a possible loss resulting from an adverse change in the
relationship between foreign currencies. The Fund may also invest in options on
currencies.
The Fund may invest in futures and options on futures for the purpose of
achieving the Fund's objectives. The Fund may invest in futures and related
options based on any type of security or index traded on U.S. or foreign
exchanges or over the counter, as long as the underlying security or securities
represented by an index, are permitted investments of the Fund. Such futures
contracts
- ------------
(1) "MSCI-EAFE Index" is a registered service mark of Morgan Stanley Capital
International which does not sponsor and is in no way affiliated with the
International Equity Fund.
<PAGE> 14
6
may include index contracts and contracts for foreign Currencies. The Fund may
enter into futures contracts and options on futures only to the extent that its
obligations under such contracts or transactions, together with options on
securities or indices represent not more than 25% of the Fund's assets.
The premium paid on options on securities positions will not exceed 10% of the
Fund's net assets at the time such options are entered into by the Fund. The
aggregate premium paid on all options on stock indices will not exceed 20% of a
Fund's total assets.
The Fund's remaining assets may be invested in investment grade bonds and
debentures issued by non-U.S. or U.S. companies, obligations of supranational
entities, securities issued or guaranteed by foreign and U.S. governments, and
foreign and U.S. commercial paper. Certain of these instruments may have
floating or variable interest rate provisions. In addition, the Fund may invest
in securities of issuers whose principal activities are in countries with
emerging markets. The Fund defines an emerging market country as any country
whose economy and market the World Bank or the United Nations considers to be
emerging or developing. The Fund may also purchase shares of closed-end
investment companies that invest in the securities of issuers in a single
country or region and shares of open-end management investment companies.
For temporary defensive purposes during periods when the Advisor determines that
market conditions warrant, the Fund may invest up to 100% of its assets in money
market instruments and in cash. The Fund will not be pursuing its investment
objective to the extent that a substantial portion of its assets are invested in
money market securities.
The Fund will restrict its investment in illiquid securities to 15% of its net
assets.
The Fund may engage in securities lending and will limit such practice to
33 1/3% of its assets.
The Fund may purchase securities, which have not been registered under the
Securities Act of 1933 (Rule 144A Securities).
For further information see "Description of Permitted Investments."
RISK FACTORS
Since the Fund invests in equity securities, the Fund's shares will fluctuate in
value, and thus may be more suitable for long-term investors who can bear the
risk of short-term fluctuations.
There may be certain risks connected with investing in foreign securities,
including risks of adverse political and economic developments (including
possible governmental seizure or nationalization of assets), the possible
imposition of exchange controls or other governmental restrictions, including
less uniformity in accounting and reporting requirements, the possibility that
there will be less information on such securities and their issuers available to
the public, the difficulty of obtaining or enforcing court judgments abroad,
restrictions on foreign investments in other jurisdictions, difficulties in
effecting repatriation of capital invested abroad, and difficulties in
transaction settlements and the effect of delay on shareholder equity. Foreign
securities may be subject to foreign taxes, which reduce yield, and may be less
marketable than comparable U.S. securities. The value of the Fund's investments
denominated in foreign currencies will depend on the relative strengths of those
currencies and the U.S. dollar, and the Fund may be affected favorably or
unfavorably by changes in the exchange rates or exchange control regulations
between foreign currencies and the U.S. dollar. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to distributed to shareholders by the Fund.
Forward foreign currency contracts do not eliminate fluctuations in the
underlying prices of securities. Rather, they simply establish a rate of
<PAGE> 15
7
exchange which one can achieve at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency at the same time, they tend to limit any
potential gain which might result should the value of such currency increase.
The Fund's investments in emerging markets can be considered speculative, and
therefore, may offer higher potential for gains and losses than developed
markets of the world. With respect to any emerging country, there is the greater
potential for nationalization, expropriation or confiscatory taxation, political
changes, government regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
investments in such countries. In addition, it may be difficult to obtain and
enforce a judgment in the courts of such countries. The economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade.
Securities rated BBB by Standard & Poor's Corporation ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's") are deemed by these ratings services to have
some speculative characteristics and adverse economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
INVESTMENT LIMITATIONS
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities and repurchase
agreements involving such securities) if as a result more than 5% of the total
assets of the Fund would be invested in the securities of such issuer. This
restriction applies to 75% of a Fund's assets. For purposes of this investment
limitation, each foreign governmental issuer is deemed a separate issuer.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and repurchase
agreements involving such securities, and provided further, that utilities as a
group will not be considered to be one industry, and wholly-owned subsidiaries
organized to finance the operations of their parent companies will be considered
to be in the same industries as their parent companies.
3. Make loans, except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objective and policies; (b) enter into repurchase
agreements; and (c) engage in securities lending as described in this Prospectus
and in the Statement of Additional Information.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Fund. Fundamental policies cannot be changed with
respect to the Fund without the consent of a majority of the Fund's outstanding
shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor continuously
reviews, supervises and administers the Fund's
<PAGE> 16
8
investment program. The Advisor discharges its responsibilities subject to the
supervision of, and policies established by, the Trustees of the Trust. The
Trust's shares are not sponsored, endorsed or guaranteed by, and do not
constitute obligations or deposits of, the Advisor and are not guaranteed by the
FDIC or any other governmental agency.
The Advisor is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .95% of the average daily net assets of the Fund. Although the
advisory fee paid by the Fund is higher than advisory fees paid by other mutual
funds, the Trust believes that the fee is comparable to the advisory fee paid by
many other mutual funds with similar investment objectives and policies. The
Advisor may from time to time waive all or a portion of its fee in order to
limit the operating expenses of the Fund. Any such waiver is voluntary and may
be terminated at any time in the Advisor's sole discretion.
For the fiscal year ended January 31, 1996, Union Bank, Ltd. predecessor of the
Advisor, was paid an advisory fee of .85% of the average daily net assets of the
Fund.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of the Fund. On April 1,
1996, Union Bank, the Trust's then-investment advisor, combined with The Bank of
California, N.A., and the resulting bank changed its name to Union Bank of
California, N.A. At the same time, the banks' investment management divisions
were combined. Each of Union Bank and The Bank of California, N.A., (or its
predecessor bank) has been in banking since the early 1900's, and historically,
each has had significant investment functions within its trust and investment
division. Union Bank of California, N.A., is a subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE SUBADVISOR
The Advisor and Tokyo-Mitsubishi Asset Management (U.K.), Ltd. (the
"SubAdvisor"), have entered into an investment subadvisory agreement relating to
the Fund (the "Investment SubAdvisory Agreement"). Under the Investment
SubAdvisory Agreement, the SubAdvisor makes the day-to-day investment decisions
for the assets of the Fund, subject to the supervision of, and policies
established by, the Advisor and the Trustees of the Trust. The Trust's shares
are not sponsored, endorsed or guaranteed by and do not constitute obligations
or deposits of the SubAdvisor and are not guaranteed by the FDIC or any other
governmental agency.
Tokyo-Mitsubishi Asset Management (U.K.), Ltd., 12-15 Finsbury Circus, London
EC2 M7BT operates as a subsidiary of The Bank of Tokyo-Mitsubishi, Ltd.
Established in 1989, the SubAdvisor provides active global investment services
for segregated funds and specialist fund management.
Prior to February, 1995, the SubAdvisor had not previously served as the
investment advisor to mutual funds. As of April 1, 1996, Tokyo-Mitsubishi Asset
Management (U.K.), Ltd., managed assets of $2.2 billion in individual portfolios
and collective funds.
The SubAdvisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .30% of the average daily net
assets of the Fund.
Andrew Richmond has served as portfolio manager of the Fund since its inception.
Mr. Richmond has been with the SubAdvisor and its predecessor, Bank of Tokyo
Asset Management (U.K.), Ltd., since 1990, and has served as senior equity
investment manager since June, 1992.
<PAGE> 17
9
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of Trust assets up to $1 billion, .12% of
assets between $1 billion and $2 billion and .10% of assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of the Fund's Institutional
Class shares. Any such waiver is voluntary, and may be terminated at any time in
the Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
SEI Financial Management Corporation serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Institutional and Cash
Sweep Class shares of the Trust and for the Investment Class shares of the
Convertible Securities, Government Securities, Emerging Growth, Blue Chip Growth
and International Equity Funds. Compensation for these services is paid under
the Administration Agreement.
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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. Investment Class shares of the Fund may bear the costs of their
distribution expenses and, a sales charge is imposed on the sale of Investment
Class shares of the Fund. It is possible that an institution may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Fund may be made on days on which
both the New York Stock Exchange and Federal Reserve wire system are open for
business ("Business Days"). The minimum initial investment in the Fund is
$2,000; however, the minimum investment may be waived in the Distributor's
discretion. Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
4:00 p.m., Eastern time, and the Custodian receives Federal funds before the
close of business on the next Business Day. The purchase price of shares of the
Fund is the net asset value next determined after a purchase order is received
and accepted by the Trust. The net asset value per share of the Fund is
determined by dividing the total market value of the Fund's investments and
other assets, less any liabilities, by the total number of outstanding shares of
a Fund. Net asset value per share is determined daily as of 4:00 p.m., Eastern
time, on any Business Day. Purchases will be made in full and fractional shares
of the Fund calculated to three decimal places. The Trust reserves the right to
reject a purchase order when the Distributor determines that it is not in the
best interest of the Trust and/or its Shareholders to accept such order.
Shares of the Fund are offered only to residents of states in which the shares
are eligible for purchase.
Shareholders who desire to redeem shares of the Trust must place their
redemption orders prior to 4:00 p.m., Eastern time, on any Business Day for the
order to be accepted on that Business Day. The redemption price is the net asset
value of the Fund next determined after receipt by the Distributor of the
redemption order. Payment on
<PAGE> 18
10
redemption will be made as promptly as possible and, in any event, within seven
calendar days after the redemption order is received.
Neither the Trust's transfer agent nor the Trust will be responsible for any
loss, liability, cost or expense for acting upon wire instructions or upon
telephone instructions that it reasonably believes to be genuine. The Trust and
its transfer agent will each employ reasonable procedures to confirm that
telephone instructions are genuine. Such procedures may include taping of
telephone conversations. If market conditions are extraordinarily active or
other extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
PERFORMANCE
From time to time, the Fund may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. The yield of the Fund refers to the annualized income generated by
an investment in the Fund over a specified 30-day period. The yield is
calculated by assuming that the same amount of income generated by the
investment during that period is generated in each 30-day period over one year
and is shown as a percentage of the investment.
The total return of the Fund refers to the average compounded rate of return to
a hypothetical investment for designated time periods (including, but not
limited to, the period from which the Fund commenced operations through the
specified date), assuming that the entire investment is redeemed at the end of
each period and assuming the reinvestment of all dividend and capital gain
distributions. The total return of the Fund may also be quoted as a dollar
amount or on an aggregate basis, an actual basis, without inclusion of any sales
charge, or with a reduced sales charge in advertisements distributed to
investors entitled to a reduced sales charge.
The Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Fund may use long term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios,
and could include the value of a hypothetical investment in any of the capital
markets. The Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to the Investment Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has
<PAGE> 19
11
been made to present a detailed explanation of the federal, state, or local
income tax treatment of the Fund or its Shareholders. In addition, state and
local tax consequences of an investment in the Fund may differ from the federal
income tax consequences discussed below. Accordingly, Shareholders are urged to
consult their tax advisers regarding specific questions as to federal, state and
local income taxes. Additional information concerning taxes is set forth in the
Statement of Additional Information.
TAX STATUS OF THE FUND:
The Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. The Fund intends to qualify for the
special tax treatment afforded regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of
federal income tax on net investment company taxable income and net capital gain
(the excess of net long-term capital gain over net short-term capital loss)
distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
The Fund will distribute substantially all of its net investment income
(including net short-term capital gain) and net capital gain to Shareholders.
Dividends from the Fund's net investment company taxable income will be taxable
to Shareholders as ordinary income (whether received in cash or in additional
shares) to the extent of the Fund's earnings and profits. Dividends paid by the
Fund to corporate Shareholders will qualify for the deduction for dividends
received by corporations to the extent derived from dividends received by the
Fund from domestic corporations. Distributions of net capital gain are taxable
to Shareholders as long-term capital gain, regardless of how long Shareholders
have held their shares and regardless of whether the distributions are received
in cash or in additional shares. Dividends and distributions of capital gain
paid by the Fund do not qualify for the dividends received deduction for
corporate Shareholders. The Fund will provide annual reports to Shareholders of
the federal income tax status of all distributions.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments,
the Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because the Fund distributes
all of its net investment income to its shareholders, the Fund may have to sell
portfolio securities to distribute such imputed income, which may occur at a
time when the Advisor or SubAdvisor would not have chosen to sell such
securities and which may result in a taxable gain or loss.
Income derived by the Fund from securities of foreign issuers may be subject to
foreign withholding taxes. The Fund expects to elect to treat Shareholders as
having paid their proportionate share of such taxes.
Investment income received directly by the Fund on direct U.S. obligations is
exempt from tax at the state level and may be exempt, depending on the state,
when received by a Shareholder as income dividends from the Fund, provided
certain state-specific conditions are satisfied. Interest realized on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. The Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from the Fund is considered tax exempt in their
particular state.
Dividends declared by the Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on the last day of
December 31 of the year declared, if paid by the Fund any time during the
following January.
<PAGE> 20
12
The Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Each sale, exchange, or redemption of Fund Shares is a taxable transaction to
the Shareholder.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different Classes of each fund. In
addition to the Fund, the Trust consists of the following funds: Treasury Money
Market Fund, Money Market Fund, California Tax-Free Money Market Fund,
Intermediate-Term Bond Fund, Limited Maturity Government Fund, California
Intermediate Tax-Free Bond Fund, Convertible Securities Fund, Government
Securities Fund, Balanced Fund, Value Momentum Fund, Blue Chip Growth Fund,
Growth Equity Fund and Emerging Growth Fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong to that fund and
would be subject to liabilities related thereto. The Trust reserves the right to
create and issue shares of additional funds.
The Trust pays its expenses, including audit and legal expenses, expenses of
preparing and printing prospectuses, proxy solicitation material and reports to
Shareholders, costs of custodial services and registering the shares under
federal and state securities laws, insurance expenses, litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to such fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings but approval will be sought for certain changes in the operation
of the Trust and for the election of Trustees under certain circumstances. In
addition, a Trustee may be removed by the remaining Trustees or by Shareholders
at a special meeting called upon the written request of Shareholders owning at
least 10% of the outstanding shares of the Trust. In the event that such a
meeting is requested the Trust will provide appropriate assistance and
information to the Shareholders requesting the information.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to the Administrator, SEI Financial
Management Corporation, 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
the Fund is periodically declared and paid as a dividend to Shareholders of
record. Currently, capital gains of the Fund, if any, will be distributed at
least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the Shareholder has elected to take such
payment in cash.
<PAGE> 21
13
Shareholders may change their election by providing written notice to the
Administrator at least 15 days prior to the change.
Dividends and distributions of the Fund are paid on a per-share basis. The value
of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a Shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
The dividends payable on Institutional Class shares will typically be higher
than the dividends payable on the Investment Class shares because of the
distribution expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110 (the "Custodian"), acts as Custodian of the assets of the Fund. The
Custodian holds cash, securities and other assets of the Fund as required by the
Investment Company Act of 1940, as amended.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Fund:
AMERICAN DEPOSITARY RECEIPTS ("ADRs") and EUROPEAN DEPOSITARY RECEIPTS
("EDRs")--Receipts, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. ADRs
include American Depositary Shares and New York Shares. EDRs, which are
sometimes referred to as Continental Depositary Receipts ("CDRs"), are receipts,
typically issued by a non-U.S. financial institution, that evidence ownership
interests in a security or a pool of securities issued by either a U.S. or
foreign issuer. ADRs, EDRs and CDRs may be available for investment through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the security underlying the receipt and a depositary,
whereas an unsponsored facility may be established by a depositary without
participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all the costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
CONVERTIBLE PREFERRED STOCK--Convertible preferred stock is a class of capital
stock that pays dividends at a specified rate and has preference over common
stock in the payment of dividends and the liquidation of assets. Convertible
preferred stock is preferred stock exchangeable for a given number of common
stock shares and has characteristics similar to both fixed-income and equity
securities. Because of the conversion feature, the market value of convertible
preferred stock tends to move together with the market value of the underlying
common stock. As a result, the Fund's selection of convertible preferred stock
is based, to a great extent, on the potential for capital appreciation that may
exist in the underlying common stock. The value of convertible preferred stock
is also affected by prevailing interest rates, the credit quality of the issuer
and any call provisions.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted
<PAGE> 22
14
Investments" for discussions of these various instruments, and see "Investment
Objectives and Policies" for more information about any policies and limitations
applicable to their use.
FORWARD FOREIGN CURRENCY CONTRACTS-- The Fund may conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market or through entering into forward
currency contracts to protect against uncertainty in the level of future
exchange rates between particular currencies or between foreign currencies in
which the Fund's securities are or may be denominated. A forward contract
involves an obligation to purchase or sell a specific currency amount at a
future date, which may be any fixed number of days from the date of the
contract, agreed upon by the parties, at a price set at the time of the
contract. Under normal circumstances, consideration of the prospect for changes
in currency exchanges rates will be incorporated into the Fund's long-term
investment strategies. However, the Advisor and SubAdvisor believe that it is
important to have the flexibility to enter into forward currency contracts when
it determines that the best interests of the Fund will be served.
When the Advisor and SubAdvisor believe that the currency of a particular
country may suffer a significant decline against another currency, the Fund may
enter into a currency contract to sell, for the appropriate currency, the amount
of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency.
At the maturity of a forward contract, the Fund may either sell a fund 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.
The Fund may realize a gain or loss from currency transactions.
FUTURES AND OPTIONS ON FUTURES--Some futures strategies, including selling
futures, buying puts and writing calls, reduce the Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that
if applied at an inappropriate time, could negatively impact a Fund's return.
MONEY MARKET INSTRUMENTS--Money Market securities are high-quality,
dollar-denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits issued by
highly-rated U.S. banks and U.S. branches of foreign banks having net assets of
at least $1 billion as of the end of their most recent fiscal year; (ii) U.S.
Treasury obligations and obligations of agencies and instrumentalities of the
U.S. Government; (iii) high-quality commercial paper issued (i.e., rated A-1 by
S&P or P-1 by Moody's) by U.S. and foreign corporations; (iv) debt obligations
with a maturity of one year or less issued by corporations that issue
high-quality commercial paper; and (v) repurchase agreements involving any of
the foregoing obligations entered into with highly-rated banks and
broker-dealers.
OBLIGATIONS OF SUPRANATIONAL ENTITIES-- Obligations of supranational entities
are established through the joint participation of several governments, and
include the Asian Development Bank, the Inter-American Development Bank,
International Bank for Reconstruction and Development (World Bank), African
Development Bank, European Economic Community, European Investment Bank and the
Nordic Investment Bank.
OPTIONS--Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option
<PAGE> 23
15
period. A put option gives the purchaser the right to sell, and the writer the
obligation to purchase, the underlying securities at the exercise price during
the option period.
In addition, the Fund may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a U.S. or foreign securities
exchange. In order to close out an option position, the Fund may enter into a
"closing purchase transaction"--the purchase of an option on the same security
with the same exercise price and expiration date as the option previously
written on any particular security. When the security is sold, the Fund effects
a closing purchase transaction so as to close out any existing option on that
security.
There are risks associated with such investments, including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor and
SubAdvisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by the
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while the Fund will receive a premium when it writes
covered call options, it may not participate fully in a rise in the market value
of the underlying security.
OPTIONS ON CURRENCIES--The Fund may purchase options and write covered call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter markets) to manage the Fund's exposure to changes in dollar
exchange rates. Call options on foreign currency written by the Fund will be
"covered," which means that the Fund will own an equal amount of the underlying
foreign currency. With respect to put options on foreign currency written by the
Fund, the Fund will establish a segregated account with its Custodian consisting
of cash, U.S. government securities or other liquid high grade debt securities
in an amount equal to the amount the Fund would be required to pay upon exercise
of the put.
REPURCHASE AGREEMENTS--Agreements by which the Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. The Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement.
The Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities or if the Fund realizes a loss in the sale
of the collateral. The Fund will enter into repurchase agreements only with
financial institutions deemed to present minimal risk of bankruptcy during the
term of the agreement based on established guidelines. Repurchase agreements are
considered loans under the 1940 Act.
RULE 144A SECURITIES--Rule 144A securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
SECURITIES LENDING--In order to generate additional income, the Fund may lend
the securities in which it is invested pursuant to agreements requiring that the
loan be continuously secured by cash, securities of the U.S. Government or its
agencies or any combination of cash and such securities as collateral equal to
100% of the market value at all times of the loaned securities. The lending Fund
will continue to receive interest on the loaned securities while simultaneously
earning interest on the investment of cash collateral. Collateral is marked to
market daily to provide a level of collateral at least equal to the market value
of the loaned securities. There may be risks of delay in receiving additional
collateral should the borrower of the securities fail financially.
<PAGE> 24
16
U.S. GOVERNMENT AGENCY SECURITIES-- Certain Federal agencies have been
established as instrumentalities of the U.S. government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. government, are either backed by the full faith and
credit of the United States or supported by the issuing agencies' right to
borrow from the Treasury.
U.S. TREASURY OBLIGATIONS--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.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of
receipts. The custodian arranges for the issuances of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's") "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is not secondary
market for such security.
WARRANTS--Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
<PAGE> 25
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary......................................... 2
Annual Operating Expenses....................... 3
Financial Highlights............................ 4
The Trust....................................... 5
Investment Objective............................ 5
Investment Policies............................. 5
Risk Factors.................................... 6
Investment Limitations.......................... 7
Fundamental Policies............................ 7
The Advisor..................................... 7
The SubAdvisor.................................. 8
The Administrator............................... 9
The Shareholder Servicing Agent................. 9
Distribution.................................... 9
Purchase and Redemption of Shares............... 9
Performance..................................... 10
Taxes........................................... 10
General Information............................. 12
Description of Permitted Investments............ 13
</TABLE>
<PAGE> 26
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient means of
investing in professionally managed portfolios of securities. This Prospectus
relates to the Trust's:
-- BALANCED FUND
-- VALUE MOMENTUM FUND
-- BLUE CHIP GROWTH FUND
-- GROWTH EQUITY FUND
-- EMERGING GROWTH FUND
INSTITUTIONAL CLASS SHARES
The Trust's Institutional Class Shares are offered to institutional investors,
including UNION BANK OF CALIFORNIA, N.A. and BANK OF TOKYO-MITSUBISHI TRUST
COMPANY, their affiliates and correspondents for the investment of their own
funds or funds for which they act in a fiduciary, agency or custodial capacity.
This Prospectus sets forth concisely the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI
TRUST COMPANY OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. THE TRUST'S SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INSTITUTIONAL CLASS
<PAGE> 27
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Institutional Class shares of the GROWTH EQUITY, VALUE MOMENTUM, BLUE CHIP
GROWTH, EMERGING GROWTH and BALANCED FUNDS, (each a "Fund"). This summary is
qualified in its entirety by reference to the more detailed information provided
elsewhere in the Prospectus and in the Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE BALANCED FUND seeks to provide
both capital appreciation and income. THE VALUE MOMENTUM FUND seeks long-term
capital growth with a secondary objective of income. THE BLUE CHIP GROWTH FUND
seeks long-term capital growth by investing in a diversified portfolio of common
stocks and other equity securities of seasoned, large capitalization companies.
THE GROWTH EQUITY FUND seeks long-term capital growth. THE EMERGING GROWTH FUND
seeks long-term growth of capital by investing in a diversified portfolio of
equity securities of small capitalization, emerging growth companies. See
"Investment Objectives."
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? Each of the Funds may invest,
consistent with its investment objectives, in equity securities, including
common stocks and securities convertible into common stocks. Each Fund, except
the Emerging Growth Fund, may also invest, consistent with its investment
objective and investment policies, in debt securities. See "Investment
Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. Each of the Funds may purchase common stocks and other
equity securities that are volatile and which may fluctuate in value more than
other types of investments. Values of fixed income securities and,
correspondingly, share prices of Funds invested in such securities, tend to vary
inversely with interest rates, and may be affected by other market and economic
factors as well. In addition, the securities of the emerging growth companies in
which the Emerging Growth Fund may invest may be less liquid, and subject to
more abrupt or erratic market movements, than securities of larger, more
established growth companies.
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies
or any instrumentalities of the securities in which any Fund invests guarantees
only the payment of principal and interest on the guaranteed security, and does
not guarantee the yield or value of the security or yield or value of shares of
that Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Trust. See "The Advisor."
WHO IS THE SUBADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
SubAdvisor to the Emerging Growth and Blue Chip Growth Funds. See "The
SubAdvisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? SEI Financial Management Corporation
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Institutional and Cash Sweep Class shares of the Trust and for the
Investment Class shares of the Convertible Securities, Government Securities,
Emerging Growth, Blue Chip Growth and International Equity Funds. See
"Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment in the Trust is $2,000. A purchase order will be
effective if the Distributor receives an order prior to 4:00 p.m., Eastern time
and the Custodian receives Federal funds before the close of business on the
next Business Day. The purchase price is the net asset value next determined
after a purchase order is received and accepted by the Trust. Redemption orders
must be placed prior to 4:00 p.m., Eastern time on any Business Day for the
order to be accepted that day. See "Purchase and Redemption of Shares."
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Funds is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. See "Dividends."
<PAGE> 28
3
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
<TABLE>
<CAPTION>
VALUE BLUE CHIP GROWTH EMERGING
BALANCED MOMENTUM GROWTH EQUITY GROWTH
FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advisory Fees............................. .60% .60% .60% .60% .80%
Other Expenses............................ .20% .20% .25% .20% .25%
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses.................. .80% .80% .85%(1) .80% 1.05%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Total Operating Expenses" of the Blue Chip Growth Fund have been restated
to reflect current fees.
EXAMPLE:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% return and (2) redemption at the
end of each time period.
Balanced Fund.................................................... $ 8 $ 26 $ 44 $ 99
Value Momentum Fund.............................................. $ 8 $ 26 $ 44 $ 99
Blue Chip Growth Fund............................................ $ 9 $ 27 $ 47 $ 105
Growth Equity Fund............................................... $ 8 $ 26 $ 44 $ 99
Emerging Growth Fund............................................. $11 $ 33 $ 58 $ 128
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the
investor in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Institutional Class shares of the Funds.
Financial institutions that are the record owner of shares for the account of
their customers may impose separate fees for account services to their
customers. The Trust also offers Investment Class shares of the Funds, which are
subject to the same expenses, except that Investment Class shares are subject to
sales charges and distribution expenses. Additional information may be found
under "The Administrator," "The Advisor" and "The SubAdvisor."
<PAGE> 29
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET -------------------------- DISTRIBUTIONS NET NET
ASSET NET REALIZED ------------------- ASSET ASSETS, RATIO
VALUE, NET AND UNREALIZED NET VALUE, END OF EXPENSES
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------
GROWTH EQUITY FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 14.13 0.115 4.483 (0.118) (0.993) 17.62 32.93 % 178,590 0.80%
1995 15.16 0.097 (0.854) (0.092) (0.181) 14.13 (4.98)% 136,668 0.78%
1994 13.79 0.066 1.370 (0.066) -- 15.16 10.48 % 142,661 0.77%
1993 12.69 0.091 1.101 (0.092) -- 13.79 9.48 % 122,529 0.68%
1992 (1) 10.00 0.103 2.703 (0.102) (0.014) 12.69 28.28 % 93,260 0.72%
- ------------------------
VALUE MOMENTUM FUND
- ------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 13.40 0.331 5.063 (0.337) (0.408) 18.05 40.88 % 222,065 0.80%
1995 14.27 0.318 (0.817) (0.317) (0.054) 13.40 (3.48)% 150,138 0.81%
1994 12.76 0.292 1.538 (0.290) (0.030) 14.27 14.56 % 140,609 0.77%
1993 11.68 0.310 1.103 (0.311) (0.022) 12.76 12.33 % 92,636 0.68%
1992 (1) 10.00 0.312 1.694 (0.302) (0.024) 11.68 20.27 % 51,682 0.78%
- ----------------
BALANCED FUND
- ----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 11.45 0.415 2.831 (0.417) (0.362) 13.92 28.93 % 233,878 0.80%
1995 12.21 0.390 (0.756) (0.391) (0.003) 11.45 (2.95)% 167,434 0.80%
1994 11.50 0.394 0.928 (0.391) (0.221) 12.21 11.79 % 152,189 0.69%
1993 11.15 0.413 0.543 (0.408) (0.198) 11.50 8.86 % 100,474 0.69%
1992 (1) 10.00 0.471 1.250 (0.465) (0.106) 11.15 17.69 % 67,098 0.78%
- ------------------------
BLUE CHIP GROWTH FUND
- ------------------------
INSTITUTIONAL CLASS
FOR THE YEAR ENDED JANUARY 31,:
1996 9.53 0.174 3.311 (0.180) (0.203) 12.63 36.95 % 63,410 0.83%
1995 (2) 10.00 0.167 (0.479) (0.158) -- 9.53 (3.10)% 39,319 0.85%
- ------------------------
EMERGING GROWTH FUND
- ------------------------
INSTITUTIONAL CLASS
FOR THE YEAR ENDED JANUARY 31,:
1996 9.42 0.026 2.807 (0.033) (0.277) 11.94 30.24 % 41,770 1.05%
1995 (2) 10.00 0.086 (0.535) (0.080) (0.051) 9.42 (4.48)% 23,928 1.05%
<CAPTION> RATIO OF
RATIO OF NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
TO AVERAGE NET INVESTMENT AVERAGE
NET ASSETS INCOME NET ASSETS PORTFOLIO
EXCLUDING TO AVERAGE EXCLUDING TURNOVER
FEE WAIVERS NET ASSETS FEE WAIVERS RATE
<S> <C> <C> <C> <C>
- -----------------------
- ---------------------
GROWTH EQUITY FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.80% 0.68% 0.68% 24%
1995 0.78% 0.69% 0.69% 22%
1994 0.79% 0.48% 0.46% 45%
1993 0.78% 0.74% 0.64% 23%
1992 (1) 0.85% 0.90% 0.77% 26%
- -----------------------
VALUE MOMENTUM FUND
- -----------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.80% 2.07% 2.07% 20%
1995 0.81% 2.36% 2.36% 6%
1994 0.79% 2.19% 2.17% 5%
1993 0.78% 2.59% 2.49% 3%
1992 (1) 0.91% 2.88% 2.75% 5%
- ----------------
BALANCED FUND
- ----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.80% 3.20% 3.20% 26%
1995 0.80% 3.41% 3.41% 48%
1994 0.79% 3.35% 3.25% 49%
1993 0.79% 3.72% 3.62% 68%
1992 (1) 0.91% 4.44% 4.31% 56%
- -----------------------
BLUE CHIP GROWTH FUND
- -----------------------
INSTITUTIONAL CLASS
FOR THE YEAR ENDED JANNUARY 31,:
1996 0.83% 1.54% 1.54% 69%
1995 (2) 0.85% 1.84% 1.84% 89%
- -----------------------
EMERGING GROWTH FUND
- -----------------------
INSTITUTIONAL CLASS
FOR THE YEAR ENDED JANNUARY 31,:
1996 1.05% 0.22% 0.22% 131%
1995 (2) 1.05% 1.01% 1.01% 123%
(1) Commenced operations on February 1, 1991.
(2) Commenced operations on February 1, 1994.
</TABLE>
<PAGE> 30
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in distribution costs, voting rights and dividends.
Except for these differences among the classes, each share of each fund
represents an equal proportionate interest in that fund. This Prospectus relates
to the Institutional Class shares of the Trust's Growth Equity, Value Momentum,
Blue Chip Growth, Emerging Growth and Balanced Funds (each a "Fund").
Information regarding the Trust's other funds is contained in separate
prospectuses that may be obtained from the Trust's Distributor, SEI Financial
Services Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVES
THE BALANCED FUND seeks to provide both capital appreciation and income.
THE VALUE MOMENTUM FUND seeks long-term capital growth with a secondary
objective of income.
THE BLUE CHIP GROWTH FUND seeks long-term capital growth by investing in a
diversified portfolio of common stocks and other equity securities of seasoned,
large capitalization companies.
THE GROWTH EQUITY FUND seeks long-term capital growth.
THE EMERGING GROWTH FUND seeks long-term growth of capital by investing in a
diversified portfolio of equity securities of small capitalization, emerging
growth companies.
There can be no assurance that a Fund's investment objective will be met.
INVESTMENT POLICIES
BALANCED FUND
The Balanced Fund invests in a combination of equity, fixed-income, and money
market securities. Under normal market conditions, the Fund will invest between
50% and 70% of its total assets in equity securities, including common stocks,
warrants, and U.S. dollar denominated securities of foreign issuers, and both
preferred stock and debt securities convertible into common stocks. The Fund may
invest in a broad spectrum of common stocks with varying characteristics. All of
the common stocks in which the Fund invests (including foreign securities in the
form of American Depositary Receipts ("ADRs")) are traded on registered
exchanges or the over the counter market. Under normal market conditions, a
minimum of 25% of the Fund's total assets will be invested in senior fixed
income securities. Such securities consist of bonds, debentures, and similar
obligations or instruments which constitute a security and evidence
indebtedness. Corporate bonds and debentures will be rated AAA, AA, A, or BBB by
Standard & Poor's Corporation ("S&P") or Aaa, Aa, A, or Baa by Moody's Investors
Service ("Moody's") or as determined by the Advisor to be of comparable quality
at the time of purchase. The Fund may also invest in mortgage-backed securities
that are rated in one of the top two rating categories by Moody's or S&P, and
may invest in other asset-backed securities backed by company receivables, truck
and auto loans, leases, and credit card receivables.
The Fund may also buy and sell options, futures contracts and options on
futures. The Fund may enter into futures contracts and options on futures only
to the extent that obligations under such contracts or transactions, together
with options on securities represent not more than 25% of the Fund's assets. The
aggregate value of options on securities (long puts and calls) will not exceed
10% of the Fund's net assets at the time such options are purchased by the Fund.
The Fund may invest in securities issued or guaranteed by foreign governments,
their political
<PAGE> 31
6
subdivisions, agencies or instrumentalities and obligations of supranational
entities such as the World Bank and the Asian Development Bank.
Money market instruments the Fund may invest in consist of: (i) commercial paper
rated at least A-1 by S&P or P-1 by Moody's at the time of investment, or, if
not rated, are determined by the Advisor to be of comparable quality; (ii)
obligations (certificates of deposit, time deposits, bank master notes, and
bankers' acceptances) of thrift institutions, savings and loans, U.S. commercial
banks (including foreign branches of such banks), and U.S. and foreign branches
of foreign banks, provided that such institutions (or, in the case of a branch,
the parent institution) have total assets of $1 billion or more as shown on
their last published financial statements at the time of investment; (iii)
short-term corporate obligations rated at least A by S&P or A by Moody's at the
time of investment, or, if not rated, determined by the Advisor to be of
comparable quality; (iv) general obligations issued by the U.S. Government and
backed by its full faith and credit, and obligations issued or guaranteed as to
principal and interest by agencies or instrumentalities of the U.S. Government
(e.g., obligations issued by Farmers Home Administration, Government National
Mortgage Association, Federal Farm Credit Bank and Federal Housing
Administration); (v) receipts, including TR's, TIGR's and CATS; (vi) repurchase
agreement involving such obligations; (vii) loan participations; (viii) money
market funds; and (ix) foreign commercial paper. The Fund may only purchase
interests in loan participations issued by a bank in the United States with
assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose obligations the Fund may invest.
Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand note.
The Fund may enter into forward commitments, or purchase securities on a
when-issued basis. The Fund is permitted to invest in when-issued securities
where such purchases are for investment and not for leveraging purposes;
however, the Fund may sell those securities before the settlement date if it is
deemed advisable. No additional forward commitments will be made if more than
20% of the Fund's net assets would be so committed.
VALUE MOMENTUM FUND
Under normal market conditions, at least 65% of the Value Momentum Fund's assets
will be invested in equity securities, including common stocks, warrants to
purchase common stock, debt securities and preferred stocks convertible into
common stocks, and ADRs.
The Fund invests primarily in securities which the Advisor believes to be
undervalued relative to the market and to the security's historic valuation.
Stocks are then screened for positive price or earnings momentum. Securities
purchased will generally have a medium to high market capitalization. A majority
of the securities in which the Fund invests will be dividend paying. All of the
common stocks in which the fund invests are traded on registered exchanges or
the over-the-counter market.
The remainder of the Fund's assets may be invested in covered call options on
equity securities, money market instruments consisting of securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities, receipts
including TR's, TIGR's and CATS, money market funds, repurchase agreements,
certificates of deposit, time deposits, bank master notes and bankers'
acceptances issued by banks having net assets of at least $1 billion as of the
end of their most recent fiscal year, commercial paper rated at least A-1 by S&P
or P-1 by Moody's and in cash.
BLUE CHIP GROWTH FUND
Under normal market conditions, at least 65% of the Blue Chip Growth Fund's
assets will be invested in equity securities, including common stocks, warrants
to purchase common stocks, U.S.
<PAGE> 32
7
dollar denominated equity securities of foreign issuers traded as ADRs,
preferred stocks convertible into common stocks, and units representing
combinations of the foregoing. The Fund primarily invests in equity securities
of seasoned, large capitalization companies. A seasoned company is a company
with a operating history of 3 years or more. A large capitalization company is a
company with capitalization in excess of $1.0 billion. The Fund will limit its
investment in foreign securities to 15% of its total assets. A majority of the
Fund's equity investments ordinarily will consist of dividend-paying securities.
The balance of the Fund's assets may be invested in money market instruments,
options, futures contracts and options on futures, Standard & Poor's Depositary
Receipts ("SPDRs"), shares of other investment companies with similar investment
objectives, investment grade bonds and bonds convertible into common stocks. The
aggregate value of options on securities (long puts and calls) will not exceed
10% of a Fund's net assets at the time such options are purchased by the Fund.
The Fund may enter into futures and options on futures only to the extent that
obligations under such contracts or transactions, together with options on
securities, represent not more than 25% of the Fund's assets. All of the common
stocks in which the Fund invests (including foreign securities, in the form of
ADRs but not including Rule 144A Securities) are traded on registered exchanges
or in the over the counter market.
GROWTH EQUITY FUND
Under normal market conditions, at least 65% of the Growth Equity Fund's assets
will be invested in equity securities consisting of common stocks, warrants to
purchase common stocks, U.S. dollar denominated equity securities of foreign
issuers, and debt securities and preferred stock convertible into common stocks.
The Fund may invest in covered call options on equity securities and money
market instruments consisting of securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, receipts, including TR's,
TIGR's and CATS, money market funds, repurchase agreements, certificates of
deposit, time deposits, bank master notes and bankers' acceptances issued by
banks having net assets of at least $1 billion as of the end of their most
recent fiscal year, commercial paper rated at least A-1 by S&P or P-1 by Moody's
and in cash. All of the common stocks in which the Fund invests (including
foreign securities in the form of ADRs) are traded on registered exchanges or
the over the counter market.
EMERGING GROWTH FUND
Under normal market conditions, the Emerging Growth Fund will invest at least
65% of its assets in equity securities (i.e., common stocks and convertible
preferred stocks) of small capitalization (i.e., companies with capitalization
between $50 million and $1 billion) with the potential for growth or which, in
the Advisor's opinion, have potential for above-average long-term capital
appreciation. An emerging growth company is one which, in the Advisor's
judgment, is in the developing stages of its life cycle and has demonstrated or
is expected to achieve rapid growth in earnings and/or revenues. Emerging growth
companies are characterized by opportunities for rapid growth rates and/or
dynamic business changes. Emerging growth companies, regardless of size, tend to
offer the potential for accelerated earnings or revenue growth because of new
products or technologies, new channels of distribution, revitalized management
or industry conditions, or similar opportunities. A company may or may not yet
be profitable at the time the Fund invests in its securities. Current income
will not be a criterion of investment selection, and any such income should be
considered incidental. Many of the securities in which the Fund invests will not
pay dividends.
The Fund may also invest in equity securities of companies in "special equity
situations," meaning companies experiencing unusual and possibly non-repetitive
developments, such as mergers; acquisitions; spin-offs; liquidations;
<PAGE> 33
8
reorganizations; and new products, technology or management. Since a special
equity situation may involve a significant change from a company's past
experiences, the uncertainties in the appraisal of the future value of the
company's equity securities and the risk of a possible decline in the value of
the Fund's investments are significant.
The Fund may invest in U.S. dollar denominated equity securities of foreign
issuers traded as ADRs. All of the common stocks in which the Fund invests (with
the exception of Rule 144A Securities) are traded on registered exchanges or in
the over the counter market.
The balance of the Fund's assets may be invested in money market instruments.
The Fund may also invest in options, futures and options on futures, shares of
other investment companies with similar investment objectives, SPDRs and
convertible bonds. The Fund may enter into futures contracts and options on
futures to the extent that obligations under such contracts or transactions,
together with options on securities, represent not more than 25% of the Fund's
assets. The aggregate value of options on securities (long puts and calls) will
not exceed 10% of the Fund's net assets at the time such options are purchased
by the Fund.
The portfolio turnover rate for the Emerging Growth Fund for the fiscal year
ended January 31, 1996 was 131%. This rate of portfolio turnover may result in
higher brokerage execution costs and higher levels of capital gains.
GENERAL INVESTMENT POLICIES
For temporary defensive purposes during periods when the Advisor determines that
market conditions warrant, each Fund may invest up to 100% of its assets in
money market instruments consisting of securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities, receipts, including TR's,
TIGR's and CATS, money market funds, repurchase agreements, certificates of
deposit, time deposits, bank master notes and bankers' acceptances issued by
banks having net assets of at least $1 billion as of the end of their most
recent fiscal year, commercial paper rated at least A-1 by S&P or P-1 by
Moody's, and in cash. A Fund will not be pursuing its investment objective to
the extent that a substantial portion of its assets are invested in money market
securities.
Each Fund will restrict its investments in illiquid securities to 15% of its net
assets.
Each of the Funds may engage in securities lending and will limit such practice
to 33 1/3% of its assets.
Each Fund may purchase securities which have not been registered under the
Securities Act of 1933 (Rule 144A Securities).
Each Fund may purchase in options on stock indices to invest cash on an interim
basis. The aggregate premium paid on all options on stock indices cannot exceed
20% of the Fund's total assets.
In the event that a security owned by a Fund is downgraded below the stated
rating categories, the Advisor or SubAdvisor will take appropriate action with
regard to the security.
For further information see "Description of Permitted Investments."
RISK FACTORS
Since the Funds invest in equity securities, each Fund's shares will fluctuate
in value, and thus may be more suitable for long-term investors who can bear the
risk of short-term fluctuations. In addition, the market value of fixed income
securities bears an inverse relationship to changes in market interest rates,
which may affect the net asset value of shares. The longer the remaining
maturity of security, the greater is the effect of interest rate changes on its
market value. Generally, because of their fixed income features, convertible
securities will fluctuate in value to a lesser degree than the common stocks
into which they are convertible.
<PAGE> 34
9
Changes in the value of a Fund's fixed income securities will not affect cash
income received from ownership of such securities, but will affect a Fund's net
asset value.
Securities rated BBB by S&P or Baa by Moody's are deemed by these rating
services to have some speculative characteristics, and adverse economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher-grade
bonds.
Investments in securities of foreign issuers may subject a Fund to different
risks than those attendant to investments in securities of U.S. issuers,
including differences in accounting, auditing and financial reporting standards,
the possibility of expropriation or confiscatory taxation, and political
instability. See "Description of Permitted investments."
Given the uncertainty of the future value of emerging growth companies and
companies in special equity situations, the risk of possible decline in the
value of the Emerging Growth Fund's net assets are significant. Companies in
which the Emerging Growth Fund invests may offer greater opportunities for
capital appreciation than larger, more established companies, but investment in
such companies may involve certain special risks. These risks may be due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and frequent lack of depth in management. The securities of
such companies are often traded in the over-the-counter market and may not be
traded in volumes typical on a national securities exchange. Thus, the
securities of emerging growth companies may be less liquid, and subject to more
abrupt or erratic market movements than securities of larger, more established
growth companies. Since a "special equity situation" may involve a significant
change from a company's past experiences, the uncertainties in the appraisal of
the future value of the company's equity securities and the risk of a possible
decline in the value of the Fund's investments are significant.
INVESTMENT LIMITATIONS
Each Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities and repurchase
agreements involving such securities) if as a result more than 5% of the total
assets of the Fund would be invested in the securities of such issuer. This
restriction applies to 75% of a Fund's assets.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and repurchase
agreements involving such securities, and provided further, that utilities as a
group will not be considered to be one industry, and wholly-owned subsidiaries
organized to finance the operations of their parent companies are considered to
be in the same industries as their parent companies.
3. Make loans, except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objective and policies; (b) enter into repurchase
agreements; and (c) engage in securities lending as described in this Prospectus
and in the Statement of Additional Information.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Funds. Fundamental policies cannot be changed with
respect to a Fund without the consent of a majority of the Fund's outstanding
shares.
<PAGE> 35
10
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of the Balanced, Value Momentum and Growth
Equity Funds and continuously reviews, supervises and administers each Fund's
investment program. The Advisor discharges its responsibilities subject to the
supervision of, and policies established by, the Trustees of the Trust. The
Trust's shares are not sponsored, endorsed or guaranteed by, and do not
constitute obligations or deposits of, the Advisor and are not guaranteed by the
FDIC, or any other governmental agency.
The Advisor is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .60% of the average daily net assets of the Growth Equity,
Value Momentum, Balanced and Blue Chip Funds, and .80% of the average daily net
assets of the Emerging Growth Fund. Although the advisory fee paid by the
Emerging Growth Fund is higher than advisory fees paid by other mutual funds,
the Trust believes that the fee is comparable to the advisory fee paid by many
other mutual funds with similar investment objectives and policies. The Advisor
may from time to time waive all or a portion of its fee in order to limit the
operating expenses of a Fund. Any such waiver is voluntary and may be terminated
at any time in the Advisor's sole discretion.
For the fiscal year ended January 31, 1996, Union Bank, as predecessor to the
Advisor, was paid an advisory fee of .60%, of the average daily net assets of
the Growth Equity, Value Momentum, Balanced, and Blue Chip Growth Funds, and
.80% of the average daily net assets of the Emerging Growth Fund.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of each Fund. On April 1,
1996, Union Bank, the Trust's then-investment advisor, combined with The Bank of
California, N.A., and the resulting bank changed its name to Union Bank of
California, N.A. At the same time, the banks' investment management divisions
were combined. Each of Union Bank and The Bank of California, N.A. (or its
predecessor bank) has been in banking since the early 1900's and historically,
each has had significant investment functions within its trust and investment
division. Union Bank of California, N.A., is a subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd.
Richard Earnest, a Vice President of the Advisor, has served as team leader of
the Value Momentum Fund since its inception, and has been with the Advisor and
its predecessor, Union Bank, since 1964. Carl J. Colombo, a Vice President of
the Advisor, has served as team leader of the Balanced Fund since its inception,
and as team leader of the Growth Equity Fund since May, 1995. Mr. Colombo has
been with the Advisor and its predecessor, Union Bank, since 1985.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE SUBADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "SubAdvisor") have
entered into an investment subadvisory agreement relating to the Emerging Growth
and Blue Chip Growth Funds (the "Investment SubAdvisory Agreement"). Under the
Investment SubAdvisory Agreement, the SubAdvisor makes the day-to-day investment
decisions for the assets of the Emerging Growth and Blue Chip Growth Funds,
subject to the supervision of, and policies established by, the Advisor and the
Trustees of the Trust.
Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, and with offices at 100 Broadway, New York,
New York 10005,
<PAGE> 36
11
operates as a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi, Ltd. The
SubAdvisor was formed by the combination on April 1, 1996, of Bank of Tokyo
Trust Company, a wholly-owned subsidiary of The Bank of Tokyo, Ltd., and
Mitsubishi Bank Trust Company of New York, a wholly-owned subsidiary of The
Mitsubishi Bank, Ltd. Bank of Tokyo Trust Company was the surviving entity, and
changed its name to Bank of Tokyo-Mitsubishi Trust Company. Prior to the
combination, subadvisory services were provided by Bank of Tokyo Trust Company.
Bank of Tokyo Trust Company was established in 1955, and has provided trust
services since that time and management services since 1965.
The SubAdvisor serves as portfolio manager to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of April 1, 1996, the SubAdvisor managed
$750 million in individual portfolios and collective funds. In addition, the
SubAdvisor also serves as SubAdvisor to the Trust's Government Securities and
Convertible Securities Funds.
The SubAdvisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .30% of the average daily net
assets of the Blue Chip Growth Fund and .50% of the average daily net assets of
the Emerging Growth Fund. For the fiscal year ended January 31, 1996, Bank of
Tokyo Trust Company, predecessor of the SubAdvisor, received .30% and .50% of
the average daily net assets of the Blue Chip Growth and Emerging Growth Funds,
respectively.
The day-to-day management of the Blue Chip Growth Fund's investments is the
responsibility of a team of investment professionals.
Seth E. Shalov has served as the portfolio manager to the Emerging Growth Fund
since its inception. Mr. Shalov has been a Senior Portfolio Manager with the
SubAdvisor and its predecessor, Bank of Tokyo Trust Company, since October,
1988.
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of Trust assets up to $1 billion, .12% of
assets between $1 billion and $2 billion and .10% of assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Institutional Class
shares. Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
SEI Financial Management Corporation serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Institutional and Cash
Sweep Class shares of the Trust and for the Investment Class shares of the
Convertible Securities, Government Securities, Emerging Growth, Blue Chip Growth
and International Equity Funds. Compensation for these services is paid under
the Administration Agreement.
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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. Investment Class shares of a Fund, which are
<PAGE> 37
12
offered by a separate prospectus, may bear the costs of their distribution
expenses and, a sales charge is imposed on the sale of Investment Class shares
of the Funds. It is possible that an institution may offer different classes of
shares to its customers and thus receive different compensation with respect to
different classes of shares.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Funds may be made on days on which
both the New York Stock Exchange and Federal Reserve wire system are open for
business ("Business Days"). The minimum initial investment in a Fund is $2,000;
however, the minimum investment may be waived in the Distributor's discretion.
Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
4:00 p.m., Eastern time, and the Custodian receives Federal funds before the
close of business on the next Business Day. The purchase price of shares of a
Fund is the net asset value next determined after a purchase order is received
and accepted by the Trust. The net asset value per share of a Fund is determined
by dividing the total market value of a Fund's investments and other assets,
less any liabilities, by the total number of outstanding shares of a Fund. Net
asset value per share is determined daily as of 4:00 p.m., Eastern time, on any
Business Day. Purchases will be made in full and fractional shares of the Trust
calculated to three decimal places. The Trust reserves the right to reject a
purchase order when the Distributor determines that it is not in the best
interest of the Trust and/or its Shareholders to accept such order.
Shares of the Funds are offered only to residents of states in which the shares
are eligible for purchase.
Shareholders who desire to redeem shares of the Trust must place their
redemption orders prior to 4:00 p.m., Eastern time, on any Business Day for the
order to be accepted on that Business Day. The redemption price is the net asset
value of the Fund next determined after receipt by the Distributor of the
redemption order. Payment on redemption will be made as promptly as possible
and, in any event, within seven calendar days after the redemption order is
received.
Neither the Trust's transfer agent nor the Trust will be responsible for any
loss, liability, cost or expense for acting upon wire instructions or upon
telephone instructions that it reasonably believes to be genuine. The Trust and
its transfer agent will each employ reasonable procedures to confirm that
telephone instructions are genuine. Such procedures may include taping of
telephone conversations. If market conditions are extraordinarily active or
other extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
PERFORMANCE
From time to time, the Funds may advertise yield and total return. These figures
will be based on historical earnings, and are not intended to indicate future
performance. The yield of a Fund refers to the annualized income generated by an
investment in the Fund over a specified 30-day period. The yield is calculated
by assuming that the same amount of income generated by the investment during
that period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
The total return of a Fund refers to the average compounded rate of return to a
hypothetical investment for designated time periods (including, but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
The total return of a Fund may also be quoted as a dollar amount or on an
aggregate basis, an actual basis, without inclusion of any sales charge, or with
a reduced sales charge in
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13
advertisements distributed to investors entitled to a reduced sales charge.
A Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Fund may use long term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios
and could include the value of a hypothetical investment in any of the capital
markets. The Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to the Investment Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state, or local income tax treatment of a Fund or
its Shareholders. In addition, state and local tax consequences of investing in
a Fund may differ from the federal income tax consequences discussed below.
Accordingly, Shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes. Additional
information concerning taxes is set forth in the Statement of Additional
Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. Each Fund intends to qualify for the
special tax treatment afforded regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal
income tax on net investment company taxable income and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)
distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
A Fund will distribute substantially all of its net investment income (including
net short-term capital gain) and net capital gain to Shareholders. Dividends
from a Fund's net investment company taxable income are taxable to Shareholders
as ordinary income (whether received in cash or in additional shares) to the
extent of the Fund's earnings and profits. Dividends paid by a Fund to corporate
Shareholders will qualify for the dividends received deduction to the extent
derived from dividends received by the Fund from domestic corporations. A
portion of such dividends may be subject to the alternative minimum tax.
Distributions of net capital gain do not qualify for the dividends-received
deduction and are taxable to Shareholders as long-term capital gain, regardless
of how long Shareholders have held their shares and regardless of whether the
distributions are received in cash or in additional shares. Each Fund will make
annual reports to Shareholders of the federal income tax status of all
<PAGE> 39
14
distributions, including the amount of dividends eligible for the
dividends-received deduction.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments, a
Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because each Fund distributes
all of its net investment income to its shareholders, a Fund may have to sell
portfolio securities to distribute such imputed income, which may occur at a
time when the Advisor would not have chosen to sell such securities and which
may result in a taxable gain or loss.
Income derived by a Fund from obligations of foreign issuers may be subject to
foreign withholding taxes. A Fund will not be able to elect to treat
Shareholders as having paid their proportionate share of such taxes.
Dividends declared by a Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared, if paid by the Fund any time during the following January.
Each Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Investment income received directly by a Fund on direct U.S. obligations is
exempt from tax at the state level and may be exempt, depending on the state,
when received by a Shareholder as income dividends from a Fund provided certain
state-specific conditions are satisfied. Interest received on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. Each Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from a Fund is considered tax exempt in their
particular state.
Each sale, exchange, or redemption of Fund Shares is a taxable transaction to
the Shareholder.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different Classes of each fund. In
addition to the Funds, the Trust consists of the following funds: Treasury Money
Market Fund, Money Market Fund, California Tax-Free Money Market Fund,
Intermediate-Term Bond Fund, Limited Maturity Government Fund, California
Intermediate Tax-Free Bond Fund, Convertible Securities Fund, Government
Securities Fund and International Equity Fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong to that fund and
would be subject to liabilities related thereto. The Trust reserves the right to
create and issue shares of additional funds.
The Trust pays its expenses, including audit and legal expenses, expenses of
preparing and printing prospectuses, proxy solicitation material and reports to
Shareholders, costs of custodial services and registering the shares under
federal and state securities laws, insurance expenses, litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses. Please refer to "Financial Highlights" in this prospectus
for more information regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management,
<PAGE> 40
15
administrative and shareholder services to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to such fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings of Shareholders, but approval will be sought for certain changes
in the operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon the written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust will provide appropriate
assistance and information to the Shareholders requesting the meeting.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to the Administrator, SEI Financial
Management Corporation, 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of a
Fund is distributed in the form of monthly dividends to Shareholders of record.
Currently, capital gains of a Fund, if any, will be distributed at least
annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the Shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to the Administrator at least 15 days prior to the change.
Dividends and distributions of a Fund are paid on a per-share basis. The value
of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a Shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
The dividends payable on Institutional Class shares will typically be higher
than the dividends payable on the Investment Class shares because of the
distribution expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the assets of the
Fund. The Custodian holds cash, securities and other assets of the Trust as
required by the 1940 Act.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Funds:
AMERICAN DEPOSITARY RECEIPTS (ADRs)-- Receipts typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interest in a
security or a pool of securities issued by a foreign issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK--Convertible bonds are bonds
convertible into a set number of shares of another form of security (usually
common stock) at a prestated price. Convertible bonds have characteristics
similar to both fixed income and equity securities. Convertible preferred stock
is a class of capital stock that pays dividends at a
<PAGE> 41
16
specified rate and that has preference over common stock in the payment of
dividends and the liquidation of assets. Convertible preferred stock is
preferred stock exchangeable for a given number of common stock shares, and has
characteristics similar to both fixed-income and equity securities. Because of
the conversion feature, the market value of convertible bonds and convertible
preferred stock tend to move together with the market value of the underlying
stock. As a result, a Fund's selection of convertible bonds and convertible
preferred stock is based, to a great extent, on the potential for capital
appreciation that may exist in the underlying stock. The value of convertible
bonds and convertible preferred stock is also affected by prevailing interest
rates, the credit quality of the issuer and any call provisions.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES--Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS--Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's.
LOAN PARTICIPATIONS--Interests in loans to U.S. corporations (i.e., borrowers)
which are administered by the lending bank or agent for a syndicate of lending
banks, and sold by the lending bank or syndicate member ("intermediary bank").
In a loan participation, the borrower of the underlying loan will be deemed to
be the issuer of the participation interest (except to the extent a purchasing
Fund derives its rights from the intermediary bank). Because the intermediary
bank does not guarantee a loan participation in any way, a loan participation is
subject to the credit risks associated with the underlying corporate borrower.
In addition, in the event the underlying corporate borrower fails to pay
principal and interest when due, the Fund may encounter delays, expenses and
risks that are greater than those that would have been involved if the Fund had
purchased a direct obligation (such as commercial paper) of such borrower
because it may be necessary under the terms of the loan participation, for the
Fund to assert its rights against the borrower through the intermediary bank.
Moreover, under the terms of a loan participation, the purchasing Fund may be
regarded as a creditor of the intermediary bank (rather than of the underlying
corporate borrower), making it subject to the risk that the issuing bank may
become insolvent. Further, in the event of the bankruptcy or insolvency of the
corporate borrower, a loan participation may be subject to certain defenses that
can be asserted by such borrower as a result of improper conduct by the issuing
bank. The secondary market, if any, for these loan participations is limited,
and any such participation purchased by the Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS--Money market securities are high-quality,
dollar-denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S.
<PAGE> 42
17
Treasury obligations and obligation of agencies and instrumentalities of the
U.S. Government; (iii) high-quality commercial paper issued by U.S. and foreign
corporations; (iv) debt obligations with a maturity of one year or less issued
by corporations that issue high-quality commercial paper; and (v) repurchase
agreements involving any of the foregoing obligations entered into with
highly-rated banks and broker-dealers.
OPTIONS--Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying securities at the exercise price during the option period.
In addition, each Fund may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction"--the purchase of an option on the same security with the same
exercise price and expiration date as the option previously written on any
particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments, including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
SubAdvisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by the
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
REPURCHASE AGREEMENTS--Agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. A Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement. A
Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities or if a Fund realizes a loss in the sale of
the collateral. A Fund will enter into repurchase agreements only with financial
institutions deemed to present minimal risk of bankruptcy during the term of the
agreement based on established guidelines. Repurchase agreements are considered
loans under the 1940 Act.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
SECURITIES LENDING--In order to generate additional income, each Fund may lend
the securities in which it is invested pursuant to agreements requiring that the
loan be continuously secured by cash, securities of the U.S. Government or its
agencies or securities as collateral equal to 100% of the market value at all
times of the loaned securities. The lending Fund will continue to receive
interest on the loaned securities while simultaneously earning interest on the
investment of cash collateral. Collateral is marked to market daily to provide a
level of collateral at least equal to the market value of the loaned securities.
There may be risks of delay in receiving additional collateral should the
borrower of the securities fail financially.
SECURITIES OF FOREIGN ISSUERS--There may be certain risks connected with
investing in foreign securities, including risks of adverse political and
economic developments (including possible
<PAGE> 43
18
governmental seizure or nationalization of assets), the possible imposition of
exchange controls or other governmental restrictions, including less uniformity
in accounting and reporting requirements, the possibility that there will be
less information on such securities and their issuers available to the public,
the difficulty of obtaining or enforcing court judgments abroad, restrictions on
foreign investments in other jurisdictions, difficulties in effecting
repatriation of capital invested abroad, and difficulties in transaction
settlements and the effect of delay on shareholder equity. Foreign securities
may be subject to foreign taxes, which reduce yield, and may be less marketable
than comparable U.S. securities. The Fund may be affected favorably or
unfavorably by changes in the exchange rates or exchange control regulations
between foreign currencies and the U.S. dollar. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to distributed to shareholders by a Fund.
STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRs")--Interests in a unit investment
trust holding a portfolio of securities linked to the S&P 500 Index. SPDRs
closely track the underlying portfolio of securities, trade like a share of
common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding a Fund's investment in SPDRs, see the Statement of Additional
Information.
U.S. GOVERNMENT AGENCY SECURITIES-- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--Bills, notes and bonds issued by the U.S. Treasury,
as well as separately traded interest and principal component parts of such
obligations that known as Separately Traded Registered Interest and Principal
Securities ("STRIPS") are transferable through the Federal book-entry system.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's") "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not
<PAGE> 44
19
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.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES--Securities subject to settlement on a future date. The interest rate
realized on these securities is fixed as of the purchase date, and no interest
accrued to the Fund before settlement. These securities are subject to market
fluctuations due to changes, real or anticipated, in market interest rates and
the public's perception of the creditworthiness of the issuers and will have the
effect of leveraging the Fund's assets. A Fund will establish one or more
segregated accounts with the Custodian, and the Fund will maintain liquid,
high-grade assets in an amount at least equal in value to the Fund's commitments
to purchase when-issued securities.
WARRANTS--Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
<PAGE> 45
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary......................................... 2
Annual Operating Expenses....................... 3
Financial Highlights............................ 4
The Trust....................................... 5
Investment Objectives........................... 5
Investment Policies............................. 5
General Investment Policies..................... 8
Risk Factors.................................... 8
Investment Limitations.......................... 9
Fundamental Policies............................ 9
The Advisor..................................... 10
The SubAdvisor.................................. 10
The Administrator............................... 11
The Shareholder Servicing Agent................. 11
Distribution.................................... 11
Purchase and Redemption of Shares............... 12
Performance..................................... 12
Taxes........................................... 13
General Information............................. 14
Description of Permitted Investments............ 15
</TABLE>
<PAGE> 46
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient means of
investing in one or more professionally managed portfolios of securities. This
Prospectus relates to the Trust's:
- -- BALANCED FUND
- -- VALUE MOMENTUM FUND
- -- GROWTH EQUITY FUND
- -- EMERGING GROWTH FUND
INVESTMENT CLASS SHARES
The Trust's Investment Class Shares are offered to individuals and institutional
investors, including accounts for which UNION BANK OF CALIFORNIA, N.A. and BANK
OF TOKYO-MITSUBISHI TRUST COMPANY, their affiliates and correspondents act in an
agency or custodial capacity.
This Prospectus sets forth concisely the information about the Trust and the
Fund that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI
TRUST COMPANY OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. THE TRUST'S SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INVESTMENT CLASS
<PAGE> 47
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed funds of
securities. The following provides basic information about the Investment Class
shares of the GROWTH EQUITY, VALUE MOMENTUM, BALANCED and EMERGING GROWTH FUNDS
(each a "Fund"). This summary is qualified in its entirety by reference to the
more detailed information provided elsewhere in the Prospectus and in the
Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE BALANCED FUND seeks to provide
both capital appreciation and income. THE VALUE MOMENTUM FUND seeks long-term
capital growth with a secondary objective of income. THE GROWTH EQUITY FUND
seeks long-term capital growth. THE EMERGING GROWTH FUND seeks long-term growth
of capital by investing in a diversified portfolio of equity securities of small
capitalization, emerging growth companies. See "Investment Objectives."
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? Each of the Funds may invest,
consistent with its investment objectives, in equity securities including common
stocks and securities convertible into common stocks. Each Fund, except the
Emerging Growth Fund, may also invest, consistent with its investment objective
and investment policies in debt securities. See "Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. Each of the Funds may purchase common stocks and other
equity securities that are volatile and which may fluctuate in value more than
other types of investments. Values of fixed income securities and,
correspondingly, share prices of Funds invested in such securities, tend to vary
inversely with interest rates, and may be affected by other market and economic
factors as well. In addition, the securities of the emerging growth companies in
which the Emerging Growth Fund may invest may be less liquid, and subject to
more abrupt or erratic market movements, than securities of larger, more
established growth companies. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies
or any instrumentalities of the securities in which any Fund invests guarantees
only the payment of principal and interest on the guaranteed security, and does
not guarantee the yield or value of the security or yield or value of shares of
that Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Trust. See "The Advisor."
WHO IS THE SUBADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
SubAdvisor to the Emerging Growth Fund. See "The SubAdvisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? State Street Bank and Trust Company
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Investment Class shares of the Trust (except for the Convertible
Securities, Government Securities, Emerging Growth, Blue Chip Growth and
International Equity Funds). SEI Financial Management Corporation serves as
transfer agent, dividend disbursing agent, and shareholder servicing agent for
the Institutional and Cash Sweep Class shares of the Trust and for the
Investment Class shares of the Convertible Securities, Government Securities,
Emerging Growth, Blue Chip Growth and International Equity Funds. See
"Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business. ("Business Days"). The
minimum initial investment is $2,000 ($1,000 for IRAs). A purchase order will be
effective if the Distributor receives an order prior to 4:00 p.m., Eastern time.
Purchase orders for shares will be executed at a per share price equal to the
asset value next determined after the purchase order is effective (plus any
applicable sales charge). Redemption orders must be placed prior to 4:00 p.m.,
Eastern time on any Business Day for the order to be effective that day. See
"Purchase and Redemption of Shares."
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Funds is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. See "Dividends."
<PAGE> 48
3
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases................................................... 4.50%
Maximum Contingent Deferred Sales Charge*................................................... None
Wire Redemption Fee......................................................................... $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of the
Funds that were purchased without a sales charge in reliance upon the waiver
accorded to purchases in the amount of $1 million or more, but only where such
redemption request is made within 1 year of the date the shares were
purchased.
ANNUAL OPERATING EXPENSES
(As a percentage of offering price)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
VALUE GROWTH EMERGING
BALANCED MOMENTUM EQUITY GROWTH
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Advisory Fees....................................... .60% .60% .60% .80%
12b-1 Fees (After Fee Waivers)(1)................... .25% .25% .25% .00%
Other Expenses...................................... .20% .20% .20% .25%
- -----------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers)(2)..... 1.05% 1.05% 1.05% 1.05%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40 for each Fund. The
Distributor reserves the right to terminate its waiver at any time in its
sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.20%, 1.20%, 1.20%
and 1.45% for the Balanced Fund, Value Momentum Fund, Growth Equity Fund and
Emerging Growth Fund, respectively.
EXAMPLE:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 YR. 3 YRS. 5 YRS. 10 YRS.
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment assuming (1) imposition of the maximum sales charge;
(2) 5% return and (3) redemption at the end of each time period.
Balanced Fund..................................................... $55 $ 77 $100 $ 167
Value Momentum Fund............................................... $55 $ 77 $100 $ 167
Growth Equity Fund................................................ $55 $ 77 $100 $ 167
Emerging Growth Fund.............................................. $55 $ 77 $100 $ 167
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the
investor in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Investment Class shares of the Funds. The
Trust also offers Institutional Class shares of the Funds, which are subject to
the same expenses except there are no sales charges or distribution costs.
Additional information may be found under "The Administrator," "The Advisor" and
"The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
<PAGE> 49
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET -------------------------- DISTRIBUTIONS NET NET
ASSET NET REALIZED ------------------- ASSET ASSETS, RATIO OF
VALUE, NET AND UNREALIZED NET VALUE, END EXPENSES
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
- ----------------
BALANCED FUND
- ----------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 11.45 0.406 2.825 (0.406) (0.362) 13.91 28.73% 8,422 0.89%
1995 12.21 0.393 (0.758) (0.392) (0.003) 11.45 (2.95)% 7,128 0.79%
1994 11.50 0.397 0.925 (0.391) (0.221) 12.21 11.79% 7,292 0.69%
1993 (1) 11.30 0.092 0.404 (0.098) (0.198) 11.50 4.45%* 425 0.60%*
- ------------------------
VALUE MOMENTUM FUND
- ------------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 13.40 0.320 5.060 (0.323) (0.408) 18.05 40.77% 11,801 0.89%
1995 14.27 0.321 (0.820) (0.317) (0.054) 13.40 (3.48)% 9,777 0.81%
1994 12.75 0.297 1.543 (0.290) (0.030) 14.27 14.65% 9,346 0.77%
1993 (2) 11.52 0.246 1.257 (0.251) (0.022) 12.75 15.97%* 3,162 0.65%*
- ---------------------
GROWTH EQUITY FUND
- ---------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 14.13 0.101 4.480 (0.109) (0.993) 17.61 32.79% 2,345 0.89%
1995 15.19 0.097 (0.884) (0.092) (0.181) 14.13 (5.17)% 1,422 0.78%
1994 13.80 0.064 1.392 (0.066) -- 15.19 10.61% 1,243 0.77%
1993 12.69 0.099 1.103 (0.092) -- 13.80 9.56% 43 0.67%
1992 (3) 11.76 0.019 0.948 (0.023) (0.014) 12.69 39.11%* 13 0.83%*
<CAPTION> RATIO OF
RATIO OF NET INVESTMENT
EXPENSES RATIO OF INCOME TO
TO AVERAGE NET INVESTMENT AVERAGE
NET ASSETS INCOME NET ASSETS PORTFOLIO
EXCLUDING TO AVERAGE EXCLUDING TURNOVER
FEE WAIVERS NET ASSETS FEE WAIVERS RATE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
- ----------------
BALANCED FUND
- ----------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 1.20% 3.12% 2.81% 26%
1995 1.19% 3.41% 3.01% 48%
1994 1.19% 3.26% 2.76% 49%
1993 (1) 1.10%* 3.20%* 2.70%* 68%
- -----------------------
VALUE MOMENTUM FUND
- -----------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 1.20% 2.00% 1.69% 20%
1995 1.21% 2.37% 1.97% 6%
1994 1.20% 2.12% 1.69% 5%
1993 (2) 1.15%* 2.53%* 2.03%* 3%
- ---------------------
GROWTH EQUITY FUND
- ---------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 1.19% 0.60% 0.30% 24%
1995 1.17% 0.69% 0.30% 22%
1994 1.18% 0.48% 0.07% 45%
1993 1.17% 0.69% 0.19% 23%
1992 (3) 0.96%* 0.79%* 0.66%* 26%
* Annualized.
** Total return does not reflect the sales charge.
(1) Commenced operations on November 13, 1992.
(2) Commenced operations on April 2, 1992.
(3) Commenced operations on November 14, 1991.
</TABLE>
<PAGE> 50
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in distribution costs, voting rights and dividends.
Except for these differences among the classes, each share of each fund
represents an equal proportionate interest in that fund. This Prospectus relates
to the Investment Class shares of the Trust's Growth Equity, Value Momentum,
Balanced and Emerging Growth Funds (each a "Fund"). Information regarding the
Trust's other funds is contained in separate prospectuses that may be obtained
from the Trust's Distributor, SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVES
THE BALANCED FUND seeks to provide both capital appreciation and income.
THE VALUE MOMENTUM FUND seeks long-term capital growth with a secondary
objective of income.
THE GROWTH EQUITY FUND seeks long-term capital growth.
THE EMERGING GROWTH FUND seeks long-term growth of capital by investing in a
diversified portfolio of equity securities of small capitalization, emerging
growth companies.
There can be no assurance that a Fund's investment objective will be met.
INVESTMENT POLICIES
BALANCED FUND
The Balanced Fund invests in a combination of equity, fixed-income, and money
market securities. Under normal market conditions, the Fund will invest between
50% and 70% of its total assets in equity securities, including common stocks,
warrants, and U.S. dollar denominated securities of foreign issuers and both
preferred stock and debt securities convertible into common stocks. The Fund may
invest in a broad spectrum of common stocks with varying characteristics. All of
the common stocks in which the Fund invests (including foreign securities in the
form of American Depositary Receipts ("ADRs")) are traded on registered
exchanges or the over-the-counter market. Under normal market conditions a
minimum of 25% of the Fund's total assets will be invested in senior fixed
income securities. Such securities consist of bonds, debentures, and similar
obligations or instruments which constitute a security and evidence
indebtedness. Corporate bonds and debentures will be rated AAA, AA, A, or BBB by
Standard & Poor's Corporation ("S&P") or Aaa, Aa, A, or Baa by Moody's Investors
Service ("Moody's") or determined by the Advisor to be of comparable quality at
the time of purchase. The Fund may also invest in mortgage-backed securities
that are rated in one of the top two rating categories by Moody's or S&P, and
may invest in other asset-backed securities backed by company receivables, truck
and auto loans, leases, and credit card receivables.
The Fund may also buy and sell options, futures contracts and options on
futures. The Fund may enter into futures contracts and options on futures only
to the extent that obligations under such contracts or transactions, together
with options on securities represent not more than 25% of the Fund's assets. The
aggregate value of options on securities (long puts and calls) will not exceed
10% of the Fund's net assets at the time such options are purchased by the Fund.
The Fund may invest in securities issued or guaranteed by foreign governments,
their political subdivisions, agencies or instrumentalities and obligations of
supranational entities such as the World Bank and the Asian Development Bank.
<PAGE> 51
6
Money market instruments the Fund may invest in consist of: (i) commercial paper
rated at least A-1 by S&P or P-1 by Moody's at the time of investment, or, if
not rated, determined by the Advisor to be of comparable quality; (ii)
obligations (certificates of deposit, time deposits, bank master notes, and
bankers' acceptances) of thrift institutions, savings and loans, U.S. commercial
banks (including foreign branches of such banks), and U.S. and foreign branches
of foreign banks, provided that such institutions (or, in the case of a branch,
the parent institution) have total assets of $1 billion or more as shown on
their last published financial statements at the time of investment; (iii)
short-term corporate obligations rated at least A by S&P or A by Moody's at the
time of investment, or, if not rated, determined by the Advisor to be of
comparable quality; (iv) general obligations issued by the U.S. Government and
backed by its full faith and credit, and obligations issued or guaranteed as to
principal and interest by agencies or instrumentalities of the U.S. Government
(e.g., obligations issued by Farmers Home Administration, Government National
Mortgage Association, Federal Farm Credit Bank and Federal Housing
Administration); (v) receipts, including TR's, TIGR's and CATS; (vi) repurchase
agreements involving such obligations; (vii) loan participations; (viii) money
market funds and (ix) foreign commercial paper. The Fund may only purchase
interests in loan participations issued by a bank in the United States with
assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose obligations the Fund may invest.
Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
The Fund may enter into forward commitments, or purchase securities on a
when-issued basis. The Fund is permitted to invest in when-issued securities
where such purchases are for investment and not for leveraging purposes;
however, the Fund may sell these securities before the settlement date if it is
deemed advisable. No additional forward commitments will be made if more than
20% of the Fund's net assets would be so committed.
VALUE MOMENTUM FUND
Under normal market conditions, at least 65% of the Value Momentum Fund's assets
will be invested in equity securities, including common stocks, warrants to
purchase common stock, debt securities and preferred stocks convertible into
common stocks, and ADRs.
The Fund will be invested primarily in securities which the Advisor believes to
be undervalued relative to the market and to the security's historic valuation.
Stocks are then screened for positive price or earnings momentum. Securities
purchased will generally have a medium to high market capitalization. A majority
of the securities in which the Fund invests will be dividend paying. All of the
common stocks in which the fund invests are traded on registered exchanges or
the over-the-counter market.
The remainder of the Fund's assets may be invested in covered call options on
equity securities, money market instruments consisting of securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities,
receipts, including TR's, TIGR's and CATS, money market funds, repurchase
agreements, certificates of deposit, time deposits, bank master notes and
bankers' acceptances issued by banks having net assets of at least $1 billion as
of the end of their most recent fiscal year, commercial paper rated at least A-1
by S&P or P-1 by Moody's and in cash.
GROWTH EQUITY FUND
Under normal market conditions, at least 65% of the Growth Equity Fund's assets
will be invested in equity securities consisting of common stocks, warrants to
purchase common stocks, U.S. dollar denominated equity securities of foreign
issuers, and debt securities and preferred stock convertible into common stocks.
<PAGE> 52
7
The Fund may also invest in covered call options on equity securities and money
market instruments consisting of securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, receipts, including TR's,
TIGR's and CATS, money market funds, repurchase agreements, certificates of
deposit, time deposits, bank master notes and bankers' acceptances issued by
banks having net assets of at least $1 billion as of the end of their most
recent fiscal year, commercial paper rated at least A-1 by S&P or P-1 by Moody's
and in cash. All of the common stocks in which the Fund invests (including
foreign securities in the form of ADRs ) are traded on registered exchanges or
in the over the counter market.
EMERGING GROWTH FUND
Under normal market conditions, the Emerging Growth Fund will invest at least
65% of its assets in equity securities (i.e., common stocks and convertible
preferred stocks) of small capitalization (i.e., companies with capitalization
between $50 million and $1 billion) with the potential for growth or which, in
the Advisor's opinion, have potential for above-average long-term capital
appreciation. An emerging growth company is one which, in the Advisor's
judgment, is in the developing stages of its life cycle and has demonstrated or
is expected to achieve rapid growth in earnings and/or revenues. Emerging growth
companies are characterized by opportunities for rapid growth rates and/or
dynamic business changes. Emerging growth companies, regardless of size, tend to
offer the potential for accelerated earnings or revenue growth because of new
products or technologies, new channels of distribution, revitalized management
or industry conditions, or similar opportunities. A company may or may not yet
be profitable at the time the Fund invests in its securities. Current income
will not be a criterion of investment selection, and any such income should be
considered incidental. Many of the securities in which the Fund invests will not
pay dividends.
The Fund may also invest in equity securities of companies in "special equity
situations," meaning companies experiencing unusual and possibly non-repetitive
developments, such as mergers; acquisitions; spin-offs; liquidations;
reorganizations; and new products, technology or management. Since a special
equity situation may involve a significant change from a company's past
experiences, the uncertainties in the appraisal of the future value of the
company's equity securities and the risk of a possible decline in the value of
the Fund's investments are significant.
The Fund may invest in U.S. dollar denominated equity securities of foreign
issuers traded as ADRs. All of the common stocks in which the Fund invests (with
the exception of Rule 144A Securities) are traded on registered exchanges or in
the over the counter market.
The balance of the Fund's assets may be invested in money market instruments,
options, futures and options on futures, shares of other investment companies
with similar investment objectives, Standard & Poor's Depositary Receipts
("SPDRs") and convertible bonds. The Fund may enter into futures contracts and
options on futures to the extent that obligations under such contracts or
transactions, together with options on securities, represent not more than 25%
of the Fund's assets. The aggregate value options on securities (long puts and
calls) will not exceed 10% of the Fund's net asset at the time such options are
purchased by the Fund.
The portfolio turnover rate for the Emerging Growth Fund for the fiscal year
ended January 31, 1996 was 131%. This rate of portfolio turnover may result in
higher brokerage execution costs and higher levels of capital gains.
GENERAL INVESTMENT POLICIES
For temporary defensive purposes during periods when the Advisor determines that
market conditions warrant, each Fund may invest up to 100% of its assets in
money market instruments consisting of securities issued or guaranteed by the
U.S. government or its agencies or
<PAGE> 53
8
instrumentalities, receipts, including TR's, TIGR's and CATS, money market
funds, repurchase agreements, certificates of deposit, time deposits, bank
master notes and bankers' acceptances issued by banks having net assets of at
least $1 billion as of the end of their most recent fiscal year, commercial
paper rated at least A-1 by S&P or P-1 by Moody's, and in cash. A Fund will not
be pursuing its investment objective to the extent that a substantial portion of
its assets are invested in money market securities.
Each Fund will restrict its investments in illiquid securities to 15% of its net
assets.
Each of the Funds may engage in securities lending and will limit such practice
to 33 1/3% of its assets.
Each Fund may purchase securities which have not been registered under the
Securities Act of 1933 (Rule 144A Securities).
Each Fund may purchase options on stock indices to invest cash on an interim
basis. The aggregate premium paid on all options on stock indices cannot exceed
20% of the Fund's total assets.
In the event that a security owned by a Fund is downgraded below the stated
rating categories, the Advisor or SubAdvisor will take appropriate action with
regard to the security.
For further information see "Description of Permitted Investments."
RISK FACTORS
Since the Funds invest in equity securities, each Fund's shares will fluctuate
in value, and thus may be more suitable for long-term investors who can bear the
risk of short-term fluctuations. In addition, the market value of fixed income
securities bears an inverse relationship to changes in market interest rates,
which may affect the net asset value of shares. The longer the remaining
maturity of security, the greater is the effect of interest rate changes on its
market value. Generally, because of their fixed income features, convertible
securities will fluctuate in value to a lesser degree than the common stocks
into which they are convertible. Changes in the value of a Fund's fixed income
securities will not affect cash income received from ownership of such
securities, but will affect a Fund's net asset value.
Securities rated BBB by S&P or Baa by Moody's are deemed by these rating
services to have some speculative characteristics, and adverse economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
Investments in securities of foreign issuers may subject the Fund to different
risks than those attendant to investments in securities of U.S. issuers,
including differences in accounting, auditing and financial reporting standards,
the possibility of expropriation or confiscatory taxation, and political
instability. See "Description of Permitted Investments."
Given the uncertainty of the future value of emerging growth companies and
companies in special equity situations, the risk of possible decline in the
value of the Emerging Growth Fund's net assets are significant. Companies in
which the Emerging Growth Fund invests may offer greater opportunities for
capital appreciation than larger, more established companies, but investment in
such companies may involve certain special risks. These risks may be due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and frequent lack of depth in management. The securities of
such companies are often traded in the over-the-counter market and may not be
traded in volumes typical on a national securities exchange. Thus, the
securities of emerging growth companies may be less liquid, and subject to more
abrupt or erratic market movements than securities of larger, more established
growth companies. Since a "special equity situation" may involve a significant
change from a company's past experiences, the uncertainties in the appraisal of
the future value of the company's equity securities and the risk of a
<PAGE> 54
9
possible decline in the value of the Fund's investments are significant.
INVESTMENT LIMITATIONS
Each Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities and repurchase
agreements involving such securities) if as a result more than 5% of the total
assets of the Fund would be invested in the securities of such issuer. This
restriction applies to 75% of the Fund's assets.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and repurchase
agreements involving such securities, and provided further, that utilities as a
group will not be considered to be one industry, and wholly-owned subsidiaries
organized to finance the operations of their parent companies will be considered
to be in the same industries as their parent companies.
3. Make loans, except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objective and policies; (b) enter into repurchase
agreements; and (c) engage in securities lending as described in this prospectus
and in the Statement of Additional Information.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Funds. Fundamental policies cannot be changed with
respect to a Fund without the consent of a majority of the Fund's outstanding
shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of the Balanced, Value Momentum and Growth
Equity Funds and continuously reviews, supervises and administers each Fund's
investment program. The Advisor discharges its responsibilities subject to the
supervision of, and policies established by, the Trustees of the Trust. The
Trust's shares are not sponsored, endorsed or guaranteed by, and do not
constitute obligations or deposits of, the Advisor and are not guaranteed by the
FDIC or any other governmental agency.
The Advisor is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .60% of the average daily net assets of the Balanced, Growth
Equity and Value Momentum Funds and .80% of the average daily net assets of the
Emerging Growth Fund. Although the advisory fee for the Emerging Growth Fund is
higher than advisory fees paid by other mutual funds, the Trust believes that
the fee is comparable to the advisory fee paid by many other mutual funds with
similar investment objectives and policies. The Advisor may from time to time
waive all or a portion of its fee in order to limit the operating expenses of a
Fund. Any such waiver is voluntary and may be terminated at any time in the
Advisor's sole discretion.
For the fiscal year ended January 31, 1996, Union Bank, predecessor of the
Advisor, was paid an advisory fee of .60% of the average daily net assets of the
Growth Equity, Value Momentum and Balanced Funds, and .80% of the average daily
net assets of the Emerging Growth Fund.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California
<PAGE> 55
10
94111, the investment management division of Union Bank of California, N.A.,
manages the day-to-day operations of each Fund. On April 1, 1996, Union Bank,
the Trust's then-investment advisor, combined with The Bank of California, N.A.,
and the resulting bank changed its name to Union Bank of California, N.A. At the
same time, the banks' investment management divisions were combined. Each of
Union Bank and The Bank of California, N.A. (or its predecessor bank) has been
in banking since the early 1900's, and historically, each has had significant
investment functions within its trust and investment division. Union Bank of
California, N.A., is a subsidiary of The Bank of Tokyo-Mitsubishi, Ltd.
Richard Earnest, a Vice President of the Advisor, has served as team leader of
the Value Momentum Fund since its inception, and has been with the Advisor and
its predecessor, Union Bank, since 1964. Carl J. Colombo, a Vice President of
the Advisor, has served as team leader of the Balanced Fund since its inception,
and as team leader of the Growth Equity Fund since May, 1995. Mr. Colombo has
been with the Advisor and its predecessor, Union Bank, since 1985.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE SUBADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "SubAdvisor") have
entered into an investment subadvisory agreement relating to the Emerging Growth
Fund (the "Investment SubAdvisory Agreement"). Under the Investment SubAdvisory
Agreement, the SubAdvisor makes the day-to-day investment decisions for the
assets of the Emerging Growth Fund, subject to the supervision of, and policies
established by, the Advisor and the Trustees of the Trust.
Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, and with offices at 100 Broadway, New York,
New York 10005, operates as a wholly-owned subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd. The SubAdvisor was formed by the combination on April 1,
1996, of Bank of Tokyo Trust Company, a wholly-owned subsidiary of The Bank of
Tokyo, Ltd., and Mitsubishi Bank Trust Company of New York, a wholly-owned
subsidiary of The Mitsubishi Bank, Ltd. Bank of Tokyo Trust Company was the
surviving entity, and changed its name to Bank of Tokyo-Mitsubishi Trust
Company. Prior to the combination, subadvisory services were provided by Bank of
Tokyo Trust Company. Bank of Tokyo Trust Company was established in 1955, and
has provided trust services since that time and management services since 1965.
The SubAdvisor serves as portfolio manager to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of April 1, 1996, the SubAdvisor managed
$750 million in individual portfolios and collective funds. In addition, the
SubAdvisor also serves as SubAdvisor to the Trust's Government Securities,
Convertible Securities and Blue Chip Growth Funds.
The SubAdvisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .50% of the average daily net
assets of the Emerging Growth Fund. For the fiscal year ended January 31, 1996,
Bank of Tokyo Trust Company, predecessor of the SubAdvisor, received .50% of the
average daily net assets of the Emerging Growth Fund.
Seth E. Shalov has served as portfolio manager to the Emerging Growth Fund since
its inception. Mr. Shalov has been a Senior Portfolio Manager with the
SubAdvisor and its predecessor, Bank of Tokyo Trust Company, since October,
1988.
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of
<PAGE> 56
11
SEI Corporation ("SEI"), and the Trust are parties to an administration
agreement (the "Administration Agreement"). Under the terms of the
Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of Trust assets up to $1 billion, .12% of
assets between $1 billion and $2 billion and .10% of assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Investment Class
shares. Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Investment Class
shares of the Trust (except for the Convertible Securities, Government
Securities, Emerging Growth, Blue Chip Growth and International Equity Funds).
SEI Financial Management Corporation serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Institutional and Cash
Sweep Class shares of the Trust and for the Investment Class shares of the
Convertible Securities, Government Securities, Emerging Growth, Blue Chip Growth
and International Equity Funds. Compensation for these services is paid under
the Administration Agreement.
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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 Investment Class shareholders has a distribution plan ("Investment Class
Plan"). The Distribution Agreement and the Investment Class Plan adopted by the
Investment Class Shareholders provide that the Investment Class shares of a Fund
may bear the following distribution expenses: (1) the cost of prospectuses,
reports to Shareholders, sales literature and other materials for potential
investors; (2) advertising; and (3) expenses incurred in connection with the
promotion and sale of the Trust's shares, including the Distributor's expenses
for travel, communication, and compensation and benefits for sales personnel. In
addition, the Trust pays the Distributor a fee of up to .40% of a Fund's
Investment Class shares average daily net assets, of which a maximum of .25% may
be used to compensate broker/dealers and service providers which provide
administrative and/or distribution services to Investment Class Shareholders or
to their other customers who beneficially own Investment Class shares.
HOW TO PURCHASE SHARES
GENERAL INFORMATION
Purchases and redemptions of shares of the Funds may be made on days on which
both the New York Stock Exchange and the Federal Reserve wire system are open
for business. ("Business Days"). The minimum initial investment in a Fund is
$2,000 ($1,000 for IRAs); however, the minimum investment may be waived in the
Distributor's discretion. All subsequent purchases must be at least $1,000 ($500
for IRAs).
Purchase orders for shares will be executed at a per share price equal to the
net asset value next determined after the receipt of the purchase order by the
Distributor (plus any applicable sales charge). The purchase price of shares of
the Fund is the net asset value next determined after a purchase order is
received and accepted by the Trust (plus a sales charge). The net asset value
<PAGE> 57
12
per share of the Fund is determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities, by the total number
of outstanding shares of the Fund. Net asset value per share is determined daily
as of 4:00 p.m., Eastern time, on any Business Day. Purchases will be made in
full and fractional shares of the Trust calculated to three decimal places. The
Trust reserves the right to reject a purchase order when the Distributor
determines that it is not in the best interest of the Trust and/or its
Shareholders to accept such order.
Shares of the Fund are offered only to residents of states in which the shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase shares of the Balanced, Value Momentum and Growth Equity Funds
by completing and signing an Account Application form and mailing it, along with
a check (or other negotiable bank instrument or money order) payable to
"Stepstone Funds (Fund Name)," to the Transfer Agent at P.O. Box 8416, Boston,
Massachusetts 02266-8416. All purchases made by check should be in U.S. dollars
and made payable to the "Stepstone Funds (Fund Name)." Third party checks,
credit card checks or cash will not be accepted. You may purchase more shares at
any time by mailing payment also to the Transfer Agent at the above address.
Orders placed by mail will be executed on receipt of your payment. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred.
You may obtain Account Application Forms for the Balanced, Value Momentum and
Growth Funds by calling the Distributor at 1-800-734-2922.
HOW TO PURCHASE BY WIRE
You may purchase shares of the Balanced, Value Momentum and Growth Equity Funds
by wiring Federal funds, provided that your Account Application has been
previously received. You must wire funds to the Transfer Agent and the wire
instructions must include your account number. You must call the Transfer Agent
at 1-800-734-2922 before wiring any funds. An order to purchase shares by
Federal funds wire will be deemed to have been received by the Fund on the
Business Day of the wire; provided that the shareholder wires funds to the
Transfer Agent prior to 4:00 p.m., Eastern time, if the Transfer Agent does not
receive the wire by 4:00 p.m., Eastern time, the order will be executed on the
next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC
INVESTMENT PLAN ("AIP")
You may arrange for periodic additional investments in the Balanced, Value
Momentum and Growth Equity Funds through automatic deductions by Automated
Clearing House ("ACH") from a checking account by completing this section in the
Account Application form. The minimum pre-authorized investment amount is $100
per month. The AIP is available only for additional investments to an existing
account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
Shares of the Funds may be purchased through financial institutions, including
the Adviser, that provide distribution assistance or shareholder services.
Shares purchased by persons ("Customers") through financial institutions may be
held of record by the financial institution. Financial institutions may impose
an earlier cut-off time for receipt of purchase orders directed through them to
allow for processing and transmittal of these orders to the Transfer Agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to the Trust.
Customers who desire to transfer the registration of shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may
<PAGE> 58
13
charge a Customer account fees. Information concerning these services and any
charges will be provided to the Customer by the financial institution.
SALES CHARGES
The following table shows the regular sales charge on Investment Class shares to
a "single purchaser" (defined below) together with the dealer discount paid to
dealers and the agency commission paid to brokers (collectively the
"commission"):
<TABLE>
<CAPTION>
SALES SALES
CHARGE CHARGE AS COMMISSION
AS A APPROPRIATE AS
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF NET OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
<S> <C> <C> <C>
- -------------------------------------------------------------
0- $ 49,999... 4.50% 4.71% 4.05%
$ 50,000- $ 99,999... 4.00% 4.17% 3.60%
$ 100,000- $249,999... 3.50% 3.63% 3.15%
$ 250,000- $499,999... 2.50% 2.56% 2.25%
$ 500,000- $999,999... 1.50% 1.52% 1.35%
$ 1,000,000 and Over... 0.00%* 0.00% 0.00%
</TABLE>
- ---------------
* A contingent deferred sales charge of 1.00% will be assessed against any
proceeds of any redemption of such Investment Class shares prior to one year
from date of purchase.
The commissions shown in the table apply to sales through authorized dealers and
brokers. Under certain circumstances, the Distributor may use its own funds to
compensate financial institutions and intermediaries in amounts that are
additional to the commissions shown above. In addition, the Distributor may,
from time to time and at its own expense, provide promotional incentives in the
form of cash or other compensation to certain financial institutions and
intermediaries whose registered representatives have sold or are expected to
sell significant amounts of the Investment Class shares of the Fund. Such other
compensation may take the form of payments for travel expenses, including
lodging, incurred in connection with trips taken by qualifying registered
representatives to places within or without the United States. Under certain
circumstances, commissions up to the amount of the entire sales charge may be
reallowed to dealers or brokers, who might then be deemed to be "underwriters"
under the Securities Act of 1933. Commission rates may vary among the Funds.
In calculating the sales charge rates applicable to current purchases of a
Fund's shares, a "single purchaser" is entitled to cumulate current purchases
with the net purchase of previously purchased shares of the Fund and other of
the Trust's funds (the "Eligible Funds") which are sold subject to a comparable
sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing shares of the Fund for their own account or for trust or
custodial accounts for their minor children, (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account including employee benefit plans
created under Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), including related plans of the same employer. To be
entitled to a reduced sales charge based upon shares already owned, the investor
must ask the Distributor for such entitlement at the time of purchase and
provide the account number(s) of the investor, the investor and spouse, and
their minor children, and give the age of such children. The Fund may amend or
terminate this right of accumulation at any time as to subsequent purchases.
LETTER OF INTENT. By initially investing at least $2,000 and submitting a
Letter of Intent (the "Letter") to the Distributor, a "single purchaser" may
purchase shares of the Fund and the other Eligible Funds during a 13-month
period at the reduced sales charge rates applying to the aggregate amount of the
intended purchases stated in the Letter. The Letter may apply to purchases made
up to 90 days before the date of the Letter. To receive credit for such prior
purchases and later purchases benefitting from the Letter, the Shareholder must
notify the Transfer Agent at the time the Letter is submitted that there are
prior purchases that may apply, and, at the time of later purchases, notify the
Transfer Agent
<PAGE> 59
14
that such purchases are applicable under the Letter.
RIGHTS OF ACCUMULATION. In calculating the sales charge rates applicable to
current purchases of Investment Class shares, a "single purchaser" is entitled
to cumulate current purchases with the current market value of previously
purchased Investment Class shares of the Funds sold subject to a comparable
sales charge.
To exercise your right of accumulation based upon shares you already own, you
must ask the Distributor for this reduced sales charge at the time of your
additional purchase and provide the account number(s) of the investor, as
applicable, the investor and spouse, and their minor children. The Funds may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
WAIVER OF SALES LOAD. No sales charge is imposed on the Investment Class shares
of the Fund: (i) issued in plans of reorganization, such as mergers, asset
acquisitions and exchange offers, to which the Trust is a party; (ii) sold to
dealers or brokers that have a sales agreement with the Distributor, for their
own account or for retirement plans for their employees or sold to employees
(and their spouses) of dealers or brokers that certify to the Distributor at the
time of purchase that such purchase is for their own account (or for the benefit
of such employees' minor children); (iii) in aggregate purchases of $1 million
or more by tax-exempt organizations enumerated in Section 501(c) of the Code, or
employee benefit plans created under Sections 401, 403(b) or 457 of the Code;
(iv) sold to employees and families of the Advisor and its affiliates; (v) sold
to fiduciary accounts of the Advisor and its affiliates; (vi) purchased with
proceeds from the recent redemption of shares of a mutual fund with similar
investment objectives and policies for which a sales load was paid; or (vii)
sold to purchasers of Investment Class shares of the Growth Equity Fund that are
sponsors of other investment companies that are unit investment trusts for
deposit by such sponsors into such unit investment trusts, and to purchasers of
Investment Class shares of the Growth Equity Fund that are holders of such unit
investment trusts that invest distributions from such investment trusts in
Investment Class shares of the Growth Equity Fund.
The waiver of the sales charge under clause (vi) applies only if the following
conditions are met: the purchase must be made within 60 days of the redemption;
the Distributor must be notified in writing by the investor, or his or her
agent, at the time a purchase is made; and a copy of the investor's account
statement showing such redemption must accompany such notice. The waiver policy
with respect to the purchase of shares through the use of proceeds from a recent
redemption above will not continue indefinitely, and may be discontinued at any
time without notice. Investors should contact the Distributor to confirm
continued availability prior to initiating the procedures described in clause
(vi).
REDEMPTION OF SHARES
You may redeem your shares of the Balanced, Value Momentum and Growth Equity
Funds without charge on any Business Day. There is, however, a $15 charge for
wiring redemption proceeds to a shareholder's designated account. Shares may be
redeemed by mail, by telephone or through a pre-arranged systematic withdrawal
plan. Investors who own shares held by a financial institution should contact
that institution for information on how to redeem shares.
BY MAIL
A written request for redemption of shares of the Balanced, Value Momentum and
Growth Equity Funds must be received by the Transfer Agent, P.O. Box 8416,
Boston, Massachusetts 02266-8416 in order to constitute a valid redemption
request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the
<PAGE> 60
15
Transfer Agent may require that the signature on the written redemption request
be guaranteed. You should be able to obtain a signature guarantee from a bank,
broker, dealer, credit union, securities exchange or association, clearing
agency or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
shares, (2) the redemption check is payable to the shareholder(s) of record, and
(3) the redemption check is mailed to the shareholder(s) at his or her address
of record.
BY TELEPHONE
You may redeem your shares of the Balanced, Value Momentum and Growth Equity
Funds by calling the Transfer Agent at 1-800-734-2922. Under most circumstances,
payments will be transmitted on the next Business Day following receipt of a
valid request or redemption. You may have the proceeds mailed to your address or
wired to a commercial bank account previously designated on your Account
Application. There is no charge for having redemption proceeds mailed to you,
but there is a $15 charge for wiring redemption proceeds.
You may request a wire redemption for redemptions of shares of the Balanced,
Value Momentum and Growth Equity Funds in excess of $500 by calling the Transfer
Agent at 1-800-734-2922 who will deduct a wire charge of $15 from the amount of
the wire redemption. Shares cannot be redeemed by Federal Reserve wire on
Federal holidays restricting wire transfers.
Neither the Transfer Agent nor the Trust will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. The Trust and Transfer Agent will each
employ reasonable procedures to confirm that instructions, communicated by
telephone are genuine. Such procedures may include taping of telephone
conversations.
If market conditions are extraordinarily active or other extraordinary
circumstance exist, and you experience difficulties placing redemption orders by
telephone, you may consider placing your order by mail.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Balanced, Value Momentum and Growth Equity Funds offer a Systematic
Withdrawal Plan ("SWP"), which you may use to receive regular distributions from
your account. Upon commencement of the SWP, your account must have a current net
asset value of $5,000 or more. You may elect to receive automatic payments via
check or ACH of $100 or more on a monthly, quarterly, semi-annual or annual
basis. You may arrange to receive regular distributions from your account via
check or ACH by completing this section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the Transfer Agent. The Transfer Agent may require that the signature
on the written notice be guaranteed.
It is generally not in your best interest to be participating in the SWP at the
same time that you are purchasing additional shares if you have to pay a sales
load in connection with such purchases.
OTHER INFORMATION REGARDING REDEMPTIONS.
Shareholders who desire to redeem shares of the Trust must place their
redemption orders prior to 4:00 p.m., Eastern time, on any Business Day for the
order to be accepted on that Business Day. The redemption price is the net asset
value of the Fund next determined after receipt by the Distributor of the
redemption order. Payment on redemption will be made as promptly as possible
<PAGE> 61
16
and, in any event, within seven calendar days after the redemption order is
received.
Payment to shareholders for shares redeemed will be made within seven days after
the Transfer Agent receives the valid redemption request. At various times,
however, a Fund may be requested to redeem shares for which it has not yet
received good payment; collection of payment may take ten or more days. In such
circumstances, the redemption request will be rejected by the Fund. Once a Fund
has received good payment for the shares a shareholder may submit another
request for redemption.
Due to the relatively high costs of handling small investments, each Fund
reserves the right to redeem your shares at net asset value, if, your account in
any Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase shares of any Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any shares.
Before any Fund exercises its right to redeem such shares you will be given
notice that the value of the shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in such Fund
in an amount which will increase the value of the account to at least the
minimum amount.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
Securities and Exchange Commission, shareholders of Investment Class shares of
other funds of the Trust that have similar sales charges may tender their shares
of those Funds for exchange into the number of shares (including fractional
shares) which have a value equal to the total net asset value of shares tendered
divided by the net asset value of Investment Class shares of the Fund next
determined after such order is received. Shares issued pursuant to this offer
will not be subject to the sales charge described above or any other charge. The
Fund may modify or terminate this exchange offer at any time upon 60 days'
notice.
PERFORMANCE
From time to time, the Funds may advertise yield and total return. These figures
will be based on historical earnings, and are not intended to indicate future
performance. The yield of a Fund refers to the annualized income generated by an
investment in the Fund over a specified 30-day period. The yield is calculated
by assuming that the same amount of income generated by the investment during
that period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
The total return of a Fund refers to the average compounded rate of return to a
hypothetical investment, for designated time periods (including, but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
The total return of a Fund may also be quoted as a dollar amount or on an
aggregate basis, an actual basis, without inclusion of any sales charge, or with
a reduced sales charge in advertisements distributed to investors entitled to a
reduced sales charge.
A Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Fund may use long-term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios,
and could include the value of a hypothetical investment in any of the capital
markets. The Fund may also quote financial and business publications and
periodicals as they
<PAGE> 62
17
relate to fund management, investment philosophy, and investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expense generally charged to the Investment Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to provide a detailed
explanation of the federal, state, or local income tax treatment of a Fund or
its Shareholders. In addition, state and local income tax consequences of an
investment in a Fund may differ from the federal income tax consequences
described below. Accordingly, Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state and local income
taxes. Additional information concerning taxes is set forth in the Statement of
Additional Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. Each Fund intends to qualify for the
special tax treatment afforded regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of
federal income tax on that part of its net investment company taxable income and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
A Fund will distribute substantially all of its net investment income (including
net short-term capital gain) and net capital gain to Shareholders. Dividends
from a Fund's net investment company taxable income are taxable to Shareholders
as ordinary income, (whether received in cash or in additional shares) to the
extent of the Fund's earnings and profits. Dividends paid by a Fund to corporate
Shareholders will qualify for the dividends received deduction to the extent
derived from dividends received by the Fund from domestic corporations. A
portion of such dividends may be subject to the alternative minimum tax.
Dividends and distributions of net capital gain do not qualify for the
dividends-received deduction and are taxable to Shareholders as long-term
capital gain, regardless of how long Shareholders have held their shares and
regardless of whether the distributions are received in cash or in additional
shares. Each Fund will make annual reports to Shareholders of the federal income
tax status of all distributions, including the amount of dividends eligible for
the dividends-received deduction.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments, a
Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because each Fund distributes
all of its net investment income to its shareholders, a Fund may have to sell
Fund securities to distribute such imputed income, which may occur at a time
when the Advisor would not have chosen to sell such securities and which may
result in a taxable gain or loss.
Income derived by a Fund from obligations of foreign issuers may be subject to
foreign
<PAGE> 63
18
withholding taxes. A Fund will not be able to treat Shareholders as having paid
their proportionate share of such taxes.
Dividends declared by a Fund in October, November, or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared, if paid by the Fund any time during the following January.
Each Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Investment income received directly by a Fund on direct U.S. obligations is
exempt from tax at the state level and may be exempt, depending on the state,
when received by a Shareholder as income dividends from a Fund provided certain
state-specific conditions are satisfied. Interest received on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. Each Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from a Fund is considered tax exempt in their
particular state.
Each sale, exchange, or redemption of Fund Shares is a taxable transaction to
the Shareholder.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate portfolio of shares and different classes of each fund. In
addition to the Funds, the Trust consists of the following funds: Treasury Money
Market Fund, Money Market Fund, California Tax-Free Money Market Fund,
Intermediate-Term Bond Fund, California Intermediate Tax-Free Bond Fund, Limited
Maturity Government Fund, Blue Chip Growth Fund, Convertible Securities Fund,
Government Securities Fund and International Equity Fund. All consideration
received by the Trust for shares of any fund and all assets of such fund belong
to that fund and would be subject to liabilities related thereto. The Trust
reserves the right to create and issue shares of additional funds.
The Trust pays its expenses, including audit and legal expenses, expenses of
preparing and printing prospectuses, proxy solicitation material and reports to
Shareholders, costs of custodial services and registering the shares under
federal and state securities laws, insurance expenses, litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses. Please refer to "Financial Highlights" in this Prospectus
for more information regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to such fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings of shareholders, but approval will be sought for certain changes
in the operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon the written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust
<PAGE> 64
19
will provide appropriate assistance and information to the Shareholders
requesting the information.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries for the Balanced, Value Momentum and Growth Equity Funds
should be directed to Stepstone Funds, P.O. Box 8416, Boston, Massachusetts
02266-8416. Shareholder inquiries for the Emerging Growth Fund should be
directed to the Administrator, SEI Financial Management Corporation, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of a
Fund is distributed in the form of monthly dividends to Shareholders. Currently,
capital gains of a Fund, if any, will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the Shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to the Administrator at least 15 days prior to the change.
Dividends and distributions of a Fund are paid on a per-share basis. The value
of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a Shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
The dividends payable on Investment Class shares will typically be lower than
dividends payable on Institutional Class shares because of the distribution
expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the assets of the
Fund. The Custodian holds cash, securities and other assets of the Trust as
required by the Investment Company Act of 1940, as amended.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Funds:
AMERICAN DEPOSITARY RECEIPTS (ADRs)-- ADRs are receipts typically issued by a
U.S. financial institution that evidence ownership of underlying securities
issued by a foreign issuer.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK--Convertible Bonds are bonds
convertible into a set number of shares of another form of security (usually
common stock) at a prestated price. Convertible bonds have characteristics
similar to both fixed income and equity securities. Convertible preferred stock
is a class of capital stock that pays dividends at a specified rate and that has
preference over common stock in the payment of dividends and the liquidation of
assets. Convertible preferred stock is preferred stock exchangeable for a given
number of common stock shares, and has characteristics similar to both
fix-income and equity securities. Because of the conversion feature, the market
value of convertible bonds and convertible preferred stock tend to move together
with the market value of the underlying stock. As a result, a Fund's selection
of convertible bonds and convertible preferred stock is based, to a great
extent, on the potential for capital appreciation that
<PAGE> 65
20
may exist in the underlying stock. The value of convertible bonds and
convertible preferred stock is also affected by prevailing interest rates, the
credit quality of the issuer and any call provisions.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES--Some futures strategies, including selling
futures, buying puts and writing calls, reduce the Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that
if applied at an inappropriate time, could negatively impact a Fund's return.
INVESTMENT GRADE BONDS--Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's.
LOAN PARTICIPATIONS--Loan Participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, the
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by the Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS--Money market securities are high-quality,
dollar-denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations of agencies and instrumentalities of the U.S. Government; (iii)
high-quality commercial paper issued by U.S. and foreign corporations; (iv) debt
obligations with a maturity of one year or less issued by corporations that
issue high-quality commercial paper; and (v) repurchase agreements involving any
of the foregoing obligations entered into with highly-rated banks and
broker-dealers.
OPTIONS--Under a call option, the purchaser of the option has the right to
purchase, and the writer
<PAGE> 66
21
(the Fund) the obligation to sell, the underlying security at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to purchase, the underlying security at the
exercise price during the option period.
In addition, each Fund may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, a Fund may enter into a "closing purchase
transaction"--the purchase of an option on the same security with the same
exercise price and expiration date as the option contract previously written on
any particular security. When the security is sold, a Fund effects a closing
purchase transaction so as to close out any existing option on that security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
SubAdvisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by a
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while a Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
REPURCHASE AGREEMENTS--Agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. A Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement. A
Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities or if the Fund realizes a loss in the sale
of the collateral. A Fund will enter into repurchase agreements only with
financial institutions deemed to present minimal risk of bankruptcy during the
term of the agreement based on established guidelines. Repurchase agreements are
considered loans under the 1940 Act.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
SECURITIES LENDING--In order to generate additional income, each Fund may lend
the securities in which it is invested, pursuant to agreements requiring that
the loan be continuously secured by cash, securities of the U.S. Government or
its agencies or any combination of cash and such securities as collateral equal
to 100% of the market value at all times of the loaned securities. The lending
Fund will continue to receive interest on the loaned securities while
simultaneously earning interest on the investment of cash collateral. Collateral
is marked to market daily to provide a level of collateral at least equal to the
value of the loaned securities. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially.
SECURITIES OF FOREIGN ISSUERS--Securities issued by non-U.S. issuers. There may
be certain risks connected with investing in foreign securities, including risks
of adverse political and economic developments (including possible governmental
seizure or nationalization of assets), the possible imposition of exchange
controls or other governmental restrictions, including less uniformity in
accounting and reporting requirements, the possibility that there will be less
information on
<PAGE> 67
22
such securities and their issuers available to the public, the difficulty of
obtaining or enforcing court judgments abroad, restrictions on foreign
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad, and difficulties in transaction settlements and the
effect of delay on shareholder equity. Foreign securities may be subject to
foreign taxes, which reduce yield, and may be less marketable than comparable
U.S. securities. The Fund may be affected favorably or unfavorably by changes in
the exchange rates or exchange control regulations between foreign currencies
and the U.S. dollar. Changes in foreign currency exchange rates may also affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income and gains, if any, to distributed
to shareholders by a Fund.
STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRs")--SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding the Fund's investment in SPDRs, see the Statement of Additional
Information.
U.S. GOVERNMENT AGENCY SECURITIES-- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--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.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's") "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES--Securities subject to settlement on a future date. The interest rate
realized on these securities is fixed as of the purchase date, and no
<PAGE> 68
23
interest accrues to a Fund before settlement. These securities are subject to
market fluctuations due to changes, real or anticipated, in market interest
rates and the public's perception of the creditworthiness of the issuer, and
will have the effect of leveraging the Fund's assets. A Fund will establish one
or more segregated accounts with the Custodian, and the Fund will maintain
liquid, high-grade assets in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities.
WARRANTS--Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
<PAGE> 69
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary.......................................... 2
Shareholder Transaction Expenses................. 3
Financial Highlights............................. 4
The Trust........................................ 5
Investment Objectives............................ 5
Investment Policies.............................. 5
General Investment Policies...................... 7
Risk Factors..................................... 8
Investment Limitations........................... 9
Fundamental Policies............................. 9
The Advisor...................................... 9
The SubAdvisor................................... 10
The Administrator................................ 10
The Shareholder Servicing Agent.................. 11
Distribution..................................... 11
How to Purchase Shares........................... 11
Redemption of Shares............................. 14
Purchases by Exchange............................ 16
Performance...................................... 16
Taxes............................................ 17
General Information.............................. 18
Description of Permitted Investments............. 19
</TABLE>
<PAGE> 70
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient means of
investing in professionally managed portfolios of securities. This Prospectus
relates to the Trust's:
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
INSTITUTIONAL CLASS SHARES
The Trust's Institutional Class Shares are offered to institutional investors,
including UNION BANK OF CALIFORNIA, N.A., its affiliates and correspondents for
the investment of their own funds or funds for which they act in a fiduciary,
agency or custodial capacity.
This Prospectus sets forth concisely the information about the Trust and the
Fund that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus, has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, OR ANY OF ITS AFFILIATES OR
CORRESPONDENTS. THE TRUST'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INSTITUTIONAL CLASS
<PAGE> 71
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Institutional Class shares of the CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
(the "Fund"). This summary is qualified in its entirety by reference to the more
detailed information provided elsewhere in this Prospectus and in the Statement
of Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund seeks to provide high current
income that is exempt from federal and State of California income taxes. See
"Investment Objective."
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund invests primarily in
investment grade bonds and notes issued by the State of California, its
agencies, instrumentalities and political sub-divisions, the income on which is
exempt from regular federal and State of California personal income taxes
("California Municipal Securities"). See "Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUND? The investment
policies of the Fund entail certain risks and considerations of which an
investor should be aware. Shares of the Fund will fluctuate in value with the
value of the Fund's underlying portfolio securities. Values of fixed income
securities in which the Fund invests tend to vary inversely with interest rates,
and may be affected by other market and economic factors affecting the State of
California as well. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies
or any instrumentalities of the securities in which the Fund invests guarantees
only the payment of principal and interest on the guaranteed security, and does
not guarantee the yield or value of the security or yield or value of shares of
that Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Fund. See "The Advisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? SEI Financial Management Corporation
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Institutional and Cash Sweep Class shares of the Trust and for the
Investment Class shares of the Convertible Securities, Government Securities,
Emerging Growth, Blue Chip Growth and International Equity Funds. See
"Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment in the Trust is $2,000. A purchase order will be
effective if the Distributor receives an order prior to 4:00 p.m., Eastern time
and the Custodian receives federal funds before the close of business on the
next Business Day. Redemption orders must be placed prior to 4:00 p.m., Eastern
time on any Business Day for the order to be accepted that day. See "Purchase
and Redemption of Shares."
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. See "Dividends."
<PAGE> 72
3
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of average net assets)
<TABLE>
<CAPTION>
CALIFORNIA INTERMEDIATE
TAX-FREE BOND FUND
<S> <C>
- --------------------------------------------------------------------------------------------------------
Advisory Fees (After Fee Waivers)(1).......................................... .01%
Other Expenses................................................................ .21%
- --------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers)(1)............................... .22%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Advisor has agreed to waive its fee to the extent necessary to limit
"Total Operating Expenses" to .22%. "Total Operating Expenses" have been
restated to reflect current expenses and fee waivers. Absent fee waivers,
"Advisory Fees" would have been .50% and "Total Operating Expenses" would
have been .71%. The Advisor may terminate its waiver at any time in its sole
discretion.
EXAMPLE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.............. $ 2 $7 $ 12 $28
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF THE FUND AND SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Institutional Class shares of
the Fund. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. The Trust also offers Investment Class shares of the Fund which
are subject the same expenses, except that Investment Class shares are subject
to a sales load and distribution expenses. Additional information may be found
under "The Administrator" and "The Advisor."
<PAGE> 73
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET -------------------------- DISTRIBUTIONS NET NET
ASSET NET REALIZED ------------------- ASSET ASSETS, RATIO OF
VALUE, NET AND UNREALIZED NET VALUE, END EXPENSES
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- -----------------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 8.95 0.518 0.873 (0.487) -- 9.85 15.83% 4,196 0.24%
1995 10.04 0.460 (1.098) (0.452) -- 8.95 (6.33 )% 12,793 0.50%
1994 (1) 10.00 0.117 0.028 (0.105) -- 10.04 5.01 %* 22,197 0.50%*
<CAPTION>
RATIO OF
RATIO OF NET INVESTMENT
EXPENSES RATIO OF INCOME TO
TO AVERAGE NET INVESTMENT AVERAGE
NET ASSETS INCOME NET ASSETS PORTFOLIO
EXCLUDING TO AVERAGE EXCLUDING TURNOVER
FEE WAIVERS NET ASSETS FEE WAIVERS RATE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- -----------------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.71% 4.97% 4.50% 30%
1995 0.72% 4.84% 4.62% 22%
1994 (1) 0.73%* 4.31%* 4.08%* 19%
</TABLE>
* Annualized.
(1) Commenced operations on October 15, 1993.
<PAGE> 74
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in sales charges, distribution costs, voting rights
and dividends. Except for these differences among the classes, each share of
each fund represents an equal proportionate interest in that fund. This
Prospectus relates to the Institutional Class shares of the Trust's California
Intermediate Tax-Free Bond Fund (the "Fund"). Information regarding the Trust's
other funds is contained in separate prospectuses that may be obtained from the
Trust's Distributor, SEI Financial Services Company, 680 East Swedesford Road,
Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVE
The California Intermediate Tax-Free Bond Fund seeks to provide high current
income that is exempt from federal and State of California income taxes.
There can be no assurance that the Fund's investment objective will be met.
INVESTMENT POLICIES
Under normal market conditions, the Fund will invest primarily in bonds and
notes issued by the State of California, its agencies, instrumentalities, and
political sub-divisions, the income on which is exempt from regular federal and
State of California personal income taxes ("California Municipal Securities").
The Fund may also invest in bonds and notes of other states, territories, and
possessions of the U.S. and their agencies, authorities, instrumentalities and
political sub-divisions which are exempt from Federal income taxes and in shares
of other investment companies, specifically money market funds, which have
similar investment objectives.
Under normal market conditions, at least 80% of the Fund's assets will be
invested in bonds and notes rated AAA, AA, A or BBB by Standard & Poor's
Corporation ("S&P"), Aaa, Aa, A or Baa by Moody's Investors Service ("Moody's"),
or AAA, AA, A or BBB by Fitch Investors Service ("Fitch") and which pay interest
that is not treated as a preference item for purposes of the federal alternative
minimum tax. The Fund may purchase unrated securities that are determined by the
Advisor to be of comparable quality at the time of purchase pursuant to quality
standards set by the Board of Trustees. In the event that a security owned by
the Fund is downgraded below the stated ratings categories, the Advisor will
take appropriate action with regard to the security.
Under California law, a mutual fund must have at least 50% of its total assets
invested in California Municipal Securities at the end of each quarter of its
taxable year in order to be eligible to pay California residents dividends that
are wholly or partially exempt from California personal income taxes.
Accordingly, the Fund intends to maintain at least 65% of its assets in
California Municipal Securities, and may invest up to 100% of its assets in such
securities.
The Fund has no restrictions on the maturity of municipal securities in which it
may invest. The dollar weighted average portfolio maturity of the Fund will be
from three to ten years. Accordingly, the Fund seeks to invest in municipal
securities of such maturities which, in the judgment of the Advisor, will
provide a high level of current income consistent with prudent investment, with
consideration given to market conditions.
The Fund may purchase securities on a forward commitment or a when-issued basis
where such purchases are for investment and not for leveraging purposes;
however, the Fund may sell these securities before the settlement date if it is
deemed advisable. No additional forward
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commitments will be made if more than 20% of the Fund's net assets would be so
committed.
The Fund may also invest in securities which have not been registered under the
Securities Act of 1933 (Rule 144A Securities). The Fund will restrict its
investment in illiquid securities to 15% of its net assets.
CALIFORNIA MUNICIPAL SECURITIES
The two principal classifications of California Municipal Securities are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit, and taxing power for the
payment of principal and interest. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source. Private activity bonds (formerly known as industrial revenue bonds) are
generally revenue bonds.
Certain California Municipal Securities are municipal lease revenue obligations
(or certificates of participation or "COPs"), which typically provide that the
municipality has no obligation to make lease or installment payments in future
years unless money is appropriated for such purpose. While the risk of
non-appropriation is inherent to COP financing, this risk is mitigated by the
Fund's policy to invest in COPs that are rated in one of the four highest rating
categories used by Moody's, S&P, or Fitch.
California Municipal Securities also include so-called Mello-Roos and assessment
district bonds, which are usually unrated instruments issued to finance the
building of roads and other public works and projects that are primarily secured
by real estate taxes levied on property located in the local community. Most of
these bonds do not seek agency ratings because the issues are too small, and in
most cases, the purchase of these bonds are based upon the Advisor's
determination that it is suitable for the Fund.
The Fund may also purchase, subject to a limit of 15% of its assets, California
Municipal Securities that are variable rate demand notes (or VRDNs).
For temporary defensive purposes during periods when the Advisor determines that
market conditions warrant, the Fund may invest up to 25% of its assets in
taxable money market instruments consisting of securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, receipts, including
TR's, TIGR's and CATS, money market funds, repurchase agreements, and commercial
paper rated at least A-1 by S&P or P-1 by Moody's or Fitch 1 by Fitch. The Fund
also may hold a portion of its assets in cash. The Fund will not be pursuing its
investment objective to the extent that a substantial portion of its assets is
invested in money market securities, and as a result it may pay taxable
dividends to shareholders.
For further information see "Description of Permitted Investments."
RISK FACTORS
The ability of the State of California and its political sub-divisions to raise
money through property taxes and to increase spending has been the subject of
considerable debate and various constitutional initiatives and other
limitations. This process, and associated legal challenges, remains on-going. It
is not possible to predict the ultimate effect of these constitutional and other
initiatives, nor can there be any assurance that additional initiatives will not
be introduced in the coming years.
The market value of the Fund's fixed income investments will change in response
to interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating agencies in the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal also affect the value of these investments.
Changes in the value of fund securities will not affect cash
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7
income derived from these securities, but will affect the Fund's net asset
value.
Securities rated BBB by S&P or Fitch or Baa by Moody's are deemed by these
rating services to have some speculative characteristics, and adverse economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than with higher grade bonds.
INVESTMENT LIMITATIONS
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the United States or its agencies and instrumentalities and repurchase
agreements involving such securities) if as a result more than 5% of the total
assets of the Fund would be invested in the securities of such issuer provided,
however, that the Fund may invest up to 25% of its total assets without regard
to this restriction as permitted by applicable law.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or guaranteed
by the U.S. Government or its agencies and instrumentalities and repurchase
agreements involving such securities, and provided further, that utilities as a
group will not be considered to be one industry, and wholly-owned subsidiaries
organized to finance the operations of their parent companies will be considered
to be in the same industries as their parent company.
3. Make loans, except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objective and policies; and (b) enter into
repurchase agreements.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Fund. Fundamental policies cannot be changed with
respect to the Fund without the consent of a majority of the Fund's outstanding
shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of the Fund and continuously reviews,
supervises and administers the Fund's investment program. The Advisor discharges
its responsibilities subject to the supervision of, and policies established by,
the Trustees of the Trust. The Trust's shares are not sponsored, endorsed or
guaranteed by, and do not constitute obligations or deposits of, the Advisor and
are not guaranteed by the FDIC or any other governmental agency.
Under the Advisory Agreement, the Advisor is entitled to a fee, which is
calculated daily and paid monthly, at an annual rate of .50% of the average
daily net assets of the Fund. The Advisor may from time to time waive all or a
portion of its fee in order to limit the operating expenses of the Fund. Any
such waiver is voluntary and may be terminated at any time in the Advisor's sole
discretion.
For the fiscal year ended January 31, 1996, Union Bank, predecessor of the
Advisor, was paid an advisory fee of .03% of the average daily net assets of the
Fund.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of the Fund. On April 1,
1996, Union Bank, the Trust's then-investment advisor, combined with The Bank of
California, N.A., and the resulting bank changed its name to Union Bank of
California, N.A. At the same time,
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8
the banks' investment management divisions were combined. Each of Union Bank and
The Bank of California, N.A. (or its predecessor bank) has been in banking since
the early 1900's, and historically, each has had significant investment
functions within its trust and investment division. Union Bank of California,
N.A., is a subsidiary of The Bank of Tokyo-Mitsubishi, Ltd.
Robert Bigelow has served as team leader of the Fund since October, 1994. Prior
to joining the Advisor's predecessor, Union Bank, in June, 1994, Mr. Bigelow
served as a portfolio manager at City National Bank from January, 1986 to June,
1994.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of Trust assets up to $1 billion, .12% of
assets between $1 billion and $2 billion and .10% of assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of the Fund's Institutional
Class shares. Any such waiver is voluntary, and may be terminated at any time in
the Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
SEI Financial Management Corporation serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Institutional and Cash
Sweep Class shares of the Trust and for the Investment Class shares of the
Convertible Securities, Government Securities, Emerging Growth, Blue Chip Growth
and International Equity Funds. Compensation for these services is paid under
the Administration Agreement.
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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. Investment Class shares of the Fund may bear the costs of their
distribution expenses, and a sales charge is imposed on the sale of Investment
Class shares of the Fund. It is possible that an institution may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Fund may be made on days on which
both the New York Stock Exchange and the Federal Reserve wire system are open
for business ("Business Days"). The minimum initial investment in the Trust is
$2,000; however, the minimum investment may be waived in the Distributor's
discretion. Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
4:00 p.m., Eastern time, and the Custodian receives federal funds before the
close of business on the next Business Day. The purchase price of shares of the
Fund is the net asset value next determined after a purchase order is received
and accepted by the Trust. The net asset value per share of the Fund is
determined by dividing the total market value of the Fund's investments and
other assets, less any
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9
liabilities, by the total number of outstanding shares of the Fund. Net asset
value per share is determined daily as of 4:00 p.m., Eastern time, on any
Business Day. Purchases will be made in full and fractional shares of the Trust
calculated to three decimal places. The Trust reserves the right to reject a
purchase order when the Distributor determines that it is not in the best
interest of the Trust and/or its Shareholders to accept such order.
Shares of the Fund are offered only to residents of states in which the shares
are eligible for purchase.
Shareholders who desire to redeem shares of the Trust must place their
redemption orders prior to 4:00 p.m., Eastern time, on any Business Day for the
order to be accepted on that Business Day. The redemption price is the net asset
value of the Fund next determined after receipt by the Distributor of the
redemption order. Payment on redemption will be made as promptly as possible
and, in any event, within seven calendar days after the redemption order is
received.
Neither the Trust's transfer agent nor the Trust will be responsible for any
loss, liability, cost or expense for acting upon wire instructions or upon
telephone instructions that it reasonably believes are genuine. The Trust and
its transfer agent will each employ reasonable procedures to confirm that
telephone instructions are genuine. Such procedures may include taping of
telephone conversations. If market conditions are extraordinary active or other
extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
PERFORMANCE
From time to time, the Fund may advertise yield and total return. These figures
will be based on historical earnings, and are not intended to indicate future
performance. The yield of the Fund refers to the annualized income generated by
an investment in the Fund over a specified 30-day period. The yield is
calculated by assuming that the same amount of income generated by the
investment during that period is generated in each 30-day period over one year
and is shown as a percentage of the investment.
The total return of the Fund refers to the average compounded rate of return to
a hypothetical investment, for designated time periods (including, but not
limited to, the period from which the Fund commenced operations through the
specified date), assuming that the entire investment is redeemed at the end of
each period and assuming the reinvestment of all dividend and capital gains
distributions. The total return of the Fund may also be quoted as a dollar
amount or on an aggregate basis, an actual basis, without inclusion of any sales
charge, or with a reduced sales charge in advertisements distributed to
investors entitled to a reduced sales charge.
The Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Fund may use long term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios
and could include the value of a hypothetical investment in any of the capital
markets. The Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising, and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical
<PAGE> 79
10
share price fluctuations or total returns to a benchmark while measures of
benchmark correlation indicate how valid a comparative benchmark might be.
Measures of volatility and correlation are calculated using averages of
historical data and cannot be calculated precisely.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to the Investment Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state, or local income tax treatment of the Fund or
its Shareholders. In addition, state and local tax consequences of an investment
in the Fund may differ from the federal income tax consequences described below.
Accordingly, Shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes. Additional
information concerning taxes is set forth in the Statement of Additional
Information.
TAX STATUS OF THE FUND:
The Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. The Fund intends to qualify for the
special tax treatment afforded regulated investment companies of the Internal
Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of
federal income tax on that part of its net investment company taxable income and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
The Fund will distribute all of its net investment income (including net
short-term capital gain) to Shareholders. If, at the close of each quarter of
its taxable year, at least 50% of the value of the Fund's assets consists of
obligations the interest on which is excludable from gross income, the Fund may
pay "exempt-interest dividends" to its Shareholders. Those dividends constitute
the portion of the aggregate dividends as designated by the Fund, equal to the
excess of the excludable interest over certain amounts disallowed as deductions.
Exempt-interest dividends are excludable from a Shareholder's gross income for
federal income tax purposes, but may have certain collateral federal income tax
consequences, including alternative minimum tax. Additional information
concerning taxes is set forth in the Statement of Additional Information.
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities to
satisfy the Code's requirements for the payment of "exempt-interest" dividends.
Any dividends paid out of income realized by the Fund on taxable securities will
be taxable to Shareholders as ordinary income, whether received in cash or in
additional shares, to the extent of the Fund's earnings and profits and will not
qualify for the dividends received deductions for corporate shareholders.
Distributions of net capital gain also do not qualify for the dividends received
deduction and are taxable to Shareholders as long-term capital gain, regardless
of how long the Shareholder has held Fund Shares, and regardless of whether the
distributions are received in cash or additional shares. The Fund will make
annual reports to Shareholders of the federal income tax status of all
distributions.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments,
the Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because the Fund
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11
distributes all of its net investment income to Shareholders, the Fund may have
to sell Fund securities to distribute such imputed income, which may occur at a
time when the Advisor would not have chosen to sell such securities and which
may result in a taxable gain or loss.
Dividends declared by the Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared, if paid by the Fund any time during the following January.
The Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Investment income received directly by the Fund on direct U.S. obligations is
exempt from tax at the state level, and may be exempt, depending on the state,
when received by a Shareholder as income dividends from the Fund, provided
certain state-specific conditions are satisfied. Interest realized on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. The Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from the Fund is considered tax exempt in their
particular state.
Each sale, exchange, or redemption of Fund shares is a taxable transaction to
the Shareholder.
Furthermore, entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by "private activity bonds" or
"industrial development bonds" should consult their tax advisors before
purchasing shares. (See the Statement of Additional Information.)
CALIFORNIA TAXES:
The Fund intends to qualify to pay dividends to Shareholders that are exempt
from California personal income tax ("California exempt-interest dividends").
The Fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of the Fund's taxable year, at least 50 percent of the
value of the Fund's total assets consists of obligations the interest on which
would be exempt from California personal income tax if the obligations were held
by an individual ("California Tax Exempt Obligations") and (2) the Fund
continues to qualify as a regulated investment company.
If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to Shareholders will be considered California exempt-interest
dividends (1) if they are designated as exempt-interest dividends by the Fund in
a written notice to Shareholders mailed within 60 days of the close of the
Fund's taxable year and (2) to the extent the interest received by the Fund
during the year on California Tax Exempt Obligations exceeds expenses of the
Fund that would be disallowed under California personal income tax law as
allocable to tax exempt interest if the Fund were an individual. If the
aggregate dividends so designated exceed the amount that may be treated as
California exempt-interest dividends, only that percentage of each dividend
distribution equal to the ratio of aggregate California exempt-interest
dividends to aggregate dividends so designated will be treated as a California
exempt-interest dividend. The Fund will notify Shareholders of the amount of
California exempt-interest dividends each year.
Corporations subject to California franchise tax that invest in the Fund may not
be entitled to exclude California exempt-interest dividends from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends will be taxable to Shareholders at ordinary income tax
rates for California personal income tax
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12
purposes to the extent of the Fund's earnings and profits.
Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of shares of the Fund will not be deductible for California
personal income tax purposes if the Fund distributes California exempt-interest
dividends.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as they directly
govern the taxation of Shareholders subject to California personal income tax.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Fund transactions.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate series of shares and different classes of each fund. In addition
to the Fund, the Trust consists of the following funds: Treasury Money Market
Fund, Money Market Fund, California Tax-Free Money Market Fund, Growth Equity
Fund, Value Momentum Fund, Limited Maturity Government Fund, Balanced Fund,
Intermediate-Term Bond Fund, Blue Chip Growth Fund, Emerging Growth Fund,
Convertible Securities Fund, Government Securities Fund and International Equity
Fund. All consideration received by the Trust for shares of any fund and all
assets of such fund belong to that fund, and would be subject to liabilities
related thereto. The Trust reserves the right to create and issue shares of
additional funds.
The Trust pays its expenses, including audit and legal expenses, expenses of
preparing and printing prospectuses, proxy solicitation material and reports to
Shareholders, costs of custodial services and registering the shares under
federal and state securities laws, insurance expenses, litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses. Please refer to "Financial Highlights" in this prospectus
for more information regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to such fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings but approval will be sought for certain changes in the operation
of the Trust and for the election of Trustees under certain circumstances. In
addition, a Trustee may be removed by the remaining Trustees or by Shareholders
at a special meeting called upon the written request of Shareholders owning at
least 10% of the outstanding shares of the Trust. In the event that such a
meeting is requested the Trust will provide appropriate assistance and
information to the Shareholders requesting the meeting.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to the Administrator, SEI Financial
Management
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13
Corporation, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
the Fund is distributed in the form of monthly dividends to Shareholders of
record. Currently, capital gains of the Fund, if any, will be distributed at
least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the Shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to the Administrator at least 15 days prior to the change.
Dividends and distributions of the Fund are paid on a per-share basis. The value
of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a Shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
The dividends payable on the Institutional Class shares will typically be higher
than the dividends payable on the Investment Class shares because of the
distribution expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the assets of the
Fund. The Custodian holds cash, securities and other assets of the Trust as
required by the Investment Company Act of 1940, as amended.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Fund:
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
MONEY MARKET INSTRUMENTS--Money market securities are high-quality,
dollar-denominated, short-term, debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations of agencies and instrumentalities of the U.S. Government; (iii)
high-quality commercial paper issued by U.S. and foreign corporations; (iv) debt
obligations with a maturity of one year or less issued by corporations that
issue high-quality commercial paper; and (v) repurchase agreements involving any
of the foregoing obligations entered into with highly-rated banks and
broker-dealers.
MUNICIPAL FORWARDS--Municipal Forwards are forward commitments for the purchase
of tax-exempt bonds with a specified coupon to be delivered by an issuer at a
future date, typically exceeding 45 days but normally less than one year after
the commitment date. Municipal forwards are normally used as a refunding
mechanism for bonds that may only be redeemed on a designated future date. As
with forward commitments, and when-issued securities, municipal forwards are
subject to market fluctuations due to changes, real or anticipated, in market
interest rates between the commitment date and the settlement date and will have
the effect of leveraging the Fund's assets. Municipal forwards may be considered
to be illiquid investments. The Fund will maintain liquid, high-grade securities
in a segregated
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account in an amount at least equal to the purchase price of the municipal
forward.
MUNICIPAL SECURITIES--Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
PARTICIPATION INTERESTS--Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of participations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying Municipal Securities.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
REPURCHASE AGREEMENTS--Agreements by which the Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. The Fund will actual or constructive
possession of the securities held as collateral for the repurchase agreement.
The Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its right to
dispose of the collateral securities or if the Fund realizes a loss on the sale
of the collateral. The Fund will enter into a repurchase agreement only with
financial institutions deemed to present minimal risk of bankruptcy during the
term of the agreement based upon established guidelines. Repurchase agreements
are considered loans under the 1940 Act.
U.S. GOVERNMENT AGENCY SECURITIES-- Certain federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--Bills, notes and bonds issued by the U.S. Treasury,
as well as separately traded interest and principal component
<PAGE> 84
15
parts of such obligations known as Separately Traded Registered Interest and
Principal Securities ("STRIPS") that are transferable through the Federal
book-entry system.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's") "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. California
Municipal Securities may also be acquired through the purchase of municipal
forwards. The interest rates on these securities may be reset daily, weekly,
quarterly or some other reset period and may have a floor or ceiling on interest
rate changes. There is a risk that the current interest rate on such obligations
may not accurately reflect existing market interest rates. A demand instrument
with a demand notice period exceeding seven days may be considered illiquid if
there is no secondary market for such security.
<PAGE> 85
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary......................................... 2
Annual Operating Expenses....................... 3
Financial Highlights............................ 4
The Trust....................................... 5
Investment Objective............................ 5
Investment Policies............................. 5
California Municipal Securities................. 6
Risk Factors.................................... 6
Investment Limitations.......................... 7
Fundamental Policies............................ 7
The Advisor..................................... 7
The Administrator............................... 8
The Shareholder Servicing Agent................. 8
Distribution.................................... 8
Purchase and Redemption of Shares............... 8
Performance..................................... 9
Taxes........................................... 10
General Information............................. 12
Description of Permitted Investments............ 13
</TABLE>
<PAGE> 86
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers to provide a
convenient means of investing in professionally managed portfolios of
securities. This Prospectus relates to the Trust's:
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
INVESTMENT CLASS SHARES
The Trust's Investment Class Shares are offered to individual and institutional
investors, including accounts for which UNION BANK OF CALIFORNIA, N.A., its
affiliates and correspondents act in an agency or custodial capacity.
This Prospectus sets forth concisely the information about the Trust and the
Fund that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus, has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., OR ANY OF ITS AFFILIATES
OR CORRESPONDENTS. THE TRUST'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INVESTMENT CLASS
<PAGE> 87
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Investment Class shares of the CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND (the
"Fund"). This summary is qualified in its entirety by reference to the more
detailed information provided elsewhere in this Prospectus and in the Statement
of Additional Information.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund seeks to provide high current
income that is exempt from federal and State of California income taxes. See
"Investment Objective."
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund invests primarily in
investment grade or better bonds and notes issued by the State of California,
its agencies, instrumentalities and political subdivisions, the income on which
is exempt from regular federal and State of California personal income taxes
("California Municipal Securities"). See "Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUND? The investment
policies of the Fund entail certain risks and considerations of which an
investor should be aware. Shares of the Fund will fluctuate in value with the
value of the Fund's underlying portfolio securities. Values of fixed income
securities in which the Fund invests tend to vary inversely with interest rates,
and may be affected by other market and economic factors affecting the State of
California as well. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies,
or any instrumentalities of the securities in which any Fund invests guarantees
only the payment of principal and interest on the guaranteed security, and does
not guarantee the yield or value of the security or yield or value of shares of
that Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Fund. See "The Advisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? State Street Bank and Trust Company
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Investment Class shares of the Trust (except for the Convertible
Securities, Government Securities, Emerging Growth, Blue Chip Growth and
International Equity Funds). See "Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is $2,000 ($1,000 for IRAs). A purchase order will be
effective if the Distributor receives an order prior to 4:00 p.m., Eastern time.
Purchase orders for shares will be executed at a per share price equal to the
asset value next determined after the purchase order is effective (plus any
applicable sales charge). Redemption orders must be placed prior to 4:00 p.m.,
Eastern time on any Business Day for the order to be accepted that day. See
"Purchase and Redemption of Shares."
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. See "Dividends."
<PAGE> 88
3
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
<TABLE>
<CAPTION>
CALIFORNIA INTERMEDIATE
TAX-FREE BOND FUND
<S> <C>
- ------------------------------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases..................................................... 3.00%
Maximum Contingent Deferred Sales Charge*..................................................... None
Wire Redemption Fee........................................................................... $15
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the proceeds of any redemption
request relating to Investment Class shares of the Fund that were purchased without a sales charge
in reliance upon the waiver accorded to purchases in the amount of $1 million or more, but only
where such redemption request is made within 1 year of the date the shares were purchased.
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
- ------------------------------------------------------------------------------------------------------
Advisory Fee (After Fee Waivers)(1)........................................................... .01%
12b-1 Fees (After Fee Waivers)(2)............................................................. .00%
Other Expenses................................................................................ .21%
- ------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers)(1)(2)(3)......................................... .22%
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Advisor has agreed to waive its fee to the extent necessary to limit
Total Operating Expenses to 0.22%. Absent such waiver, the advisory fee
would have been .50%. The Advisor may terminate its waiver at any time in
its sole discretion.
(2) Absent voluntary fee waivers, 12b-1 Fees would be .40% for the Fund. The
Distributor reserves the right to terminate its waiver at any time in its
sole discretion.
(3) "Total Operating Expenses" have been restated to reflect current expenses
and fee waivers. Absent fee waivers, "Total Operating Expenses" would have
been 1.11%.
EXAMPLE:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
assuming (1) imposition of the maximum sales charge; (2) 5%
annual return and (3) redemption at the end of each time
period........................................................... $32 $37 $42 $57
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF THE FUND AND SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Investment Class shares of the
Fund. The Trust also offers Institutional Class shares of the Fund which are
subject to the same expenses, except there are no sales charges or distribution
costs. Additional information may be found under "The Administrator" and "The
Advisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term Shareholders may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
<PAGE> 89
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET -------------------------- DISTRIBUTIONS NET NET
ASSET NET REALIZED ------------------- ASSET ASSETS, RATIO
VALUE, NET AND UNREALIZED NET VALUE, END OF EXPENSES
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- -----------------------------------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 8.94 0.470 0.918 (0.487) -- 9.84 15.84 % 4,266 0.23%
1995 10.03 0.439 (1.077) (0.452) -- 8.94 (6.33 )% 4,882 0.50%
1994 (1) 10.00 0.115 0.020 (0.105) -- 10.03 4.67 %* 2,830 0.50%*
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
TO AVERAGE NET INVESTMENT AVERAGE
NET ASSETS INCOME NET ASSETS PORTFOLIO
EXCLUDING TO AVERAGE EXCLUDING TURNOVER
FEE WAIVERS NET ASSETS FEE WAIVERS RATE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
- -----------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- -----------------------------------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 1.12% 4.93% 4.04% 30%
1995 1.12% 4.92% 4.30% 22%
1994 (1) 1.13%* 4.26%* 3.63%* 19%
</TABLE>
* Annualized.
** Total return does not reflect the sales charge.
(1) Commenced operations on October 15, 1993.
<PAGE> 90
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the Funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in sales charges, distribution costs, voting rights
and dividends. Except for these differences among the classes, each share of
each fund represents an equal proportionate interest in that fund. This
Prospectus relates to the Investment Class shares of the Trust's California
Intermediate Tax-Free Bond Fund (the "Fund"). Information regarding the Trust's
other funds is contained in separate prospectuses that may be obtained from the
Trust's Distributor, SEI Financial Services Company, 680 East Swedesford Road,
Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVE
The California Intermediate Tax-Free Bond Fund seeks to provide high current
income that is exempt from federal and State of California income taxes.
There can be no assurance that the Fund's investment objective will be met.
INVESTMENT POLICIES
Under normal market conditions, the Fund will invest primarily in bonds and
notes issued by the State of California, its agencies, instrumentalities, and
political sub-divisions, the income on which is exempt from regular federal and
State of California personal income taxes ("California Municipal Securities").
The Fund may also invest in bonds and notes of other states, territories, and
possessions of the U.S. and their agencies, authorities, instrumentalities and
political sub-divisions which are exempt from federal income taxes, and in
shares of other investment companies, specifically money market funds, which
have similar investment objectives.
Under normal market conditions, at least 80% of the Fund's assets will be
invested in bonds and notes rated AAA, AA, A or BBB by Standard & Poor's
Corporation ("S&P"), Aaa, Aa, A or Baa by Moody's Investors Service ("Moody's"),
or AAA, AA, A or BBB by Fitch Investors Service ("Fitch") and which pay interest
that is not treated as a preference item for purposes of the federal alternative
maximum tax. The Fund may purchase unrated securities that are determined by the
Advisor to be of comparable quality at the time of purchase pursuant to quality
standards set by the Board of Trustees. In the event that a security owned by
the Fund is downgraded below the stated ratings categories, the Advisor will
take appropriate action with regard to the security.
Under California law, a mutual fund must have at least 50% of its total assets
invested in California Municipal Securities at the end of each quarter of its
taxable year in order to be eligible to pay California residents dividends that
are wholly or partially exempt from California personal income taxes.
Accordingly, the Fund intends to maintain at least 65% of its assets in
California Municipal Securities and may invest up to 100% of its assets in such
securities.
The Fund has no restrictions on the maturity of municipal securities in which it
may invest. The dollar-weighted average portfolio maturity of the Fund will be
from three to ten years. Accordingly, the Fund seeks to invest in municipal
securities of such maturities which, in the judgment of the Advisor, will
provide a high level of current income consistent with prudent investment, with
consideration given to market conditions.
The Fund may purchase securities on a forward commitment or a when-issued basis
where such purchases are for investment and not for leveraging purposes;
however, the Fund may sell these securities before the settlement date if it is
deemed advisable. No additional forward
<PAGE> 91
6
commitments will be made if more than 20% of the Fund's net assets would be so
committed.
The Fund may invest in securities which have not been registered under the
Securities Act of 1933 (Rule 144A Securities). The Fund will restrict its
investment in illiquid securities to 15% of its net assets.
CALIFORNIA MUNICIPAL SECURITIES
The two principal classifications of California Municipal Securities are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit, and taxing power for the
payment of principal and interest. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source. Private activity bonds (formerly known as industrial revenue bonds) are
generally revenue bonds.
Certain California Municipal Securities are municipal lease revenue obligations
(or certificates of participation or "COPs"), which typically provide that the
municipality has no obligation to make lease or installment payments in future
years unless money is appropriated for such purpose. While the risk of
non-appropriation is inherent to COP financing, this risk is mitigated by the
Fund's policy to invest in COPs that are rated in one of the four highest rating
categories used by Moody's, S&P, or Fitch.
California Municipal Securities also include so-called Mello-Roos and assessment
district bonds, which are usually unrated instruments issued to finance the
building of roads and other public works and projects that are primarily secured
by real estate taxes levied on property located in the local community. Most of
these bonds do not seek agency ratings because the issues are too small, and in
most cases, the purchase of these bonds are based upon the Advisor's
determination that it is suitable for the Fund.
The Fund may also purchase, subject to a limit of 15% of its assets, California
Municipal Securities that are variable rate demand notes (or VRDNs).
For temporary defensive purposes during periods when the Advisor determines that
market conditions warrant, the Fund may invest up to 25% of its assets in
taxable money market instruments consisting of securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, receipts, including
TR's, TIGR's and CATS, money market funds, repurchase agreements, and commercial
paper rated at least A-1 by S&P, or P-1 by Moody's, or Fitch-1 by Fitch. The
Fund also may hold a portion of its assets in cash. The Fund will not be
pursuing its investment objective to the extent that a substantial portion of
its assets is invested in money market securities, and the Fund may pay taxable
dividends to shareholders as a result.
For further information see "Description of Permitted Investments."
RISK FACTORS
The ability of the State of California and its political sub-divisions to raise
money through property taxes and to increase spending has been the subject of
considerable debate and various constitutional initiatives and other
limitations. This process, and associated legal challenges, remains on-going. It
is not possible to predict the ultimate effect of these constitutional
initiatives, nor can there be any assurance that additional initiatives will not
be introduced in the coming years.
The market value of the Fund's fixed income investments will change in response
to interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating agencies in the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal also affect the value of these investments.
Changes in the value of fund securities will not affect cash
<PAGE> 92
7
income derived from these securities, but will affect the Fund's net asset
value.
Securities rated BBB by S&P or Fitch or Baa by Moody's are deemed by these
rating services to have some speculative characteristics, and adverse economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
INVESTMENT LIMITATIONS
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the United States or its agencies and instrumentalities and repurchase
agreements involving such securities) if as a result more than 5% of the total
assets of the Fund would be invested in the securities of such issuer provided,
however, that the Fund may invest up to 25% of its total assets without regard
to this restriction as permitted by applicable law.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or guaranteed
by the U.S. Government or its agencies and instrumentalities and repurchase
agreements involving such securities, and provided further, that utilities as a
group will not be considered to be one industry, and wholly-owned subsidiaries
organized to finance the operations of their parent companies will be considered
to be in the same industries as their parent companies.
3. Make loans, except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objective and policies; and (b) enter into
repurchase agreements.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Fund. Fundamental policies cannot be changed with
respect to the Fund without the consent of a majority of the Fund's outstanding
shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of the Fund and continuously reviews,
supervises and administers the Fund's investment program. The Advisor discharges
its responsibilities subject to the supervision of, and policies established by,
the Trustees of the Trust. The Trust's shares are not sponsored, endorsed or
guaranteed by, and do not constitute obligations or deposits of, the Advisor and
are not guaranteed by the FDIC or any other governmental agency.
Under the Advisory Agreement, the Advisor is entitled to a fee, which is
calculated daily and paid monthly, at an annual rate of .50% of the average
daily net assets of the Fund. The Advisor may from time to time waive all or a
portion of its fee in order to limit the operating expenses of the Fund. Any
such waiver is voluntary and may be terminated at any time in the Advisor's sole
discretion.
For the fiscal year ended January 31, 1996, Union Bank, predecessor of the
Advisor, was paid an advisory fee of .03% of the average daily net assets of the
Fund.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of the Fund. On April 1,
1996, Union Bank, the Trust's then-investment
<PAGE> 93
8
advisor, combined with The Bank of California, N.A., and the resulting bank
changed its name to Union Bank of California, N.A. At the same time, the banks'
investment management divisions were combined. Each of Union Bank and The Bank
of California, N.A., (or its predecessor bank) has been in banking since the
early 1900's and historically, each has had significant investment functions
within its trust and investment division. Union Bank of California, N.A., is a
subsidiary of The Bank of Tokyo-Mitsubishi, Ltd.
Robert Bigelow has served as team leader of the Fund since October, 1994. Prior
to joining the Advisor's predecesser, Union Bank, in June, 1994, Mr. Bigelow
served as a portfolio manager at City National Bank from January, 1986 to June,
1994.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
administration agreement dated January 30, 1991 (the "Administration
Agreement"). Under the terms of the Administration Agreement, the Administrator
provides the Trust with certain management services including all necessary
office space, equipment, personnel, and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of Trust assets up to $1 billion, .12% of
assets between $1 billion and $2 billion and .10% of assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of the Fund's Investment Class
shares. Any such waiver is voluntary, and may be terminated at any time in the
Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Investment Class
shares of the Trust (except for the Convertible Securities, Government
Securities, Emerging Growth, Blue Chip Growth and International Equity Funds).
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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 Investment Class shares have a distribution plan ("Investment Class Plan").
The Distribution Agreement and the Investment Class Plan provide that the
Investment Class shares of the Fund may bear the following distribution
expenses: (1) the cost of prospectuses, reports to shareholders, sales
literature and other materials for potential investors; (2) advertising; and (3)
expenses incurred in connection with the promotion and sale of the Trust's
shares, including the Distributor's expenses for travel, communication, and
compensation and benefits for sales personnel. In addition, the Trust pays the
Distributor a fee of up to .40% of the Fund's Investment Class shares average
daily net assets, of which a maximum of .25% may be used to compensate
broker/dealers and service providers which provide administrative and/or
distribution services to Investment Class Shareholders or to their other
customers who beneficially own Investment Class shares.
HOW TO PURCHASE SHARES
GENERAL INFORMATION
Purchases and redemptions of shares of the Fund may be made on days on which
both the New York
<PAGE> 94
9
Stock Exchange and the Federal Reserve wire system are open for business.
("Business Days"). The minimum initial investment is $2,000 ($1,000 for IRAs);
however, the minimum investment may be waived in the Distributor's discretion.
All subsequent purchases must be at least $1,000 ($500 for IRAs).
Purchase orders for shares will be executed at a per share price equal to the
net asset value next determined after the receipt of the purchase order by the
Distributor (plus any applicable sales charge). The purchase price of shares of
the Fund is the net asset value next determined after a purchase order is
received and accepted by the Trust (plus a sales charge). The net asset value
per share of the Fund is determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities, by the total number
of outstanding shares of the Fund. Net asset value per share is determined daily
as of 4:00 p.m., Eastern time, on any Business Day. Purchases will be made in
full and fractional shares of the Trust calculated to three decimal places. The
Trust reserves the right to reject a purchase order when the Distributor
determines that it is not in the best interest of the Trust and/or its
Shareholders to accept such order.
Shares of the Fund are offered only to residents of states in which the shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase shares of the Fund by completing and signing an Account
Application form and mailing it, along with a check (or other negotiable bank
instrument or money order) payable to "Stepstone Funds (Fund Name)," to the
Transfer Agent at P.O. Box 8416, Boston, Massachusetts 02266-8416. All purchases
made by check should be in U.S. dollars and made payable to the "Stepstone Funds
(Fund Name)." Third party checks, credit card checks or cash will not be
accepted. You may purchase more shares at any time by mailing payment also to
the Transfer Agent at the above address. Orders placed by mail will be executed
on receipt of your payment. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred.
You may obtain Account Application Forms by calling the Distributor at
1-800-734-2922.
HOW TO PURCHASE BY WIRE
You may purchase shares by wiring Federal funds, provided that your Account
Application has been previously received. You must wire funds to the Transfer
Agent and the wire instructions must include your account number. You must call
the Transfer Agent at 1-800-734-2922 before wiring any funds. An order to
purchase shares by Federal funds wire will be deemed to have been received by
the Fund on the Business Day of the wire; provided that the shareholder wires
funds to the Transfer Agent prior to 4:00 p.m., Eastern time, if the Transfer
Agent does not receive the wire by 4:00 p.m., Eastern time, the order will be
executed on the next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC
INVESTMENT PLAN ("AIP")
You may arrange for periodic additional investments in the Fund through
automatic deductions by Automated Clearing House ("ACH") from a checking account
by completing this section in the Account Application form. The minimum
pre-authorized investment amount is $100 per month. The AIP is available only
for additional investments to an existing account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
Shares may be purchased through financial institutions, including the Adviser,
that provide distribution assistance or shareholder services. Shares purchased
by persons ("Customers") through financial institutions may be held of record by
the financial institution. Financial institutions may impose an earlier cut-off
time for receipt of purchase orders directed through them to allow for
processing and transmittal of these orders to the Transfer Agent for
effectiveness the same day.
<PAGE> 95
10
Customers should contact their financial institution for information as to that
institution's procedures for transmitting purchase, exchange or redemption
orders to the Trust.
Customers who desire to transfer the registration of shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
SALES CHARGES
The following table shows the regular sales charge on Investment Class shares to
a "single purchaser" (defined below), together with the dealer discount paid to
dealers and the agency commission paid to brokers (collectively the
"commission"):
<TABLE>
<CAPTION>
SALES
CHARGE SALES COMMISSION
AS A CHARGE AS AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF NET OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
<C> <S> <C> <C> <C>
- ------------------------------------------------------
0- $ 99,999... 3.00% 3.09% 2.70%
$ 100,000- $249,999... 2.50% 2.56% 2.25%
$ 250,000- $499,999... 2.00% 2.04% 1.80%
$ 500,000- $999,999... 1.50% 1.52% 1.35%
$1,000,000- and Over... 0.00%* 0.00% 0.00%
</TABLE>
- ---------------
* A contingent deferred sales charge of 1.00% will be assessed against any
proceeds of any redemption of such Investment Class shares prior to one year
from date of purchase.
The commissions shown in the table apply to sales through authorized dealers and
brokers. Under certain circumstances, the Distributor may use its own funds to
compensate financial institutions and intermediaries in amounts that are
additional to the commissions shown above. In addition, the Distributor may,
from time to time and at its own expense, provide promotional incentives in the
form of cash or other compensation to certain financial institutions and
intermediaries whose registered representatives have sold or are expected to
sell significant amounts of the Investment Class shares of the Fund. Such other
compensation may take the form of payments for travel expenses, including
lodging, incurred in connection with trips taken by qualifying registered
representatives to places within or without the United States. Under certain
circumstances, commissions up to the amount of the entire sales charge may be
reallowed to dealers or brokers, who might then be deemed to be "underwriters"
under the Securities Act of 1933. Commission rates may vary among the Funds.
In calculating the sales charge rates applicable to current purchases of a
Fund's shares, a "single purchaser" is entitled to cumulate current purchases
with net purchases of previously purchased shares of the Fund and other of the
Trust's funds (the "Eligible Funds") which are sold subject to a comparable
sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing shares of the Fund for their own account or for trust or
custodial accounts for their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account, including employee benefit plans
created under Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), including related plans of the same employer. To be
entitled to a reduced sales charge based upon shares already owned, the investor
must ask the Distributor for such entitlement at the time of purchase and
provide the account number(s) of the investor, the investor and spouse, and
their minor children, and give the age of such children. The Fund may amend or
terminate this right of accumulation at any time as to subsequent purchases.
LETTER OF INTENT. By initially investing at least $2,000 and submitting a
Letter of Intent (the "Letter") to the Distributor, a "single purchaser" may
purchase shares of the Fund and the other Eligible Funds during a 13-month
period at the reduced sales charge rates applying to the aggregate amount of the
intended purchases stated in the Letter. The Letter may apply to
<PAGE> 96
11
purchases made up to 90 days before the date of the Letter. To receive credit
for such prior purchases and later purchases benefitting from the Letter, the
Shareholder must notify the Transfer Agent at the time the Letter is submitted
that there are prior purchases that may apply, and, at the time of later
purchases, notify the Transfer Agent that such purchases are applicable under
the Letter.
RIGHTS OF ACCUMULATION. In calculating the sales charge rates applicable to
current purchases of Investment Class shares, a "single purchaser" is entitled
to cumulate current purchases with the current market value of previously
purchased Investment Class shares of the Fund sold subject to a comparable sales
charge.
To exercise your right of accumulation based upon shares you already own, you
must ask the Distributor for this reduced sales charge at the time of your
additional purchase and provide the account number(s) of the investor, as
applicable, the investor and spouse, and their minor children. The Fund may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
WAIVER OF SALES LOAD. No sales charge is imposed on Investment Class shares of
the Fund: (i) issued in plans of reorganization, such as mergers, asset
acquisitions and exchange offers, to which the Trust is a party; (ii) sold to
dealers or brokers that have a sales agreement with the Distributor, for their
own account or for retirement plans for their employees or sold to employees
(and their spouses) of dealers or brokers that certify to the Distributor at the
time of purchase that such purchase is for their own account (or for the benefit
of such employees' minor children); (iii) in aggregate purchases of $1 million
or more by tax-exempt organizations enumerated in Section 501(c) of the Code, or
employee benefit plans created under Sections 401, 403(b) or 457 of the Code;
(iv) sold to employees and families of the Advisor and its affiliates; (v) sold
to fiduciary accounts of the Advisor and its affiliates; or (vi) purchased with
proceeds from the recent redemption of shares of a mutual fund with similar
investment objectives and policies for which a sales charge was paid.
The waiver of the sales charge under circumstance (vi) above applies only if the
purchase is made within 60 days of the redemption and if conditions imposed by
the Distributor are met. This waiver policy with respect to the purchase of
shares through the use of proceeds from a recent redemption as described in
circumstance (vi) above will not be continued indefinitely, and may be
discontinued at any time without notice. Investors should contact the
Distributor to determine whether they are eligible to purchase shares without
paying a sales charge through the use of proceeds from a recent redemption as
described above and to confirm continued availability of this waiver policy
prior to initiating the procedures described in circumstance (vi).
REDEMPTION OF SHARES
You may redeem your shares without charge on any Business Day. There is,
however, a $15 charge for wiring redemption proceeds to a shareholder's
designated account. Shares may be redeemed by mail, by telephone or through a
pre-arranged systematic withdrawal plan. Investors who own shares held by a
financial institution should contact that institution for information on how to
redeem shares.
BY MAIL
A written request for redemption must be received by the Transfer Agent, P.O.
Box 8416, Boston, Massachusetts 02266-8416 in order to constitute a valid
redemption request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the Transfer
Agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker, dealer, credit union, securities exchange or association, clearing
agency or savings association. Notaries public cannot guarantee
<PAGE> 97
12
signatures. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption is for not more than $5,000 worth
of shares, (2) the redemption check is payable to the shareholder(s) of record,
and (3) the redemption check is mailed to the shareholder(s) at his or her
address of record.
BY TELEPHONE
You may redeem your shares by calling the Transfer Agent at 1-800-734-2922.
Under most circumstances, payments will be transmitted on the next Business Day
following receipt of a valid request or redemption. You may have the proceeds
mailed to your address or wired to a commercial bank account previously
designated on your Account Application. There is no charge for having redemption
proceeds mailed to you, but there is a $15 charge for wiring redemption
proceeds.
You may request a wire redemption for redemptions in excess of $500 by calling
the Transfer Agent at 1-800-734-2922 who will deduct a wire charge of $15 from
the amount of the wire redemption. Shares cannot be redeemed by Federal Reserve
wire on Federal holidays restricting wire transfers.
Neither the Transfer Agent nor the Trust will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. The Trust and Transfer Agent will each
employ reasonable procedures to confirm that instructions, communicated by
telephone are genuine. Such procedures may include taping of telephone
conversations.
If market conditions are extraordinarily active or other extraordinary
circumstance exist, and you experience difficulties placing redemption orders by
telephone, you may consider placing your order by mail.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Fund offers a Systematic Withdrawal Plan ("SWP"), which you may use to
receive regular distributions from your account. Upon commencement of the SWP,
your account must have a current net asset value of $5,000 or more. You may
elect to receive automatic payments via check or ACH of $100 or more on a
monthly, quarterly, semi-annual or annual basis. You may arrange to receive
regular distributions from your account via check or ACH by completing this
section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the Transfer Agent. The Transfer Agent may require that the signature
on the written notice be guaranteed.
It is generally not in your best interest to be participating in the SWP at the
same time that you are purchasing additional shares if you have to pay a sales
load in connection with such purchases.
OTHER INFORMATION REGARDING REDEMPTIONS.
Shareholders who desire to redeem shares of the Trust must place their
redemption orders prior to 4:00 p.m., Eastern time, on any Business Day for the
order to be accepted on that Business Day. The redemption price is the net asset
value of the Fund next determined after receipt by the Distributor of the
redemption order. Payment on redemption will be made as promptly as possible
and, in any event, within seven calendar days after the redemption order is
received.
Payment to shareholders for shares redeemed will be made within seven days after
the Transfer Agent receives the valid redemption request. At various times,
however, a Fund may be requested to redeem shares for which it has not yet
received good payment; collection of payment may take ten or more days. In such
circumstances, the redemption request will be rejected by the Fund. Once a Fund
has received good payment for the
<PAGE> 98
13
shares a shareholder may submit another request for redemption.
Due to the relatively high costs of handling small investments, each Fund
reserves the right to redeem your shares at net asset value, if, your account in
any Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase shares of any Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any shares.
Before any Fund exercises its right to redeem such shares you will be given
notice that the value of the shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in such Fund
in an amount which will increase the value of the account to at least the
minimum amount.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
Securities and Exchange Commission, shareholders of Investment Class shares of
other Funds of the Trust that have similar sales charge schedules may tender
their shares of those Funds for exchange into the number of shares (including
fractional shares) which have a value equal to the total net asset value of
shares tendered divided by the net asset value of Investment Class shares of the
Fund next determined after such order is received. Shares issued pursuant to
this offer will not be subject to the sales charge described above or any other
charge. The Fund may modify or terminate this exchange offer at any time upon 60
days' notice.
PERFORMANCE
From time to time, the Fund may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. The yield of the Fund refers to the annualized income generated by
an investment in the Fund over a specified 30-day period. The yield is
calculated by assuming that the same amount of income generated by the
investment during that period is generated in each 30-day period over one year,
and is shown as a percentage of the investment.
The total return of the Fund refers to the average compounded rate of return to
a hypothetical investment for designated time periods (including, but not
limited to, the period from which the Fund commenced operations through the
specified date), assuming that the entire investment is redeemed at the end of
each period and assuming the reinvestment of all dividend and capital gain
distributions. The total return of the Fund may also be quoted as a dollar
amount or on an aggregate basis, an actual basis, without inclusion of any sales
charge, or with a reduced sales charge in advertisements distributed to
investors entitled to a reduced sales charge.
The Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Fund may use long-term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios
and could include the value of a hypothetical investment in any of the capital
markets. The Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising, and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark
<PAGE> 99
14
correlation indicate how valid a comparative benchmark might be. Measures of
volatility and correlation are calculated using averages of historical data and
cannot be calculated precisely.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to the Investment Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to provide a detailed
explanation of the federal, state, or local income tax treatment of the Fund or
its Shareholders. In addition, state and local tax consequences of an investment
in the Fund may differ from the federal income tax consequences described below.
Accordingly, Shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes. Additional
information concerning taxes is set forth in the Statement of Additional
Information.
TAX STATUS OF THE FUND:
The Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. The Fund intends to qualify for the
special tax treatment afforded regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of
federal income tax on that part of its net investment company taxable income and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
The Fund will distribute all of its net investment income (including net
short-term capital gain) to Shareholders. If, at the close of each quarter of
its taxable year, at least 50% of the value of the Fund's assets consists of
obligations the interest on which is excludable from gross income, the Fund may
pay "exempt-interest dividends" to its Shareholders. Those dividends constitute
the portion of the aggregate dividends as designated by the Fund, equal to the
excess of the excludable interest over certain amounts disallowed as deductions.
Exempt-interest dividends are excludable from a Shareholder's gross income for
federal income tax purposes, but may have certain collateral federal income tax
consequences, including alternative minimum tax. Additional information
concerning taxes is set forth in the Statement of Additional Information.
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities to
satisfy the Code's requirements for the payment of "exempt-interest" dividends.
Any dividends paid out of income realized by the Fund on taxable securities will
be taxable to Shareholders as ordinary income, whether received in cash or in
additional shares, to the extent of the Fund's earnings and profits and will not
qualify for the dividends received deductions for corporate shareholders.
Distributions of net capital gain also do not qualify for the dividends-received
deduction and are taxable to shareholders as long-term capital gain, regardless
of how long a Shareholder has held Fund shares, and regardless of whether the
distributions are received in cash or in additional shares. The Fund will make
annual reports to Shareholders of the federal income tax status of all
distributions.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments,
the Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because the Fund
<PAGE> 100
15
distributes all of its net investment income to shareholders, the Fund may have
to sell Fund securities to distribute such imputed income, which may occur at a
time when the Advisor would not have chosen to sell such securities and which
may result in a taxable gain or loss.
Dividends declared by the Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared if paid by the Fund any time during the following January.
The Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Investment income received directly by the Fund on direct U.S. obligations is
exempt from tax at the state level, and may be exempt, depending on the state,
when received by a Shareholder as income dividends from the Fund provided
certain state-specific conditions are satisfied. Interest received on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. The Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from the Fund is considered tax exempt in their
particular state.
Each sale, exchange, or redemption of Fund shares is a taxable transaction to
the Shareholder.
Furthermore, entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by "private activity bonds" or
"industrial development bonds" should consult their tax advisors before
purchasing shares. (See the Statement of Additional Information.)
CALIFORNIA TAXES:
The Fund intends to qualify to pay dividends to Shareholders that are exempt
from California personal income tax ("California exempt-interest dividends").
The Fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of the Fund's taxable year, at least 50 percent of the
value of the Fund's total assets consists of obligations the interest on which
would be exempt from California personal income tax if the obligations were held
by an individual ("California Tax Exempt Obligations") and (2) the Fund
continues to qualify as a regulated investment company.
If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to Shareholders will be considered California exempt-interest
dividends (1) if they are designated as exempt-interest dividends by the Fund in
a written notice to Shareholders mailed within 60 days of the close of the
Fund's taxable year and (2) to the extent the interest received by the Fund
during the year on California Tax Exempt Obligations exceeds expenses of the
Fund that would be disallowed under California personal income tax law as
allocable to tax-exempt interest if the Fund were an individual. If the
aggregate dividends so designated exceed the amount that may be treated as
California exempt-interest dividends, only that percentage of each dividend
distribution equal to the ratio of aggregate California exempt-interest
dividends to aggregate dividends so designated will be treated as a California
exempt-interest dividend. The Fund will notify Shareholders of the amount of
California exempt-interest dividends each year.
Corporations subject to California franchise tax that invest in the Fund may not
be entitled to exclude California exempt-interest dividends from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends will be taxable to Shareholders at ordinary income tax
rates for California personal income tax
<PAGE> 101
16
purposes to the extent of the Fund's earnings and profits.
Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of shares of the Fund will not be deductible for California
personal income tax purposes if the Fund distributes California exempt-interest
dividends.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as they directly
govern the taxation of Shareholders subject to California personal income tax.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Fund transactions.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate series of shares and different classes of each fund. In addition
to the Fund, the Trust consists of the following funds: Treasury Money Market
Fund, Money Market Fund, California Tax-Free Money Market Fund, Growth Equity
Fund, Value Momentum Fund, Limited Maturity Government Fund, Balanced Fund,
Intermediate-Term Bond Fund, Blue Chip Growth Fund, Emerging Growth Fund,
Convertible Securities Fund, Government Securities Fund and International Equity
Fund. All consideration received by the Trust for shares of any fund and all
assets of such fund belong to that fund, and would be subject to liabilities
related thereto. The Trust reserves the right to create and issue shares of
additional funds.
The Trust pays its expenses, including audit and legal expenses, expenses of
preparing and printing prospectuses, proxy solicitation material and reports to
Shareholders, costs of custodial services and registering the shares under
federal and state securities laws, insurance expenses, litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses. Please refer to "Financial Highlights" in this prospectus
for more information regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to such fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings, but approval will be sought for certain changes in the
operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon the written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust will provide appropriate
assistance and information to the Shareholders requesting the meeting in
connection with such matters.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
<PAGE> 102
17
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to Stepstone Funds, P.O. Box 8416,
Boston, Massachusetts 02266-8416.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
the Fund is distributed in the form of monthly dividends to Shareholders of
record. Currently, capital gains of the Fund, if any, will be distributed at
least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the Shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to the Administrator at least 15 days prior to the change.
Dividends and distributions of the Fund are paid on a per-share basis. The value
of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a Shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
The dividends payable on Investment Class shares will typically be lower than
dividends payable on Institutional Class shares because of the distribution
expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A. Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the assets of the
Fund. The Custodian holds cash, securities and other assets of the Trust as
required by the Investment Company Act of 1940, as amended.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Fund:
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
MONEY MARKET INSTRUMENTS--Money market securities are high-quality,
dollar-denominated, short-term, debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations of agencies and instrumentalities of the U.S. Government; (iii)
high-quality commercial paper issued by U.S. and foreign corporations; (iv) debt
obligations with a maturity of one year or less issued by corporations that
issue high-quality commercial paper; and (v) repurchase agreements involving any
of the foregoing obligations entered into with highly-rated banks and
broker-dealers.
MUNICIPAL FORWARDS--Municipal Forwards are forward commitments for the purchase
of tax-exempt bonds with a specified coupon to be delivered by an issuer at a
future date, typically exceeding 45 days but normally less than one year after
the commitment date. Municipal forwards are normally used as a refunding
mechanism for bonds that may only be redeemed on a designated future date. As
with forward commitments and when-issued securities, municipal forwards are
subject to market fluctuations due to changes, real or anticipated, in market
interest rates between the
<PAGE> 103
18
commitment date and the settlement date and will have the effect of leveraging
the Fund's assets. Municipal forwards may be considered to be illiquid
investments. The Fund will maintain liquid, high-grade securities in a
segregated account in an amount at least equal to the purchase price of the
municipal forward.
MUNICIPAL SECURITIES--Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) 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.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes. Municipal bonds include
general obligation bonds, revenue or special obligation bonds, private activity
and industrial development bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility, tolls from a toll bridge, for example. The
payment of principal and interest on private activity and industrial development
bonds generally is dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment.
PARTICIPATION INTERESTS--Participation interests are interests in municipal
securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies. These interests may take
the form of participations, beneficial interests in a trust, partnership
interests or any other form of indirect ownership that allows the Fund to treat
the income from the investment as exempt from federal income tax. The Fund
invests in these participation interests in order to obtain credit enhancement
or demand features that would not be available through direct ownership of the
underlying Municipal Securities.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
REPURCHASE AGREEMENTS--Agreements by which the Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. The Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement.
The Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its right to
dispose of the collateral securities or if the Fund realizes a loss on the sale
of the collateral. The Fund will enter into a repurchase agreement only with
financial institutions deemed to present minimal risk of bankruptcy during the
term of the agreement based on established guidelines. Repurchase agreements are
considered loans under the 1940 Act.
U.S. GOVERNMENT AGENCY SECURITIES-- Certain federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
<PAGE> 104
19
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--Bills, notes and bonds issued by the U.S. Treasury
and separately traded interest and principal component parts of such obligations
that are transferable through the Federal book-entry system known as Separately
Traded Registered Interest and Principal Securities ("STRIPS").
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. California
Municipal Securities may also be acquired through the purchase of municipal
forwards. The interest rates on these securities may be reset daily, weekly,
quarterly or some other reset period, and may have a floor or ceiling on
interest rate changes. There is a risk that the current interest rate on such
obligations may not accurately reflect existing market interest rates. A demand
instrument with a demand notice period exceeding seven days may be considered
illiquid if there is no secondary market for such security.
<PAGE> 105
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary.......................................... 2
Shareholder Transaction Expenses................. 3
Annual Operating Expenses........................ 3
Financial Highlights............................. 4
The Trust........................................ 5
Investment Objective............................. 5
Investment Policies.............................. 5
California Municipal Securities.................. 6
Risk Factors..................................... 6
Investment Limitations........................... 7
Fundamental Policies............................. 7
The Advisor...................................... 7
The Administrator................................ 8
The Shareholder Servicing Agent.................. 8
Distribution..................................... 8
How to Purchase Shares........................... 8
Redemption of Shares............................. 11
Purchases by Exchange............................ 13
Performance...................................... 13
Taxes............................................ 14
General Information.............................. 16
Description of Permitted Investments............. 17
</TABLE>
<PAGE> 106
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient and
economical means of investing in professionally managed portfolios of
securities. This Prospectus relates to the Trust's:
-- INTERMEDIATE-TERM BOND FUND
-- GOVERNMENT SECURITIES FUND
-- CONVERTIBLE SECURITIES FUND
INSTITUTIONAL CLASS SHARES
The Trust's Institutional Class Shares are offered to institutional investors,
including UNION BANK OF CALIFORNIA, N.A. and BANK OF TOKYO-MITSUBISHI TRUST
COMPANY, their affiliates and correspondents for the investment of their own
funds or funds for which they act in a fiduciary, agency or custodial capacity.
This Prospectus sets forth concisely the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI
TRUST COMPANY OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. THE TRUST'S SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INSTITUTIONAL CLASS
<PAGE> 107
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Institutional Class shares of the GOVERNMENT SECURITIES FUND, INTERMEDIATE-TERM
BOND FUND and CONVERTIBLE SECURITIES FUND (each a "Fund"). This summary is
qualified in its entirety by reference to the more detailed information provided
elsewhere in the Prospectus and in the Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE INTERMEDIATE-TERM BOND FUND
seeks to provide total return. THE GOVERNMENT SECURITIES FUND seeks to achieve
total return consistent with the preservation of capital by investing in a
diversified portfolio of obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities. THE CONVERTIBLE SECURITIES FUND seeks a
high level of current income and capital appreciation by investing in
convertible securities. See "Investment Objectives."
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE INTERMEDIATE-TERM BOND FUND
invests primarily in debt instruments. THE GOVERNMENT SECURITIES FUND invests
primarily in debt obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities, including mortgage-backed securities issued or
guaranteed by U.S. government agencies. THE CONVERTIBLE SECURITIES FUND invests
primarily in convertible securities, including bonds, debentures, notes, and
preferred stocks convertible into common stock. See "Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUND? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. The market value of a Fund's fixed income investments
will change in response to interest rate changes and other factors. During
periods of falling interest rates, the value of outstanding fixed income
securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. The Convertible Securities Fund
may invest up to 35% of its assets in convertible bonds rated lower than Baa by
Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P") and as low as Caa by Moody's or CCC by S&P, which are
lower-quality, higher-yielding, high-risk debt securities. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by U.S. Government, its agencies or
instrumentalities of the securities in which any Fund invests guarantees only
the payment of principal and interest on the guaranteed security and does not
guarantee the yield or value of the security or yield or value of shares of that
Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Trust. See "The Advisor."
WHO IS THE SUBADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
SubAdvisor to the Government Securities and Convertible Securities Funds. See
"The SubAdvisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? SEI Financial Management Corporation
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Institutional and Cash Sweep Class shares of the Trust and for the
Investment Class shares of the Convertible Securities, Government Securities,
Emerging Growth, Blue Chip Growth and International Equity Funds. See
"Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment in the Fund's Institutional Class is $2,000. A
purchase order will be effective if the Distributor receives an order prior to
4:00 p.m., Eastern time and the Custodian receives Federal funds before the
close of business on the next Business Day. The purchase price is the net asset
value next determined after a purchase order is received and accepted by the
Trust. Redemption orders must be placed prior to 4:00 p.m., Eastern time on any
Business Day for the order to be accepted that day. See "Purchase and Redemption
of Shares."
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of each Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. See "Dividends."
<PAGE> 108
3
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of offering price)
<TABLE>
<CAPTION>
INTERMEDIATE- GOVERNMENT CONVERTIBLE
TERM SECURITIES SECURITIES
BOND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Fees.................................... .50% .50% .60%
Other Expenses................................... .18% .25% .25%
- -------------------------------------------------------------------------------------------------------
Total Operating Expenses......................... .68% .75% .85%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period
Intermediate-Term Bond Fund........................... $ 7 $ 22 $ 38 $ 85
Government Securities Fund............................ $ 8 $ 24 $ 42 $ 93
Convertible Securities Fund........................... $ 9 $ 27 $ 47 $ 105
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the
investor in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Institutional Class shares of the Funds.
Financial institutions that are the record owner of shares for the account of
their customers may impose separate fees for account services to their
customers. The Trust also offers Investment Class shares of the Funds, which are
subject to the same expenses, except there are distribution and sales charges.
Additional information may be found under "The Administrator," "The Advisor" and
"The SubAdvisor."
<PAGE> 109
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET -------------------------- DISTRIBUTIONS NET NET
ASSET NET REALIZED ------------------- ASSET ASSETS, RATIO OF
VALUE, NET AND UNREALIZED NET VALUE, END EXPENSES
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- --------------------------------
INTERMEDIATE-TERM BOND FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.67 0.609 0.951 (0.609) -- 10.62 16.58 % 132,942 0.68%
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11 )% 109,848 0.71%
1994 10.57 0.598 0.352 (0.595) (0.205) 10.72 9.22 % 130,308 0.69%
1993 10.49 0.650 0.409 (0.636) (0.343) 10.57 10.47 % 112,806 0.67%
1992 (1) 10.00 0.750 0.603 (0.745) (0.118) 10.49 14.05 % 76,779 0.72%
- -----------------------------
CONVERTIBLE SECURITIES FUND
- -----------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.08 0.407 1.35 (0.404) -- 10.43 19.67 % 16,668 0.85%
1995 (2) 10.00 0.354 (0.931) (0.343) -- 9.08 (5.83 )% 10,297 0.85%
- ------------------------------
GOVERNMENT SECURITIES FUND
- ------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.07 0.556 0.87 (0.556) -- 9.94 16.16 % 46,725 0.75%
1995 (2) 10.00 0.491 (0.946) (0.475) -- 9.07 (4.49 )% 32,178 0.75%
<CAPTION>
RATIO OF
RATIO OF NET INVESTMENT
EXPENSES RATIO OF INCOME TO
TO AVERAGE NET INVESTMENT AVERAGE
NET ASSETS INCOME NET ASSETS PORTFOLIO
EXCLUDING TO AVERAGE EXCLUDING TURNOVER
FEE WAIVERS NET ASSETS FEE WAIVERS RATE
<S> <C> <C> <C> <C>
- ------------------------------
- ------------------------------
INTERMEDIATE-TERM BOND FUND
- ------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.68% 5.97% 5.97% 147%
1995 0.71% 5.89% 5.89% 95%
1994 0.69% 5.56% 5.56% 72%
1993 0.67% 6.16% 6.16% 88%
1992 (1) 0.75% 7.37% 7.34% 126%
- ------------------------------
CONVERTIBLE SECURITIES FUND
- ------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.85% 4.14% 4.14% 46%
1995 (2) 0.85% 3.87% 3.87% 36%
- ------------------------------
GOVERNMENT SECURITIES FUND
- ------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.75% 5.89% 5.89% 239%
1995 (2) 0.75% 5.46% 5.46% 184%
</TABLE>
(1) Commenced operations on February 1, 1991.
(2) Commenced operations on February 1, 1994.
<PAGE> 110
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes)
which provide for variations in distribution costs, voting rights and dividends.
Except for these differences among the classes, each share of each fund
represents an equal proportionate interest in that fund. This Prospectus relates
to the Institutional Class shares of the Trust's Government Securities,
Intermediate-Term Bond and Convertible Securities Funds (each a "Fund").
Information regarding the Trust's other funds is contained in separate
prospectuses that may be obtained from the Trust's Distributor, SEI Financial
Services Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVES
THE INTERMEDIATE-TERM BOND FUND seeks to provide total return.
THE GOVERNMENT SECURITIES FUND seeks to achieve total return consistent with the
preservation of capital by investing in a diversified portfolio of obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
THE CONVERTIBLE SECURITIES FUND seeks a high level of current income and capital
appreciation by investing in convertible securities.
There can be no assurance that a Fund will meet its investment objective.
INVESTMENT POLICIES
INTERMEDIATE-TERM BOND FUND
Under normal market conditions, at least 65% of the Intermediate-Term Bond
Fund's assets will be invested in debt instruments. Such debt instruments shall
include corporate bonds and debentures rated AAA, AA, A or BBB by Standard &
Poor's Corporation ("S&P") or Aaa, Aa, A or Baa by Moody's Investors Service
("Moody's") or determined by the Advisor to be of comparable quality at the time
of purchase; Yankee Bonds and EuroDollar instruments; obligations issued by the
U.S. Government and its agencies and instrumentalities (such as Government
National Mortgage Association ("GNMA") securities); mortgage-backed securities
including privately issued mortgage-backed securities; readily-marketable
asset-backed securities; securities issued or guaranteed by foreign governments,
their political subdivisions, agencies or instrumentalities; and obligations of
supranational entities such as the World Bank and the Asian Development Bank.
The remainder of the Fund's assets may be invested in money market instruments
and in cash. The dollar-weighted average portfolio maturity of the Fund will be
from three to ten years.
The portfolio turnover rate for the Intermediate-Term Bond Fund for the fiscal
year ended January 31, 1996 was 147%. This rate of portfolio turnover may result
in higher brokerage execution costs and higher levels of capital gains.
GOVERNMENT SECURITIES FUND
Under normal market conditions, the Government Securities Fund will invest at
least 80% of its assets in obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities, including mortgage-backed
securities issued or guaranteed by U.S. government agencies such as GNMA, the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), and repurchase agreements backed by such securities. The
Fund may invest any remaining assets in corporate bonds that carry a rating of
Baa or better by Moody's or BBB or better by S&P, or that are deemed by the
SubAdvisor to be of comparable quality; Yankee Bonds, including sovereign,
supranational and Canadian bonds; shares of other investment companies with
similar investment objectives;
<PAGE> 111
6
commercial paper; money market funds; privately issued mortgage-backed and other
readily-marketable asset-backed securities; and money market instruments and
cash.
The SubAdvisor will seek to enhance the yield of the Fund by taking advantage of
yield disparities or other factors that occur in the government securities and
money markets. The Fund may dispose of any security prior to its maturity if
such disposition and reinvestment of the proceeds are expected to enhance its
yield consistent with the SubAdvisor's judgment as to a desirable maturity
structure or if such disposition is believed to be advisable due to other
circumstances or considerations. The Fund will seek to achieve capital gains by
taking advantage of price appreciation caused by interest rate and credit
quality changes.
The Fund may invest in futures and options on futures for the purpose of
achieving the Fund's objectives and for adjusting portfolio duration. The Fund
may invest in futures and related options based on any type of security or index
traded on U.S. or foreign exchanges or over the counter, as long as the
underlying security, or securities represented by an index, are permitted
investments of the Fund. The Fund may enter into futures contracts and options
on futures only to the extent that obligations under such contracts or
transactions represent not more than 10% of the Fund's assets.
The portfolio turnover rate for the Government Securities Fund for the fiscal
year ended January 31, 1996 was 239%. This rate of portfolio turnover may result
in higher brokerage execution costs and higher levels of capital gains.
CONVERTIBLE SECURITIES FUND
Under normal market conditions, at least 65% of the Convertible Securities
Fund's assets will be invested in convertible securities consisting of bonds,
debentures, notes and preferred stocks convertible into common stock. In
general, a convertible security is a fixed-income security, such as a bond
(which typically pays a fixed annual rate of interest) or preferred stock (which
typically pays a fixed dividend), that may be converted at a stated price within
a specified period of time into a specified number of shares of common stock of
the issuing company or of a different company. A convertible security may be
subject to redemption by the issuer, but only after a particular date and under
certain circumstances (including a specified price) established upon issue. If a
convertible security held by the Fund is called for redemption, the Fund could
be required to tender it for redemption, convert it into the underlying common
stock, or sell it to a third party. Common stock received upon conversion will
be sold when, in the opinion of the SubAdvisor, it is advisable to do so.
Because of its conversion feature, the market value of convertible preferred
stock tends to move together with the market value of the underlying common
stock. As a result, the Fund's selection of convertible securities is based, to
a great extent, on the potential for capital appreciation that may exist in the
underlying common stocks. The value of convertible securities is also affected
by prevailing interest rates, the credit quality of the issuer, and any call
provisions. Investments in convertible securities generally entail less
volatility than investments in the common stocks of the same issuers.
Nevertheless, it is the fixed income component of these securities that is often
deemed by the ratings agencies to be high risk or speculative. The Fund may
invest less than 35% of its assets in convertible bonds rated lower than Baa by
Moody's or BBB by S&P and as low as Caa by Moody's or CCC by S&P, which are
lower-quality, higher-yielding, high-risk debt securities (commonly known as
"junk bonds"). The Fund may also invest in unrated convertible securities which,
in the SubAdvisor's opinion, are of comparable quality to such rated securities.
See "Risk Factors."
The Fund may invest any remaining assets in common stocks; securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities;
corporate bonds rated Baa or better by Moody's or BBB by S&P or better
<PAGE> 112
7
(investment grade bonds); shares of other investment companies with similar
investment objectives; high grade commercial paper; money market funds; money
market instruments and cash; floating and variable rate notes; repurchase
agreements; dollar-denominated securities of foreign issuers; and Standard and
Poor's Depository Receipts ("SPDRs").
GENERAL INVESTMENT POLICIES
Mortgage-backed securities purchased by the Funds will be issued or guaranteed
as to payment of principal and interest by the U.S. government or its agencies
or instrumentalities or, if issued by private issuers, rated in one of the two
highest rating categories by a nationally recognized rating agency. The
principal governmental issuers or guarantors of mortgage-backed securities are
GNMA, FNMA, and FHLMC. Obligations of GNMA are backed by the full faith and
credit of the United States Government, while obligations of FNMA and FHLMC are
supported by the credit of the respective agency only. The Funds may purchase
mortgage-backed securities that are backed or collateralized by fixed,
adjustable or floating rate mortgages.
For temporary defensive purposes during periods when the Advisor or SubAdvisor
determines that market conditions warrant, each Fund may invest up to 100% of
its assets in money market instruments consisting of securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, repurchase
agreements, receipts (including TR's, TIGR's and CATS), money market funds,
certificates of deposit, time deposits, bank master notes and bankers'
acceptances issued by banks having net assets of at least $1 billion as of the
end of their most recent fiscal year, commercial paper rated at least A-1 by S&P
or P-1 by Moody's, and in cash. A Fund will not be pursuing its investment
objective to the extent that a substantial portion of its assets are invested in
money market securities.
In the event that a security owned by a Fund is downgraded below the stated
ratings categories, the Advisor or SubAdvisor will take appropriate action with
regard to the security.
Each Fund will restrict its investment in illiquid securities to 15% of its net
assets.
Each Fund may engage in securities lending and will limit such practice to
33 1/3% of total assets.
Each Fund may purchase securities which have not been registered under the
Securities Act of 1933 (Rule 144A Securities).
Each Fund may purchase securities on a forward commitment or when-issued basis
where such purchases are for investment and not for leveraging purposes;
however, the Fund may sell these securities before the settlement date if it is
deemed advisable. No additional forward commitments will be made if more than
20% of a Fund's net assets would be so committed.
For further information see "Description of Permitted Investments."
RISK FACTORS
Each Fund's shares will fluctuate in value with the value of the underlying
securities in its portfolio. Because of their fixed income features, however,
convertible securities are expected to fluctuate in value to a lesser degree
than the common stock into which they are convertible. Changes in the value of a
Fund's portfolio securities will not affect cash income received from ownership
of such securities, but will affect the Fund's net asset value.
Mortgage-backed securities that are not issued or guaranteed by the U.S.
government or its agencies or instrumentalities, including securities nominally
issued by a government entity (such as the Resolution Trust Corporation), are
not obligations of a governmental entity, and thus may bear a greater risk of
nonpayment. The timely payment of principal and interest normally is supported,
at least partially, by various forms of insurance or guarantees. There can be no
assurance, however, that such credit enhancements will support fully the payment
of principal and interest on such obligations.
<PAGE> 113
8
Securities rated BBB by S&P or Baa by Moody's are deemed by these rating
services to have some speculative characteristics and adverse economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
Each Fund may hold dollar-denominated securities of foreign issuers which may
bear greater investment risks than those of U.S. domestic issuers. Such risks
include political and economic instability, expropriation of foreign deposits
and other restrictions which may adversely affect the payment of principal, and
interest on such securities. See "Description of Permitted Investments."
RISKS ASSOCIATED WITH CONVERTIBLE SECURITIES
Investments in lower-rated debt securities (i.e., securities rated lower than
BBB by S&P or Baa by Moody's), in which the Convertible Securities Fund may
invest, bear certain risks, including the risk that such securities may be
thinly traded, which can adversely affect the price at which these securities
can be sold and can result in high transaction costs. Market quotations may not
be available, and therefore, judgment plays a greater role in valuing
lower-rated debt securities than securities for which more extensive quotations
and last sale information are available. Adverse publicity and changing investor
perceptions may affect the ability of outside pricing services to value
lower-rated debt securities, and the Convertible Securities Fund's ability to
dispose of these securities.
The market price of lower-rated debt securities may decline significantly in
periods of general economic difficulty which may follow periods of rising
interest rates. During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of lower-rated debt to meet their payment
obligations on these securities may be impaired.
The Convertible Securities Fund may invest in securities which are rated as low
as 'Caa' by Moody's or 'CCC' by S&P. Securities rated 'Caa' by Moody's are of
poor standing and may be in default or may present elements of danger with
respect to principal or interest. Debt rated 'CCC' by S&P is regarded as having
speculative characteristics with respect to capacity to pay interest and repay
principal. In the event of adverse business, financial, and economic conditions,
debt rated 'CCC' is not likely to have the capacity to repay principal.
INVESTMENT LIMITATIONS
Each Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities and repurchase
agreements involving such securities) if as a result more than 5% of the total
assets of a Fund would be invested in the securities of such issuer. This
restriction applies to 75% of a Fund's assets.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and repurchase
agreements involving such securities, and provided further, that utilities as a
group will not be considered to be one industry, and wholly-owned subsidiaries
organized to finance the operations of their parent companies will be considered
to be in the same industries as their parent companies.
3. Make loans except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objectives and policies, (b) enter into
repurchase agreements, and (c) engage in securities lending as described in this
Prospectus and in the Statement of Additional Information.
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The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Funds. Fundamental policies cannot be changed with
respect to a Fund without the consent of the holders of a majority of the Fund's
outstanding shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of the Intermediate-Term Bond Fund and
continuously reviews, supervises and administers each Fund's investment program.
The Advisor discharges its responsibilities subject to the supervision of, and
policies established by, the Trustees of the Trust. The Trust's shares are not
sponsored, endorsed or guaranteed by, and do not constitute obligations or
deposits of, the Advisor and are not guaranteed by the FDIC or any other
governmental agency.
The Advisor is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .50% of the average daily net assets of the Government
Securities and Intermediate-Term Bond Funds and .60% of the average daily net
assets of the Convertible Securities Fund. The Advisor may from time to time
waive all or a portion of its fee in order to limit the operating expenses of a
Fund. Any such waiver is voluntary and may be terminated at any time in the
Advisor's sole discretion.
For the fiscal year ended January 31, 1996, Union Bank, predecessor of the
Advisor, was paid an advisory fee of .50%, .50% and .60% of the average daily
net assets of the Intermediate-Term Bond Fund, Government Securities Fund and
Convertible Securities Fund, respectively.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of each Fund. On April 1,
1996, Union Bank, the Trust's then-investment advisor, combined with The Bank of
California, N.A., and the resulting bank changed its name to Union Bank of
California, N.A. At the same time, the banks' investment management divisions
were combined. Each of Union Bank and The Bank of California, N.A. (or its
predecessor bank) has been in banking since the early 1900's, and historically,
each has had significant investment functions within its trust and investment
division. Union Bank of California, N.A., is a subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd..
James V. Atkinson has served as team leader of the Intermediate-Term Bond Fund
since 1991. Mr. Atkinson is a Vice President of the Advisor and has been with
the Advisor and its predecessor, Union Bank, since 1991. Mr. Atkinson was a
portfolio manager at The Boston Company from 1988 to 1990.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE SUBADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "SubAdvisor") have
entered into an investment subadvisory agreement relating to the Government
Securities and Convertible Securities Funds (the "Investment SubAdvisory
Agreement"). Under the Investment SubAdvisory Agreement, the SubAdvisor makes
the day-to-day investment decisions for the assets of the Government Securities
and Convertible Securities Funds, subject to the supervision of, and policies
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10
established by, the Advisor and the Trustees of the Trust.
Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, and with offices at 100 Broadway, New York,
New York 10005, operates as a wholly-owned subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd. The SubAdvisor was formed by the combination on April 1,
1996, of Bank of Tokyo Trust Company, a wholly-owned subsidiary of The Bank of
Tokyo, Ltd., and Mitsubishi Bank Trust Company of New York, a wholly-owned
subsidiary of The Mitsubishi Bank, Ltd. Bank of Tokyo Trust Company was the
surviving entity, and changed its name to Bank of Tokyo-Mitsubishi Trust
Company. Prior to the combination, subadvisory services were provided by Bank of
Tokyo Trust Company. Bank of Tokyo Trust Company was established in 1955, and
has provided trust services since that time and management services since 1965.
The SubAdvisor serves as portfolio manager to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of April 1, 1996, Bank of
Tokyo-Mitsubishi Trust Company managed $750 million in individual portfolios and
collective funds. In addition, the SubAdvisor also serves as SubAdvisor to the
Trust's Emerging Growth and Blue Chip Growth Funds.
The SubAdvisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .20% of the average daily net
assets of the Government Securities Fund and .30% of the average daily net
assets of the Convertible Securities Fund. For the fiscal year ended January 31,
1996, Bank of Tokyo Trust Company, predecessor of the SubAdvisor, received .20%
and .30% of the average daily net assets of the Government Securities Fund and
the Convertible Securities Fund, respectively.
Stephen W. Blocklin has served as portfolio manager of the Government Securities
Fund since its inception. Mr. Blocklin has been a Vice President with the
SubAdvisor and its predecessor, Bank of Tokyo Trust Company, since December,
1993. From September, 1988 to December, 1993, he served as a senior fixed income
fund manager in the institutional investment management group at First Fidelity
Bancorporation.
The day-to-day management of the Convertible Securities Fund's investments is
the responsibility of a team of investment professionals.
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of the average daily net assets of the Trust
up to $1 billion, .12% of the average daily net assets between $1 billion and $2
billion and .10% of the average daily net assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Institutional Class
shares. Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
SEI Financial Management Corporation serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Institutional and Cash
Sweep Class shares of the Trust and for the Investment Class shares of the
Convertible Securities, Government Securities, Emerging Growth, Blue Chip Growth
and International Equity Funds. Compensation for these services is paid under
the Administration Agreement.
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11
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the outstanding shares of
the Trust upon not more than 60 days' written notice by either party, or upon
assignment by the Distributor. Investment Class shares of a Fund, which are
offered by a separate prospectus, may bear the costs of their distribution
expenses and, a sales charge is imposed on the sale of Investment Class shares
of the Funds. It is possible that an institution may offer different classes of
shares to its customers and thus receive different compensation with respect to
different classes of shares.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Funds may be made on days on which
both the New York Stock Exchange and Federal Reserve wire system are open for
business ("Business Days"). The minimum initial investment in a Fund is $2,000;
however, the minimum investment may be waived at the Distributor's discretion.
Purchase orders will be effective as of the day they are received by the
Distributor if the Distributor receives the order before 4:00 p.m., Eastern time
and the Custodian receives Federal funds before the close of business on the
next Business Day.
The purchase price of shares of a Fund is the net asset value next determined
after a purchase order is received and accepted by the Trust. The net asset
value per share of a Fund is determined by dividing the total market value of a
Fund's investments and other assets, less any liabilities, by the total number
of outstanding shares of a Fund. Net asset value per share is determined daily
as of 4:00 p.m., Eastern time, on any Business Day. Purchases will be made in
full and fractional shares of a Fund calculated to three decimal places. The
Trust reserves the right to reject a purchase order when the Distributor
determines that it is not in the best interest of the Trust and/or its
Shareholders to accept such order.
Shares of the Funds are offered only to residents of states in which the shares
are eligible for purchase.
Shareholders who desire to redeem shares of a Fund must place their redemption
orders prior to 4:00 p.m., Eastern time, on any Business Day for the order to be
accepted on that Business Day. The redemption price is the net asset value of a
Fund next determined after receipt by the Distributor of the redemption order.
Payment on redemption will be made as promptly as possible and, in any event,
within seven calendar days after the redemption order is received.
Neither the Trust's Transfer Agent nor the Trust will be responsible for any
loss, liability, cost, or expense for acting upon wire instructions or upon
telephone instructions that it reasonably believes are genuine. The Trust and
its transfer agent will each employ reasonable procedures to confirm that
telephone instructions are genuine. Such procedures may include taping of
telephone conversations. If market conditions are extraordinarily active or
other extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
PERFORMANCE
From time to time, the Funds may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. The yield of a Fund refers to the annualized income generated by an
investment in the Fund over a specified 30-day period. The yield is calculated
by assuming that the same amount of income generated by the investment during
the period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
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12
The total return of a Fund refers to the average compounded rate of return to a
hypothetical investment, for designated time periods (including, but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
The total return of a Fund may also be quoted as a dollar amount or on an
aggregate basis, an actual basis, without inclusion of any sales charge, or with
a reduced sales charge in advertisements distributed to investors entitled to a
reduced sales charge.
A Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Fund may use long term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios
and could include the value of a hypothetical investment in any of the capital
markets. The Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to the Investment Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial, or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state, or local income tax treatment of a Fund or
its Shareholders. In addition, state and local income tax consequences of an
investment in a Fund may differ from the federal income tax consequences
described below. Accordingly, Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, and local income
taxes. Additional information concerning taxes is set forth in the Statement of
Additional Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. Each Fund intends to continue to
qualify for the special tax treatment afforded regulated investment companies by
the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved
of federal income tax on that part of its net investment company taxable income
and net capital gain (the excess of net long-term capital gain over net
short-term capital loss) distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
A Fund will distribute all of its net investment income (including net
short-term capital gain) to Shareholders. Dividends from the Fund's net
investment company taxable income are taxable to Shareholders as ordinary income
(whether received in cash or in additional shares) to the extent of the Fund's
earnings and profits. Any net capital gains will be distributed at least
annually
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13
and will be taxed to Shareholders as long-term capital gains, regardless of how
long the Shareholder has held shares and regardless of whether the distributions
are received in cash or in additional shares. Dividends paid by a Fund to
corporate Shareholders will qualify for the dividends-received deduction to the
extent derived from dividends received by the Fund from domestic corporations. A
portion of such dividends may be subject to the alternative minimum tax. Each
Fund will provide annual reports to Shareholders of the federal income tax
status of all distributions.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments, a
Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because each Fund distributes
all of its net investment income to Shareholders, a Fund may have to sell
portfolio securities to distribute such imputed income, which may occur at a
time when the Advisor or SubAdvisor would not have chosen to sell such
securities and which may result in a taxable gain or loss.
Investment income received directly by the Fund on direct U.S. obligations is
exempt from tax at the state level when received directly by a Fund, and may be
exempt, depending on the state, when received by a Shareholder as income
dividends from a Fund provided certain state-specific conditions are satisfied.
Interest realized on repurchase agreements collateralized by U.S. government
obligations normally is not exempt from state tax. Each Fund will inform
Shareholders annually of the percentage of income and distributions derived from
direct U.S. Treasury obligations. Shareholders should consult their tax advisors
to determine whether any portion of the income dividends received from a Fund is
considered tax exempt in their particular state.
Income derived by a Fund from obligations of foreign issuers may be subject to
foreign withholding taxes. A Fund will not be able to elect to treat
Shareholders as having paid their proportionate share of such taxes.
Dividends declared by a Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared if paid by the Fund any time during the following January.
The Funds intend to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Each sale, exchange, or redemption of Fund shares is a taxable event to the
Shareholder.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different classes of each fund. In
addition to the Funds, the Trust consists of the following funds: Treasury Money
Market Fund, Money Market Fund, California Tax-Free Money Market Fund, Growth
Equity Fund, Value Momentum Fund, Balanced Fund, California Intermediate
Tax-Free Bond Fund, Blue Chip Growth Fund, Limited Maturity Government Fund,
Emerging Growth Fund and International Equity Fund. All consideration received
by the Trust for shares of any fund and all assets of such fund belong to that
fund and would be subject to liabilities related thereto. The Trust reserves the
right to create and issue shares of additional funds.
The Trust pays its expenses, including fees of its service providers, audit and
legal expenses, expenses of preparing prospectuses, proxy solicitation material
and reports to shareholders, costs of custodial services and registering the
shares under Federal and State securities laws, pricing, insurance expenses,
litigation and other
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extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses. Please refer to "Financial Highlights" in this prospectus
for more information regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to that fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings of shareholders, but approval will be sought for certain changes
in the operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust will provide appropriate
assistance and information to the Shareholders requesting the meeting.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to the Administrator, SEI Financial
Management Corporation, 680 East Swedesford Road, Wayne, Pennsylvania,
19087-1658.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
the Fund is distributed in the form of monthly dividends to Shareholders of
record. Currently, capital gains of a Fund, if any, will be distributed at least
annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares unless the Shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Administrator at least 15 days prior to the distribution.
Dividends and distributions of the Fund are paid on a per-share basis. The value
of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a Shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
The amount of dividends payable on Institutional Class shares will typically be
higher than the dividends payable on the Investment Class shares because of the
distribution expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the Trust. The
Custodian holds cash, securities and other assets of the Trust as required by
the Investment Company Act of 1940, as amended.
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15
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Funds:
ASSET-BACKED SECURITIES (NON-MORTGAGE)--Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for purpose of owning such assets and issuing
such debt. The purchase of non-mortgage asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK--Convertible bonds are bonds
convertible into a set number of shares of another form of security (usually
common stock) at a prestated price. Convertible bonds have characteristics
similar to both fixed income and equity securities. Convertible preferred stock
is a class of capital stock that pays dividends at a specified rate and that has
preference over common stock in the payment of dividends and the liquidation of
assets. Convertible preferred stock is preferred stock exchangeable for a given
number of common stock shares, and has characteristics similar to both
fixed-income and equity securities. Because of the conversion feature, the
market value of convertible bonds and convertible preferred stock tends to move
together with the market value of the underlying stock. As a result, the Fund's
selection of convertible bonds and convertible preferred stock is based, to a
great extent, on the potential for capital appreciation that may exist in the
underlying stock. The value of convertible bonds and convertible preferred stock
is also affected by prevailing interest rates, the credit quality of the issuer
and any call provisions.
CORPORATE OR GOVERNMENT BONDS-- Interest-bearing or discounted corporate or
government securities that obligates the issuer to pay the bondholder a
specified sum of money, usually at specific intervals, and to repay the
principal amount of the loan at maturity. Bonds rated Baa or better by Moody's
or BBB or better by S&P, are considered investment grade quality.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities, (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES--Some futures strategies, including selling
futures, buying puts and writing calls, reduce a Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that
if applied at an inappropriate time, could negatively impact the Fund's return.
LOWER-RATED, HIGHER-YIELDING, HIGH-RISK DEBT SECURITIES--High-yield, high-risk
securities consist of securities rated Ba or lower by Moody's or BB or lower by
S&P. Lower-rated debt securities are considered speculative and involve greater
risk of loss than investment grade debt securities, and are more sensitive to
changes
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in the issuer's capacity to pay. For a description of the debt securities
ratings, see the "Appendix."
MONEY MARKET INSTRUMENTS--Money market securities are high-quality,
dollar-denominated, short-term, debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations of agencies and instrumentalities of the U.S. Government; (iii)
high-quality commercial paper issued by U.S. and foreign corporations; (iv) debt
obligations with a maturity of one year or less issued by corporations that
issue high-quality commercial paper; and (v) repurchase agreements involving any
of the foregoing obligations entered into with highly-rated banks and
broker-dealers.
MORTGAGE-BACKED SECURITIES--Mortgage-backed securities are generally issued or
guaranteed by U.S. government agencies such as GNMA, FNMA, or FHLMC. GNMA
mortgage-backed certificates are mortgage-backed securities of the modified
pass-through type, which means that both interest and principal payments
(including prepayments) are passed through monthly to the holder of the
certificate. Each GNMA certificate evidences an interest in a specific pool of
mortgage loans insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. FNMA, a federally-
chartered and stockholder-owned corporation, issues pass-through certificates
which are guaranteed as to payment of principal and interest by FNMA. FHLMC, a
corporate instrumentality of the United States, issues participation
certificates which represent an interest in mortgages held in FHLMC's portfolio.
FHLMC guarantees the timely payment of interest and the ultimate collection of
principal. Securities issued or guaranteed by FNMA and FHLMC are not backed by
the full faith and credit of the United States. There can be no assurance that
the U.S. government would provide financial support to FNMA or FHLMC if
necessary in the future.
Adjustable rate mortgage securities ("ARMs") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annually) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and prepayments of principal on the underlying mortgage pool
(less GNMA's, FNMA's, or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). The Government
Securities Fund and Intermediate-Term Bond Fund may purchase fixed, adjustable,
or "floating" rate CMOs that are collateralized by fixed rate or adjustable rate
mortgages that are guaranteed as to payment of principal and interest by an
agency or
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instrumentality of the U.S. government or are directly guaranteed as to payment
of principal and interest by the issuer, which guarantee is collateralized by
U.S. government securities; or are collateralized by privately issued fixed rate
or adjustable rate mortgages.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
REPURCHASE AGREEMENTS--Agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. The Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement. A
Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities or if the Fund realizes a loss on the sale
of the collateral. A Fund will enter into repurchase agreements only with
financial institutions deemed to present minimal risk of bankruptcy during the
term of the agreement based on established guidelines. Repurchase agreements are
considered loans under the 1940 Act.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES--Securities subject to settlement on a future date. The interest rate
realized on these securities is fixed as of the purchase date, and no interest
accrues to a Fund before settlement. These securities are subject to market
fluctuation due to changes, real or anticipated, in market interest rates and
the public's perception of the creditworthiness of the issuer and will have the
effect of leveraging the Fund's assets. Purchasing securities on a forward
commitment or when-issued basis when a Fund is fully or almost fully invested
may result in greater potential fluctuation in the value of a Fund's net asset
value per share. The purchasing Fund will establish one or more segregated
accounts with the Custodian, and will maintain liquid, high-grade assets in an
amount at least equal in value to the Fund's commitments to purchase when-issued
securities.
SECURITIES LENDING--In order to generate additional income, each Fund may lend
the securities in which it is invested, pursuant to agreements requiring that
the loan be continuously secured by cash, securities of the U.S. Government or
its agencies or any combination of cash and such securities as collateral equal
to 100% of the market value at all times of the loaned securities. The lending
Fund will continue to receive interest on the loaned securities while
simultaneously earning interest on the investment of cash collateral. Collateral
is marked to market daily to provide a level of collateral at least equal to the
value of the loaned securities. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially.
STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRs")--Interests in a unit investment
trust holding a portfolio of securities linked to the S&P 500 Index. SPDRs
closely track the underlying portfolio of securities, trade like a share of
common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding a Fund's investment in SPDRs, see the Statement of Additional
Information.
<PAGE> 123
18
U.S. GOVERNMENT AGENCY SECURITIES-- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--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.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
YANKEE BONDS--Dollar-denominated securities issued by foreign-domiciled issuers
that obligate the issuer to pay the bondholder a specified sum of money, usually
semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and the European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
SECURITIES OF FOREIGN ISSUERS--Securities issued by non-U.S. issuers. There may
be certain risks connected with investing in foreign securities, including risks
of adverse political and economic developments (including possible governmental
seizure or nationalization of assets), the possible imposition of exchange
controls or other governmental restrictions, including less uniformity in
accounting and reporting requirements, the possibility that there will be less
information on such securities and their issuers available to the public, the
difficulty of obtaining or enforcing court judgments abroad, restrictions on
foreign investments in other jurisdictions, difficulties in effecting
repatriation of capital invested abroad, and difficulties in transaction
settlements and the effect of delay on shareholder equity. Foreign securities
may be subject to foreign taxes, which reduce yield, and may be less marketable
than comparable U.S. securities. A Fund may be affected favorably or unfavorably
by changes in the
<PAGE> 124
19
exchange rates or exchange control regulations between foreign currencies and
the U.S. dollar. Changes in foreign currency exchange rates may also affect the
value of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, distributed to
shareholders by a Fund. See "Risk Factors."
<PAGE> 125
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary......................................... 2
Annual Operating Expenses....................... 3
Financial Highlights............................ 4
The Trust....................................... 5
Investment Objectives........................... 5
Investment Policies............................. 5
General Investment Policies..................... 7
Risk Factors.................................... 7
Investment Limitations.......................... 8
Fundamental Policies............................ 9
The Advisor..................................... 9
The SubAdvisor.................................. 9
The Administrator............................... 10
The Shareholder Servicing Agent................. 10
Distribution.................................... 11
Purchase and Redemption of Shares............... 11
Performance..................................... 11
Taxes........................................... 12
General Information............................. 13
Description of Permitted Investments............ 15
</TABLE>
<PAGE> 126
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient and
economical means of investing in professionally managed portfolios of
securities. This Prospectus relates to the Trust's:
-- INTERMEDIATE-TERM BOND FUND
-- GOVERNMENT SECURITIES FUND
INVESTMENT CLASS SHARES
The Trust's Investment Class Shares are offered to individual and institutional
investors, including accounts for which UNION BANK OF CALIFORNIA, N.A. and BANK
OF TOKYO-MITSUBISHI TRUST COMPANY, their affiliates and correspondents act in an
agency or custodial capacity.
This Prospectus sets forth concisely the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus, has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Trust's Distributor, SEI Financial Services Company, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922.
The Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI
TRUST COMPANY OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. THE TRUST'S SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INVESTMENT CLASS
<PAGE> 127
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Investment Class shares of the GOVERNMENT SECURITIES FUND, INTERMEDIATE-TERM
BOND FUND (each a "Fund"). This summary is qualified in its entirety by
reference to the more detailed information provided elsewhere in this Prospectus
and in the Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE INTERMEDIATE-TERM BOND FUND
seeks to provide total return. THE GOVERNMENT SECURITIES FUND seeks to achieve
total return consistent with the preservation of capital by investing in a
diversified portfolio of obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities. See "Investment Objectives."
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE INTERMEDIATE-TERM BOND FUND
invests primarily in debt instruments. THE GOVERNMENT SECURITIES FUND invests
primarily in debt obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities, including mortgage-backed securities issued or
guaranteed by U.S. government agencies. See "Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? The investment
policies of each Fund entail certain risks and considerations of which an
investor should be aware. The market value of a Fund's fixed income investments
will change in response to interest rate changes and other factors. During
periods of falling interest rates, the value of outstanding fixed income
securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies
or any instrumentalities of the securities in which any Fund invests guarantees
only the payment of principal and interest on the guaranteed security, and does
not guarantee the yield or value of the security or yield or value of shares of
that Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Trust. See "The Advisor."
WHO IS THE SUBADVISOR? Bank of Tokyo-Mitsubishi Trust Company serves as the
SubAdvisor to the Government Securities Fund. See "The SubAdvisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? State Street Bank and Trust Company
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Investment Class shares of the Trust (except for the Convertible
Securities, Government Securities, Emerging Growth, Blue Chip Growth and
International Equity Funds). SEI Financial Management Corporation serves as
transfer agent, dividend disbursing agent, and shareholder servicing agent for
the Institutional and Cash Sweep Class shares of the Trust and for the
Investment Class shares of the Convertible Securities, Government Securities,
Emerging Growth, Blue Chip Growth and International Equity Funds. See
"Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment in the Fund's Investment Class is $2,000 ($1,000 for
IRAs). A purchase order will be effective if the Distributor receives an order
prior to 4:00 p.m., Eastern time. Purchase orders for shares will be executed at
a per share price equal to the asset value next determined after the purchase
order is effective (plus any applicable sales charge). Redemption orders must be
placed prior to 4:00 p.m., Eastern time on any Business Day for the order to be
effective that day. See "Purchase and Redemption of Shares."
HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of each Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional shares unless the Shareholder
elects to take the payment in cash. See "Dividends."
<PAGE> 128
3
SHAREHOLDER TRANSACTION EXPENSES INVESTMENT CLASS
(As a percentage of offering price)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases.................................................... 3.00%
Maximum Contingent Deferred Sales Charge*.................................................... None
Wire Redemption Fee.......................................................................... $15
</TABLE>
* A Contingent Deferred Sales Charge of 1.00% will be assessed against the
proceeds of any redemption request relating to Investment Class shares of the
Funds that were purchased without a sales charge in reliance upon the waiver
accorded to purchases in the amount of $1 million or more, but only where such
redemption request is made within 1 year of the date the shares were
purchased.
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT
INTERMEDIATE-TERM SECURITIES
BOND FUND FUND
<S> <C> <C>
Advisory Fees.................................................... .50% .50%
12b-1 Fees (After Fee Waivers)(1)................................ .00% .00%
Other Expenses................................................... .18% .25%
- -------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers)(2).................. .68% .75%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Absent voluntary fee waivers, 12b-1 Fees would be .40% of each Fund. The
Distributor reserves the right to terminate its waiver at any time in its
sole discretion.
(2) Absent fee waivers, "Total Operating Expenses" would be 1.15% for the
Government Securities Fund and 1.08% for the Intermediate-Term Bond Fund.
EXAMPLE:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) imposition of the maximum sales charge;
(2) 5% annual return and (3) redemption at the end of each time
period
Intermediate-Term Bond Fund...................................... $37 $ 51 $ 67 $ 112
Government Securities Fund....................................... $37 $ 53 $ 70 $ 120
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the
investor in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Investment Class shares of the Funds. The
Trust also offers Institutional Class Shares of the Funds which are subject to
the same expenses, except there are no sales charges or distribution costs.
Additional information may be found under "The Administrator," "The Advisor" and
"The SubAdvisor."
The rules of the Securities and Exchange Commission require that the maximum
sales charge be reflected in the above table. However, certain investors may
qualify for reduced sales charges. See "Purchase and Redemption of Shares."
Long-term investors may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the Rules of the National Association of
Securities Dealers ("NASD").
<PAGE> 129
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET -------------------------- DISTRIBUTIONS NET NET
ASSET NET REALIZED ------------------- ASSET ASSETS, RATIO OF
VALUE, NET AND UNREALIZED NET VALUE, END EXPENSES
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- --------------------------------
INTERMEDIATE-TERM BOND FUND
- --------------------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 9.67 0.609 0.940 (0.609) -- 10.61 16.48 % 6,417 0.68%
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11)% 6,645 0.71%
1994 10.57 0.615 0.335 (0.595) (0.205) 10.72 9.23 % 9,308 0.69%
1993 (1) 10.49 0.609 0.450 (0.636) (0.343) 10.57 10.59 %* 2,897 0.65%*
<CAPTION>
RATIO OF
RATIO OF NET INVESTMENT
EXPENSES RATIO OF INCOME TO
TO AVERAGE NET INVESTMENT AVERAGE
NET ASSETS INCOME NET ASSETS PORTFOLIO
EXCLUDING TO AVERAGE EXCLUDING TURNOVER
FEE WAIVERS NET ASSETS FEE WAIVERS RATE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
- --------------------------------
INTERMEDIATE-TERM BOND FUND
- --------------------------------
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 1.09% 5.99% 5.58% 147%
1995 1.11% 5.87% 5.47% 95%
1994 1.09% 5.51% 5.11% 72%
1993 (1) 1.05%* 6.01%* 5.61%* 88%
</TABLE>
* Annualized.
** Total Return does not reflect the sales charge.
(1) Commenced operations on February 3, 1992.
<PAGE> 130
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in distribution costs, voting rights and dividends.
Except for these differences among the classes, each share of each fund
represents an equal proportionate interest in that fund. This Prospectus relates
to the Investment Class shares of the Trust's Government Securities and
Intermediate-Term Bond Funds (each a "Fund"). Information regarding the Trust's
other funds is contained in separate prospectuses that may be obtained from the
Trust's Distributor, SEI Financial Services Company, 680 East Swedesford Road,
Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVES
THE INTERMEDIATE-TERM BOND FUND seeks to provide total return.
THE GOVERNMENT SECURITIES FUND seeks to achieve total return consistent with the
preservation of capital by investing in a diversified portfolio of obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
There can be no assurance that a Fund will meet its investment objective.
INVESTMENT POLICIES
INTERMEDIATE-TERM BOND FUND
Under normal market conditions, at least 65% of the Intermediate-Term Bond
Fund's assets will be invested in debt instruments. Such debt instruments shall
include corporate bonds and debentures rated AAA, AA, A, or BBB by Standard &
Poor's Corporation ("S&P") or Aaa, Aa, A, or Baa by Moody's Investors Service
("Moody's") or determined by the Advisor to be of comparable quality at the time
of purchase; Yankee Bonds and Eurodollar instruments, obligations issued by the
U.S. Government and its agencies and instrumentalities (such as Government
National Mortgage Association ("GNMA") securities); mortgage-backed securities,
including privately issued mortgage-backed securities; readily-marketable
asset-backed securities; securities issued or guaranteed by foreign governments,
their political subdivisions, agencies or instrumentalities; and obligations of
supranational entities such as the World Bank and the Asian Development Bank.
The remainder of the Fund's assets may be invested in money market instruments
and in cash. The dollar-weighted average portfolio maturity of the Fund will be
from three to ten years.
The portfolio turnover rate for the Intermediate-Term Bond Fund for the fiscal
year ended January 31, 1996 was 147%. This rate of portfolio turnover may result
in higher brokerage execution costs and higher levels of capital gains.
GOVERNMENT SECURITIES FUND
Under normal market conditions, the Government Securities Fund will invest at
least 80% of its assets in obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities, including mortgage-backed
securities issued or guaranteed by U.S. government agencies such as GNMA, the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), and repurchase agreements backed by such securities. The
Fund may invest any remaining assets in corporate bonds that carry a rating of
Baa or better by Moody's or BBB or better by S&P, or that are deemed by the
SubAdvisor to be of comparable quality; Yankee Bonds, including sovereign,
supranational and Canadian bonds; shares of other investment companies with
similar investment objectives; commercial paper; money market funds; privately
issued mortgage-backed and other readily-marketable asset-backed securities; and
money market instruments and cash.
The SubAdvisor will seek to enhance the yield of the Fund by taking advantage of
yield disparities or other factors that occur in the government securities and
money markets. The Fund may dispose of any security prior to its maturity if
such
<PAGE> 131
6
disposition and reinvestment of the proceeds are expected to enhance its yield
consistent with the SubAdvisor's judgment as to a desirable maturity structure
or if such disposition is believed to be advisable due to other circumstances or
considerations. The Fund will seek to achieve capital gains by taking advantage
of price appreciation caused by interest rate and credit quality changes.
The Fund may invest in futures and options on futures for the purpose of
achieving the Fund's objectives and for adjusting portfolio duration. The Fund
may invest in futures and related options based on any type of security or index
traded on U.S. or foreign exchanges or over the counter, as long as the
underlying security, or securities represented by an index, are permitted
investments of the Fund. The Fund may enter into futures contracts and options
on futures only to the extent that obligations under such contracts or
transactions represent not more than 10% of the Fund's assets.
The portfolio turnover rate for the Government Securities Fund for the fiscal
year ended January 31, 1996 was 239%. This rate of portfolio turnover may result
in higher brokerage execution costs and higher levels of capital gains.
GENERAL INVESTMENT POLICIES
Mortgage-backed securities purchased by the Funds will be issued or guaranteed
as to payment of principal and interest by the U.S. government or its agencies
or instrumentalities or, if issued by private issuers, rated in one of the two
highest rating categories by a nationally recognized rating agency. The
principal governmental issuers or guarantors of mortgage-backed securities are
GNMA, FNMA, and FHLMC. Obligations of GNMA are backed by the full faith and
credit of the United States Government, while obligations of FNMA and FHLMC are
supported by the credit of the respective agency only. The Funds may purchase
mortgage-backed securities that are backed or collateralized by fixed,
adjustable or floating rate mortgages.
For temporary defensive purposes during periods when the Advisor or SubAdvisor
determines that market conditions warrant, each Fund may invest up to 100% of
its assets in money market instruments consisting of securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, repurchase
agreements, receipts (including TR's, TIGR's and CATS), money market funds,
certificates of deposit, time deposits, bank master notes and bankers'
acceptances issued by banks having net assets of at least $1 billion as of the
end of their most recent fiscal year, commercial paper rated at least A-1 by S&P
or P-1 by Moody's, and in cash. A Fund will not be pursuing its investment
objective to the extent that more than a substantial portion of its assets are
invested in money market securities.
In the event that a security owned by a Fund is downgraded below the stated
ratings categories, the Advisor or SubAdvisor will take appropriate action with
regard to the security.
Each Fund will restrict its investment in illiquid securities to 15% of its net
assets.
Each Fund may engage in securities lending and will limit such practice to
33 1/3% of total assets.
Each Fund may purchase securities which have not been registered under the
Securities Act of 1933 (Rule 144A Securities).
Each Fund may purchase securities on a forward commitment or when-issued basis
where such purchases are for investment and not for leveraging purposes;
however, the Fund may sell these securities before the settlement date if it is
deemed advisable. No additional forward commitments will be made if more than
20% of a Fund's net assets would be so committed.
For further information see "Description of Permitted Investments."
RISK FACTORS
Each Fund's shares will fluctuate in value with the value of the underlying
securities in its portfolio. Changes in the value of a Fund's portfolio
securities will not affect cash received from ownership of such securities, but
will affect the Fund's net asset value.
Mortgage-backed securities that are not issued or guaranteed by the U.S.
government or its agencies
<PAGE> 132
7
or instrumentalities, including securities nominally issued by a government
entity (such as the Resolution Trust Corporation), are not obligations of a
governmental entity, and thus may bear a greater risk of nonpayment. The timely
payment of principal and interest normally is supported, at least partially, by
various forms of insurance or guarantees. There can be no assurance, however,
that such credit enhancements will support fully the payment of principal and
interest on such obligations.
Securities rated BBB by S&P or Baa by Moody's are deemed by these rating
services to have some speculative characteristics and adverse economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
Each Fund may hold dollar denominated securities of foreign issuers which may
bear greater investment risks than those of U.S. domestic issuers. Such risks
include political and economic instability, expropriation of foreign deposits
and other restrictions which may adversely affect the payment of principal and
interest on such securities. See "Description of Permitted Investments."
INVESTMENT LIMITATIONS
Each Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities and repurchase
agreements involving such securities) if as a result more than 5% of the total
assets of a Fund would be invested in the securities of such issuer. This
restriction applies to 75% of a Fund's assets.
2. Purchase any securities which would cause more than 25% 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 the obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and repurchase
agreements involving such securities, and provided further, that utilities as a
group will not be considered to be one industry, and wholly-owned subsidiaries
organized to finance the operations of their parent companies will be considered
to be in the same industries as their parent companies.
3. Make loans except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objectives and policies, (b) enter into
repurchase agreements, and (c) engage in securities lending as described in this
Prospectus and in the Statement of Additional Income.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Funds. Fundamental policies cannot be changed with
respect to a Fund without the consent of the holders of a majority of the Fund's
outstanding shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of the Intermediate-Term Bond Fund and
continuously reviews, supervises and administers each Fund's investment program.
The Advisor discharges its responsibilities subject to the supervision of, and
policies established by, the Trustees of the Trust. The Trust's shares are not
sponsored, endorsed or guaranteed by, and do not constitute obligations or
deposits of, the Advisor and are not guaranteed by the FDIC or any other
governmental agency.
The Advisor is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .50% of the average daily net assets of the Government
Securities and Intermediate-Term Bond Funds. The Advisor may from time to time
waive all or a portion of its fee in order to limit the operating expenses of a
Fund. Any such waiver is voluntary
<PAGE> 133
8
and may be terminated at any time in the Advisor's sole discretion.
For the fiscal year ended January 31, 1996, Union Bank, predecessor of the
Advisor, was paid an advisory fee of .50% of the average daily net assets of the
Intermediate-Term Bond and the Government Securities Funds.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of each Fund. On April 1,
1996, Union Bank, the Trust's then-investment advisor, combined with The Bank of
California, N.A., and the resulting bank changed its name to Union Bank of
California, N.A. At the same time, the banks' investment management divisions
were combined. Each of Union Bank and The Bank of California, N.A. (or its
predecessor bank) has been in banking since the early 1900's, and historically,
each has had significant investment functions within its trust and investment
division. Union Bank of California, N.A., is a subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd.
James V. Atkinson has served as team leader of the Intermediate-Term Bond Fund
since 1991. Mr. Atkinson is a Vice President of the Advisor and has been with
the Advisor and its predecessor, Union Bank, since 1991. Mr. Atkinson was a
portfolio manager at The Boston Company from 1988 to 1990.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE SUBADVISOR
The Advisor and Bank of Tokyo-Mitsubishi Trust Company (the "SubAdvisor") have
entered into an investment subadvisory agreement relating to the Government
Securities Fund (the "Investment SubAdvisory Agreement"). Under the Investment
SubAdvisory Agreement, the SubAdvisor makes the day-to-day investment decisions
for the assets of the Government Securities Fund, subject to the supervision of,
and policies established by, the Advisor and the Trustees of the Trust.
Bank of Tokyo-Mitsubishi Trust Company, headquartered at 1251 Avenue of the
Americas, New York, New York 10116, and with offices at 100 Broadway, New York,
New York 10005, operates as a wholly-owned subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd. The SubAdvisor was formed by the combination on April 1,
1996 of Bank of Tokyo Trust Company, a wholly-owned subsidiary of The Bank of
Tokyo, Ltd., and Mitsubishi Bank Trust Company of New York, a wholly-owned
subsidiary of The Mitsubishi Bank, Ltd. Bank of Tokyo Trust Company was the
surviving entity, and changed its name to Bank of Tokyo-Mitsubishi Trust
Company. Prior to the combination, subadvisory services were provided by Bank of
Tokyo Trust Company. Bank of Tokyo Trust Company was established in 1955, and
has provided trust services since that time and management services since 1965.
The SubAdvisor serves as portfolio manager to bank common funds, employee
benefit funds and personal trust accounts, managing assets in money market,
equity and fixed income portfolios. As of April 1, 1996, the SubAdvisor managed
$750 million in individual portfolios and collective funds. In addition, the
SubAdvisor also serves as SubAdvisor to the Trust's Convertible Securities,
Emerging Growth and Blue Chip Growth Funds.
The SubAdvisor is entitled to a fee, which is calculated daily and paid monthly
out of the Advisor's fee, at an annual rate of .20% of the average daily net
assets of the Government Securities Fund. For the fiscal year ended January 31,
1996, Bank of Tokyo Trust Company, predecessor of the SubAdvisor, received .20%
of the average daily net assets of the Government Securities Fund.
Stephen W. Blocklin has served as portfolio manager of the Government Securities
Fund since its inception. Mr. Blocklin has been a Vice President with the
SubAdvisor and its predecessor, Bank of Tokyo Trust Company, since December,
1993. From September, 1988 to December, 1993, he served as a senior fixed income
fund manager in the institutional investment management group at First Fidelity
Bancorporation.
<PAGE> 134
9
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of the average daily net assets of the Trust
up to $1 billion, .12% of the average daily net assets between $1 billion and $2
billion, and .10% of the average daily net assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Investment Class
shares. Any such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Investment Class
shares of the Trust (except for the Convertible Securities, Government
Securities, Emerging Growth, Blue Chip Growth and International Equity Funds).
SEI Financial Management Corporation serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Institutional and Cash
Sweep Class shares of the Trust and for the Investment Class shares of the
Convertible Securities, Government Securities, Emerging Growth, Blue Chip Growth
and International Equity Funds. Compensation for these services is paid under
the Administration Agreement.
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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 Investment Class shares have a distribution plan (the "Investment Class
Plan"). The Distribution Agreement and the Investment Class Plan provide that
the Investment Class shares of a Fund may bear the following distribution
expenses: (1) the cost of prospectuses, reports to Shareholders, sales
literature and other materials for potential investors; (2) advertising; and (3)
expenses incurred in connection with the promotion and sale of the Trust's
shares, including the Distributor's expenses for travel, communication, and
compensation and benefits for sales personnel. In addition, the Trust pays the
Distributor a fee of up to .40% of a Fund's Investment Class shares average
daily net assets, of which a maximum of .25% may be used to compensate
broker/dealers and service providers that provide administrative and/or
distribution services to Investment Class Shareholders or to their other
customers who beneficially own Investment Class shares.
HOW TO PURCHASE SHARES
GENERAL INFORMATION
Purchases and redemptions of shares of the Funds may be made on days on which
both the New York Stock Exchange and Federal Reserve wire system are open for
business ("Business Days"). The minimum initial investment in a Fund is $2,000
($1,000 for IRAs); however, the minimum investment may be waived at the
Distributor's discretion. All subsequent purchases must be in amounts of at
least $1,000 ($500 for IRAs).
Purchase orders for shares will be executed at a per share price equal to the
net asset value next determined after the receipt of the purchase order by the
Distributor (plus any applicable sales charge). The purchase price of shares of
a Fund is the net asset value next determined after a purchase order is received
and accepted by the Trust (plus a sales charge). The net asset value per share
of a Fund is determined by dividing the total market value of a Fund's
investments and other assets, less any liabilities, by the number of total
outstanding shares of a Fund. Net asset value per share is determined daily as
of 4:00 p.m.,
<PAGE> 135
10
Eastern time, on any Business Day. Purchases will be made in full and fractional
shares of the Trust calculated to three decimal places. The Trust reserves the
right to reject a purchase order when the Distributor determines that it is not
in the best interest of the Trust and/or its Shareholders to accept such order.
Shares of the Funds are offered only to residents of states in which the shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase shares of the Intermediate-Term Bond Fund by completing and
signing an Account Application form and mailing it, along with a check (or other
negotiable bank instrument or money order) payable to "Stepstone Funds (Fund
Name)," to the Transfer Agent at P.O. Box 8416, Boston, Massachusetts
02266-8416. All purchases made by check should be in U.S. dollars and made
payable to the "Stepstone Funds (Fund Name)." Third party checks, credit card
checks or cash will not be accepted. You may purchase more shares at any time by
mailing payment also to the Transfer Agent at the above address. Orders placed
by mail will be executed on receipt of your payment. If your check does not
clear, your purchase will be canceled and you could be liable for any losses or
fees incurred.
You may obtain Account Application Forms for the Intermediate-Term Bond Fund by
calling the Distributor at 1-800-734-2922.
HOW TO PURCHASE BY WIRE
You may purchase shares of the Intermediate-Term Bond Fund by wiring Federal
funds, provided that your Account Application has been previously received. You
must wire funds to the Transfer Agent and the wire instructions must include
your account number. You must call the Transfer Agent at 1-800-734-2922 before
wiring any funds. An order to purchase shares by Federal funds wire will be
deemed to have been received by the Fund on the Business Day of the wire;
provided that the shareholder wires funds to the Transfer Agent prior to 4:00
p.m., Eastern time, if the Transfer Agent does not receive the wire by 4:00
p.m., Eastern time, the order will be executed on the next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC
INVESTMENT PLAN ("AIP")
You may arrange for periodic additional investments in the Intermediate-Term
Bond Fund through automatic deductions by Automated Clearing House ("ACH") from
a checking account by completing this section in the Account Application form.
The minimum pre-authorized investment amount is $100 per month. The AIP is
available only for additional investments to an existing account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
Shares of the Funds may be purchased through financial institutions, including
the Adviser, that provide distribution assistance or shareholder services.
Shares purchased by persons ("Customers") through financial institutions may be
held of record by the financial institution. Financial institutions may impose
an earlier cut-off time for receipt of purchase orders directed through them to
allow for processing and transmittal of these orders to the Transfer Agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to the Trust.
Customers who desire to transfer the registration of shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
SALES CHARGES
The following table shows the regular sales charge on Investment Class shares to
a "single purchaser" (described below) together with the dealer discount paid to
dealers and the agency
<PAGE> 136
11
commission paid to brokers (collectively the "commission"):
<TABLE>
<CAPTION>
SALES SALES
CHARGE CHARGE AS COMMISSION
AS A APPROPRIATE AS
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF NET OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
<S> <C> <C> <C>
- --------------------------------------------------------------
0- $ 24,999... 3.00% 3.09% 2.70%
$ 25,000- $ 49,999... 2.50% 2.56% 2.25%
$ 50,000- $ 99,999... 2.00% 2.04% 1.80%
$ 100,000- $249,999... 1.50% 1.52% 1.35%
$ 250,000- $999,999... 1.00% 1.01% 0.90%
$1,000,000- and Over... 0.00%* 0.00% 0.00%
</TABLE>
- ---------------
* A contingent deferred sales charge of 1.00% will be assessed against any
proceeds of any redemption of such Investment Class shares prior to one year
from date of purchase.
The commissions shown in the table apply to sales through authorized dealers and
brokers. Under certain circumstances, the Distributor may use its own funds to
compensate financial institutions and intermediaries in amounts that are
additional to the commissions shown above. In addition, the Distributor may,
from time to time and at its own expense, provide promotional incentives in the
form of cash or other compensation to certain financial institutions and
intermediaries whose registered representatives have sold or are expected to
sell significant amounts of the Investment Class shares of the Fund. Such other
compensation may take the form of payments for travel expenses, including
lodging, incurred in connection with trips taken by qualifying registered
representatives to places within or without the United States. Under certain
circumstances, commissions up to the amount of the entire sales charge may be
reallowed to dealers or brokers, who might then be deemed to be "underwriters"
under the Securities Act of 1933. Commission rates may vary among the Funds.
In calculating the sales charge rates applicable to current purchases of a
Fund's shares, a "single purchaser" is entitled to cumulate current purchases
with the net purchases of previously purchased shares of the Fund and other of
the Trust's funds (the "Eligible Funds") which are sold subject to a comparable
sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing shares of the Fund for their own account or for trust or
custodial accounts for their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account, including employee benefit plans
created under Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), including related plans of the same employer. To be
entitled to a reduced sales charge based upon shares already owned, the investor
must ask the Distributor for such entitlement at the time of purchase and
provide the account number(s) of the investor, the investor and spouse, and
their minor children, and give the age of such children. The Fund may amend or
terminate this right of accumulation at any time as to subsequent purchases.
LETTER OF INTENT. By initially investing at least $2,000 and submitting a
Letter of Intent (the "Letter") to the Distributor, a "single purchaser" may
purchase shares of the Fund and the other Eligible Funds during a 13-month
period at the reduced sales charge rates applying to the aggregate amount of the
intended purchases stated in the Letter. The Letter may apply to purchases made
up to 90 days before the date of the Letter. To receive credit for such prior
purchases and later purchases benefitting from the Letter, the Shareholder must
notify the Transfer Agent at the time the Letter is submitted that there are
prior purchases that may apply, and, at the time of later purchases, notify the
Transfer Agent that such purchases are applicable under the Letter.
RIGHTS OF ACCUMULATION. In calculating the sales charge rates applicable to
current purchases of Investment Class shares, a "single purchaser" is entitled
to cumulate current purchases with the current market value of previously
purchased Investment Class shares of the Funds sold subject to a comparable
sales charge.
To exercise your right of accumulation based upon shares you already own, you
must ask the Distributor for this reduced sales charge at the time of your
additional purchase and provide the account number(s) of the investor, as
applicable, the investor and spouse, and their minor children. The Funds may
amend or terminate this right of
<PAGE> 137
12
accumulation at any time as to subsequent purchases.
WAIVER OF SALES LOAD. No sales charge is imposed on Investment Class shares of
the Fund: (i) issued in plans of reorganization, such as mergers, asset
acquisitions and exchange offers, to which the Trust is a party; (ii) sold to
dealers or brokers that have a sales agreement with the Distributor, for their
own account or for retirement plans for their employees or sold to employees
(and their spouses) of dealers or brokers that certify to the Distributor at the
time of purchase that such purchase is for their own account (or for the benefit
of such employees' minor children); (iii) in aggregate purchases of $1 million
or more by tax-exempt organizations enumerated in Section 501(c) of the Code, or
employee benefit plans created under Sections 401, 403(b) or 457 of the Code;
(iv) sold to employees and families of the Advisor and its affiliates; (v) sold
to fiduciary accounts of the Advisor and its affiliates; or (vi) purchased with
proceeds from the recent redemption of shares of a mutual fund with similar
investment objectives and policies for which a sales charge was paid.
The waiver of the sales changes under clause (vi) applies only if the following
conditions are met: the purchase must be made within 60 days of the redemption;
the Distributor must be notified in writing by the investors, or his or her
agent, at the time a purchase is made; and a copy of the investor's account
statement showing such redemption must accompany such notice. The waiver policy
with respect to the purchase of shares through the use of proceeds from a recent
redemption above will not continue indefinitely and may be discontinued at any
time without notice. Investors should contact the Distributor to confirm
continued availability prior to initiating the procedures described in clause
(vi).
REDEMPTION OF SHARES
You may redeem your shares of the Intermediate-Term Bond Fund without charge on
any Business Day. There is, however, a $15 charge for wiring redemption proceeds
to a shareholder's designated account. Shares may be redeemed by mail, by
telephone or through a pre-arranged systematic withdrawal plan. Investors who
own shares held by a financial institution should contact that institution for
information on how to redeem shares.
BY MAIL
A written request for redemption of shares of the Intermediate-Term Bond Fund
must be received by the Transfer Agent, P.O. Box 8416, Boston, Massachusetts
02266-8416 in order to constitute a valid redemption request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the Transfer
Agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker, dealer, credit union, securities exchange or association, clearing
agency or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
shares, (2) the redemption check is payable to the shareholder(s) of record, and
(3) the redemption check is mailed to the shareholder(s) at his or her address
of record.
BY TELEPHONE
You may redeem your shares of the Intermediate-Term Bond Fund by calling the
Transfer Agent at 1-800-734-2922. Under most circumstances, payments will be
transmitted on the next Business Day following receipt of a valid request or
redemption. You may have the proceeds mailed to your address or wired to a
commercial bank account previously designated on your Account Application. There
is no charge for having redemption proceeds mailed to you, but there is a $15
charge for wiring redemption proceeds.
You may request a wire redemption for redemptions of shares of the
Intermediate-Term Bond Fund in excess of $500 by calling the Transfer Agent at
1-800-734-2922 who will deduct a wire charge of $15 from the amount of the wire
redemption. Shares cannot be redeemed by Federal Reserve wire on Federal
holidays restricting wire transfers.
<PAGE> 138
13
Neither the Transfer Agent nor the Trust will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. The Trust and Transfer Agent will each
employ reasonable procedures to confirm that instructions, communicated by
telephone are genuine. Such procedures may include taping of telephone
conversations.
If market conditions are extraordinarily active or other extraordinary
circumstance exist, and you experience difficulties placing redemption orders by
telephone, you may consider placing your order by mail.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Intermediate-Term Bond Fund offers a Systematic Withdrawal Plan ("SWP"),
which you may use to receive regular distributions from you account. Upon
commencement of the SWP, your account must have a current net asset value of
$5,000 or more. You may elect to receive automatic payments via check or ACH of
$100 or more on a monthly, quarterly, semi-annual or annual basis. You may
arrange to receive regular distributions from your account via check or ACH by
completing this section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the Transfer Agent. The Transfer Agent may require that the signature
on the written notice be guaranteed.
It is generally not in your best interest to be participating in the SWP at the
same time that you are purchasing additional shares if you have to pay a sales
load in connection with such purchases.
OTHER INFORMATION REGARDING REDEMPTIONS.
Shareholders who desire to redeem shares of a Fund must place their redemption
orders prior to 4:00 p.m., Eastern time, on any Business Day for the order to be
accepted on that Business Day. The redemption price is the net asset value of a
Fund next determined after receipt by the Distributor of the redemption order.
Payment on redemption will be made as promptly as possible and, in any event,
within seven calendar days after the redemption order is received.
Payment to shareholders for shares redeemed will be made within seven days after
the Transfer Agent receives the valid redemption request. At various times,
however, a Fund may be requested to redeem shares for which it has not yet
received good payment; collection of payment may take ten or more days. In such
circumstances, the redemption request will be rejected by the Fund. Once a Fund
has received good payment for the shares a shareholder may submit another
request for redemption.
Due to the relatively high costs of handling small investments, each Fund
reserves the right to redeem your shares at net asset value, if, your account in
any Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase shares of any Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any shares.
Before any Fund exercises its right to redeem such shares you will be given
notice that the value of the shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in such Fund
in an amount which will increase the value of the account to at least the
minimum amount.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
Securities and Exchange Commission, shareholders of Investment Class shares of
other Funds of the Trust that have similar sales charges may tender their shares
for those Funds for exchange into the number of shares (including fractional
shares) which have a value equal to the total net asset value of shares tendered
divided by the net asset value of Investment Class shares of the Fund next
determined after such order is received. Shares issued pursuant to this offer
will not be subject to this sales charge described above or any other
<PAGE> 139
14
charge. The Fund may modify or terminate this exchange offer at any time upon 60
days' notice.
PERFORMANCE
From time to time, the Funds may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. The yield of a Fund refers to the annualized income generated by an
investment in the Fund over a specified 30-day period. The yield is calculated
by assuming that the same amount of income generated by the investment during
that period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
The total return of a Fund refers to the average compounded rate of return to a
hypothetical investment for designated time periods (including, but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
The total return of a Fund may also be quoted as a dollar amount or on an
aggregate basis, an actual basis, without inclusion of any sales charge, or with
a reduced sales charge in advertisements distributed to investors entitled to a
reduced sales charge.
A Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Fund may use long-term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios
and could include the value of a hypothetical investment in any of the capital
markets. The Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to the Investment Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial, or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state, or local income tax treatment of a Fund or
its Shareholders. In addition, state and local tax consequences of an investment
in the Fund may differ from the federal income tax consequences described below.
Accordingly, Shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state, and local income taxes. Additional
information concerning taxes is set forth in the Statement of Additional
Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. Each Fund intends to qualify for the
special tax treatment afforded regulated investment companies by the Internal
Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal
income tax on that part of its net investment company taxable income and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Shareholders.
<PAGE> 140
15
TAX STATUS OF DISTRIBUTIONS:
A Fund will distribute substantially all of its net investment income (including
net short-term capital gain) to Shareholders. Dividends from a Fund's net
investment company taxable income are taxable to Shareholders as ordinary income
(whether received in cash or in additional shares) to the extent of the Fund's
earnings and profits. Any net capital gains will be distributed at least
annually and will be taxed to Shareholders as long-term capital gains,
regardless of how long the Shareholder has held shares and regardless of whether
the distributions are received in cash or in additional shares. Dividends and
distributions of capital gain do not qualify for the dividends-received
deduction for corporate shareholders. Each Fund will provide annual reports to
Shareholders of the federal income tax status of all distributions.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments, a
Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because each Fund distributes
all of its net investment income to Shareholders, a Fund may have to sell
portfolio securities to distribute such imputed income, which may occur at a
time when the Advisor or SubAdvisor would not have chosen to sell such
securities and which may result in a taxable gain or loss.
Investment income received directly by a Fund on direct U.S. obligations is
exempt from tax at the state level, and may be exempt, depending on the state,
when received by a Shareholder as income dividends from a Fund, provided certain
state-specific conditions are satisfied. Interest realized on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. Each Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from a Fund is considered tax exempt in their
particular state.
Dividends declared by a Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared if paid by the Fund any time during the following January.
The Funds intend to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Each sale, exchange, or redemption of Fund shares is a taxable event to the
Shareholder.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different classes of each fund. In
addition to the Funds, the Trust consists of the following funds: Treasury Money
Market Fund, Money Market Fund, California Tax-Free Money Market Fund, Growth
Equity Fund, Value Momentum Fund, Balanced Fund, California Intermediate
Tax-Free Bond Fund, Blue Chip Growth Fund, Emerging Growth Fund, Limited
Maturity Government Fund, Convertible Securities Fund and International Equity
Fund. All consideration received by the Trust for shares of any fund and all
assets of such fund belong to that fund and would be subject to liabilities
related thereto. The Trust reserves the right to create and issue shares of
additional funds.
The Trust pays its expenses, including fees of its service providers, audit and
legal expenses, expenses of preparing prospectuses, proxy solicitation material
and reports to shareholders, costs of custodial services and registering the
shares under Federal and State securities laws, pricing, insurance expenses,
litigation and other extraordinary expenses, brokerage costs, interest charges,
taxes and organization expenses. Please refer to "Financial Highlights" in this
prospectus for more information regarding the Trust's expenses.
<PAGE> 141
16
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to that fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings of shareholders, but approval will be sought for certain changes
in the operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust will provide appropriate
assistance and information to the Shareholders requesting the meeting.
REPORTING
The Trust issues unaudited financial information semi-annually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries for the Intermediate-Term Bond Fund should be directed to
Stepstone Funds, P.O. Box 8416, Boston, Massachusetts 02266-8416. Shareholder
inquiries for the Government Securities Fund should be directed to the
Administrator, SEI Financial Management Corporation, 680 East Swedesford Road,
Wayne, Pennsylvania 19087-1658.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
the Fund is distributed in the form of monthly dividends to Shareholders of
record. Currently, capital gains of a Fund, if any, will be distributed at least
annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the Shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Administrator at least 15 days prior to the distribution.
Dividends and distributions of the Fund are paid on a per-share basis. The value
of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a Shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
The dividends payable on the Investment Class shares will typically be lower
than the dividends payable on the Institutional Class shares because of the
distribution expenses charged on Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the Trust. The
Custodian holds cash, securities and other assets of the Trust as required by
the Investment Company Act of 1940, as amended (the "1940 Act").
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Funds:
ASSET-BACKED SECURITIES (NON-MORTGAGE)--Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
<PAGE> 142
17
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for purpose of owning such assets and issuing
such debt. The purchase of non-mortgage asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities.
CORPORATE OR GOVERNMENT BONDS-- Interest-bearing or discounted corporate or
government securities that obligates the issuer to pay the bondholder a
specified sum of money, usually at specific intervals, and to repay the
principal amount of the loan at maturity. Bonds rated Baa or better by Moody's
or BBB or better by S&P are considered investment grade quality.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
FUTURES AND OPTIONS ON FUTURES--Some futures strategies, including selling
futures, buying puts and writing calls, reduce the Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks that,
if applied at an inappropriate time, could negatively impact the Fund's return.
MONEY MARKET INSTRUMENTS--Money market securities are high-quality, dollar
denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations of agencies and instrumentalities of the U.S. Government; (iii)
high-quality commercial paper issued by U.S. and foreign corporations; (iv) debt
obligations with a maturity of one year or less issued by corporations that
issue high-quality commercial paper; and (v) repurchase agreements involving any
of the foregoing obligations entered into with highly-rated banks and broker
dealers.
MORTGAGE-BACKED SECURITIES--Securities generally issued or guaranteed by U.S.
government agencies such as GNMA, FNMA, or FHLMC. GNMA mortgaged-backed
certificates are mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including prepayments)
are passed through monthly to the holder of the certificate. Each GNMA
certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. FNMA, a federally-chartered and
stockholder-owned corporation, issues pass-through certificates which are
guaranteed as to payment of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation certificates which
represent an interest in mortgages held in FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities issued or guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. There can be no assurance that the U.S.
government would provide financial support to FNMA or FHLMC if necessary in the
future.
Adjustable rate mortgage securities ("ARMs") are pass-through certificates
representing ownership interests in a pool of adjustable rate mortgages and the
resulting cash flow from those mortgages. Unlike conventional debt securities,
which provide for periodic (usually semi-annually) payments of interest and
payments of principal at maturity or on specified call dates, ARMs provide for
monthly payments based on a pro rata share of both periodic interest and
principal payments and
<PAGE> 143
18
prepayments of principal on the underlying mortgage pool (less GNMA's, FNMA's,
or FHLMC's fees and any applicable loan servicing fees).
Collateralized mortgage obligations ("CMOs") are bonds generally issued by
single purpose, stand-alone finance subsidiaries or trusts established by
financial institutions, government agencies, investment banks, or other similar
institutions, and collateralized by pools of mortgage loans. Payments of
principal and interest on the collateral mortgages are used to pay debt service
on the CMO. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date. The
principal and interest payment on the underlying mortgages may be allocated
among the classes of CMOs in several ways. Typically, payments of principal,
including any prepayments, on the underlying mortgages would be applied to the
classes in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on CMOs of a class until all
CMOs of other classes having earlier stated maturities or final distribution
dates have been paid in full.
One or more classes of CMOs may have coupon rates that reset periodically based
on an index, such as the London Interbank Offered Rate ("LIBOR"). Each Fund may
purchase fixed, adjustable, or "floating" rate CMOs that are collateralized by
fixed rate or adjustable rate mortgages that are guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government or
are directly guaranteed as to payment of principal and interest by the issuer,
which guarantee is collateralized by U.S. government securities or are
collateralized by privately issued fixed rate or adjustable rate mortgages.
Real Estate Mortgage Investment Conduits ("REMICs") are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
REPURCHASE AGREEMENTS--Agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. A Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement. A
Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities or if the Fund realizes a loss on the sale
of the collateral. A Fund will enter into repurchase agreements only with
financial institutions deemed to present minimal risk of bankruptcy during the
term of the agreement based on established guidelines. Repurchase agreements are
considered loans under the 1940 Act.
RULE 144A SECURITIES -- Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of the Trust has established guidelines and procedures to
be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES--Securities subject to settlement on a future date. The interest rate
realized on these securities is fixed as of the purchase date, and no interest
accrues to a Fund before settlement. These securities are subject to market
fluctuation due to changes, real or anticipated, in market interest rates and
the public's perception of the creditworthiness of the issuer, and will have the
effect of leveraging the Fund's assets. The Fund will establish one or more
segregated accounts with the Custodian, and the Fund will maintain liquid,
high-grade assets in an amount at least equal in value to the Fund's commitments
to purchase when-issued securities.
SECURITIES LENDING--In order to generate additional income, each Fund may lend
the securities in which it is invested pursuant to
<PAGE> 144
19
agreements requiring that the loan be continuously secured by cash, securities
of the U.S. Government or its agencies or any combination of cash and such
securities as collateral equal to 100% of the market value at all times of the
loaned securities. The lending Fund will continue to receive interest on the
loaned securities while simultaneously earning interest on the investment of
cash collateral. Collateral is marked to market daily to provide a level of
collateral at least equal to the value of the loaned securities. There may be
risks of delay in receiving additional collateral or risks of delay in recovery
of the securities or even loss of rights in the collateral should the borrower
of the securities fail financially.
U.S. GOVERNMENT AGENCY SECURITIES-- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--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.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts includes
"Treasury Receipts" ("TR's") "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
YANKEE BONDS--Dollar denominated securities issued by foreign-domiciled issuers
that obligate the issuer to pay the bondholder a specified sum of money, usually
semiannually, and to repay the principal amount of the loan at maturity.
Sovereign bonds are bonds issued by the governments of foreign countries.
Supranational bonds are those issued by supranational entities, such as the
World Bank and the European Investment Bank. Canadian bonds are bonds issued by
Canadian provinces.
SECURITIES OF FOREIGN ISSUERS--Securities issued by non-U.S. issuers. There may
be certain risks connected with investing in foreign securities, including risks
of adverse political and economic developments (including possible governmental
seizure or nationalization of assets), the possible imposition of exchange
controls or other governmental restrictions, including less uniformity in
accounting and reporting requirements, the possibility that there will be less
information on such securities and their issuers available to the public, the
difficulty of obtaining or enforcing court judgments abroad, restrictions on
foreign
<PAGE> 145
20
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad, and difficulties in transaction settlements and the
effect of delay on shareholder equity. Foreign securities may be subject to
foreign taxes, which reduce yield, and may be less marketable than comparable
U.S. securities. A Fund may be affected favorably or unfavorably by changes in
the exchange rates or exchange control regulations between foreign currencies
and the U.S. dollar. Changes in foreign currency exchange rates may also affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income and gains, if any, distributed to
shareholders by a Fund. See "Risk Factors."
<PAGE> 146
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary......................................... 2
Shareholder Transaction Expenses................ 3
Financial Highlights............................ 4
The Trust....................................... 5
Investment Objectives........................... 5
Investment Policies............................. 5
General Investment Policies..................... 6
Risk Factors.................................... 6
Investment Limitations.......................... 7
Fundamental Policies............................ 7
The Advisor..................................... 7
The SubAdvisor.................................. 8
The Administrator............................... 9
The Shareholder Servicing Agent................. 9
Distribution.................................... 9
How To Purchase Shares.......................... 9
Redemption of Shares............................ 12
Purchases by Exchange........................... 13
Performance..................................... 14
Taxes........................................... 14
General Information............................. 15
Description of Permitted Investments............ 16
</TABLE>
<PAGE> 147
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient means of
investing in one or more professionally managed portfolios of securities. This
Prospectus relates to the Trust's:
-- MONEY MARKET FUND
-- TREASURY MONEY MARKET FUND
-- CALIFORNIA TAX-FREE MONEY MARKET FUND
INSTITUTIONAL CLASS SHARES
The Trust's Institutional Class Shares are offered to institutional investors,
including UNION BANK OF CALIFORNIA, N.A. and BANK OF TOKYO-MITSUBISHI TRUST
COMPANY, their affiliates and correspondents for the investment of their own
funds or funds for which they act in a fiduciary, agency or custodial capacity.
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. THE CALIFORNIA TAX-FREE MONEY MARKET
FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
INVESTING IN THE FUND MAY BE RISKIER THAN INVESTING IN OTHER TYPES OF MONEY
MARKET FUNDS.
This Prospectus sets forth concisely the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI
TRUST COMPANY OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. THE TRUST'S SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INSTITUTIONAL CLASS
<PAGE> 148
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company providing a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Institutional Class shares of the MONEY MARKET, TREASURY MONEY MARKET and
CALIFORNIA TAX-FREE MONEY MARKET FUNDS (each a "Fund"). This summary is
qualified in its entirety by reference to the more detailed information provided
elsewhere in this Prospectus and in the Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE MONEY MARKET FUND seeks to
preserve principal value and maintain a high degree of liquidity while providing
current income. THE TREASURY MONEY MARKET FUND seeks to preserve principal value
and maintain a high degree of liquidity while providing current income. THE
CALIFORNIA TAX-FREE MONEY MARKET FUND seeks to preserve principal and maintain a
high degree of liquidity while providing current income exempt from federal and
California state personal income taxes. See "Investment Objectives."
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE MONEY MARKET FUND invests in
obligations denominated in U.S. dollars including commercial paper, bank
obligations, thrift and savings and loan obligations, short-term corporate
obligations, general U.S. Government obligations and repurchase agreements
involving such obligations, receipts evidencing ownership of component parts of
U.S. Treasury obligations and securities issued or guaranteed by foreign
branches of foreign banks and foreign commercial paper. THE TREASURY MONEY
MARKET FUND invests exclusively in direct obligations issued by the U.S.
Treasury, separately traded component parts of such obligations transferrable
through the Federal book-entry system, and repurchase agreements involving such
obligations. THE CALIFORNIA TAX-FREE MONEY MARKET FUND invests in municipal
obligations of the State of California and its political subdivisions and
municipal obligations issued by territories or possessions of the United States.
See "Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? Each Fund seeks to
maintain a net asset value of $1.00 per share. There can be no assurance that a
Fund will be able to maintain a net asset value of $1.00 per share on a
continuous basis. The California Tax-Free Money Market Fund concentrates its
investments in California municipal securities, and an investment in the Fund
therefore may be riskier than an investment in other types of money market
funds. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies
or any instrumentalities of the securities in which any Fund invests guarantees
only the payment of principal and interest on the guaranteed security, and does
not guarantee the yield or value of the security or yield or value of shares of
that Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Trust. See "The Advisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? SEI Financial Management Corporation
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Institutional and Cash Sweep Class shares of the Trust and for the
Investment Class shares of the Convertible Securities, Government Securities,
Emerging Growth, Blue Chip Growth and International Equity Funds. See
"Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve Wire System are open for business ("Business Days"). The
minimum initial investment in the Trust is $2,000. Shareholders must place
orders to purchase prior to 12:00 noon, Eastern time or orders to redeem prior
to 11:00 a.m., Eastern time for the California Tax-Free Money Market Fund, and
prior to 12:00 noon, Eastern time for the Money Market and Treasury Money Market
Funds on any Business Day. Otherwise the order will be effective the next
Business Day. In addition, effectiveness of a purchase is contingent on the
Custodian's receipt of Federal funds before 2:00 p.m., Eastern time. See
"Purchase and Redemption of Shares."
HOW ARE DIVIDENDS PAID? The net investment income (exclusive of short-term
capital gains) of the Funds is determined and declared on each Business Day as a
dividend for Shareholders of record as of the close of business on that day.
Dividends are paid monthly in additional shares unless the Shareholder elects to
take the payment in cash. See "Dividends."
<PAGE> 149
3
ANNUAL OPERATING EXPENSES INSTITUTIONAL CLASS
(As a percentage of average net assets)
<TABLE>
<CAPTION>
CALIFORNIA
MONEY TREASURY TAX-FREE
MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Fees (After Fee Waivers)........................... .30% .25% (1) .10% (1)
Other Expenses.............................................. .20% .20% .20%
- ------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers)................ .50% .45% (1) .30% (1)
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Advisor has voluntarily agreed to waive fees to the extent necessary in
order to limit "Total Operating Expenses" to not more than .45% for the
Treasury Money Market Fund and .30% for the California Tax-Free Money Market
Fund. The Advisor reserves the right to terminate its waiver at any time in
its sole discretion. Absent fee waivers, the "Advisory Fees" and "Total
Operating Expenses" would be .30% and .50%, for the Treasury Money Market
Fund and California Tax Free Money Market Fund, respectively. "Total
Operating Expenses" of the California Tax-Free Money Market Fund have been
restated to reflect current fees and fee waivers.
EXAMPLE:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.
Money Market Fund.................................................... $5 $16 $28 $63
Treasury Money Market Fund........................................... $5 $14 $25 $57
California Tax-Free Money Market Fund................................ $3 $10 $17 $38
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the
investor in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Institutional Class shares of the Funds.
Financial institutions that are the record owner of shares for the account of
their customers may impose separate fees for account services to their
customers. The Trust also offers Investment Class shares of the Funds which are
subject to the same expenses, except that Investment Class shares are subject to
certain distribution expenses. Additional information may be found under "The
Administrator" and "The Advisor."
<PAGE> 150
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET -------------------------- DISTRIBUTIONS NET NET
ASSET NET REALIZED ------------------- ASSET ASSETS,
VALUE, NET AND UNREALIZED NET VALUE, END
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL CONTRIBUTION END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF CAPITAL OF PERIOD RETURN (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- -------------------------------
TREASURY MONEY MARKET FUND
- -------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.054 -- (0.054) -- -- 1.00 5.52% 182,286
1995 1.00 0.039 -- (0.039) -- -- 1.00 3.97% 143,035
1994 1.00 0.027 -- (0.027) -- -- 1.00 2.75% 170,879
1993 (1) 1.00 0.005 -- (0.005) -- -- 1.00 2.90%* 125,673
- ---------------------
MONEY MARKET FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.054 -- (0.054) -- -- 1.00 5.57% 503,080
1995 1.00 0.039 (.001) (0.039) -- .001 1.00 3.99% 536,754
1994 1.00 0.029 -- (0.029) -- -- 1.00 2.99% 498,795
1993 1.00 0.035 -- (0.035) -- -- 1.00 3.61% 521,664
1992 (2) 1.00 0.057 -- (0.057) -- -- 1.00 5.86% 240,341
- ------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- ------------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.034 -- (0.034) -- -- 1.00 3.48% 42,923
1995 1.00 0.026 -- (0.026) -- -- 1.00 2.67% 52,050
1994 1.00 0.021 -- (0.021) -- -- 1.00 2.13% 52,982
1993 1.00 0.025 -- (0.025) -- -- 1.00 2.61% 45,521
1992 (3) 1.00 0.025 -- (0.025) -- -- 1.00 3.75%* 30,567
<CAPTION>
RATIO OF
RATIO OF NET INVESTMENT
EXPENSES RATIO OF INCOME TO
RATIO OF TO AVERAGE NET INVESTMENT AVERAGE
EXPENSES NET ASSETS INCOME NET ASSETS
TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING
NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
- -------------------------------
TREASURY MONEY MARKET FUND
- -------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.45% 0.50% 5.37% 5.32%
1995 0.44% 0.51% 3.85% 3.78%
1994 0.45% 0.55% 2.72% 2.62%
1993 (1) 0.45%* 0.55%* 2.81%* 2.71%*
- ---------------------
MONEY MARKET FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.50% 0.50% 5.43% 5.43%
1995 0.50% 0.50% 3.93% 3.93%
1994 0.49% 0.49% 2.93% 2.93%
1993 0.46% 0.46% 3.47% 3.47%
1992 (2) 0.48% 0.51% 5.68% 5.65%
- ------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- ------------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.28% 0.49% 3.43% 3.22%
1995 0.29% 0.50% 2.66% 2.45%
1994 0.30% 0.54% 2.09% 1.85%
1993 0.30% 0.54% 2.53% 2.29%
1992 (3) 0.30%* 0.57%* 3.82%* 3.55%*
</TABLE>
* Annualized.
(1) Commenced operations on December 1, 1992.
(2) Commenced operations on February 1, 1991.
(3) Commenced operations on June 10, 1991.
<PAGE> 151
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes), and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in distribution costs, voting rights and dividends.
Except for these differences among the classes, each share of each fund
represents an equal proportionate interest in that fund. This Prospectus relates
to the Institutional Class shares of the Trust's Money Market, Treasury Money
Market and California Tax-Free Money Market Funds (each a "Fund"). Information
regarding the Trust's other funds is contained in separate prospectuses that may
be obtained from the Trust's Distributor, SEI Financial Services Company, 680
East Swedesford Road, Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVES
THE MONEY MARKET FUND seeks to preserve principal value and maintain a high
degree of liquidity while providing current income.
THE TREASURY MONEY MARKET FUND seeks to preserve principal value and maintain a
high degree of liquidity while providing current income.
THE CALIFORNIA TAX-FREE MONEY MARKET FUND seeks to preserve principal and
maintain a high degree of liquidity while providing current income exempt from
federal and California state personal income taxes.
There can be no assurance that a Fund's investment objective will be met.
INVESTMENT POLICIES
MONEY MARKET FUND
The Money Market Fund invests in obligations denominated in U.S. dollars
consisting of: (i) commercial paper (including Section 4(2) Commercial Paper)
issued by domestic and foreign issuers rated at least A-1 by Standard & Poor's
Corporation ("S&P") or Prime-1 by Moody's Investors Service ("Moody's") at the
time of investment or, if not rated, determined by the Advisor to be of
comparable quality; (ii) obligations (certificates of deposit, bank notes, time
deposits, and bankers' acceptances) of thrift institutions, savings and loans,
U.S. commercial banks (including foreign branches of such banks), and U.S. and
foreign branches of foreign banks, provided that such institutions (or, in the
case of a branch, the parent institution) have total assets of $1 billion or
more as shown on their last published financial statements at the time of
investment; (iii) short-term corporate obligations (including Rule 144A
Securities) with a remaining term of not more than 397 days of issuers with
commercial paper of comparable priority and security meeting the above ratings
criteria or determined by the Advisor to be of comparable quality; (iv)
obligations issued by the U.S. Government and backed by its full faith and
credit, and obligations issued or guaranteed as to principal and interest by the
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TR's, TIGR's and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations; (viii) readily marketable securities
backed by company receivables, truck and auto loans, leases, and credit card
loans provided that such instruments satisfy the rating requirements described
above or are determined by the Advisor to be of comparable quality and (ix) U.S.
dollar denominated securities issued or guaranteed by foreign governments, their
political subdivisions, agencies or instrumentalities, and obligations of
supranational entities such as the World Bank and the Asian Development Bank;
provided that the Fund invests no more than 5% of its assets in any such
instrument and invests no more than 25% of its assets in such instruments in the
aggregate. The Advisor will determine that the
<PAGE> 152
6
permitted investments present minimal credit risks in accordance with guidelines
established by the Trust's Board of Trustees.
The Fund may concentrate its investments in certain instruments issued by U.S.
banks, U.S. branches of foreign banks and foreign branches of U.S. banks, but
only so long as the investment risk associated with investing in foreign
branches of domestic banks is the same as that associated with investing in
instruments issued by the U.S. parent, in that the U.S. parent would be
unconditionally liable in the event that the foreign branch failed to pay.
The Fund may invest up to 5% of its total assets in loan participations issued
by a bank in the United States with assets exceeding $1 billion where the
underlying loan is made to a borrower in whose obligations the Fund may invest
and the underlying loan has a remaining maturity of one year or less.
TREASURY MONEY MARKET FUND
The Treasury Money Market Fund invests exclusively in direct obligations issued
by the U.S. Treasury, separately traded component parts of such obligations
transferable through the Federal book-entry system ("STRIPS"), and repurchase
agreements involving such obligations.
The Fund is limited to making investments and engaging in investment
transactions that are permissible for federal credit unions.
Guarantees of the Fund's portfolio securities by the U.S. Government or its
agencies or instrumentalities guarantee only the principal and interest on the
guaranteed securities, and do not guarantee the securities' yield or value or
the yield or value of the Fund's shares.
CALIFORNIA TAX-FREE MONEY MARKET FUND
As a matter of fundamental policy, at least 80% of the California Tax-Free Money
Market Fund's assets are invested in obligations which produce interest that, in
the opinion of bond counsel, is exempt from Federal income tax and California
state personal income tax. These include obligations issued by the State of
California and its political subdivisions or municipal authorities and
obligations issued by territories or possessions of the United States.
Qualifying obligations consist of municipal notes; municipal bonds; floating or
variable rate municipal obligations; tax-exempt commercial paper; and shares of
open-end investment companies with similar investment objectives and policies.
The Advisor may engage in "put" transactions. The Advisor has discretion to
invest up to 20% of the Fund's assets in taxable money market instruments
(including repurchase agreements), securities which have not been registered
under the Securities Act of 1933 (Rule 144A Securities and Section 4(2)
Commercial Paper), receipts (including TR's, TIGR's and CATS), and securities,
the interest income from which is subject to the alternative minimum tax. While
the Fund generally intends to be fully invested in tax-exempt securities, the
Advisor may leave a portion of the Fund's assets uninvested.
For temporary defensive purposes when the Advisor determines that market
conditions warrant, the Fund may invest up to 100% of its assets in municipal
obligations of other states or taxable money market instruments (including
repurchase agreements, U.S. Treasury securities and instruments of certain U.S.
commercial banks or savings and loan institutions). The Fund will not be
pursuing its investment objective to the extent that more than 20% of its assets
are so invested in taxable money market securities.
The Fund will invest in obligations which are rated or are issued by entities
with debt obligations rated, at the time of investment, in one of the two
highest rating categories by S&P, Moody's or Fitch Investors Service, Inc.
("Fitch"), or, if not rated, determined by the Advisor to be of comparable
quality.
Opinions relating to the validity of municipal securities and to the exemption
of interest thereon from Federal income tax (and, with respect to California
municipal securities, to the exemption of
<PAGE> 153
7
interest thereon from California state personal income tax) are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
its Adviser will review the proceedings relating to the issuance of municipal
securities or the basis for such opinions.
GENERAL INVESTMENT POLICIES
Each Fund intends to comply with Rule 2a-7 adopted by the Securities and
Exchange Commission ("SEC"), which Rule permits money market funds to use the
amortized cost method for calculating net asset value. The Rule imposes certain
quality, maturity and diversification restraints on investments by a Fund. Under
the Rule, a Fund will invest only in U.S. dollar denominated securities, will
maintain an average maturity on a dollar-weighted basis of 90 days or less, and
will acquire only "eligible securities" that present minimal credit risks and
have a maturity of 397 days or less. For a further discussion, see the
"Description of Permitted Investments."
Each Fund may enter into forward commitments, or purchase securities on a
when-issued basis. A Fund is permitted to invest in when-issued securities where
such purchases are for investment and not for leveraging purposes; however, a
Fund may sell these securities before the settlement date if it is deemed
advisable. No additional forward commitments will be made if more than 20% of a
Fund's net assets would be so committed.
Each Fund may engage in securities lending, and will limit such practice to
33 1/3% of its total assets.
Each Fund will limit its investments in illiquid securities to 10% of its net
assets.
For further information, see "Description of Permitted Investments."
ELIGIBILITY UNDER FEDERAL CREDIT
UNION ACT
Shares of the Treasury Money Market Fund (the Fund) are designed to qualify as
eligible investments for federally chartered credit unions pursuant to Section
107(7), 107(8) and 107(15) of the Federal Credit Union Act and Part 703 of the
National Credit Union Administration Rules and Regulations. The Fund will
continually monitor changes in the applicable laws, rules and regulations
governing eligible investments, including new investments, for federally
chartered credit unions and will take such action as may be necessary to assure
that the Fund's investments, and, therefore, shares of the Fund, continue to
qualify as eligible investments under the Federal Credit Union Act.
Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act set forth
those securities, deposits and other obligations in which federally chartered
credit unions may invest. The Fund's investments consist exclusively of assets
designed to qualify as eligible investments if owned directly by a federally
chartered credit union. Shares of the Fund may or may not qualify as eligible
investments for particular state chartered credit unions. Accordingly, the Fund
encourages, but does not require, each state chartered credit union to consult
qualified legal counsel concerning whether the Fund's shares are permissible
investments for that credit union. While the Advisor will assure that the Fund
follows investment policies set forth herein, the Fund cannot be responsible for
compliance by participating state chartered credit unions with limitations on
permissible investments to which they may be subject.
RISK FACTORS
It is a fundamental policy of each Fund to use its best efforts to maintain a
constant net asset value of $1.00 per share. There can be no assurance that a
Fund will be able to maintain a stable net asset value of $1.00 per share.
Foreign securities which the Money Market Fund may purchase involve risks that
are different from investments in securities of U.S. issuers. These risks may
include future unfavorable political and economic developments, possible
withholding taxes, seizure of foreign deposits, currency controls, interest
limitations or other government
<PAGE> 154
8
restrictions which might affect payment of principal or interest. Additionally,
there may be less public information available about foreign issuers. Foreign
branches of foreign banks are not regulated by U.S. banking authorities, and
foreign issuers generally are not bound by accounting, auditing and financial
reporting standards comparable to U.S. issuers.
Certain risks are inherent in the California Tax-Free Money Market Fund's
concentrated investment in California municipal securities, which may make an
investment in the Fund riskier than an investment in other types of money market
funds. These risks result from (1) amendments to the California Constitution and
other statutes that limit the taxing and spending authority of California
government entities, (2) the general financial condition of the State of
California, and (3) a variety of California laws and regulations that may
affect, directly or indirectly, California municipal securities. The ability of
issuers to pay interest on, or repay principal of, California municipal
securities may be impaired as a result. A more complete description of these
risks is contained in the Statement of Additional Information.
INVESTMENT LIMITATIONS
1. The Money Market Fund and the Treasury Money Market Fund may not purchase
securities of any issuer (except securities issued or guaranteed by the United
States its agencies or instrumentalities and repurchase agreements involving
such securities) if as a result more than 5% of the total assets of the Fund
would be invested in the securities of such issuer. While this restriction
applies to 75% of each Fund's assets, the Money Market Fund and the Treasury
Money Market Fund have each adopted, in accordance with Rule 2a-7, a policy
providing that the 5% limitation shall apply to 100% of the Fund's assets,
provided however, that each Fund may invest up to 25% of its assets in the First
Tier quality securities of a single issuer for up to three days. For purposes of
this limitation, loan participations are considered to be issued by both the
issuing bank and the underlying corporate borrower.
2. The California Tax-Free Money Market Fund may not purchase securities of any
issuer (except securities issued or guaranteed by the United States, its
agencies or instrumentalities) and repurchase agreements involving such
securities if as a result more than 5% of the total assets of the Fund would be
invested in the securities of such issuer.
3. Each Fund may not purchase any securities which would cause more than 25% of
its total assets 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 the obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities, and provided further, that
utilities as a group will not be considered to be one industry, and wholly-owned
subsidiaries organized to finance the operations of their parent companies will
be considered to be in the same industries as their parent companies. For
purposes of this limitation, loan participations are considered to be issued by
both the issuing bank and the underlying corporate borrower, and supranational
entities are considered to be a separate industry. This limitation does not
apply to investments by the Money Market Fund in certain bank instruments. In
addition, this limitation applies only to the California Tax-Free Money Market
Fund's investments in taxable securities and securities issued or backed by the
revenues of non-governmental users.
4. Each Fund may not make loans, except that a Fund may (a) purchase or hold
debt instruments in accordance with its investment objective and policies; (b)
enter into repurchase agreements; and (c) engage in securities lending as
described in this Prospectus and in the Statement of Additional Information.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
<PAGE> 155
9
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Funds. It is also a fundamental policy of each Fund
to use its best effort to maintain a constant net asset value of $1.00 per
share. Fundamental policies cannot be changed with respect to a Fund without the
consent of a majority of the Fund's outstanding shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of each Fund and continuously reviews,
supervises and administers the Funds' investment programs. The Advisor
discharges its responsibilities subject to the supervision of, and policies
established by, the Trustees of the Trust. The Trust's shares are not sponsored,
endorsed or guaranteed by, and do not constitute obligations or deposits of, the
Advisor and are not guaranteed by the FDIC or any other governmental agency.
The Advisor is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .30% of the average daily net assets of each Fund. The Advisor
may from time to time waive all or a portion of its fee in order to limit the
operating expenses of a Fund. Any such waiver is voluntary, and may be
terminated at any time in the Advisor's sole discretion.
For the fiscal year ended January 31, 1996, Union Bank, predecessor of the
Advisor, was paid an advisory fee of .30%, .25% and .10% of the average daily
net assets of the Money Market, Treasury Money Market and California Tax-Free
Money Market Funds, respectively.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of each Fund. On April 1,
1996, Union Bank, the Trust's then-investment advisor, combined with The Bank of
California, N.A., and the resulting bank changed its name to Union Bank of
California, N.A. At the same time, the banks' investment management divisions
were combined. Each of Union Bank and The Bank of California, N.A. (or its
predecessor bank) has been in banking since the early 1900's, and historically,
each has had significant investment functions within its trust and investment
division. Union Bank of California, N.A., is a subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
administration agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of Trust assets up to $1 billion, .12% of
assets between $1 billion and $2 billion and .10% of assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Institutional Class
shares. Any such waiver is voluntary, and may be terminated at any time in the
Administrator's sole discretion.
THE SHAREHOLDER SERVICING AGENT
SEI Financial Management Corporation serves as the transfer agent, dividend
disbursing agent, and
<PAGE> 156
10
shareholder servicing agent for the Institutional and Cash Sweep Class shares of
the Trust and for the Investment Class shares of the Convertible Securities,
Government Securities, Emerging Growth, Blue Chip Growth and International
Equity Funds. Compensation for these services is paid under the Administration
Agreement.
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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. Investment Class shares of the Funds may bear the costs of their
distribution expenses. It is possible that an institution may offer different
classes of shares to its customers, and thus receive different compensation with
respect to different classes of shares.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Funds may be made on days on which
both the New York Stock Exchange and Federal Reserve wire system are open for
business ("Business Days"). The minimum initial investment in a Fund is $2,000;
however, the minimum investment may be waived in the Distributor's discretion.
Shareholders may place orders by telephone.
Purchase orders will be effective on the Business Day made if the Distributor
receives an order before 12:00 noon, Eastern time on such Business Day.
Otherwise, the purchase order will be effective the next Business Day.
Effectiveness of a purchase order on any Business Day is contingent on the
Custodian's receipt of Federal funds before 2:00 p.m., Eastern time on such
Business Day. The purchase price is the net asset value per share, which is
expected to remain constant at $1.00. The net asset value per share is
calculated as of 12:00 noon, Eastern time, each Business Day based on the
amortized cost method. The net asset value per share of a Fund is determined by
dividing the total value of its investments and other assets, less any
liabilities, by the total number of its outstanding shares. The Trust reserves
the right to reject a purchase order when the Distributor determines that it is
not in the best interest of the Trust and/or Shareholder(s).
Shares of the Funds are offered only to residents of states in which the shares
are eligible for purchase.
The Trust is required to redeem for cash all full and fractional shares of the
Trust. The redemption price is the net asset value per share of a Fund (normally
$1.00 per share).
Redemption orders may be made any time before 11:00 a.m., Eastern time for the
California Tax-Free Money Market Fund and 12:00 noon, Eastern time for the Money
Market and Treasury Money Market Funds in order to receive that day's redemption
price (i.e. the next determined net asset value per share). For redemption
orders received before 12:00 noon, Eastern time, payment will be made the same
day by transfer of Federal funds. Otherwise, payment will be made on the next
Business Day. Redeemed shares are entitled to dividends declared the day the
redemption order is effective.
Neither the Trust's transfer agent nor the Trust will be responsible for any
loss, liability, cost or expense for acting upon wire instructions or upon
telephone instructions that it reasonably believes are genuine. The Trust and
its transfer agent will each employ reasonable procedures to confirm that
telephone instructions are genuine. Such procedures may include taping of
telephone conversations. If market conditions are extraordinarily active or
extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
<PAGE> 157
11
COMPUTATION OF YIELD
From time to time a Fund advertises its "current yield" and "effective compound
yield." Both yield figures are based on historical earnings and are not intended
to indicate future performance. The "current yield" of the Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will typically be slightly higher than the
"current yield" because of the compounding effect of this assumed reinvestment.
The California Tax Free Money Fund may also advertise tax-equivalent yields. The
California Tax-Free Money Market Fund may also advertise tax-equivalent yields.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to the Investment Class shares.
The yield of each Fund will fluctuate, and the annualization of a week's
dividend is not a representation by the Trust as to what an investment in the
Fund will actually yield in the future.
Each Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Funds may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Funds may use long term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios,
and could include the value of a hypothetical investment in any of the capital
markets. The Funds may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Funds may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark, while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
TAXES
The following summary of federal and California income tax consequences is based
on current tax laws and regulations, which may be changed by legislative,
judicial or administrative action. No attempt has been made to present a
detailed explanation of the federal, state, or local income tax treatment of a
Fund or its Shareholders. In addition, state and local income tax consequences
on an investment in a Fund may differ from the federal income tax consequences
discussed below. Accordingly, Shareholders are urged to consult their tax
advisors regarding specific questions as to federal, state and local income
taxes. Additional information concerning taxes is set forth in the Statement of
Additional Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. Each Fund intends to qualify for the
special tax treatment afforded regulated investment companies under the Internal
<PAGE> 158
12
Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of
federal income tax on that part of its net investment income and net capital
gain (the excess of net long-term capital gain over net short-term capital loss)
distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
Each Fund will distribute all of its net investment income (including net
short-term capital gain) and net capital gain to Shareholders. Dividends from
net investment company taxable income are taxable to Shareholders as ordinary
income (whether received in cash or in additional shares) to the extent of the
Fund's earnings and profits. Distributions of net capital gain will be taxable
to Shareholders as long-term capital gain regardless of how long Shareholders
have held their shares and regardless of whether the distributions are received
in cash or in additional shares. Dividends and distributions of capital gain
paid by a Fund do not qualify for the dividends received deduction for corporate
shareholders. Each Fund will provide annual reports to Shareholders of the
federal income tax status of all distributions.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments, a
Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because each Fund distributes
all of its net investment income to its shareholders, a Fund may have to sell
portfolio securities to distribute such imputed income, which may occur at a
time when the Advisor would not have chosen to sell such securities and which
may result in a taxable gain or loss.
Dividends declared by a Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared, if paid by the Fund any time during the following January.
The Funds intend to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Income received on direct U.S. obligations is exempt from tax at the state level
when received directly by a Fund, and may be exempt, depending on the state,
when received by a Shareholder as income dividends from a Fund provided certain
state-specific conditions are satisfied. Interest received on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. Each Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from a Fund is considered tax exempt in their
particular state.
Income derived by the Money Market Fund from obligations of foreign issuers may
be subject to foreign withholding taxes. The Money Market Fund will not be able
to elect to treat Shareholders as having paid their proportionate share of such
foreign taxes.
Each sale, exchange, or redemption of Fund shares is a taxable event to the
Shareholder.
SPECIAL CONSIDERATIONS FOR THE CALIFORNIA TAX-FREE MONEY MARKET FUND
The California Tax-Free Money Market Fund will distribute all of its net
investment income (including net short-term capital gain) to Shareholders. If,
at the close of each quarter of its taxable year, at least 50% of the value of
the Fund's assets consists of obligations the interest on which is excludable
from gross income, the Fund may pay "exempt-interest dividends" to its
Shareholders. Those dividends constitute the portion of the aggregate dividends
as designated by the Fund, equal to the excess of the excludable interest over
certain amounts disallowed as deductions. Exempt-interest dividends are
excludable from a Shareholder's gross income for federal income tax purposes,
but may have certain collateral federal income tax consequences, as
<PAGE> 159
13
described in the Statement of Additional Information.
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities to
satisfy the Code's requirements for the payment of "exempt-interest" dividends.
Any dividends attributable to the Fund's taxable income will be taxable to
Shareholders as ordinary income (whether received in cash or in additional
shares) to the extent of the Fund's earnings and profits. None of the Fund's
distributions will qualify for the corporate dividends-received deduction.
Furthermore, entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by "private activity bonds" or
"industrial development bonds" should consult their tax advisors before
purchasing shares. (See the Statement of Additional Information.)
CALIFORNIA TAXES:
The Fund intends to qualify to pay dividends to Shareholders that are exempt
from California personal income tax ("California exempt-interest dividends").
The Fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of the Fund's taxable year, at least 50 percent of the
value of the Fund's total assets consists of obligations the interest on which
would be exempt from California personal income tax if the obligations were held
by an individual ("California Tax Exempt Obligations") and (2) the Fund
continues to qualify as a regulated investment company.
If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to Shareholders will be considered California exempt-interest
dividends (1) if they are designated as exempt-interest dividends by the Fund in
a written notice to Shareholders mailed within 60 days of the close of the
Fund's taxable year and (2) to the extent the interest received by the Fund
during the year on California Tax Exempt Obligations exceeds expenses of the
Fund that would be disallowed under California personal income tax law as
allocable to tax-exempt interest if the Fund were an individual. If the
aggregate dividends so designated exceed the amount that may be treated as
California exempt-interest dividends, only that percentage of each dividend
distribution equal to the ratio of aggregate California exempt-interest
dividends to aggregate dividends so designated will be treated as a California
exempt-interest dividend. The California Tax-Free Money Market Fund will notify
Shareholders of the amount of California exempt-interest dividends each year.
Corporations subject to California franchise tax that invest in the Fund may not
be entitled to exclude California exempt-interest dividends from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends will be taxable to Shareholders at ordinary income tax
rates for California personal income tax purposes to the extent of the Fund's
earnings and profits.
Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of shares of the Fund will not be deductible for California
personal income tax purposes if the Fund distributes California exempt-interest
dividends.
The foregoing is a general, abbreviated summary of certain 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 advisors for more
detailed information concerning California tax matters.
<PAGE> 160
14
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different classes of each fund. In
addition to these Funds, the Trust consists of the following funds: California
Intermediate Tax-Free Bond Fund, Growth Equity Fund, Value Momentum Fund,
Intermediate-Term Bond Fund, Limited Maturity Government Fund, Balanced Fund,
Blue Chip Growth Fund, Emerging Growth Fund, Convertible Securities Fund,
Government Securities Fund and International Equity Fund. All consideration
received by the Trust for shares of any fund and all assets of such fund belong
to that fund, and would be subject to liabilities related thereto. The Trust
reserves the right to create and issue shares of additional funds.
The Trust pays its expenses, including audit and legal expenses, expenses of
preparing and printing prospectuses, proxy solicitation material and reports to
Shareholders, costs of custodial services and registering the shares under
federal and state securities laws, insurance expenses, litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses. Please refer to "Financial Highlights" in this prospectus
for more information regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each Fund or class will vote separately on matters relating solely to such Fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings, but approval will be sought for certain changes in the
operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon the written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust will provide appropriate
assistance to the Shareholders requesting the meeting.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to the Administrator, SEI Financial
Management Corporation, 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658.
DIVIDENDS
The net investment income (exclusive of net short-term capital gain) of the Fund
is determined and declared on each business day as a dividend for Shareholders
of record as of the close of business on that day. Dividends are paid by the
Fund in additional shares, unless the Shareholder has elected to take such
payment in cash, on the first business day of each month. Shareholders may
change their election by providing written notice to the Administrator at least
15 days prior to the change.
The amount of dividends payable on Institutional Class shares will typically be
higher than the dividends payable on Investment Class shares
<PAGE> 161
15
because of the distribution expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the assets of the
Fund. The Custodian holds cash, securities and other assets of the Trust as
required by the Investment Company Act of 1940, as amended.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Funds:
ASSET-BACKED SECURITIES (NON-MORTGAGE)--Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust organized solely for purpose of owning such assets and issuing
such debt. The purchase of non-mortgage asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset.
BANKERS' ACCEPTANCES--Bills of exchange or time drafts drawn on and accepted by
commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT--Negotiable interest-bearing instruments with a specific
maturity. Certificates of deposit 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.
COMMERCIAL PAPER--Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
LOAN PARTICIPATIONS--Interests in loans to U.S. corporations (i.e., borrowers)
administered by the lending bank or agent for a syndicate of lending banks, and
sold by the lending bank or syndicate member ("intermediary bank"). Because the
intermediary bank does not guarantee a loan participation in any way, a loan
participation is subject to the credit risks generally associated with the
underlying corporate borrower. In addition, in the event the underlying
corporate borrower fails to pay principal and interest when due, the Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower. Moreover, the purchasing Fund may be
regarded as a creditor of the intermediary bank (rather than of the underlying
corporate borrower), making it subject to the risk that the issuing bank may
become insolvent. Further, in the event of the bankruptcy or insolvency of the
corporate borrower, a loan participation may be subject to certain defenses that
can be asserted by
<PAGE> 162
16
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by the Fund may be regarded as illiquid.
MUNICIPAL BONDS--Obligations issued by or on behalf of governments and political
sub-divisions thereof, including private activity bonds. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
MUNICIPAL NOTES--Instruments issued by or on behalf of governments and political
sub-divisions thereof, and consist of general obligation notes, tax anticipation
notes, revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
REPURCHASE AGREEMENTS--Agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. A Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement. A
Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities or if a Fund realizes a loss on the sale of
the collateral. A Fund will enter into repurchase agreements only with financial
institutions deemed to present minimal risk of bankruptcy during the term of the
agreement based on established guidelines. Repurchase agreements are considered
loans under the 1940 Act.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES--Securities subject to settlement on a future date. The interest rate
realized on these securities is fixed as of the purchase date, and no interest
accrues to a Fund before settlement. These securities are subject to market
fluctuation due to changes, real or anticipated, in market interest rates and
the public's perception of the creditworthiness of the issuer, and will have the
effect of leveraging the Fund's assets. Purchasing securities on a forward
commitment or when-issued basis when a Fund is fully or almost fully invested
may result in greater potential fluctuation in the value of a Fund's net asset
value per share. The purchasing Fund will establish one or more segregated
accounts with the Custodian, and will maintain liquid, high-grade assets in an
amount at least equal in value to the Fund's commitments to purchase when-issued
securities.
SECURITIES LENDING--In order to generate additional income, each Fund may lend
the securities in which it is invested, pursuant to agreements requiring that
the loan be continuously secured by cash, securities of the U.S. Government or
its agencies or any combination of cash and such securities as collateral equal
to 100% of the market value at all times of the loaned securities. The lending
Fund will continue to receive interest on the loaned securities while
simultaneously earning interest on the investment of cash collateral. Collateral
is marked to market daily to provide a level of collateral at least equal to the
value of the loaned securities. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially.
<PAGE> 163
17
TAX-EXEMPT COMMERCIAL PAPER-- Commercial paper, which is commercial paper issued
by governments and political sub-divisions.
SECURITIES SUBJECT TO A PUT FEATURE--A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
TIME DEPOSITS--Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES-- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--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
systems.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks and brokerage firms and
are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuances of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's") "Treasury Investment Growth Receipts" ("TIGR's")
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS 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 securities. See also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS -- Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS
Investments by the Funds are subject to limitations imposed under regulations
adopted by the SEC.
These regulations generally require money market funds to acquire only U.S.
dollar denominated obligations maturing in 397 days or less and to maintain a
dollar-weighted average portfolio maturity of 90 days or less. In addition, the
Funds
<PAGE> 164
18
may acquire only obligations that present minimal credit risks and that are
"eligible securities," which means they are (i) rated, at the time of
investment, by at least two nationally recognized statistical rating
organizations (one if it is the only organization rating such obligation) in the
highest short-term rating category or, if unrated, determined to be of
comparable quality (a "first tier security"), or (ii) rated according to the
foregoing criteria in the second highest short-term rating category or, if
unrated, determined to be of comparable quality ("second tier security"). A
security is not considered to be unrated if its issuer has outstanding
obligations of comparable priority and security that have a short-term-rating.
In determining whether obligations are eligible securities, the rating of the
issuer's commercial paper, if any, is used for the above tests. Investments by
the Money Market Fund in second tier securities are subject to the further
constraints that (i) no more than 5% of the Fund's assets may be invested in
such securities in the aggregate, and (ii) any investment in such securities of
one issuer is limited to the greater of 1% of the Fund's total assets or $1
million. In addition, the Fund may invest up to 25% of its total assets in first
tier securities of a single issuer for three business days.
<PAGE> 165
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary......................................... 2
Annual Operating Expenses....................... 3
Financial Highlights............................ 4
The Trust....................................... 5
Investment Objectives........................... 5
Investment Policies............................. 5
General Investment Policies..................... 7
Eligibility Under Federal Credit Union Act...... 7
Risk Factors.................................... 7
Investment Limitations.......................... 8
Fundamental Policies............................ 9
The Advisor..................................... 9
The Administrator............................... 9
The Shareholder Servicing Agent................. 9
Distribution.................................... 10
Purchase and Redemption of Shares............... 10
Computation of Yield............................ 11
Taxes........................................... 11
General Information............................. 14
Description of Permitted Investments............ 15
Restraints on Investments by Money Market
Funds......................................... 17
</TABLE>
<PAGE> 166
STEPSTONE FUNDS
A Family of Mutual Funds
STEPSTONE FUNDS (the "Trust") is a mutual fund that offers a convenient means of
investing in one or more professionally managed portfolios of securities. This
Prospectus relates to the Trust's:
-- MONEY MARKET FUND
-- TREASURY MONEY MARKET FUND
-- CALIFORNIA TAX-FREE MONEY MARKET FUND
INVESTMENT CLASS SHARES
The Trust's Investment Class Shares are offered to individuals and institutional
investors, including accounts for which UNION BANK OF CALIFORNIA, N.A. and BANK
OF TOKYO-MITSUBISHI TRUST COMPANY, their affiliates and correspondents act in an
agency or custodial capacity.
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. THE CALIFORNIA TAX-FREE MONEY MARKET
FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
INVESTING IN THE FUND MAY BE RISKIER THAN INVESTING IN OTHER TYPES OF MONEY
MARKET FUNDS.
This Prospectus sets forth concisely the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Financial Services Company, 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, or by calling 1-(800) 734-2922. The
Statement of Additional Information is incorporated into this Prospectus by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., BANK OF TOKYO-MITSUBISHI
TRUST COMPANY OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. THE TRUST'S SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 28, 1996
INVESTMENT CLASS
<PAGE> 167
2
SUMMARY
STEPSTONE FUNDS (the "Trust") is a diversified, open-end management investment
company which provides a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about
Investment Class shares of the MONEY MARKET, TREASURY MONEY MARKET and
CALIFORNIA TAX FREE MONEY MARKET FUNDS (each a "Fund"). This summary is
qualified in its entirety by reference to the more detailed information provided
elsewhere in this Prospectus and in the Statement of Additional Information.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? THE MONEY MARKET FUND seeks to
preserve principal value and maintain a high degree of liquidity while providing
current income. THE TREASURY MONEY MARKET FUND seeks to preserve principal value
and maintain a high degree of liquidity while providing current income. THE
CALIFORNIA TAX-FREE MONEY MARKET FUND seeks to preserve principal and maintain a
high degree of liquidity while providing current income exempt from federal and
California state personal income taxes. See "Investment Objectives."
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? THE MONEY MARKET FUND invests in
obligations denominated in U.S. dollars, including commercial paper, bank
obligations, thrift and savings and loan obligations, short-term corporate
obligations, general U.S. Government obligations and repurchase agreements
involving such obligations, receipts evidencing ownership of component parts of
U.S. Treasury obligations and securities issued or guaranteed by foreign
branches of foreign banks and foreign commercial paper. THE TREASURY MONEY
MARKET FUND invests exclusively in direct obligations issued by the U.S.
Treasury, separately traded component parts of such obligations transferable
through the Federal book-entry system, and repurchase agreements involving such
obligations. THE CALIFORNIA TAX-FREE MONEY MARKET FUND invests in municipal
obligations of the State of California and its political subdivisions and
municipal obligations issued by territories or possessions of the United States.
See "Investment Policies."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUNDS? Each Fund seeks to
maintain a net asset value of $1.00 per share. There can be no assurance that a
Fund will be able to maintain a net asset value of $1.00 per share on a
continuous basis. The California Tax-Free Money Market Fund concentrates its
investments in California municipal securities, and an investment in the Fund
therefore may be riskier than an investment in other types of money market
funds. See "Risk Factors."
ARE MY INVESTMENTS INSURED? Any guarantee by the U.S. Government, its agencies
or instrumentalities of the securities in which any Fund invests guarantees only
the payment of principal and interest on the guaranteed security, and does not
guarantee the yield or value of the security or yield or value of shares of that
Fund. The Trust's shares are not federally insured by the FDIC or any other
government agency.
WHO IS THE ADVISOR? MERUS-UCA Capital Management, a division of Union Bank of
California, N.A., serves as the Advisor to the Trust. See "The Advisor."
WHO IS THE ADMINISTRATOR? SEI Financial Management Corporation serves as the
Administrator of the Trust. See "The Administrator."
WHO IS THE SHAREHOLDER SERVICING AGENT? State Street Bank and Trust Company
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Investment Class shares of the Trust (except for the Convertible
Securities, Government Securities, Emerging Growth, Blue Chip Growth and
International Equity Funds). See "Shareholder Servicing Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company acts as Distributor of
the Trust's shares. See "The Distributor."
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which both the New York Stock Exchange and
the Federal Reserve wire system are open for business ("Business Days"). The
minimum initial investment is $2,000 ($1,000 for IRAs). Shareholders must place
orders to purchase prior to 12:00 noon, Eastern time or orders to redeem prior
to 11:00 a.m., Eastern time for the California Tax-Free Money Market Fund, and
prior to 12:00 noon, Eastern time for the Money Market and Treasury Money Market
Funds on any Business Day. Otherwise the order will be effective the next
Business Day. In addition, effectiveness of a purchase is contingent on the
Custodian's receipt of Federal funds before 2:00 p.m., Eastern time. See
"Purchase and Redemption of Shares."
HOW ARE DIVIDENDS PAID? The net investment income (exclusive of short-term
capital gains) of the Funds is determined and declared on each Business Day as a
dividend for Shareholders of record as of the close of business on that day.
Dividends are paid monthly in additional shares unless the Shareholder elects to
take the payment in cash. See "Dividends."
<PAGE> 168
3
ANNUAL OPERATING EXPENSES INVESTMENT CLASS
(As a percentage of average net assets)
<TABLE>
<CAPTION>
CALIFORNIA
MONEY TREASURY TAX-FREE
MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Fees (After Fee Waivers)........................... .30% .25%(1) .10%(1)
12b-1 Fees (After Fee Waivers)(2)........................... .25% .25% .33%
Other Expenses.............................................. .20% .20% .20%
- ------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers)(3)............. .75% .70% .63%
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Advisor has voluntarily agreed to waive fees to the extent necessary in
order to limit Total Operating Expenses of the Treasury Money Market and
California Tax-Free Money Market Funds. The Advisor reserves the right to
terminate its waiver at any time in its sole discretion. Absent this fee
waiver, the Advisory Fees would be .30% for each Fund.
(2) Absent voluntary fee waivers, 12b-1 Fees would be .40% of each Fund. The
Distributor reserves the right to terminate its waiver at any time in its
sole discretion.
(3) Absent fee waivers, "Total Operating Expenses" would be .90% for each of the
Money Market Fund, Treasury Money Market Fund and California Tax-Free Money
Market Fund. "Total Operating Expenses" of the California Tax-Free Money
Market Fund have been restated to reflect current fees and fee waivers.
EXAMPLE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1 YR. 3 YRS. 5 YRS. 10 YRS.
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period.
Money Market Fund................................................... $ 8 $ 24 $ 42 $93
Treasury Money Market Fund.......................................... $ 7 $ 22 $ 39 $87
California Tax-Free Money Market Fund............................... $ 6 $ 20 $ 35 $79
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the
investor in understanding the various costs and expenses that may be directly or
indirectly borne by investors in the Investment Class shares of the Funds. The
Trust also offers Institutional Class shares of the Funds which are subject to
the same expenses, except there are no distribution expenses. Additional
information may be found under "The Administrator" and "The Advisor."
<PAGE> 169
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent accountants, as indicated in their report dated March 21, 1996 on
the Trust's financial statements as of January 31, 1996, included in the Trust's
Statement of Additional Information under "Financial Information." This table
should be read in conjunction with the Trust's financial statements and notes
thereto. Additional performance information is set forth in the Trust's 1996
Annual Report to Shareholders, and is available without charge by calling
1-(800) 734-2922.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES
NET ------------------------------ DISTRIBUTIONS NET
ASSET NET REALIZED ---------------------- ASSET
VALUE, NET AND UNREALIZED NET VALUE,
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- -------------------------------
TREASURY MONEY MARKET FUND
- -------------------------------
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.051 -- (0.051) -- 1.00 5.26%
1995 1.00 0.036 -- (0.036) -- 1.00 3.71%
1994 (1) 1.00 0.022 -- (0.022) -- 1.00 2.51%*
- ---------------------
MONEY MARKET FUND
- ---------------------
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.052 -- (0.052) -- 1.00 5.31%
1995 1.00 0.037 -- (0.037) -- 1.00 3.78%
1994 1.00 0.027 -- (0.027) -- 1.00 2.77%
1993 1.00 0.033 -- (0.033) -- 1.00 3.36%
1992 (2) 1.00 0.036 -- (0.036) -- 1.00 4.74%*
- ------------------------------------------
CALIFORNIA TAX FREE MONEY MARKET FUND
- ------------------------------------------
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.031 -- (0.031) -- 1.00 3.14%
1995 1.00 0.023 -- (0.023) -- 1.00 2.33%
1994 1.00 0.018 -- (0.018) -- 1.00 1.80%
1993 1.00 0.022 -- (0.022) -- 1.00 2.27%
1992 (3) 1.00 0.021 -- (0.021) -- 1.00 3.24%*
<CAPTION>
RATIO OF
RATIO OF NET INVESTMENT
NET EXPENSES RATIO OF INCOME TO
ASSETS, RATIO OF TO AVERAGE NET INVESTMENT AVERAGE
END EXPENSES NET ASSETS INCOME NET ASSETS
OF PERIOD TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING
(000) NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
- ---------------------------------
TREASURY MONEY MARKET FUND
- ---------------------------------
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 215,720 0.70% 0.90% 5.10% 4.90%
1995 129,024 0.69% 0.90% 4.04% 3.83%
1994 (1) 29,188 0.71%* 0.96%* 2.45%* 2.20%*
- ---------------------
MONEY MARKET FUND
- ---------------------
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 259,608 0.75% 0.90% 5.16% 5.01%
1995 111,267 0.70% 0.90% 3.79% 3.59%
1994 86,291 0.70% 0.89% 2.71% 2.52%
1993 79,253 0.69% 0.86% 3.41% 3.24%
1992 (2) 144,086 0.67%* 0.70%* 4.95%* 4.92%*
- ----------------------------------------
CALIFORNIA TAX FREE MONEY MARKET FUND
- ----------------------------------------
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 81,177 0.61% 0.88% 3.09% 2.82%
1995 49,494 0.62% 0.90% 2.33% 2.05%
1994 52,220 0.63% 0.94% 1.76% 1.45%
1993 8,542 0.63% 0.94% 2.21% 1.90%
1992 (3) 8,246 0.61%* 0.88%* 3.44%* 3.17%*
* Annualized.
(1) Commenced operations on March 5, 1993.
(2) Commenced operations on May 28, 1991.
(3) Commenced operations on June 25, 1991.
</TABLE>
<PAGE> 170
5
THE TRUST
STEPSTONE FUNDS (formerly Union Investors Funds) (the "Trust") is a diversified,
open-end management investment company that offers units of beneficial interest
("shares") in fourteen separate funds. Shareholders may purchase shares of
twelve of the funds through two separate classes of shares (Institutional and
Investment Classes) and through three separate classes of the Money Market and
Treasury Money Market Funds (Institutional, Investment and Cash Sweep Classes),
which provide for variations in distribution costs, voting rights and dividends.
Except for these differences among the classes, each share of each fund
represents an equal proportionate interest in that fund. This Prospectus relates
to the Investment Class shares of the Trust's Money Market, Treasury Money
Market and California Tax-Free Money Market Funds (each a "Fund"). Information
regarding the Trust's other funds is contained in separate prospectuses that may
be obtained from the Trust's Distributor, SEI Financial Services Company, 680
East Swedesford Road, Wayne, Pennsylvania 19087-1658.
INVESTMENT OBJECTIVES
THE MONEY MARKET FUND seeks to preserve principal value and maintain a high
degree of liquidity while providing current income.
THE TREASURY MONEY MARKET FUND seeks to preserve principal value and maintain a
high degree of liquidity while providing current income.
THE CALIFORNIA TAX-FREE MONEY MARKET FUND seeks to preserve principal and
maintain a high degree of liquidity while providing current income exempt from
federal and California state personal income taxes.
There can be no assurance that a Fund's investment objective will be met.
INVESTMENT POLICIES
MONEY MARKET FUND
The Money Market Fund invests in obligations denominated in U.S. dollars
consisting of:
(i) commercial paper (including Section 4(2) Commercial Paper) issued by
domestic and foreign issuers rated at least A-1 by Standard & Poor's Corporation
("S&P") or Prime-1 by Moody's Investors Service ("Moody's") at the time of
investment or, if not rated, determined by the Advisor to be of comparable
quality; (ii) obligations (certificates of deposit, bank notes, time deposits,
and bankers' acceptances) of thrift institutions, savings and loans, U.S.
commercial banks (including foreign branches of such banks), and U.S. and
foreign branches of foreign banks, provided that such institutions (or, in the
case of a branch, the parent institution) have total assets of $1 billion or
more as shown on their last published financial statements at the time of
investment; (iii) short-term corporate obligations (including Rule 144A
Securities) with a remaining term of not more than 397 days of issuers with
commercial paper of comparable priority and security meeting the above ratings
criteria or determined by the Advisor to be of comparable quality; (iv)
obligations issued by the U.S. Government and backed by its full faith and
credit, and obligations issued or guaranteed as to principal and interest by the
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration, Government National Mortgage Association,
Federal Farm Credit Bank and Federal Housing Administration); (v) receipts,
including TR's, TIGR's and CATS; (vi) repurchase agreements involving such
obligations; (vii) loan participations; (viii) readily-marketable securities
backed by company receivables, truck and auto loans, leases, and credit card
loans provided that such instruments satisfy the rating requirements described
above or are determined by the Advisor to be of comparable quality and (ix) U.S.
dollar denominated securities issued or guaranteed by foreign governments, their
political subdivisions, agencies or instrumentalities, and obligations of
supranational entities such as the World Bank and the Asian Development Bank;
provided that the Fund invests no more than 5% of its assets in any such
instrument and invests no more than 25% of its assets in such instruments in the
aggregate. The Advisor will determine that the
<PAGE> 171
6
permitted investments present minimal credit risks in accordance with guidelines
established by the Trust's Board of Trustees.
The Fund may concentrate its investments in certain instruments issued by U.S.
banks, U.S. branches of foreign banks and foreign branches of U.S. banks, but
only so long as the investment risk associated with investing in foreign
branches of domestic banks is the same as that associated with investing in
instruments issued by the U.S. parent, in that the U.S. parent would be
unconditionally liable in the event that the foreign branch failed to pay.
The Fund may invest up to 5% of its total assets in loan participations issued
by a bank in the United States with assets exceeding $1 billion where the
underlying loan is made to a borrower in whose obligations the Fund may invest
and the underlying loan has a remaining maturity of one year or less.
TREASURY MONEY MARKET FUND
The Treasury Money Market Fund invests exclusively in direct obligations issued
by the U.S. Treasury, separately traded component parts of such obligations
transferable through the Federal book-entry system ("STRIPS"), and repurchase
agreements involving such obligations.
The Fund is limited to making investments and engaging in investment
transactions that are permissible for federal credit unions.
Guarantees of the Fund's portfolio securities by the U.S. Government or its
agencies or instrumentalities guarantee only the principal and interest on the
guaranteed securities, and do not guarantee the securities' yield or value or
the yield or value of the Fund's shares.
CALIFORNIA TAX-FREE MONEY MARKET FUND
As a matter of fundamental policy, at least 80% of the California Tax-Free Money
Market Fund's assets are invested in obligations which produce interest that, in
the opinion of bond counsel, is exempt from Federal income tax and California
state personal income tax. These include obligations issued by the State of
California and its political subdivisions or municipal authorities and
obligations issued by territories or possessions of the United States.
Qualifying obligations consist of municipal notes; municipal bonds; floating or
variable rate municipal obligations; tax-exempt commercial paper; and shares of
open-end investment companies with similar investment objectives and policies.
The Advisor may engage in "put" transactions. The Advisor has discretion to
invest up to 20% of the Fund's assets in taxable money market instruments
(including repurchase agreements), securities which have not been registered
under the Securities Act of 1933 (Rule 144A Securities and Section 4(2)
Commercial Paper), receipts (including TR's, TIGR's, and CATS), and securities
the interest income from which is subject to the alternative minimum tax. While
the Fund generally intends to be fully invested in tax-exempt securities, the
Advisor may leave a portion of the Fund's assets uninvested.
For temporary defensive purposes when the Advisor determines that market
conditions warrant, the Fund may invest up to 100% of its assets in municipal
obligations of other states or taxable money market instruments (including
repurchase agreements, U.S. Treasury securities and instruments of certain U.S.
commercial banks or savings and loan institutions). The Fund will not be
pursuing its investment objective to the extent that more than 20% of its assets
are so invested in taxable money market securities.
The Fund will invest in obligations which are rated or are issued by entities
with debt obligations rated, at the time of investment, in one of the two
highest rating categories by S&P, Moody's or Fitch Investors Service, Inc.
("Fitch"), or, if not rated, determined by the Advisor to be of comparable
quality.
Opinions relating to the validity of municipal securities and to the exemption
of interest thereon from Federal income tax (and, with respect to California
municipal securities, to the exemption of interest thereon from California state
personal
<PAGE> 172
7
income tax) are rendered by bond counsel to the respective issuers at the time
of issuance. Neither the Fund nor its Adviser will review the proceedings
relating to the issuance of municipal securities or the bases for such opinions.
GENERAL INVESTMENT POLICIES
Each Fund intends to comply with Rule 2a-7 adopted by the Securities and
Exchange Commission ("SEC"), which Rule permits money market funds to use the
amortized cost method for calculating net asset value. The Rule imposes certain
quality, maturity and diversification restraints on investments by a Fund. Under
the Rule, a Fund will invest only in U.S. dollar denominated securities, will
maintain an average maturity on a dollar-weighted basis of 90 days or less, and
will acquire only "eligible securities" that present minimal credit risks and
have a maturity of 397 days or less. For a further discussion, see the
"Description of Permitted Investments."
Each Fund may enter into forward commitments, or purchase securities on a
when-issued basis. A Fund is permitted to invest in when-issued securities where
such purchases are for investment and not for leveraging purposes; however, a
Fund may sell these securities before the settlement date if it is deemed
advisable. No additional forward commitments will be made if more than 20% of a
Fund's net assets would be so committed.
Each Fund may engage in securities lending, and will limit such practice to
33 1/3% of its total assets.
Each Fund will limit its investment in illiquid securities to 10% of its net
assets.
For further information, see "Description of Permitted Investments."
ELIGIBILITY UNDER FEDERAL CREDIT
UNION ACT
Shares of the Treasury Money Market Fund (the Fund) are designed to qualify as
eligible investments for federally chartered credit unions pursuant to Section
107(7), 107(8) and 107(15) of the Federal Credit Union Act and Part 703 of the
National Credit Union Administration Rules and Regulations. The Fund will
continually monitor changes in the applicable laws, rules and regulations
governing eligible investments, including new investments, for federally
chartered credit unions and will take such action as may be necessary to assure
that the Fund's investments, and, therefore, shares of the Fund, continue to
qualify as eligible investments under the Federal Credit Union Act.
Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act set forth
those securities, deposits and other obligations in which federally chartered
credit unions may invest. The Fund's investments consist exclusively of assets
designed to qualify as eligible investments if owned directly by a federally
chartered credit union. Shares of the Fund may or may not qualify as eligible
investments for particular state chartered credit unions. Accordingly, the Fund
encourages, but does not require, each state chartered credit union to consult
qualified legal counsel concerning whether the Fund's shares are permissible
investments for that credit union. While the Advisor will assure that the Fund
follows investment policies set forth herein, the Fund cannot be responsible for
compliance by participating state chartered credit unions with limitations on
permissible investments to which they may be subject.
RISK FACTORS
It is a fundamental policy of each Fund to use its best efforts to maintain a
constant net asset value of $1.00 per share. There can be no assurance that a
Fund will be able to maintain a stable net asset value of $1.00 per share.
Foreign securities which the Money Market Fund may purchase involve risks that
are different from investments in securities of U.S. issuers. These risks may
include future unfavorable political and economic developments, possible
withholding taxes, seizure of foreign deposits, currency controls, interest
limitations or other government
<PAGE> 173
8
restrictions which might affect payment of principal or interest. Additionally,
there may be less public information available about foreign issuers. Foreign
branches of foreign banks are not regulated by U.S. banking authorities, and
foreign issuers generally are not bound by accounting, auditing and financial
reporting standards comparable to U.S. issuers.
Certain risks are inherent in the California Tax-Free Money Market Fund's
concentrated investment in California municipal securities, which may make an
investment in the Fund riskier than an investment in other types of money market
funds. These risks result from (1) amendments to the California Constitution and
other statutes that limit the taxing and spending authority of California
government entities, (2) the general financial condition of the State of
California, and (3) a variety of California laws and regulations that may
affect, directly or indirectly, California municipal securities. The ability of
issuers to pay interest on, or repay principal of, California municipal
securities may be impaired as a result. A more complete description of these
risks is contained in the Statement of Additional Information.
INVESTMENT LIMITATIONS
1. The Money Market Fund and the Treasury Money Market Fund may not purchase
securities of any issuer (except securities issued or guaranteed by the United
States its agencies or instrumentalities and repurchase agreements involving
such securities) if as a result more than 5% of the total assets of the Fund
would be invested in the securities of such issuer. While this restriction
applies to 75% of each Fund's assets, the Money Market Fund and the Treasury
Money Market Fund have each adopted, in accordance with Rule 2a-7, a policy
providing that the 5% limitation shall apply to 100% of the Fund's assets,
provided, however, that each Fund may invest up to 25% of its assets in the
First Tier quality securities of a single issuer for up to three days. For
purposes of this limitation, loan participations are considered to be issued by
both the issuing bank and the underlying corporate borrower.
2. The California Tax-Free Money Market Fund may not purchase securities of any
issuer (except securities issued or guaranteed by the United States, its
agencies or instrumentalities) and repurchase agreements involving such
securities if as a result more than 5% of the total assets of the Fund would be
invested in the securities of such issuer.
3. Each Fund may not purchase any securities which would cause more than 25% of
its total assets 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 the obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities, and provided further, that
utilities as a group will not be considered to be one industry, and wholly-owned
subsidiaries organized to finance the operations of their parent companies will
be considered to be in the same industry as their parent companies. For purposes
of this limitation, loan participations are considered to be issued by both the
issuing bank and the underlying corporate borrower, and supranational entities
are considered to be a separate industry. This limitation does not apply to
investments by the Money Market Fund in certain bank instruments. In addition,
this limitation applies only to the California Tax-Free Money Market Fund's
investments in taxable securities and securities issued or backed by the
revenues of non-governmental users.
4. Each Fund may not make loans, except that a Fund may (a) purchase or hold
debt instruments in accordance with its investment objective and policies; (b)
enter into repurchase agreements; and (c) engage in securities lending as
described in this Prospectus and in the Statement of Additional Information.
The foregoing percentages will apply at the time of the purchase of a security.
Additional fundamental and non-fundamental investment limitations are set forth
in the Statement of Additional Information.
<PAGE> 174
9
FUNDAMENTAL POLICIES
The investment objective and certain of the investment limitations are
fundamental policies of the Funds. It is also a fundamental policy of each Fund
to use its best efforts to maintain a constant net asset value of $1.00 per
share. Fundamental policies cannot be changed with respect to a Fund without the
consent of a majority of the Fund's outstanding shares.
THE ADVISOR
The Trust and MERUS-UCA Capital Management, a division of Union Bank of
California, N.A. (the "Advisor"), have entered into an advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of each Fund and continuously reviews,
supervises and administers the Fund's investment program. The Advisor discharges
its responsibilities subject to the supervision of, and policies established by,
the Trustees of the Trust. The Trust's shares are not sponsored, endorsed or
guaranteed by, and do not constitute obligations or deposits of, the Advisor and
are not guaranteed by the FDIC or any other government agency.
The Advisor is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .30% of the average daily net assets of each Fund. The Advisor
may from time to time voluntarily waive all or a portion of its fees in order to
limit the operating expenses of a Fund. Any such waiver is voluntary, and may be
terminated at any time in the Advisor's sole discretion.
For the fiscal year ended January 31, 1996, the Money Market, Treasury Money
Market and California Tax-Free Money Market Funds paid Union Bank, predecessor
of the Advisor, a fee of .30%, .25% and .10% of their average daily net assets,
respectively.
MERUS-UCA Capital Management (the "Advisor"), 475 Sansome Street, San Francisco,
California 94111, the investment management division of Union Bank of
California, N.A., manages the day-to-day operations of each Fund. On April 1,
1996, Union Bank, the Trust's then-investment advisor, combined with The Bank of
California, N.A., and the resulting bank changed its name to Union Bank of
California, N.A. At the same time, the banks' investment management divisions
were combined. Each of Union Bank and The Bank of California, N.A. (or its
predecessor bank) has been in banking since the early 1900's, and historically,
each has had significant investment functions within its trust and investment
division. Union Bank of California, N.A., is a subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd.
As of April 1, 1996, the Advisor managed approximately $12 billion in individual
portfolios and collective funds. The Advisor's clients range from pension funds,
national labor union plans and foundations to personal investments and trust
portfolios.
THE ADMINISTRATOR
SEI Financial Management Corporation (the "Administrator"), a wholly-owned
subsidiary of SEI Corporation ("SEI"), and the Trust are parties to an
Administration Agreement (the "Administration Agreement"). Under the terms of
the Administration Agreement, the Administrator provides the Trust with certain
management services including all necessary office space, equipment, personnel,
and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of Trust assets up to $1 billion, .12% of
assets between $1 billion and $2 billion and .10% of assets over $2 billion. The
Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses applicable to a Fund's
Investment Class shares. Any such waiver is voluntary, and may be terminated at
any time.
THE SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the Investment Class
shares of the Trust (except for the Convertible Securities, Government
Securities,
<PAGE> 175
10
Emerging Growth, Blue Chip Growth and International Equity Funds).
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement is renewable annually and may be
terminated by the Distributor, by a majority vote of the Disinterested Trustees
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 Investment Class shares have a distribution plan ("Investment Class Plan").
The Distribution Agreement and the Investment Class Plan provide that the
Investment Class shares of a Fund may bear the following distribution expenses:
(1) the cost of prospectuses, reports to Shareholders, sales literature and
other materials for potential investors; (2) advertising; and (3) expenses
incurred in connection with the promotion and sale of the Trust's shares
including the Distributor's expenses for travel, communication, and compensation
and benefits for sales personnel. In addition, the Trust pays the Distributor a
fee of up to .40% of a Fund's Investment Class shares average daily net assets,
of which a maximum of .25% may be used to compensate broker/dealers and service
providers which provide administrative and/or distribution services to
Investment Class Shareholders or to their other customers who beneficially own
Investment Class shares.
HOW TO PURCHASE SHARES
GENERAL INFORMATION
Purchases and redemptions of shares of the Funds may be made on days on which
both the New York Stock Exchange and the Federal Reserve wire system are open
for business ("Business Days"). The minimum initial investment in a Fund is
$2,000 ($1,000 for IRAs); however, the minimum investment may be waived in the
Distributor's discretion. Subsequent purchases must be at least $1,000 ($500 for
IRAs).
Purchase orders will be effective on the Business Day made if the Distributor
receives an order before 12:00 noon, Eastern time on such Business Day.
Otherwise, the purchase order will be effective the next Business Day.
Effectiveness of a purchase order on any Business Day is contingent on the
Custodian's receipt of Federal funds before 2:00 p.m. Eastern time on such day.
The purchase price is the net asset value per share, which is expected to remain
constant at $1.00. The net asset value per share is calculated as of 12:00 noon,
Eastern time, each Business Day based on the amortized cost method. The net
asset value per share of a Fund is determined by dividing the total value of its
investments and other assets, less any liabilities, by the total number of its
outstanding shares. The Trust reserves the right to reject a purchase order when
the Distributor determines that it is not in the best interest of the Trust
and/or Shareholder(s).
Shares of the Funds are offered only to residents of states in which the shares
are eligible for purchase.
HOW TO PURCHASE BY MAIL
You may purchase shares of a Fund by completing and signing an Account
Application form and mailing it, along with a check (or other negotiable bank
instrument or money order) payable to "Stepstone Funds (Fund Name)," to the
Transfer Agent at P.O. Box 8416, Boston, Massachusetts 02266-8416. All purchases
made by check should be in U.S. dollars and made payable to the "Stepstone Funds
(Fund Name)." Third party checks, credit card checks and cash will not be
accepted. You may purchase more shares at any time by mailing payment also to
the Transfer Agent at the above address. Orders placed by mail will be executed
on receipt of your payment. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred.
<PAGE> 176
11
You may obtain Account Application forms by calling the Distributor at
1-800-734-2922.
HOW TO PURCHASE BY WIRE
You may purchase shares by wiring Federal funds, provided that your Account
Application has been previously received. You must wire funds to the Transfer
Agent and the wire instructions must include your account number. You must call
the Transfer Agent at 1-800-734-2922 before wiring any funds. An order to
purchase shares by Federal funds wire will be deemed to have been received by
the Fund on the Business Day of the wire; provided that the shareholder wires
funds to the Transfer Agent prior to 4:00 p.m., Eastern time. If the Transfer
Agent does not receive the wire by 4:00 p.m., Eastern time, the order will be
executed on the next Business Day.
HOW TO PURCHASE THROUGH AN AUTOMATIC
INVESTMENT PLAN ("AIP")
You may arrange for periodic additional investments in the Funds through
automatic deductions by Automated Clearing House ("ACH") from a checking account
by completing this section in the Account Application form. The minimum
pre-authorized investment amount is $100 per month. The AIP is available only
for additional investments to an existing account.
HOW TO PURCHASE THROUGH FINANCIAL INSTITUTIONS
Shares may be purchased through financial institutions, including the Adviser,
that provide distribution assistance or shareholder services. Shares purchased
by persons ("Customers") through financial institutions may be held of record by
the financial institution. Financial institutions may impose an earlier cut-off
time for receipt of purchase orders directed through them to allow for
processing and transmittal of these orders to the Transfer Agent for
effectiveness the same day. Customers should contact their financial institution
for information as to that institution's procedures for transmitting purchase,
exchange or redemption orders to the Trust.
Customers who desire to transfer the registration of shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. Information concerning these
services and any charges will be provided to the Customer by the financial
institution.
REDEMPTION OF SHARES
You may redeem your shares without charge on any Business Day. There is,
however, a $15 charge for wiring redemption proceeds to a shareholder's
designated account. Shares may be redeemed by mail, by telephone or through a
pre-arranged systematic withdrawal plan. Investors who own shares held by a
financial institution should contact that institution for information on how to
redeem shares.
BY MAIL
A written request for redemption must be received by the Transfer Agent, P.O.
Box 8416, Boston, Massachusetts 02266-8416 in order to constitute a valid
redemption request.
If the redemption request exceeds $5,000, or if the request directs the proceeds
to be sent or wired to an address different from that of record, the Transfer
Agent may require that the signature on the written redemption request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker, dealer, credit union, securities exchange or association, clearing
agency or savings association. Notaries public cannot guarantee signatures. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption is for not more than $5,000 worth of
shares, (2) the redemption check is payable to the shareholder(s) of record, and
(3) the redemption check is mailed to the shareholders(s) at his or her address
of record.
<PAGE> 177
12
BY TELEPHONE
You may redeem your shares by calling the Transfer Agent at 1-800-734-2922.
Under most circumstances, payments will be transmitted on the next Business Day
following receipt of a valid request for redemption. You may have the proceeds
mailed to your address or wired to a commercial bank account previously
designated on your Account Application. There is no charge for having redemption
proceeds mailed to you, but there is a $15 charge for wiring redemption
proceeds.
You may request a wire redemption for redemptions in excess of $500 by calling
the Transfer Agent at 1-800-734-2922 who will deduct a wire charge of $15 from
the amount of the wire redemption. Shares cannot be redeemed by Federal Reserve
wire on Federal holidays restricting wire transfers.
Neither the Transfer Agent nor the Trust will be responsible for any loss,
liability, cost or expense for acting upon wire or telephone instructions that
it reasonably believes to be genuine. The Trust and Transfer Agent will each
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Such procedures may include taping of telephone
conversations.
If market conditions are extraordinarily active or other extraordinary
circumstance exist, and you experience difficulties placing redemption orders by
telephone, you may consider placing your order by mail.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Funds offer a Systematic Withdrawal Plan ("SWP"), which you may use to
receive regular distributions from your account. Upon commencement of the SWP,
your account must have a current net asset value of $5,000 or more. You may
elect to receive automatic payments via check or ACH of $100 or more on a
monthly, quarterly, semi-annual or annual basis. You may arrange to receive
regular distributions from your account via check or ACH by completing this
section in the Account Application form.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, your original investment could be
exhausted entirely. You may change or cancel the SWP at any time on written
notice to the Transfer Agent. The Transfer Agent may require that the signature
on the written notice be guaranteed.
OTHER INFORMATION REGARDING REDEMPTIONS
The Trust is required to redeem for cash all full and fractional shares of the
Trust. The redemption price is the net asset value per share of a Fund (normally
$1.00 per share).
Redemption orders may be made any time before 11:00 a.m., Eastern time for the
California Tax-Free Money Market Fund and 12:00 noon, Eastern time for the Money
Market and Treasury Money Market Fund in order to receive that day's redemption
price (i.e. the next determined net asset value per share). For redemption
orders received before 12:00 noon, Eastern time, payment will be made the same
day by transfer of federal funds. Otherwise, payment will be made on the next
Business Day. Redeemed shares are entitled to dividends declared the day the
redemption order is effective.
Payment to shareholders for shares redeemed will be made within seven days after
the Transfer Agent receives the valid redemption request. At various times,
however, a Fund may be requested to redeem shares for which it has not yet
received good payment; collection of payment may take ten or more days. In such
circumstances, the redemption request will be rejected by the Fund. Once a Fund
has received good payment for the shares a shareholder may submit another
request for redemption.
<PAGE> 178
13
Due to the relatively high costs of handling small investments, each Fund
reserves the right to redeem your shares at net asset value, if, your account in
any Fund has a value of less than the minimum initial purchase amount.
Accordingly, if you purchase shares of any Fund in only the minimum investment
amount, you may be subject to involuntary redemption if you redeem any shares.
Before any Fund exercises its right to redeem such shares, you will be given
notice that the value of the shares in your account is less than the minimum
amount and will be allowed 60 days to make an additional investment in such Fund
in an amount which will increase the value of the account to at least the
minimum amount.
COMPUTATION OF YIELD
From time to time a Fund advertises its "current yield" and "effective compound
yield." Both yield figures are based on historical earnings and are not intended
to indicate future performance. The "current yield" of the Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will typically be slightly higher than the
"current yield" because of the compounding effect of this assumed reinvestment.
The California Tax-Free Money Market Fund may also advertise tax equivalent
yields.
The performance of Institutional Class shares will normally be higher than for
Investment Class shares because the Institutional Class is not subject to
distribution expenses generally charged to Investment Class shares.
The yield of each Fund will fluctuate, and the annualization of a week's
dividend is not a representation by the Trust as to what an investment in the
Fund will actually yield in the future.
Each Fund may periodically compare its performance to the performance of: other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical),
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Funds may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. The Funds may use long term performance of these
capital markets to demonstrate general long-term risk versus reward scenarios,
and could include the value of a hypothetical investment in any of the capital
markets. The Funds may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Funds may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark, while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
TAXES
The following summary of federal and California income tax consequences is based
on current tax laws and regulations, which may be changed by legislative,
judicial or administrative action. No attempt has been made to present a
detailed explanation of the federal, state, or local income tax treatment of a
Fund or its Shareholders. In addition, state and local income tax consequences
<PAGE> 179
14
of an investment in a Fund may differ from federal tax consequences described
below. Accordingly, Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state and local income taxes.
Additional information concerning taxes is set forth in the Statement of
Additional Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other Funds. Each Fund intends to qualify for the
special tax treatment afforded regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of
federal income tax on that part of its net investment company taxable income and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
Each Fund will distribute all of its net investment income (including net
short-term capital gain) and net capital gain to Shareholders. Dividends from
net investment company taxable income are taxable to Shareholders as ordinary
income (whether received in cash or in additional shares) to the extent of the
Fund's earnings and profits. Distributions of net capital gain also will not
qualify for the dividends-received deduction and will be taxable to Shareholders
as long-term capital gain regardless of how long the Shareholders have held
their shares and regardless of whether the distributions are received in cash or
in additional shares. Dividends and distributions of capital gain paid by a Fund
do not qualify for the dividends received deduction for corporate Shareholders.
Each Fund will provide annual reports to Shareholders of the federal income tax
status of all distributions.
With respect to investments in STRIPS, TR's, TIGR's and CATS, which are sold at
original issue discount and thus do not make periodic cash interest payments, a
Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because each Fund distributes
all of its net investment income to its shareholders, a Fund may have to sell
portfolio securities to distribute such imputed income, which may occur at a
time when the Advisor would not have chosen to sell such securities and which
may result in a taxable gain or loss.
Dividends declared by a Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders on December 31 of the
year declared, if paid by the Fund any time during the following January.
The Funds intend to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Income received on direct U.S. obligations is exempt from tax at the state level
when received directly by a Fund, and may be exempt, depending on the state,
when received by a Shareholder as income dividends from a Fund provided certain
state-specific conditions are satisfied. Interest received on repurchase
agreements collateralized by U.S. government obligations normally is not exempt
from state tax. Each Fund will inform Shareholders annually of the percentage of
income and distributions derived from direct U.S. Treasury obligations.
Shareholders should consult their tax advisors to determine whether any portion
of the income dividends received from a Fund is considered tax exempt in their
particular state.
Income derived by a Fund from obligations of foreign issuers may be subject to
foreign withholding taxes. The Money Market Fund will not be able to elect to
treat Shareholders as having paid their proportionate share of such foreign
taxes.
Each sale, exchange or redemption of Fund shares is a taxable event to the
Shareholder.
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15
SPECIAL CONSIDERATIONS FOR THE CALIFORNIA TAX-FREE MONEY MARKET FUND
The California Tax-Free Money Market Fund will distribute all of its net
investment income (including net short-term capital gain) to Shareholders. If,
at the close of each quarter of its taxable year, at least 50% of the value of
the Fund's assets consists of obligations the interest on which is excludable
from gross income, the Fund may pay "exempt-interest dividends" to its
Shareholders. Those dividends constitute the portion of the aggregate dividends
as designated by the Fund, equal to the excess of the excludable interest over
certain amounts disallowed as deductions. Exempt-interest dividends are
excludable from a Shareholder's gross income for federal income tax purposes,
but may have certain collateral federal income tax consequences, as described in
the Statement of Additional Information.
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities to
satisfy the Code's requirements for the payment of "exempt-interest" dividends.
Any dividends attributable to the Fund's taxable income will be taxable to
Shareholders as ordinary income (whether received in cash or in additional
shares) to the extent of the Fund's earnings and profits. None of the Fund's
distributions will qualify for the corporate dividends-received deduction.
Furthermore, entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by "private activity bonds" or
"industrial development bonds" should consult their tax advisors before
purchasing shares. (See the Statement of Additional Information.)
CALIFORNIA TAXES:
The Fund intends to qualify to pay dividends to Shareholders that are exempt
from California personal income tax ("California exempt-interest dividends").
The Fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of the Fund's taxable year, at least 50 percent of the
value of the Fund's total assets consists of obligations the interest on which
would be exempt from California personal income tax if the obligations were held
by an individual ("California Tax Exempt Obligations") and (2) the Fund
continues to qualify as a regulated investment company.
If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to Shareholders will be considered California exempt-interest
dividends (1) if they are designated as exempt-interest dividends by the Fund in
a written notice to Shareholders mailed within 60 days of the close of the
Fund's taxable year and (2) to the extent the interest received by the Fund
during the year on California Tax Exempt Obligations exceeds expenses of the
Fund that would be disallowed under California personal income tax law as
allocable to tax-exempt interest if the Fund were an individual. If the
aggregate dividends so designated exceed the amount that may be treated as
California exempt-interest dividends, only that percentage of each dividend
distribution equal to the ratio of aggregate California exempt-interest
dividends to aggregate dividends so designated will be treated as a California
exempt-interest dividend. The California Tax-Free Money Market Fund will notify
Shareholders of the amount of California exempt-interest dividends each year.
Corporations subject to California franchise tax that invest in the Fund may not
be entitled to exclude California exempt-interest dividends from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends will be taxable to Shareholders at ordinary income tax
rates for California personal income tax purposes to the extent of the Fund's
earnings and profits.
Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of shares of the Fund will not be deductible for California
personal income tax purposes if the
<PAGE> 181
16
Fund distributes California exempt-interest dividends.
The foregoing is a general, abbreviated summary of certain 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 advisors for more
detailed information concerning California tax matters.
GENERAL INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 16, 1990. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different classes of each fund. In
addition to the Fund, the Trust consists of the following funds: Growth Equity
Fund, Value Momentum Fund, Intermediate-Term Bond Fund, Limited Maturity
Government Fund, Balanced Fund, Blue Chip Growth Fund, Emerging Growth Fund,
Convertible Securities Fund, Government Securities Fund, California Intermediate
Tax-Free Bond Fund, and International Equity Fund. All consideration received by
the Trust for shares of any fund and all assets of such fund belong to that fund
and would be subject to liabilities related thereto. The Trust reserves the
right to create and issue shares of additional funds.
The Trust pays its expenses, including audit and legal expenses, expenses of
preparing and printing prospectuses, proxy solicitation material and reports to
Shareholders, costs of custodial services and registering the shares under
federal and state securities laws, insurance expenses, litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses. Please refer to "Financial Highlights" in this prospectus
for more information regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Shareholders of
each fund or class will vote separately on matters relating solely to such fund
or class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings, but approval will be sought for certain changes in the
operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon the written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust will provide appropriate
assistance and information to the Shareholders requesting the meeting.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually. This Trust furnishes proxy statements and other
reports to Shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to Stepstone Funds, P.O. Box 8416,
Boston, Massachusetts 02266-8416.
DIVIDENDS
The net investment income (exclusive of net short-term capital gain) of each
Fund is determined and declared on each business day as a dividend for
Shareholders of record as of the close of business on that day. Dividends are
paid by the Fund in
<PAGE> 182
17
additional shares, unless the Shareholder has elected to take such payment in
cash, on the first business day of each month. Shareholders may change their
election by providing written notice to the Administrator at least 15 days prior
to the change.
The dividends payable on the Investment Class shares will typically be lower
than the dividends payable on the Institutional Class shares because of the
distribution expenses charged to Investment Class shares.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
CUSTODIAN
CoreStates Bank NA., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the "Custodian"), acts as Custodian of the assets of the
Fund. The Custodian holds cash, securities and other assets of the Trust as
required by the Investment Company Act of 1940, as amended.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Funds:
ASSET-BACKED SECURITIES (NON-MORTGAGE)--Instruments secured by company
receivables, truck and auto loans, leases, and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for purpose of owning such assets and issuing
such debt. The purchase of non-mortgage asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset.
BANKERS' ACCEPTANCES--Bills of exchange or time drafts drawn on and accepted by
commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT--Negotiable interest-bearing instruments with a specific
maturity. Certificates of deposit 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.
COMMERCIAL PAPER--Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of
Permitted Investments" for discussions of these various instruments, and see
"Investment Objectives and Policies" for more information about any policies and
limitations applicable to their use.
LOAN PARTICIPATIONS--Interests in loans to U.S. corporations (i.e., borrowers)
administered by the lending bank or agent for a syndicate of lending banks, and
sold by the lending bank or syndicate member ("intermediary bank"). Because the
intermediary bank does not guarantee a loan participation in any way, a loan
participation is subject to the credit risks generally associated with the
underlying corporate borrower. In addition, in the event the underlying
corporate borrower fails to pay principal and interest when due, the Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct
<PAGE> 183
18
obligation (such as commercial paper) of such borrower. Moreover, the purchasing
Fund may be regarded as a creditor of the intermediary bank (rather than of the
underlying corporate borrower), making it subject to the risk that the issuing
bank may become insolvent. Further, in the event of the bankruptcy or insolvency
of the corporate borrower, a loan participation may be subject to certain
defenses that can be asserted by such borrower as a result of improper conduct
by the issuing bank. The secondary market, if any, for these loan participations
is limited, and any such participation purchased by the Fund may be regarded as
illiquid.
MUNICIPAL BONDS--Obligations issued by or on behalf of governments and political
sub-divisions thereof, including private activity bonds. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
MUNICIPAL NOTES--Instruments issued by or on behalf of governments and political
sub-divisions thereof, and consist of general obligation notes, tax anticipation
notes, revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of Rule 144A Securities. The
Board of Trustees of the Trust has established guidelines and procedures to be
utilized to determine the liquidity of such securities.
REPURCHASE AGREEMENTS--Agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. A Fund will have actual or constructive
possession of the securities held as collateral for the repurchase agreement. A
Fund bears a risk of loss in the event the other party defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities or if a Fund realizes a loss on the sale of
the collateral. A Fund will enter into repurchase agreements only with financial
institutions deemed to present minimal risk of bankruptcy during the term of the
agreement based on established guidelines. Repurchase agreements are considered
loans under the 1940 Act.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES--Securities subject to settlement on a future date. The interest rate
realized on these securities is fixed as of the purchase date, and no interest
accrues to a Fund before settlement. These securities are subject to market
fluctuation due to changes, real or anticipated, in market interest rates and
the public's perception of the creditworthiness of the issuer, and will have the
effect of leveraging the Fund's assets. Purchasing securities on a forward
commitment or when-issued basis when a Fund is fully or almost fully invested
may result in greater potential fluctuation in the value of a Fund's net asset
value per share. The purchasing Fund will establish one or more segregated
accounts with the Custodian, and will maintain liquid, high grade assets in an
amount at least equal in value to the Fund's commitments to purchase when-issued
securities.
SECURITIES LENDING--In order to generate additional income, each Fund may lend
the securities in which it is invested pursuant to agreements requiring that the
loan be continuously secured by cash, securities of the U.S. Government or its
agencies or any combination of cash and such securities as collateral equal to
100% of the market value at all times of the loaned securities. The lending Fund
will continue to receive interest on the loaned securities while simultaneously
earning interest on the investment of cash collateral. Collateral is marked to
market daily to provide a level of collateral at least equal to the value of the
loaned securities. There may be
<PAGE> 184
19
risks of delay in receiving additional collateral or risks of delay in recovery
of the securities or even loss of rights in the collateral should the borrower
of the securities fail financially.
TAX-EXEMPT COMMERCIAL PAPER-- Commercial paper issued by governments and
political sub-divisions.
SECURITIES SUBJECT TO A PUT FEATURE--A "put" feature permits a Fund to sell a
security at a fixed price prior to maturity. The underlying securities subject
to a put may be sold at any time at the market rates. However, unless the put
was an integral part of the security as originally issued, it may not be
marketable or assignable. Generally, a premium is paid for a put feature or a
put feature is purchased separately which results in a lower yield than would
otherwise be available for the same securities.
TIME DEPOSITS--Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES-- Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the Treasury. The issues of other agencies are
supported only by the credit of the instrumentality (e.g., FNMA securities).
U.S. TREASURY OBLIGATIONS--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.
RECEIPTS--Interests in separately traded interest and principal component parts
of U.S. Treasury obligations that are issued by banks or brokerage firms and are
created by depositing Treasury notes and Treasury bonds into a special account
at a custodian bank. The custodian holds the interest and principal payments for
the benefit of the registered owners of the certificates or receipts. The
custodian arranges for the issuance of the certificates or receipts evidencing
ownership and maintains the register. Receipts include "Treasury Receipts"
("TR's"), "Treasury Investment Growth Receipts" ("TIGR's") and "Certificates of
Accrual on Treasury Securities" ("CATS"). TR'S, TIGR'S and CATS 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 securities. See
also "Taxes."
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS
Investments by the Funds are subject to limitations imposed under regulations
adopted by the SEC.
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20
These regulations generally require money market funds to acquire only U.S.
dollar denominated obligations maturing in 397 days or less and to maintain a
dollar-weighted average portfolio maturity of 90 days or less. In addition, the
Funds may acquire only obligations that present minimal credit risks and that
are "eligible securities," which means they are (i) rated, at the time of
investment, by at least two nationally recognized statistical rating
organizations (one if it is the only organization rating such obligation) in the
highest short-term rating category or, if unrated, determined to be of
comparable quality (a "first tier security"), or (ii) rated according to the
foregoing criteria in the second highest short-term rating category or, if
unrated, determined to be of comparable quality ("second tier security"). A
security is not considered to be unrated if its issuer has outstanding
obligations of comparable priority and security that have a short-term-rating.
In determining whether obligations are eligible securities, the rating of the
issuer's commercial paper, if any, is used for the above tests. Investments by
the Money Market Fund in second tier securities are subject to the further
constraints that (i) no more than 5% of the Fund's assets may be invested in
such securities in the aggregate, and (ii) any investment in such securities of
one issuer is limited to the greater of 1% of the Fund's total assets or $1
million. In addition, the Fund may invest up to 25% of its total assets in the
first tier securities of a single issuer for three business days.
<PAGE> 186
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary.......................................... 2
Annual Operating Expenses........................ 3
Financial Highlights............................. 4
The Trust........................................ 5
Investment Objectives............................ 5
Investment Policies.............................. 5
General Investment Policies...................... 7
Eligibility Under Federal Credit Union Act....... 7
Risk Factors..................................... 7
Investment Limitations........................... 8
Fundamental Policies............................. 9
The Advisor...................................... 9
The Administrator................................ 9
The Shareholder Servicing Agent.................. 9
Distribution..................................... 10
How to Purchase Shares........................... 10
Redemption of Shares............................. 11
Computation of Yield............................. 13
Taxes............................................ 13
General Information.............................. 16
Description of Permitted Investments............. 17
Restraints on Investments by Money Market
Funds.......................................... 20
</TABLE>
<PAGE> 187
STEPSTONE FUNDS
A FAMILY OF MUTUAL FUNDS
INVESTMENT ADVISOR:
UNION BANK OF CALIFORNIA, N.A.
This Statement of Additional Information is not a prospectus. It is intended
to provide additional information regarding the activities and operations of
the Trust and should be read in conjunction with the Trust's prospectuses dated
May 28, 1996. Prospectuses may be obtained through the Distributor, SEI
Financial Services Company, 680 E. Swedesford Road, Wayne, Pennsylvania
19087-1658.
TABLE OF CONTENTS
PAGE
THE TRUST . . . . . . . . . . . . . . . . . . . . S-2
DESCRIPTION OF PERMITTED INVESTMENTS . . . . . . S-2
INVESTMENT LIMITATIONS . . . . . . . . . . . . . S-28
THE ADVISOR . . . . . . . . . . . . . . . . . . . S-30
THE SUBADVISORS . . . . . . . . . . . . . . . . . S-31
THE ADMINISTRATOR . . . . . . . . . . . . . . . . S-32
THE DISTRIBUTOR . . . . . . . . . . . . . . . . . S-34
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . . S-35
REPORTING . . . . . . . . . . . . . . . . . . . . S-37
PERFORMANCE . . . . . . . . . . . . . . . . . . . S-37
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . S-43
DETERMINATION OF NET ASSET VALUE . . . . . . . . S-43
TAXES . . . . . . . . . . . . . . . . . . . . . . S-44
FUND TRANSACTIONS . . . . . . . . . . . . . . . . S-46
DESCRIPTION OF SHARES . . . . . . . . . . . . . . S-50
SHAREHOLDER LIABILITY . . . . . . . . . . . . . . S-50
LIMITATION OF TRUSTEES' LIABILITY . . . . . . . . S-50
5% SHAREHOLDERS . . . . . . . . . . . . . . . . . S-51
EXPERTS . . . . . . . . . . . . . . . . . . . . . S-57
FINANCIAL STATEMENTS . . . . . . . . . . . . . . S-58
APPENDIX . . . . . . . . . . . . . . . . . . . . A-1
May 28, 1996
S-1
<PAGE> 188
THE TRUST
Stepstone Funds (formerly Union Investors Funds) (the "Trust") is a
diversified, open-end management investment company established under
Massachusetts law as a business trust pursuant to a Declaration of Trust dated
October 16, 1990. The Trust changed its name on May 12, 1992, from Union
Investors Portfolios to Union Investors Funds. On March 1, 1994, the Trust
changed its name from Union Investors Funds to its current name, Stepstone
Funds. The Declaration of Trust permits the Trust to offer separate series of
shares of beneficial interest ("shares") and different classes of shares of
each Fund. Shareholders may purchase shares through two separate classes
(Institutional and Investment Classes) of twelve of the Trust's Funds and
through three separate classes (Institutional, Investment and Cash Sweep
Classes) of two of the Trust's Funds, which provide for variations in
distribution costs, voting rights and dividends. Except for these differences
among Institutional, Investment and Cash Sweep Class shares, each share of
each Fund represents an equal proportionate interest in that Fund. See
"Description of Shares." This Statement of Additional Information relates to
the Institutional Class and Investment Class shares of the Trust's
International Equity, Balanced, Blue Chip Growth, California Intermediate
Tax-Free Bond, California Tax-Free Money Market, Convertible Securities,
Emerging Growth, Government Securities, Growth Equity, Intermediate-Term Bond,
Limited Maturity Government, Money Market, Treasury Money Market, and Value
Momentum Funds and the Cash Sweep Class shares of the Money Market and Treasury
Money Market Funds (the "Funds").
DESCRIPTION OF PERMITTED INVESTMENTS
The following information supplements the information about permitted
investments set forth in the Prospectuses.
VARIABLE AMOUNT MASTER DEMAND NOTES. Certain of the permitted investments of
the Funds may include VARIABLE AMOUNT MASTER DEMAND NOTES, which may or may not
be backed by bank letters of credit. These notes permit the investment of
fluctuating amounts at varying market rates of interest pursuant to direct
arrangements between the Trust, as lender, and the borrower. Such notes
provide that the interest rate on the amount outstanding varies on a daily,
weekly or monthly basis depending upon a stated short-term interest rate index.
Both the lender and the borrower have the right to reduce the amount of
outstanding indebtedness at any time. There is no secondary market for the
notes. It is not generally contemplated that such instruments will be traded.
SHARES OF OTHER INVESTMENT COMPANIES. A Fund's purchase of investment company
securities will result in the layering of expenses. A Fund is prohibited from
acquiring the securities of other investment companies if, as a result of such
acquisition, the Fund owns in the aggregate (1) more than 3% of the total
outstanding voting stock of the acquired company, (2) securities issued by the
acquired company having an aggregate value in excess of 5% of the value of the
total assets of the Fund, or (3) securities issued by the acquired company and
all other investment companies having an aggregate value in excess of 10% of
the value of the total assets of the Fund.
GNMA SECURITIES. Certain of the Funds may invest in SECURITIES ISSUED BY THE
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA"), a wholly-owned U.S.
Government corporation which guarantees the timely payment of principal and
interest. The market value and interest yield of these instruments can vary
due to market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of federally insured
mortgage loans. GNMA certificates consist of underlying mortgages with a
maximum maturity of 30 years. However, due to scheduled and unscheduled
principal payments, GNMA certificates have a shorter average maturity and,
therefore, less principal volatility than a comparable 30-year bond. Since
prepayment
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rates vary widely, it is not possible to predict accurately the average
maturity of a particular GNMA pool. The scheduled monthly interest and
principal payments relating to mortgages in the pool will be "passed through"
to investors. GNMA securities differ from conventional bonds in that principal
is paid back to the certificate holders over the life of the loan rather than
at maturity. As a result, there will be monthly scheduled payments of
principal and interest. In addition, there may be unscheduled principal
payments representing prepayments on the underlying mortgages. Although GNMA
certificates may offer yields higher than those available from other types of
U.S. Government securities, GNMA certificates may be less effective than other
types of securities as a means of "locking in" attractive long-term rates
because of the prepayment feature. For instance, when interest rates decline,
the value of a GNMA certificate likely will not rise as much as comparable debt
securities due to the prepayment feature. In addition, these prepayments can
cause the price of a GNMA certificate originally purchased at a premium to
decline in price to its par value, which may result in a loss.
MORTGAGE-BACKED SECURITIES. The Intermediate-Term Bond, Balanced, Government
Securities and Limited Maturity Government Funds may invest in MORTGAGE-BACKED
SECURITIES. Two types of mortgage-backed securities are
collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICS"), which are rated in one of the two top
categories by S&P or Moody's. CMOs are securities collateralized by mortgages,
mortgage pass-throughs, mortgage pay-through bonds (bonds representing an
interest in a pool of mortgages where the cash flow generated from the mortgage
collateral pool is dedicated to bond repayment), and mortgage-backed bonds
(general obligations of the issuers payable out of the issuers' general funds
and additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which
have different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages, plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until
that portion of such CMO obligation is repaid, investors in the longer
maturities receive interest only. Accordingly, the CMOs in the longer maturity
series are less likely than other mortgage pass-throughs to be prepaid prior to
their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-throughs issued or guaranteed by U.S.
Government agencies or instrumentalities, the CMOs themselves are not generally
guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
ASSET-BACKED SECURITIES. The Intermediate-Term Bond, Money Market, Balanced
and Government Securities Funds may invest in readily marketable ASSET-BACKED
SECURITIES backed by corporate receivables, truck and auto loans, leases, and
credit card receivables. These issues may be traded over-the-counter and
typically have a short-intermediate maturity structure depending on the paydown
characteristics of the underlying assets which are passed through to the
security holder.
REPURCHASE AGREEMENTS. REPURCHASE AGREEMENTS are agreements by which a
Fund obtains a security and simultaneously commits to return the security to
the seller (a member bank of the Federal Reserve System or recognized
securities dealer) at an agreed upon price (including principal and interest)
on an agreed upon date within a number of days (usually not more than seven)
from the date of purchase. The repurchase price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the underlying security. A repurchase agreement
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involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
Repurchase agreements are considered to be loans by the Fund for
purposes of its investment limitations. The 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 repurchase price stated in the agreement
(the Advisor monitors 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
that the proceeds of sale including accrued interest are less than the
repurchase price provided in the agreement including interest. 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 delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Funds are
treated as an unsecured creditor and required to return the underlying security
to the seller's estate.
MUNICIPAL SECURITIES. MUNICIPAL NOTES in which the California Tax-Free Money
Market and California Intermediate Tax-Free Bond Funds may invest, include, but
are not limited to, 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 to receipt of expected non-tax revenues from a
specific source), bond anticipation notes, certificates of indebtedness, demand
notes and construction loan notes. The Fund's investments in any of the notes
described above will be limited to those obligations (i) where both principal
and interest are backed by the full faith and credit of the United States, (ii)
which are rated MIG-2 or V-MIG-2 at the time of investment by Moody's Investors
Service ("Moody's"), (iii) which are rated SP-2 at the time of investment by
Standard and Poor's Corporation ("S&P"), (iv) which are rated F-1 at the time
of investment by Fitch Investors Service, Inc. ("Fitch") or (v) which, if not
rated, are of equivalent quality in the Advisor's judgment, to MIG-2, V-MIG-2,
SP-2 or F-1.
MUNICIPAL BONDS, in which the California Tax-Free Money Market and California
Intermediate Tax-Free Bond Funds may invest, must be rated AA or better S&P or
Fitch or Aa or better by Moody's at the time of investment for the California
Tax-Free Money Market Fund or, if purchased for the California Intermediate
Tax-Free Bond Fund, rated BBB or better by S&P or Fitch or Baa or better by
Moody's, or, if unrated, be deemed by the Advisor to have essentially the same
characteristics and quality as bonds having the above ratings. The Advisor may
purchase private activity bonds if the interest paid is excludable from Federal
income tax. Private activity bonds are issued by or on behalf of States or
political subdivisions thereof to finance privately owned or operated
facilities for business and manufacturing, housing, sports, and pollution
control and to finance activities of and facilities for charitable
institutions. Private activity bonds are also used to finance public
facilities such as airports, mass transit systems, ports, parking and low
income housing. The payment of the principal and interest on private activity
bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and may be secured by a pledge of real and personal
property so financed.
California municipal securities, which are payable only from the revenues
derived from a particular facility, may be adversely affected by California
laws or regulations which make it more difficult for the particular facility to
generate revenues sufficient to pay such interest and principal, including,
among others, laws and regulations which limit the amount of fees, rates or
other charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have the
effect of reducing the use of such facilities generally, thereby reducing the
revenues generated by the particular facility. California municipal
securities, the payment of interest and principal on which is insured in whole
or in part by a California governmentally created fund, may
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be adversely affected by California laws or regulations which restrict the
aggregate insurance proceeds available for payment of principal and interest in
the event of a default on such municipal securities. Similarly, California
municipal securities, the payment of interest and principal on which is
secured, in whole or in part, by an interest in real property, may be adversely
affected by California laws which limit the availability of remedies or the
scope of remedies available in the event of a default on such municipal
securities. Because of the diverse nature of such laws and regulations and the
impossibility of either predicting in which specific California municipal
securities the Funds will invest from time to time or predicting the nature or
extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the municipal
securities in which the Funds may invest and, therefore, on the shares of the
Funds.
TAX-EXEMPT COMMERCIAL PAPER will be limited to investments in obligations which
are rated at least A-2 by S&P, F-2 by Fitch or Prime-2 by Moody's at the time
of investment or which are determined by the Advisor to be of equivalent
quality.
Other types of TAX-EXEMPT INSTRUMENTS which are permissible investments for the
California Tax-Free Money Market and California Intermediate Tax-Free Bond
Funds include floating rate notes. Investments in such floating rate
instruments will normally involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate (such as the prime rate) at a major commercial bank, and
that a Fund can demand payment of the obligation at all times, or at stipulated
dates on short notice (not to exceed 30 days), at par plus accrued interest.
The Funds may use the longer of the period required before a Fund is entitled
to prepayment under such obligations or the period remaining until the next
interest rate adjustment date for purposes of determining the maturity. Such
obligations are frequently secured by letters of credit or other credit support
arrangements provided by banks. The quality of the underlying credit or of the
bank, as the case may be, must, in the Advisor's opinion, be equivalent to the
long-term bond or commercial paper ratings stated above. The Advisor will
monitor the earning power, cash flow and liquidity ratios of the issuers of
such instruments, and the ability of an issuer of a demand instrument to pay
principal and interest on demand. The Advisor may purchase other types of
tax-exempt instruments, as long as they are of a quality equivalent to the bond
or commercial paper ratings stated above.
The Advisor 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 it can simultaneously acquire the right to sell
the securities back to the seller, the issuer, or a third party (the "writer")
at an agreed-upon price at any time during a stated period or on a certain
date. Such a right is generally denoted as a "standby commitment" or a "put."
The purpose of engaging in transactions involving puts is to maintain
flexibility and liquidity to permit the California Tax-Free Money Market and
California Intermediate Tax-Free Bond Funds to meet redemptions and remain as
fully invested as possible in municipal securities. The Funds reserve the
right to engage in put transactions. The right to put the securities depends
on the writer's ability to pay for the securities at the time the put is
exercised. The Funds limit their put transactions to institutions which the
Advisor believes present minimum credit risks, and the Advisor uses 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, the affected Fund would
be a general creditor (i.e., on a parity with all other unsecured creditors) of
the writer. Furthermore, particular provisions of the contract between a Fund
and the writer may excuse the writer from repurchasing the securities; for
example, a change in the published rating of the underlying municipal
securities or any similar event
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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. A Fund could, however, at any
time sell the underlying portfolio security in the open market or wait until
the portfolio security matures, at which time it should realize the full par
value of the security.
The municipal 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 a Fund. Sale of the securities to third parties or lapse of time with the
put unexercised may terminate the right to put the securities. Prior to the
expiration of any put option, a Fund could seek to negotiate terms for the
extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to a Fund, such Fund could, of course, sell the portfolio
security. The maturity of the underlying security will generally be different
from that of the put. There will be no limit to the percentage of portfolio
securities that the Funds may purchase subject to a put, but the amount paid
directly or indirectly for puts which are not integral parts of the security as
originally issued held in either Fund will not exceed 1/2 of 1% of the value of
the total assets of such Funds calculated immediately after any such put is
acquired. For the purpose of determining the "maturity" of securities
purchased subject to an option to put, and for the purpose of determining the
dollar-weighted average maturity of the Funds including such securities, the
Trust will consider "maturity" to be the first date on which it has the right
to demand payment from the writer of the put although the final maturity of the
security is later than such date.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
The ability of issuers to pay interest on, and repay principal of, California
municipal securities ("California Municipal Securities") may be affected by (1)
amendments to the California Constitution and related statutes that limit the
taxing and spending authority of California government entities, (2) voter
initiatives, (3) a wide variety of California laws and regulations, including
laws related to the operation of health care institutions and laws related to
secured interests in real property and (4) the general financial condition of
the State of California. The following information constitutes only a brief
summary, and is not intended as a complete description. The information has
been drawn, in some cases by excerpt, from official statements relating to
securities offerings of the State of California available as of the date of
this Statement of Additional Information. While the information has not been
independently verified by the California Tax-Free Money Market and California
Intermediate Tax-Free Bond Funds, these Funds have no reason to believe that
such information is not correct in all material respects.
Amendments to the California Constitution and Related Statutes. Certain of the
California Municipal Securities may be obligations of issuers who rely in whole
or in part on ad valorem real property taxes as a source of revenue. On June
6, 1978, California voters approved an amendment to the California Constitution
known as Proposition 13, which added Article XIIIA to the California
Constitution. The effect of Article XIIIA is to limit ad valorem taxes on real
property, and to restrict the ability of taxing entities to increase real
property tax revenues. On November 7, 1978, California voters approved
Proposition 8, and on June 3, 1986, California voters approved Proposition 46,
both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real property
to 1% of full cash value (as defined in Section 2), to be collected by the
counties and apportioned according to law; provided that the 1% limitation does
not apply to ad valorem taxes or special assessments to pay the interest and
redemption charges on (i) any indebtedness approved by the voters prior to July
1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement of
real property approved on or after July 1, 1978, by two-thirds of the votes
cast by the voters voting on the proposition. Section 2 of Article
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XIIIA defines "full cash value" to mean "the County Assessor's valuation of
real property as shown on the 1975/76 tax bill under 'full cash value' or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The "full cash value" may be adjusted annually to reflect inflation at a rate
not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors. The California State Board of
Equalization has adopted regulations, binding on county assessors, interpreting
the meanings of "change in ownership" and "new construction" for purposes of
determining full cash value of property under Article XIIIA.
Legislation enacted by the California Legislature to implement Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that notwithstanding any
other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes).
The legislation further provided that, for the 1978/79 fiscal year only, the
tax levied by each county was to be apportioned among all taxing agencies
within the county in proportion to their average share of taxes levied in
certain previous years. The apportionment of property taxes in fiscal years
after 1978/79 has been revised pursuant to Statutes of 1979, Chapter 282, which
provides relief funds from State moneys beginning in fiscal year 1979/80 and is
designed to provide a permanent system for sharing State taxes and budget funds
with local agencies. Under Chapter 282, cities and counties receive more of
the remaining property tax revenues collected under Proposition 13 instead of
direct State aid. School districts receive a correspondingly reduced amount of
property taxes, but receive compensation directly from the State and are given
additional relief. Chapter 282 does not affect the derivation of the base levy
($4.00 per $100 of assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or the "Gann
Initiative" was approved by the California voters, which added Article XIIIB to
the California Constitution. Under Article XIIIB, State and local governmental
entities have an annual "appropriations limit" and are not allowed to spend
certain moneys called "appropriations subject to limitation" in an amount
higher than the "appropriations limit." Article XIIIB does not affect the
appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising the tax rates or fee schedules over the
subsequent two years.
Article XIIIB, like XIIIA, may require further interpretation by both the
Legislature and the courts to determine its applicability to specific
situations involving the State and local taxing authorities. Depending upon
the interpretation, Article XIIIB may limit significantly a governmental
entity's ability to budget sufficient funds to meet debt service on bonds and
other obligations.
Voter Initiatives. 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 Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (as modified by Proposition 111, which was enacted on June 5,
1990), K-14 schools are guaranteed the greater of (a) in general, a fixed
percent of General Fund revenues ("Test 1"), (b) the amount appropriated to
K-14 schools in the
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prior year, adjusted for changes in the cost of living (measured as in Article
XIII B by reference to State per capita personal income) and enrollment ("Test
2"), or (c) a third test, which would replace "Test 2" in any year when the
percentage growth in per capita General Fund revenues from the prior year plus
one half of one percent is less than the percentage growth in State per capita
personal income ("Test 3"). Under "Test 3," schools would receive the amount
appropriated in the prior year adjusted for changes in enrollment and per
capita General Fund revenues, plus an additional small adjustment factor. If
"Test 3" is used in any year, the difference between "Test 3" and "Test 2"
would become a "credit" to schools which would be the basis of payments in
future years when per capita General Fund revenue growth exceeds per capita
personal income growth. Legislation adopted prior to the end of the 1988-89
Fiscal Year, implementing Proposition 98, determined the K-14 schools' funding
guarantee under Test 1 to be 40.3 percent of the General Fund Tax revenues,
based on 1986-87 appropriations. However, that percent would be adjusted to
account for redirection of local property taxes, since such a subsequent
redirection directly affects the share of General Fund revenues to schools.
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.
During the recent recession, General Fund revenues for several years were less
than originally projected, so that the original Proposition 98 appropriations
turned out to be higher than the minimum percentage provided in the law. The
Legislature responded to these developments by designating the "extra"
Proposition 98 payments in one year as a "loan" from future years' Proposition
98 entitlements, and also intended that the "extra" payments would not be
included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from
Proposition 98 sources stayed almost constant at approximately $4,220 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called CALIFORNIA TEACHERS' ASSOCIATION V. GOULD,
which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached
to settle this case. It is expected that a formal settlement reflecting these
conditions will be entered into in the near future.
The oral agreement provides that both the State and K-14 schools share in the
repayment of prior years' emergency loans to schools. Of the total $1.76
billion in loans, the State will repay $935 million by forgiveness of the
amount owed, while schools will repay $825 million. The State share of the
repayment will be reflected as expenditures above the current Proposition 98
base calculation. The schools' share of the repayment will count as
appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year
period of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. Once
a court settlement is reached, and the Director of Finance certifies that such
a settlement has occurred, approximately $377 million in appropriations from
the 1995-96 Fiscal Year to schools will be disbursed in August 1996.
On November 4, 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii)
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restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed, (iv) prohibits the imposition of
ad valorem taxes on real property by local governmental entities except as
permitted by Article XIIIA, (v) prohibits the imposition of transaction taxes
and sales taxes on the sale of real property by local governments, (vi)
requires that any tax imposed by a local government on or after August 1, 1985
be ratified by a majority vote of the electorate within two years of the
adoption of the initiative or be terminated by November 15, 1988, (vii)
requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative, and (viii) permits these provisions to be amended exclusively by
the voters of the State of California.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App.
1988), held that Proposition 62 is unconstitutional to the extent that it
requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes, or on new taxes imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87. Proposition 87
amended Article XVI, Section 16, of the California Constitution by authorizing
the California Legislature to prohibit redevelopment agencies from receiving
any of the property tax revenue raised by increased property tax rates levied
to repay bonded indebtedness of local governments which is approved by voters
on or after January 1, 1989. It is not possible to predict whether the
California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their
ability to make payments on outstanding debt obligations.
Other Relevant California Laws. A wide variety of California laws and
regulations may affect, directly or indirectly, the payment of interest on, or
the repayment of the principal of, California Municipal Securities in which the
California Tax-Free Money Market and California Intermediate Tax-Free Bond
Funds may invest. The impact of such laws and regulations on particular
California Municipal Securities may vary depending upon numerous factors
including, among others, the particular type of Municipal Security involved,
the public purpose funded by the Municipal Security and the nature and extent
of insurance or other security for payment of principal and interest on the
Municipal Security. For example, California Municipal Securities which are
payable only from the revenues derived from a particular facility may be
adversely affected by California laws or regulations which make it more
difficult for the particular facility to generate revenues sufficient to pay
such interest and principal, including, among others, laws and regulations
which limit the amount of fees, rates or other charges which may be imposed for
use of the facility or which increase competition among facilities of that type
or which limit or otherwise have the effect of reducing the use of such
facilities generally, thereby reducing the revenues generated by the particular
facility. California Municipal Securities, the payment of interest and
principal on which is insured in whole or in part by a California
governmentally created fund, may be adversely affected by California laws or
regulations which restrict the aggregate insurance proceeds available for
payment of principal and interest in the event of a default on such Municipal
Securities.
Certain California Municipal Securities in which the Tax-Free Money Market and
California Intermediate Tax-Free Bond Funds may invest may be obligations that
are payable solely from the revenues of health care institutions. Certain
provisions under California law may adversely affect such revenues and,
consequently, payment on those California Municipal Securities.
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The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides
that the State of California shall selectively contract with hospitals to
provide acute inpatient services to Medi-Cal patients. Medi-Cal contracts
currently apply only to acute inpatient services. Generally, such selective
contracting is made on a flat per diem payment basis for all services to
Medi-Cal beneficiaries, and generally such payment has not increased in
relation to inflation, costs or other factors. Other reductions or limitations
may be imposed in payment for services rendered to Medi-Cal beneficiaries in
the future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California
will be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice
under certain circumstances and is obligated to make contractual payments only
to the extent the California legislature appropriates adequate funding
therefor.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital
acute inpatient services) would be decreased by ten percent through June 1987.
However, a federal district court issued a preliminary injunction preventing
application of any cuts until a trial on the merits can be held. If the
injunction is deemed to have been granted improperly, the State of California
would be entitled to recapture the payment differential for the intended
reduction period. It is not possible to predict at this time whether any
decreases will ultimately be implemented.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO.
It is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December, 1983, to evaluate the adequacy of
the reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study
and concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur
D. Little, Inc. prepared a further review of the study and recommended that
separate reserves
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continue to be established for "multi-level" facilities at a reserve level
consistent with those that would be required by an insurance company.
Certain California Municipal Securities in which the California Tax-Free Money
Market and California Intermediate Tax-Free Bond Funds may invest may be
obligations which are secured in whole or in part by a mortgage or deed of
trust on real property. California has five principal statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of trust,
two of which limit the creditor's right to obtain a deficiency judgment. One
of the limitations is based on the method of foreclosure and the other on the
type of debt secured. Under the former, a deficiency judgment is barred when
the foreclosure is accomplished by means of a nonjudicial trustee's sale.
Under the latter, a deficiency judgment is barred when the foreclosed mortgage
or deed of trust secures certain purchase money obligations. Another
California statute, commonly known as the "one form of action" rule, requires
the creditors secured by real property to exhaust their real property security
by foreclosure before bringing a personal action against the debtor. The
fourth statutory provision limits any deficiency judgment obtained by a
creditor secured by real property following a judicial sale of such property to
the excess of the outstanding debt over the fair value of the property at the
time of the sale, thus preventing the creditor from obtaining a large
deficiency judgment against the debtor as the result of low bids at a judicial
sale. The fifth statutory provision gives the debtor the right to redeem the
real property from any judicial foreclosure sale as to which a deficiency
judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three
full monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. Therefore, the effective
minimum period for foreclosing on a home mortgage could be in excess of seven
months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to a
substantial number of mortgages or deeds of trust securing an issuer's
obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
Federal or State Constitutions, consequently preventing an issuer from using
the nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in which the California Tax-Free Money
Market and California Intermediate Tax-Free Bond Funds may invest may be
obligations which finance the acquisition of single family home mortgages for
low and moderate income mortgagors. These obligations may be payable solely
from revenues derived from the home mortgages, and are subject to the
California statutory limitations described above applicable to obligations
secured by real property. Under California anti-deficiency legislation, there
is no personal recourse against a mortgagor of a single family residence
purchased with the loan secured by the mortgage, regardless of whether the
creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage
loans may be imposed only with respect
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to voluntary prepayments made during the first five years during the term of
the mortgage loan, and cannot in any event exceed six months' advance interest
on the amount prepaid in excess of 20% of the original amount of the mortgage
loan. This limitation could affect the flow of revenues available to an issuer
for debt service on the outstanding debt obligations which financed such home
mortgages.
Because of the diverse nature of such laws and regulations and the
impossibility of either predicting in which specific California Municipal
Securities the Funds will invest from time to time or predicting the nature or
extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the Municipal
Securities in which the Funds may invest and, therefore, on the units of the
Funds.
The General Financial Condition of the State of California. The 1989-90 Fiscal
Year ended with revenues below estimates, so that the State's budget reserve
(the Special Fund for Economic Uncertainties or "SFEU") was fully depleted by
June 30, 1990. A recession began in mid-1990, which severely affected State
General Fund revenues, and increased expenditures above initial budget
appropriations due to greater health and welfare costs. The State's budget
problems in recent years have also been caused by a structural imbalance in
that the largest General Fund Programs -- K-14 education, health, welfare and
corrections -- were increasing faster than the revenue base, driven by the
State's rapid population growth. These pressures are expected to continue as
population trends maintain strong demand for health and welfare services, as
the school age population continues to grow, and as the State's corrections
program responds to a "Three Strikes" law enacted in 1994, which requires
mandatory life prison terms for certain third-time felony offenders.
As a result of these factors and others, from the late 1980's until 1992-93,
the State had a period of budget imbalance. During this period, expenditures
exceeded revenues in four out of six years, and the State accumulated and
sustained a budget deficit in the SFEU approaching $2.8 billion at its peak at
June 30, 1993. Starting in the 1990-91 Fiscal Year and for each fiscal year
thereafter, each budget required multibillion dollar actions to bring projected
revenues and expenditures into balance. The Legislature and Governor agreed on
the following principal steps to produce Budget Acts in the years 1991-92 to
1993-94, including:
- significant cuts in health and welfare program expenditures;
- transfers of program responsibilities and funding from the
State to local governments referred to as "realignment"), coupled with some
reduction in mandates on local government;
- transfer of about $3.6 billion in local property tax revenues
from cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing State funding for schools under Proposition
98;
- reduction in growth of support for higher education programs,
coupled with increases in student fees;
- revenue increases (particularly in the 1991-92 Fiscal Year
budget), most of which were of a short duration;
- increased reliance on aid from the federal government to
offset the costs of incarcerating, educating and providing health and welfare
services to illegal immigrants; and
- various one-time adjustments and accounting changes.
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Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95.
Another consequence of the accumulated budget deficits, together-with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the state to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992 the State Controller issued a total of approximately $3.8 billion of
registered warrants. After that date, all remaining outstanding registered
warrants (about $2.9 billion) were called for redemption from proceeds of the
issuance of 1992 Interim Notes after the budget was adopted.
In late spring of 1992, the State Controller issued revenue anticipation
warrants maturing in the following fiscal year in order to pay the State's
continuing obligations. The State was forced to rely increasingly on external
debt markets to meet its cash needs, as a succession of notes and warrants were
issued in the period from June 1992 to July 1994, often needed to pay
previously maturing notes or warrants. These borrowings were used also in part
to spread out the repayment of the accumulated budget deficit over the end of a
fiscal year, as noted earlier.
The Governor's Budget Proposal for the 1994-95 Fiscal Year, as updated in May
and June 1994, recognized that the accumulated deficit could not be repaid in
one year, and proposed a two-year solution designed to eliminate the
accumulated budget deficit, estimated at about $1.8 billion at June 30, 1994,
by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projected
General Fund revenues and transfers of $41.9 billion, $2.1 billion more than
actual revenues received in 1993-94, and expenditures of $40.9 billion, an
increase of $1.6 billion from the prior year. As a result of the improving
economy, the Department of Finance's final estimates for the fiscal year showed
revenues and transfers of $42.7 billion and expenditures of $42.0 billion,
reducing he accumulated budget deficit to about $600 million.
The principal features of the 1994-95 Budget Act were the following:
1. Receipt of additional federal aid of about $760 million for
costs of refugee assistance and costs of incarceration and medical care for
illegal immigrants. Only about $33 million of this amount was received, with
about another $98 million scheduled to be received in the 1995-96 Fiscal Year.
2. Reductions of approximately $1.1 billion in health and welfare
costs. Certain of these actions were blocked by legal challenges.
3. A General Fund increase of approximately $38 million in
support for the University of California and $65 million for California State
University, accompanied by student fee increases for both the University of
California and California State University.
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4. Proposition 98 funding for K-14 schools was increased by $526
million from 1993-94 Fiscal Year levels, representing an increase for
enrollment growth and inflation. Consistent with previous budget agreements,
Proposition 98 funding provided approximately $4,217 per student for K-12
schools, equal to the level in the prior three years.
5. Additional miscellaneous cuts ($500 million), fund transfers
($255 million), adjustment to prior years' legislation concerning property tax
shifts for local governments ($300 million).
The 1994-95 Budget Act contained no tax increases. Under legislation enacted
for the 1993-94 Budget Act, the renters' tax credit was suspended for two years
(1993 and 1994). A ballot proposition to permanently restore the renters' tax
credit after this year failed at the June 1994 election. The Legislature
enacted a further one-year suspension of the renters' tax credit, for 1995,
saving about $390 million in the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 Fiscal Year included the
issuance $4.0 billion of Revenue Anticipation Warrants, Series C and D (the
"RAWs") on July 26, 1994, to mature on April 25, 1996, as part of a two-year
plan to retire the accumulated State budget deficit. To assure payment of the
RAWs, the Legislature enacted a backup mechanism which could result in
automatic expenditure cuts if projected revenues did not meet certain targets
(Section 12467 of the California Government Code, enacted by Chapter 135,
Statutes of 1994, the "Budget Adjustment Law").
The third and last step in the Budget Adjustment Law process occurred on
October 16, 1995, when the State Controller issued a report (the "October
Trigger Report") reviewing the estimated cash condition of the General Fund for
the 1995-96 Fiscal Year. The State Controller estimated that the General Fund
would have at least $1.4 billion of internal cash resources on June 30, 1996
(i. e., external borrowing would not be needed on June 30, 1996). As a result
of this funding, certain provisions of the Budget Adjustment Law, which could
have ultimately led to automatic, across-the-board cuts in the General Fund
budget, will not have to be implemented. Likewise, an earlier report issued on
November 15, 1994, avoided implementation of any automatic budget cuts in the
1994-95 fiscal year.)
The discussion below of the 1995-96 Fiscal Year budget is based on estimates
and projections of revenues and expenditures for the current fiscal year and
must not be construed as statements of fact. These estimates and projections
are based upon various assumptions which may be affected by numerous factors,
including future economic conditions in the State and the nation, and there can
be no assurance that the estimates will be achieved.
Periodic reports on revenues and expenditures during the fiscal year are issued
by the Administration, the State Controller's Office and the Legislative
Analyst's Office. The Department of Finance issues a monthly Bulletin which
reports the most recent revenue receipts, comparing them to Budget projections,
and reports on other current developments affecting the Budget. The
Administration also formally updates its budget projections twice during each
fiscal year, generally in January and May.
With strengthening revenues and reduced caseload growth based on an improving
economy, the State entered the 1995-96 Fiscal Year budget negotiations with the
smallest nominal "budget gap" to be closed in many years. Nonetheless, serious
policy differences between the Governor and Legislature prevented timely
enactment of the budget. The 1995-96 Budget Act was signed by the Governor on
August 3, 1995, 34 days after the start of the fiscal year. The Budget Act
projected General Fund revenues and transfers of $44.1 billion, a 3.5 percent
increase from the prior year. Expenditures were budgeted at $43.4 billion, a 4
percent increase. The Department of Finance projected that, after repaying the
last of the carry over budget deficit, there would be a positive balance of $28
million in the budget reserve, the Special Fund for Economic Uncertainties, at
June 30,1996. The Budget Act
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also projected Special Fund revenues of $12.7 billion and appropriated Special
Fund expenditures of $13.0 billion.
The Governor's Budget for the 1996-97 Fiscal Year, released on January 10, 1996
(the Governor's Budget"), updated the current year projections, so that
revenues and transfers are estimated to be $45.0 billion, and expenditures to
be $44.2 billion. The Special Fund for Economic Uncertainties is projected to
have a positive balance of about $50 million at June 30, 1996, and on that date
available internal borrowable resources (available cash, after payment of
obligations due) will be about $2.2 billion. The Administration projects it
will issue up to $2.0 billion of revenue anticipation notes in April, 1996, to
mature June 30, 1996, to assist in cash flow management for the final two
months of the year, after repayment of the $4.0 billion RAW issue on April 25,
1996.
The following are the principal features of the 1995-96 Budget Act:
1. Proposition 98 funding for schools and community colleges was
originally budgeted to increase by about $ 1.0 billion (General Fund) and $ 1.2
billion total above revised 1994-95 levels. Because of higher than projected
revenues in 1994-95, an additional $543 million ($91 per K-12 ADA) was
appropriated to the 1994-95 Proposition 98 entitlement. A large part of this
is a block grant of about $54 per pupil for any one-time purpose. For the
first time in several years, a full 2.7 percent cost of living allowance was
funded. The budget compromise anticipates a settlement of the CTA v. Gould
litigation discussed above under "Voter Initiatives". The Governor's Budget
indicates that, with revenues even higher than projected, Proposition 98
apportionments will exceed the amounts originally budgeted, reaching a level of
$4,500 per ADA.
2. Cuts in health and welfare costs totaling about $0.9 billion.
Some of these cuts (totaling about $500 million) require federal legislative or
administrative approval, which were still pending as of February, 1996.
3. A 3.5 percent increase in funding for the University of
California ($90 million General Fund) and the California State University
system ($24 million General Fund), with no increases in student fees.
4. The Budget, as updated by the 1996-97 Governor's Budget dated
January 10, 1996, assumed receipt of $494 million in new federal aid for
incarceration and health care costs of illegal immigrants, above commitments
already made by the federal government.
5. General Fund support for the Department of Corrections is
increased by about 8 percent over the prior year, reflecting estimates of
increased prison population, but funding is less than proposed in the 1995
Governor's Budget.
On January 10, 1996, the Governor released his proposed budget for the next
fiscal year (the "Governor's Budget"). The Governor requested total General
Fund appropriations of about $45.2 billion, based on projected revenues and
transfers of about $45.6 billion, which would leave a budget reserve in the
Special Fund for Economic Uncertainties at June 30, 1997 of about $400 million.
The Governor renewed a proposal, which had been rejected by the Legislature in
1995, for a 15 percent phased cut in individual and corporate tax rates over
three years (the budget proposal assumes this will be enacted, reducing
revenues in 1996-97 by about $600 million). There was also a proposal to
restructure trial court funding in a way which would result in a $300 million
decrease in General Fund revenues. The Governor requested legislation to make
permanent a moratorium on cost of living increases for welfare payments, and
suspension of a renters tax credit, which otherwise would go back into effect
in the 1996-97 Fiscal Year. He further proposed additional cuts in certain
health and welfare programs, and assumed that cuts previously approved by the
Legislature will receive federal
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approval. The Governor's Budget proposes increases in funding for K-12 schools
under Proposition 98, for State higher education systems (with a second year of
no student fee increases), and for corrections. The Governor's Budget projects
external cash flow borrowing of up to $3.2 billion, mature by June 30, 1997.
Additional Considerations. With respect to Municipal Securities issued by the
State of California and its political subdivisions, as well as certain other
governmental issuers such as the Commonwealth of Puerto Rico, the Trust cannot
predict what legislation, if any, may be proposed in the California State
Legislature as regards the California State personal income tax status of
interest on such obligations, or which proposals, if any, might be enacted.
Such proposals, if enacted, might materially adversely affect the availability
of California Municipal Securities for investment by the Funds and the value of
the Funds' investments. In such event, the Trustees would reevaluate the
investment objective and policies of the Funds and consider changes in its
investments structure or possible dissolution.
OPTIONS ON SECURITIES. The Blue Chip Growth, Emerging Growth, Balanced, and
International Equity Funds may buy and sell options, and the Growth Equity,
Emerging Growth, Blue Chip Growth, Value Momentum, International Equity and
Balanced Funds may write CALL OPTIONS on a covered basis only. A Fund will not
engage in option writing strategies for speculative purposes.
COVERED CALL WRITING. The Growth Equity, Emerging Growth, Blue Chip Growth,
Balanced, International Equity and Value Momentum Funds may write covered call
options from time to time on such portion of its assets, without limit, as the
Advisor determines is appropriate in seeking to obtain each Fund's investment
objective. A call option gives the purchaser of such option the right to buy,
and the writer, in this case the Fund, has the obligation to sell the
underlying security at the exercise price during the option period. The
advantage to the Fund of writing covered calls is that the Fund receives a
premium which is additional income. However, if the value of the security
rises, the Fund may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold,
which requires the writer to deliver the underlying security against payment of
the exercise price. This obligation is terminated upon the expiration of the
option period or at such earlier time in which the writer effects a closing
purchase transaction. A closing purchase transaction is one in which a Fund
when obligated as a writer of an option, terminates its obligation by
purchasing an option of the same series as the option previously written. A
closing purchase transaction cannot be effected with respect to an option once
the option writer has received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit
on an outstanding call option, to prevent an underlying security from being
called, to permit the sale of the underlying security, or to enable the Fund to
write another call option on the underlying security with either a different
exercise price or expiration date or both. The Fund may realize a net gain or
loss from a closing purchase transaction, depending upon whether the net amount
of the original premium received on the call option is more or less than the
cost of effecting the closing purchase transaction. Any loss incurred in a
closing purchase transaction may be partially or entirely offset by the premium
received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a
gain resulting from a closing purchase transaction could be offset in whole or
in part by a decline in the market value of the underlying security.
If a call option expires unexercised, the Fund will realize a short term
capital gain in the amount of the premium on the option, less the commission
paid. Such a gain, however, may be offset by
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depreciation in the market value of the underlying security during the option
period. If a call option is exercised, the Fund will realize a gain or loss
from the sale of the underlying security equal to the difference between the
cost of the underlying security, and the proceeds of the sale of the security
plus the amount of the premium on the option, less the commission paid.
The market value of a call option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date. The Fund will write
call options only on a covered basis, which means that the Fund will own the
underlying security subject to a call option at all times during the option
period or will own the right to acquire the underlying security at a price
equal to or below the option's strike price. Unless a closing purchase
transaction is effected the Fund would be required to continue to hold a
security which it might otherwise wish to sell, or deliver a security it would
want to hold. Options written by the Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of a
call option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
Purchasing Call Options . The Blue Chip Growth, Balanced, Emerging and
International Equity Funds may purchase call options to hedge against an
increase in the price of securities that the Fund wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the Fund,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Fund might
have realized had it bought the underlying security at the time it purchased the
call option.
Purchasing Put Options. The Blue Chip Growth, Balanced, Emerging and
International Equity Growth Funds may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such hedge protection is provided during the life of the put option since the
Fund, as holder of the put option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. For a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, a Fund
will reduce any profit it might otherwise have realized from appreciation of
the underlying security by the premium paid for the put option and by
transaction costs.
The Growth Equity Fund, the Value Momentum Fund, Emerging Growth, Blue Chip
Growth, Balanced Fund and the International Equity Fund may engage in OPTIONS
ON STOCK INDICES. A stock index assigns relative values to the common stocks
included in the index with the index fluctuating with changes in the market
values of the underlying common stock.
Options on stock indices are similar to options on stocks but have different
delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the
option. The amount of cash received will be equal to such difference between
the closing price of the index and exercise price of the option expressed in
dollars times a specified multiple. The writer of the option is obligated, in
return for the premium received, to
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make delivery of this amount. Gain or loss to a Fund on transactions in stock
index options will depend on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than price movements
of individual securities.
As with stock options, a Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an Exchange or it
may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock so
included. Some stock index options are based on a broad market index, such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower market index such as the Standard & Poor's 100. Indices are also
based on an industry or market segment such as the AMEX Oil and Gas Index or
the Computer and Business Equipment Index. Options on stock indices are
currently traded on the following Exchanges among others: The Chicago Board
Options Exchange, New York Stock Exchange, American Stock Exchange and London
Stock Exchange.
A Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indices depends on the degree to which
price movements in the underlying index correlate with price movements in the
Fund's portfolio securities. Since a Fund's portfolio will not duplicate the
components of an index, the correlation will not be exact. Consequently, a Fund
bears the risk that the prices of the securities being hedged will not move in
the same amount as the hedging instrument. It is also possible that there may
be a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an exchange which
provides a secondary market. There can be no assurance that a liquid secondary
market will exist for any particular stock index option. Thus, it may not be
possible to close such an option. The inability to close options positions
could have an adverse impact on a Fund's ability to hedge effectively its
securities. A Fund will enter into an option position only if there appears to
be a liquid secondary market for such options.
A Fund will not engage in transactions in options on stock indices for
speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets. The aggregate premium paid on all options on stock indices will not
exceed 20% of a Fund's total assets.
Risk Factors in Options Transactions . The successful use of options
strategies depends on the ability of the investment advisor or, where
applicable, SubAdvisor to forecast interest rate and market movements correctly.
When it purchases an option, a Fund runs the risk that it will lose
its entire investment in the option in a relatively short period of time,
unless the Fund exercises the option or enters into a closing sale transaction
with respect to the option during the life of the option. If the price of the
underlying security does not rise (in the case of a call) or fall (in the case
of a put) to an extent sufficient to cover the option premium and transaction
costs, a Fund will lose part or all of its investment in the option. This
contrasts with an investment by a Fund in the underlying securities, since the
Fund may continue to hold its investment in those securities notwithstanding
the lack of a change in price of those securities.
The effective use of options also depends on a Fund's ability to
terminate option positions at times when its investment advisor or, where
applicable, SubAdvisor deems it desirable to do so. Although a Fund will take
an option position only if its investment advisor or, where applicable,
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SubAdvisor believes there is a liquid secondary market for the option, there is
no assurance that a Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
If a secondary trading market in options were to become unavailable, a
Fund could no longer engage in closing transactions. Lack of investor interest
might adversely affect the liquidity of the market for particular options or
series of options. A marketplace may discontinue trading of a particular
option or options generally. In addition, a market could become temporarily
unavailable if unusual events, such as volume in excess of trading or clearing
capability, were to interrupt normal market operations. A marketplace may at
times find it necessary to impose restrictions on particular types of options
transactions, which may limit a Fund's ability to realize its profits or limit
its losses.
Disruptions in the markets for the securities underlying options
purchased or sold by a Fund could result in losses on the options. If trading
is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, a Fund as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with losses if trading in the security
reopens at a substantially different price. In addition, the Options Clearing
Corporation (OCC) or other options markets, such as the London Options Clearing
House, may impose exercise restrictions. If a prohibition on exercise is
imposed at the time when trading in the option has also been halted, a Fund as
purchaser or writer of an option will be locked into its position until one of
the two restrictions has been lifted. If a prohibition on exercise remains in
effect until an option owned by a Fund has expired, the Fund could lose the
entire value of its option.
Futures Contracts on Securities and Related Options
Futures Contracts on Securities . A Fund will enter into futures
contracts on securities only when, in compliance with the SEC's requirements,
cash or equivalents equal in value to the securities' value (less any applicable
margin deposits) have been deposited in a segregated account of the Fund's
custodian.
A futures contract sale creates an obligation by the seller to deliver
the type of instrument called for in the contract in a specified delivery month
for a stated price. A futures contract purchase creates an obligation by the
purchaser to take delivery of the type of instrument called for in the contract
in a specified delivery month at a stated price. The specific instruments
delivered or taken at settlement date are not determined until on or near that
date. The determination is made in accordance with the rules of the exchanges
on which the futures contract was made. Futures contracts are traded in the
United States only on commodity exchange or boards of trade, known as "contract
markets," approved for such trading by the Commodity Futures Trading Commission
(CFTC), and must be executed through a futures commission merchant or brokerage
firm which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Closing out a
futures contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument with the same
delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Similarly, the closing out of a futures contract purchase
is effected by the purchaser's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the purchaser realizes a
gain, and if the purchase price exceeds the offsetting sale price, the
purchaser realizes a loss.
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract, although
the Fund is required to deposit with its
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custodian in a segregated account in the name of the futures broker an amount
of cash and/or U.S. Government securities. This amount is known as "initial
margin." The nature of initial margin in futures transactions is different
from that of margin in security transactions in that futures contract margin
does not involve the borrowing of funds by the Fund to finance the
transactions. Rather, initial margin is in the nature of a performance bond or
good faith deposit on the contract that is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin," to and from the broker
(or the custodian) are made on a daily basis as the price of the underlying
security fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to market."
A Fund may elect to close some or all of its futures positions at any
time prior to their expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position then currently held by the Fund. A Fund
may close its positions by taking opposite positions which will operate to
terminate the Fund's position in the futures contracts. Final determinations
of variation margin are then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. Such closing
transactions involve additional commission costs.
Options on Securities' Futures Contracts . A Fund will enter into
written options on securities' futures contracts only when, in compliance with
the SEC's requirements, cash or equivalents equal in value to the securities'
value (less any applicable margin deposits) have been deposited in a segregated
account of the Fund's custodian. A Fund may purchase and write call and put
options on the futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions. A
Fund may use such options on futures contracts in lieu of writing options
directly on the underlying securities or purchasing and selling the underlying
futures contracts. Such options generally operate in the same manner as options
purchased or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
A Fund will be required to deposit initial margin and maintenance
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above.
Aggregate initial margin deposits for futures contracts (including
futures contracts on securities, indices and currency) and premiums paid for
related options, may not exceed 5% of a Fund's total assets.
Risk of Transactions in Securities' Futures Contracts and Related
Options. Successful use of securities' futures contracts by a Fund is subject
to the ability of its investment advisor or, where applicable, SubAdvisor to
predict correctly movements in the direction of interest rates and other
factors affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to a Fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the price of
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the hedged investments. The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures
contracts.
There is no assurance that higher than anticipated trading activity or
other unforeseen events will not, at times, render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.
To reduce or eliminate a hedge position held by a Fund, the Fund may
seek to close out a position. The ability to establish and close out positions
will be subject to the development and maintenance of a liquid secondary
market. It is not certain that this market will develop or continue to exist
for a particular futures contract. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of contracts or
options, or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
or a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of contracts or options (or a particular class or series of contracts or
options), in which event the secondary market on that exchange (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Futures Contracts on Indices and Related Options
Index Futures Contracts . A Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective, and may purchase and sell options on such index
futures contracts. A Fund will not enter into any index futures contract for the
purpose of speculation, and will only enter into contracts traded on securities
exchanges with standardized maturity dates.
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 index value at the
close of trading of the contracts and the price at which the futures contract
is originally struck. No physical delivery of the securities comprising the
index is made; generally contracts are closed out prior to the expiration date
of the contract. No price is paid upon entering into index futures contracts.
When a Fund purchases or sells an index futures contract, it is required to
make an initial margin deposit in the name of the futures broker and to make
variation margin deposits as the value of the contract fluctuates, similar to
the deposits made with respect to futures contracts on securities. Positions
in index futures contracts may be closed only on an exchange or board of trade
providing a secondary market for such index futures contracts. The value of
the contract usually will vary in direct proportion to the total face value.
A Fund's ability to effectively utilize index futures contracts
depends on several factors. First, it is possible that there will not be a
perfect price correlation between the index futures contracts and their
underlying index. Second, it is possible that a lack of liquidity for index
futures contracts could exist in the secondary market, resulting in the Fund's
inability to close a futures position prior to its maturity date. Third, the
purchase of an index futures contract involves the risk that the Fund could
lose more than the original margin deposit required to initiate a futures
transaction. In order to avoid leveraging and related risks, when a Fund
purchases an index futures contract, it will collateralize its
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position by depositing an amount of cash or cash equivalents, equal to the
market value of the index futures positions held, less margin deposits, in a
segregated account with the Fund's custodian. Collateral equal to the current
market value of the index futures position will be maintained on a daily basis.
The extent to which a Fund may enter into transactions involving index
futures contracts may be limited by the Internal Revenue Code's requirements
for qualification as a regulated investment company and the Funds' intention to
qualify as such.
Options on Index Futures Contracts. Options on index futures
contracts are similar to options on securities except that options on index
futures contracts gives the purchaser the right, in return for the premium
paid, to assume a position in an index futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the period of the option. Upon exercise of
the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account which represents the amount by
which the market price of the index futures contract, at exercise, exceeds (in
the case of a call) or is less than (in the case of a put) the exercise price
of the option on the index futures contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the exercise
price of the option and the closing level of the index on which the future is
based on the expiration date. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
U.S. DOLLAR DENOMINATED OBLIGATIONS OF SECURITIES OF FOREIGN ISSUERS. Certain
of the Funds may invest in U.S. DOLLAR DENOMINATED OBLIGATIONS OF SECURITIES OF
FOREIGN ISSUERS. Permissible investments may consist of obligations of foreign
branches of U.S. banks and of foreign banks, including European Certificates of
Deposit, European Time Deposits, Canadian Time Deposits and Yankee Certificates
of Deposits, and investments in Canadian Commercial Paper, foreign securities
and Europaper. In addition, the Growth Equity, Emerging Growth, Blue Chip
Growth, Government Securities, Convertible Securities, Value Momentum,
International Equity and Balanced Funds may invest in American Depositary
Receipts. These instruments may subject the Fund to investment risks that
differ in some respects from those related to investments in obligations of
U.S. domestic issuers. Such risks include future adverse political and
economic developments, the possible imposition of withholding taxes on interest
or other income, possible seizure, nationalization, or expropriation of foreign
deposits, the possible establishment of exchange controls or taxation at the
source, greater fluctuations in value due to changes in exchange rates, or the
adoption of other foreign governmental restrictions which might adversely
affect the payment of principal and interest on such obligations. Such
investments may also entail higher custodial fees and sales commissions than
domestic investments. Foreign issuers of securities or obligations are often
subject to accounting treatment and engage in business practices different from
those respecting domestic issuers of similar securities or obligations.
Foreign branches of U.S. banks and foreign banks may be subject to less
stringent reserve requirements than those applicable to domestic branches of
U.S. banks.
FOREIGN CURRENCY TRANSACTIONS. Under normal market conditions, the
International Equity Fund may engage in foreign currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The
International Equity Fund expects to engage in foreign currency exchange
transactions in connection with the purchase and sale of portfolio securities
("transaction hedging"), and to protect the value of specific portfolio
positions ("position hedging"). The Fund may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in that
foreign currency, and may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and
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purchase or sell foreign currency futures contracts ("futures contracts"). The
Fund may also purchase domestic and foreign exchange-listed and
over-the-counter call and put options on foreign currencies and futures
contracts. Hedging transactions involve costs and may result in losses, and
the Fund's ability to engage in hedging and related options transactions may be
limited by tax considerations.
TRANSACTION HEDGING. When it engages in transaction hedging, the International
Equity Fund enters into foreign currency transactions with respect to specific
receivables or payables of the International Equity Fund generally arising in
connection with the purchase or sale of its portfolio securities. The
International Equity Fund will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging, the Fund will attempt to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received.
Although there is no current intention to do so, the International
Equity Fund reserves the right to purchase and sell foreign currency futures
contracts which are traded in the United States and are subject to regulation
by the CFTC.
For transaction hedging purposes the International Equity Fund may
also purchase exchange-listed call and put options on foreign currency futures
contracts and on foreign currencies. A put option on a futures contract gives
the International Equity Fund the right to assume a short position in the
futures contract until expiration of the option. A put option on currency
gives the International Equity Fund the right to sell a currency at an exercise
price until the expiration of the option. A call option on a futures contract
gives the Fund the right to assume a long position in the futures contract
until the expiration of the option. A call option on currency gives the Fund
the right to purchase a currency at the exercise price until the expiration of
the option.
POSITION HEDGING. When it engages in position hedging, the International
Equity Fund enters into foreign currency exchange transactions to protect
against a decline in the values of the foreign currencies in which its
portfolios securities are denominated (or an increase in the value of currency
for securities which the SubAdvisor expects to purchase, when the Fund holds
cash or short- term investments). In connection with the position hedging, the
Fund may purchase or sell foreign currency forward contracts or foreign
currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward contract or
futures contract. Accordingly, it may be necessary for the International
Equity Fund to purchase additional foreign currency on the spot market (and
bear the expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security or securities if the market value of such
security or securities exceeds the amount of foreign currency the International
Equity Fund is obligated to deliver.
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Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the International Equity Fund owns or
expects to purchase or sell. They simply establish a rate of exchange which
one can achieve at some future point in time. Additionally, although these
techniques tend to minimize the risk of loss due to a decline in the value of
the hedged currency, they tend to limit any potential gain which might result
from the increase in the value of such currency.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed by the
parties, at a price set at the time of the contract. In the case of a
cancelable forward contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. Forward contracts are trades
in the interbank markets conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has
no deposit requirement, and no commissions are charged at any stage for trades.
A futures contract is a standardized contract for the future delivery
of a specified amount of a foreign currency at a future date at a price set at
the time of the contract. Futures contracts are designed by and traded on
exchanges. The Fund would enter into futures contracts solely for hedging or
other appropriate risk management purposes as defined in the controlling
regulations.
Forward contracts differ from futures contracts in certain respects.
For example, the maturity date of a forward contract may be any fixed number of
days from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month. Forward contracts may be in any amounts
agreed upon by the parties rather than predetermined amounts. Also, forward
contracts are traded directly between currency traders so that no intermediary
is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market in such contracts.
Although the Fund intends to purchase or sell futures contracts only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board
of trade will exist for any particular contract or at any particular time. In
such event, it may not be possible to close a futures position and, in the
event of adverse price movements, the Fund would continue to be required to
make daily cash payments of variation margin, as described below.
GENERAL CHARACTERISTICS OF CURRENCY FUTURES CONTRACTS. When the Fund purchases
or sells a futures contract, it is required to deposit with its custodian an
amount of cash or U.S. Treasury bills up to 5% of the amount of the futures
contract. This amount is known as "initial margin." The nature of initial
margin is different from that of margin in security transactions in that it
does not involve borrowing money to finance transactions. Rather, initial
margin is similar to a performance bond or good faith deposit that is returned
to the International Equity Fund upon termination of the contract, assuming the
Fund satisfies its contractual obligation.
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Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin," and are made as the value of the underlying futures contract
fluctuates. For example, when the Fund sells a futures contract and the price
of the underlying currency rises above the delivery price, the International
Equity Fund's position declines in value. The Fund then pays a broker a
variation margin payment equal to the difference between the delivery price of
the futures contract and the market price of the currency underlying the
futures contract. Conversely, if the price of the underlying currency falls
below the delivery price of the contract, the Fund's futures position increases
in value. The broker then must make a variation margin payment equal to the
difference between the delivery price of the futures contract and the market
price of the currency underlying the futures contract.
When the International Equity Fund terminates a position in a futures
contract, a final determination of variation margin is made, additional cash is
paid by or to the International Equity Fund, and the International Equity Fund
realizes a loss or gain. Such closing transactions involve additional
commission costs.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies have recently been listed on several
exchanges. Such options will be purchased or written only when the Fund's
SubAdvisor believes that a liquid secondary market exists for such options.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies, and there is no regulatory requirement that quotations available
through dealer or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market, and thus may not reflect relatively
smaller transactions (less than $1 million), where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to an
International Equity Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
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. The Funds
will only make commitments to purchase obligations on a when-issued basis with
the intention of actually acquiring the securities, but may sell them before
the settlement date. The when-issued securities are subject to market
fluctuation, and no interest accrues on the security to the purchaser during
this period. The payment obligation and the interest rate that
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will be received on the securities are each fixed at the time the purchaser
enters into the commitment. Purchasing obligations on a when-issued basis is a
form of leveraging, and can involve a risk that the yields available in the
market when the delivery takes place may actually be higher than those obtained
in the transaction itself. In that case there could be an unrealized loss at
the time of delivery.
Segregated accounts will be established with the Custodian, and the Funds will
maintain liquid, high grade assets in an amount at least equal in value to the
Funds' commitments to purchase when-issued securities.
RESTRICTED SECURITIES. RESTRICTED SECURITIES are securities that may
not be sold to the public without registration under the Securities Act of 1933
(the "1933 Act") absent an exemption from registration. All of the Funds may
invest in restricted securities. The Advisor may invest up to 25% of the total
assets of a Fund in restricted securities. In purchasing such restricted
securities, the Advisor intends to rely upon the exemptions from registration
provided by Section 4(2) and Rule 144A promulgated under the 1933 Act.
Restricted securities may be determined by the Advisor to be liquid
based on guidelines established and periodically reviewed by the Board of
Trustees. Under these guidelines, the Advisor will consider the frequency of
trades and quotes for the security, the number of dealers in, and potential
purchasers for, the securities, dealer undertakings to make a market in the
security, and the nature of the security and of the marketplace trades.
LENDING OF PORTFOLIO SECURITIES. All of the Funds except the California
Intermediate Tax-Free Bond Fund may LEND SECURITIES pursuant to agreements
requiring that the loans be continuously secured by cash, securities of the
U.S. government or its agencies, or any combination of cash and such
securities, as collateral equal to 100% of the market value at all times of the
loaned securities. Such loans will not be made if, as a result, the aggregate
amount of all outstanding securities loans for a Fund exceed one-third of the
value of its total assets taken at fair market value. A Fund will continue to
receive interest on the loaned securities while simultaneously earning interest
on the investment of the cash collateral in U.S. government securities.
However, a Fund will normally pay lending fees to such broker-dealers and
related expenses from the interest earned on invested collateral. There may be
risks of delay in receiving additional collateral or risks of delay in recovery
of the securities or even loss of rights in the collateral should the borrower
of the securities fail financially. However, loans are made only to borrowers
deemed by the Advisor to be of good standing and when, in the judgment of the
Advisor, the consideration which can be earned currently from such securities
loans justifies the attendant risk. Any loan may be terminated by either party
upon reasonable notice to the other party. The Funds may use the Distributor
or a broker/dealer affiliate of the Advisor as a broker in these transactions.
STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRS"). SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market as SPDRs are listed on the American Stock Exchange.
The UIT will issue SPDRs 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
Standard & Poor's 500 Composite Stock Price Index (the "S&P 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
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payment or credit ("Balancing Amount") designed to equalize the net asset value
of the S&P Index and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT. To
redeem, the Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, 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 SPDRs is derived and based upon the securities held by the UIT.
Accordingly, the level of risk involved in the purchase or sale of a SPDR is
similar to the risk involved in the purchase or sale of traditional common
stock, with the exception that the pricing mechanism for SPDRs is based on a
basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Portfolio could result in losses on SPDRs.
Trading in SPDRs involves risks similar to those risks, described above under
"Options," involved in the writing of options on securities.
HIGH YIELD SECURITIES
The Convertible Securities Fund may invest in lower rated 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 interest 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
the 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.
The high yield market is relatively new and its growth has paralleled a long
period of economic expansion and an increase in merger, acquisition and
leveraged buyout activity. 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 Convertible Securities Fund 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 Convertible
Securities Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls an obligation for redemption, the Convertible
Securities Fund may have to replace the security with a lower yielding
security, resulting in a decreased return for investors. If the Convertible
Securities 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 Convertible Securities Fund's investment portfolio and
increasing the exposure of the Convertible Securities Fund to the risks of high
yield securities.
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The Convertible Securities Fund may choose, at its expense or in conjunction
with others, to pursue litigation or otherwise exercise its rights as a
security holder to seek to protect the interest of security holders if it
determines this to be in the interest of the Convertible Securities Fund's
Shareholders.
OTHER INVESTMENTS
The Trust is not prohibited from investing in obligations of banks, but the
Trust may not purchase obligations of the Advisor or its affiliates.
INVESTMENT LIMITATIONS
Fundamential Policies
The following investment limitations (and those set forth in the Prospectuses)
are fundamental policies of each Fund which cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's
outstanding shares. The term "majority of the outstanding shares" means the
vote of (i) 67% or more of a Fund's shares present at a meeting, if more than
50% of the outstanding shares of a Fund are present or represented by proxy, or
(ii) more than 50% of a Fund's outstanding shares, whichever is less.
A Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer. For
the Government Securities Fund and the Limited Maturity Government
Fund, this limitation applies to only 75% of the Fund's assets.
2. Invest in companies for the purpose of exercising control.
3. Borrow money, except for temporary or emergency purposes and then only
in an amount not exceeding one-third of the value of total assets.
Any borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of the Fund's assets, asset coverage
of at least 300% is required. In the event that such asset coverage
shall at any time fall below 300%, the Fund shall, within three days
thereafter or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce the amount
of its borrowings to such an extent that the asset coverage of such
borrowings shall be at least 300%. This borrowing provision is
included solely to facilitate the orderly sale of portfolio securities
to accommodate heavy redemption requests if they should occur and is
not for investment purposes. All borrowings will be repaid before
making additional investments and any interest paid on such borrowings
will reduce income.
4. Make loans, except that (a) a Fund may purchase or hold debt
instruments in accordance with its investment objective and policies;
(b) a Fund may enter into repurchase agreements, and (c) the Funds may
engage in securities lending as described in the Prospectus and in
this Statement of Additional Information.
5. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed
10% of total assets taken at current value at the time of the
incurrence of such loan, except as permitted with respect to
securities lending.
6. Purchase or sell real estate, real estate limited partnership
interests, commodities or commodities contracts (except that the
Government Securities, Balanced, Blue Chip Growth, Emerging Growth and
International Equity Funds may invest in futures contracts and
options on futures contracts, as disclosed in the prospectuses) and
interests in a pool of securities that are secured by interests in
real estate. However, subject to their permitted investments, any Fund
may invest in companies which invest in real estate, commodities or
commodities contracts.
7. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Trust may obtain short-term
credits as necessary for the clearance of security transactions.
8. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a Fund security.
S-28
<PAGE> 215
9. Purchase securities of other investment companies except for money
market funds and then only as permitted by the Investment Company Act
of 1940 and the rules and regulations thereunder. The Emerging
Growth, Blue Chip Growth, Convertible Securities, International Equity
and Government Securities Funds may also purchase the securities of
non-money market funds as permitted by the Investment Company Act of
1940. Under these rules and regulations, the Funds are prohibited
from acquiring the securities of other investment companies if, as a
result of such acquisition, the Funds own more than 3% of the total
voting stock of the company; securities issued by any one investment
company represent more than 5% of the total Funds' assets; or
securities (other than treasury stock) issued by all investment
companies represent more than 10% of the total assets of the Funds.
These investment companies typically incur fees that are separate from
those fees incurred directly by the Fund. A Fund's 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.
10. Issue senior securities (as defined in the Investment Company Act of
1940) except in connection with permitted borrowings as described
above or as permitted by rule, regulation or order of the Securities
and Exchange Commission.
11. Purchase or retain securities of an issuer if, to the knowledge of the
Trust, an officer, trustee, partner or director of the Trust or any
investment advisor of the Trust owns beneficially more than 1/2 of 1%
of the shares or securities of such issuer and all such officers,
trustees, partners and directors owning more than 1/2 of 1% of such
shares or securities together own more than 5% of such shares or
securities.
12. Invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
13. Write or purchase puts, calls, options or combinations thereof, except
that the Growth Equity, Emerging Growth, Blue Chip Growth, Balanced,
International Equity and the Value Momentum Funds may write covered
call options with respect to any or all parts of its Fund securities,
and the Balanced, Blue Chip Growth and Emerging Growth Funds may
purchase call and purchase and sell put options listed on national
exchanges and the International Equity Fund may purchase call and
purchase and sell put options listed on U.S. and foreign exchanges.
The California Tax-Free Money Market Fund may purchase puts as
described in the prospectus. The Growth Equity, Emerging Growth, Blue
Chip Growth, Balanced, International Equity and Value Momentum Funds
may sell options previously purchased and enter into closing
transactions with respect to covered call options. In addition, the
Growth Equity, Emerging Growth, Blue Chip Growth, Value Momentum,
International Equity and Balanced Funds may engage in options on stock
indices to invest cash on an interim basis.
NON-FUNDAMENTAL POLICIES
No Fund may invest in warrants, except that the Growth Equity, Emerging Growth,
Blue Chip Growth, Convertible Securities, Value Momentum, International Equity,
and Balanced Funds may invest in warrants in an amount not exceeding 5% of the
Fund's net assets as valued at the lower of cost or market value. Included in
that amount, but not to exceed 2% of the Fund's net assets, may be warrants not
listed on the New York Stock Exchange or American Stock Exchange.
No Fund may invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of its net assets, except that the Money Market Fund, Treasury
Money Market Fund and California Tax-Free
S-29
<PAGE> 216
Money Market Fund may not invest more than 10% of net assets in illiquid
securities. An illiquid security is a security which cannot be disposed of
within seven business days at approximately the price at which they are being
carried on the Fund's books, and includes repurchase agreements maturing in
excess of seven days, time deposits with a withdrawal penalty, non-negotiable
instruments and instruments for which no market exists.
The foregoing percentages will apply at the time of the purchase of a security.
THE ADVISOR
The Trust and Union Bank of California, N.A. (the "Advisor"), have entered into
an advisory agreement (the "Advisory Agreement") dated April 1, 1996. The
Advisory Agreement provides that the Advisor shall not be protected against any
liability to the Trust or its Shareholders by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
from reckless disregard of its obligations or duties thereunder.
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of any Fund (including amounts payable to the Advisor but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by the State of California, the Advisor will
bear the amount of such excess. The Advisor will not be required to bear
expenses of the Trust to an extent which would result in a Fund's inability to
qualify as a regulated investment company under provisions of the Internal
Revenue Code.
The continuance of the Advisory Agreement, after the first two years, must be
specifically approved at least annually (i) by the vote of a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
party thereto, cast in person at a meeting called for the purpose of voting on
such approval, and (ii) by the vote of the Trustees or a majority of
outstanding shares of the Funds, as defined in the 1940 Act. The Advisory
Agreement will terminate automatically in the event of its assignment, and is
terminable at any time without penalty by the Trustees of the Trust or, with
respect to the Funds by a majority of the outstanding shares of the Funds, on
not less than 30 days' nor more than 60 days' written notice to the Advisor, or
by the Advisor on 90 days' written notice to the Trust.
The Advisor is entitled to a fee, which is calculated daily and paid monthly,
at an annual rate of .80% of the daily average net assets of the Emerging
Growth Fund, .60% of the daily average net assets of each of the Value
Momentum, Growth Equity, Blue Chip Growth, Convertible Securities and Balanced
Funds, .50% of the average daily net assets of the Intermediate-Term Bond,
California Intermediate Tax-Free Bond and Government Securities Funds, and .30%
of the average daily net assets of each of the Money Market, Treasury Money
Market, California Tax-Free Money Market, and Limited Maturity Government
Funds, and .95% of the average daily net assets of the International Equity
Fund.
For the fiscal years ended January 31, 1994, 1995 and 1996, the Funds paid the
following advisory fees to Union Capital Advisors, the Advisor's predecessor:
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
-------------------------------------- ------------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $ 757,744 $1,015,559 $1,238,970 $126,291 $ 0 $ 0
</TABLE>
S-30
<PAGE> 217
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
-------------------------------------- ------------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Blue Chip Growth * $ 183,178 $ 288,983 * $ 0 $ 0
Fund
California Tax- $ 27,277 $ 60,306 $ 3,065 $ 12,731 $ 48,888 $ 61,451
Free Bond Fund
California Tax- $ 268,986 $ 99,901 $ 113,705 $217,383 $264,000 $237,331
Free Money Market
Fund
Convertible * $ 44,430 $ 77,050 * $ 0 $ 0
Securities Fund
Emerging Growth * $ 130,134 $ 255,357 * $ 0 $ 0
Fund
Government * $ 145,821 $ 185,894 * $ 0 $ 0
Securities Fund
Growth Equity Fund $ 854,563 $ 835,080 $ 972,952 $ 30,118 $ 0 $ 0
Intermediate Term $ 630,576 $ 617,704 $ 648,012 $ 0 $ 0 $ 0
Bond Fund
Limited Maturity $ 63,919 $ 111,587 $ 105,887 $ 0 $ 0 $ 0
Government Fund
Money Market Fund $1,732,049 $1,820,479 $2,002,595 $ 0 $ 0 $ 0
Treasury Money $544,009 $ 461,318 $ 775,061 $181,336 $ 129,255 $155,289
Market Fund
Value Momentum $701,450 $ 923,288 $1,169,765 $ 24,411 $ 0 $ 0
Fund
International * * $ 300,582 * * $ 76,243
Equity Fund
</TABLE>
* Not in operation during such period.
The Glass-Steagall Act restricts the securities activities of banks such as
Union Bank of California, N.A., but federal regulatory authorities permit such
banks to provide investment advisory and other services to mutual funds.
Should this position be challenged successfully in court or reversed by
legislation, the Trust might have to make other investment advisory
arrangements.
THE SUBADVISORS
S-31
<PAGE> 218
The Advisor and Bank of Tokyo-Mitsubishi Trust Company have entered into a
sub-advisory agreement which relates to the Emerging Growth, Blue Chip Growth,
Convertible Securities and Government Securities Funds. The Advisor and the
Tokyo-Mitsubishi Asset Management (UK) Limited have entered into a sub-advisory
agreement which relates to the International Equity Fund (the Bank of Tokyo
Trust Company, together with the BOT Asset Management (UK) Limited, the
"SubAdvisors").
Under its sub-advisory agreement, Bank of Tokyo-Mitsubishi Trust Company is
entitled to a fee which is calculated daily and paid monthly at an annual rate
of.20% of the average daily net assets of the Government Securities Fund, .30%
of the average daily net assets of the Blue Chip Growth Fund and Convertible
Securities Fund and .50% of the average daily net assets of the Emerging Growth
Fund. Such fee is paid by the Advisor, and Bank of Tokyo-Mitsubishi Trust
Company receives no fees directly from a Fund.
Bank of Tokyo-Mitsubishi Trust Company operates as a subsidiary of The Bank of
Tokyo-Mitsubishi, Ltd. Bank of Tokyo-Mitsubishi Trust Company was established
in 1955 and has been providing asset management services since 1965.
For the Fiscal Year ended January 31, 1996, Bank of Tokyo Trust Company,
as predecessor to the SubAdvisor, was paid $159,198, $144,472, $37,745, and
$74,358 in sub-advisory fees for the Emerging Growth, Blue Chip Growth,
Convertible Securities and Government Securities Funds, respectively.
Under its sub-advisory agreement, the Tokyo-Mitsubishi Asset Management (UK),
Ltd. is entitled to a fee which is calculated daily and paid monthly at an
annual rate of .30% of the average daily net assets of the International Equity
Fund. Such a fee is paid by the Advisor and Tokyo-Mitsubishi Asset Management
(UK), Ltd. receives no fees directly from the International Equity Fund.
Tokyo-Mitsubishi Asset Management (UK), Ltd. operates as a subsidiary of The
Bank of Tokyo-Mitsubishi, Ltd. Tokyo-Mitsubishi Asset Management (UK), Ltd. was
established in 1989.
THE ADMINISTRATOR
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 Administrator, a wholly-owned subsidiary of SEI Corporation ("SEI"), was
organized as a Delaware corporation in 1969 and has its principal business
offices at 101 Main Street, Cambridge, Massachusetts. Alfred P. West, Jr.,
Henry H. Greer and Carmen V. Romeo constitute the Board of Directors of the
Administrator and the Distributor. Mr. West is the Chairman of the Board and
Chief Executive Officer of SEI, the Administrator and the Distributor. Mr.
Greer serves as the President and Chief Operating Officer of SEI, the
Administrator and the Distributor. SEI and its subsidiaries are leading
providers of funds evaluation services, trust accounting systems, and brokerage
and information services to financial institutions, institutional investors and
money managers. The Administrator also serves as administrator to the
following other mutual funds: The Achievement Funds Trust, The Advisors' Inner
Circle Fund, The Arbor Fund, ARK Funds, Bishop Street Funds, CoreFunds, Inc.,
CrestFunds, Inc., CUFUND, First American Funds, Inc., First American
Investment Funds, Inc., FMB Funds, Inc., Insurance Investment Products Trust,
Inventor Funds, Inc., Marquis Funds(R), Monitor Funds, Morgan Grenfell
Investment Trust, The PBHG Funds, Inc., The Pillar Funds, Rembrandt Funds(R),
SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
S-32
<PAGE> 219
Institutional Managed Trust, SEI International Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, 1784 Funds, STI Classic Funds and STI Classic Variable
Trust.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .15% of average daily net assets of the Trust up
to $1 billion, .12% of the average daily net assets of the Trust between $1
billion and $2 billion and .10% of average daily net assets of the Trust over
$2 billion. Prior to March 9, 1993, the Administrator's fee was .12% of
average daily net assets of each Fund of the Trust up to $650 million and .09%
of average daily assets over $650 million.
For the fiscal years ended January 31, 1994, 1995 and 1996, the Funds paid the
following administration fees:
<TABLE>
<CAPTION>
Administrative Fees Paid Administrative Fees Waived
---------------------------------- ----------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $175,724 $233,783 $276,935 $ 0 $ 0 $ 0
Blue Chip * $ 42,147 $ 64,519 * $ 0 $ 0
Growth Fund
California Tax- $ 7,630 $ 30,713 $ 17,405 $ 0 $ 0 $ 0
Free Bond Fund
California Tax- $125,242 $170,054 $157,204 $ 0 $ 0 $ 0
Free Money Market
Fund
Convertible * $ 10,223 $ 17,197 * $ 0 $ 0
Securities Fund
Emerging Growth * $ 22,454 $ 42,746 * $ 0 $ 0
Fund
Government * $ 40,273 $ 49,832 * $ 0 $ 0
Securities Fund
Growth Equity $198,074 $192,266 $217,610 $ 0 $ 0 $ 0
Fund
Intermediate $175,200 $170,689 $173,915 $ 0 $ 0 $ 0
Term Bond Fund
Limited Maturity $ 29,975 $ 51,392 $ 47,409 * $ 0 $ 0
Government
Fund
Money Market $801,746 $838,165 $895,102 $ 0 $ 0 $ 0
Fund
Treasury Money $252,859 $ 271,795 $415,272 $ 0 $ 0 $ 0
Market Fund
Value $162,576 $ 212,556 $261,423 $ 0 $ 0 $ 0
Momentum Fund
</TABLE>
S-33
<PAGE> 220
<TABLE>
<CAPTION>
Administrative Fees Paid Administrative Fees Waived
---------------------------------- ----------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
International * * $ 54,149 * * $ 0
Equity Fund
</TABLE>
* Not in operation during such period.
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary
of SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement") dated January 30, 1991, which applies to both Institutional Class
and Investment Class shares of the Funds. The Distributor will receive no
compensation for distribution of Institutional Class shares. The Investment
Class has a distribution plan dated January 30, 1991 ("Investment Class
Distribution Plan").
INVESTMENT CLASS DISTRIBUTION PLAN
The Distribution Agreement and the Investment Class Distribution Plan adopted
by the Investment Class Shareholders provides that each Investment Class Fund
will bear the cost of its distribution expenses as provided in a budget
approved annually and reviewed quarterly by the Trustees of the Trust who are
not interested persons and have no financial interest in the Plan or any
related agreement ("Qualified Trustees"). The budget includes (1) the cost of
prospectuses, reports to Shareholders, sales literature and other materials for
potential investors; (2) advertising; (3) expenses incurred in connection with
the promotion and sale of the Trust's shares including the Distributor's
expenses for travel, communication, and compensation and benefits for sales
personnel; (4) any other expenses reasonably incurred in connection with the
distribution and marketing of the Investment Class shares subject to approval
of a majority of the Qualified Trustees. The Trust is not obligated to
reimburse the Distributor for any expenditures in excess of the approved
budget. In addition, the Trust will pay the Distributor a fee of up to .40% of
the Investment Class Fund's average daily net assets which the Distributor can
use to compensate broker/dealers and service providers, including Union Bank
and its affiliates, which provide administrative and/or distribution services
to Investment Class Shareholders or their customers who beneficially own
Investment Class shares. The Class C shares of the Trust have also adopted a
distribution plan.
For the fiscal year ending January 31, 1996, no distribution fees were incurred
by the Institutional Class Shares of the Trust or the Investment Class Shares
of the Intermediate-Term Bond, Limited Maturity Government, California
Intermediate Tax-Free Bond, Blue Chip Growth, Convertible Securities, Emerging
Growth, Government Securities and International Equity Funds. The Investment
Class Shares of the remaining Funds incurred the following distribution
expenses:
<TABLE>
<CAPTION>
AMOUNT
PAID TO PROSPECTUS
3RD PARTIES BY PRINTING COSTS
SFS FOR AND MAILING ASSOCIATED
DISTRIBUTOR COSTS (NEW WITH
RELATED SALES SHAREHOLDERS REGISTRATION
TOTAL BASIS SERVICES EXPENSES ADVERTISING ONLY) FEES
FUND/CLASS ($ AMOUNT) POINTS ($ AMOUNT) ($ AMOUNT) ($ AMOUNT) ($ AMOUNT) ($ AMOUNT) OTHER
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
S-34
<PAGE> 221
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury Money 357,535 25 357,535 0 0 0 0 0
Market Fund
Money Market 449,528 25 449,528 0 0 0 0 0
Fund
California Tax- 235,554 33 235,554 0 0 0 0 0
Free
Money Market
Fund
Growth Equity 1,545 9 1,545 0 0 0 0 0
Fund
Value Momentum 9,265 9 9,265 0 0 0 0 0
Fund
Balanced Fund 6,702 9 6,702 0 0 0 0 0
</TABLE>
The Distribution Agreement is renewable annually and may be terminated by the
Distributor, the Qualified Trustees, or by a majority vote of the outstanding
securities of the Trust upon not more than 60 days' written notice by either
party.
The Trust has adopted the Investment Class Distribution Plan in accordance with
the provisions of Rule 12b-1 under the Investment Company Act of 1940, which
regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of its shares.
Continuance of the Investment Class Distribution Plan must be approved annually
by a majority of the Trustees of the Trust and by a majority of the Qualified
Trustees. The Investment Class Distribution Plan requires that quarterly
written reports of amounts spent under the Investment Class Distribution Plan
and the purposes of such expenditures be furnished to and reviewed by the
Trustees. The Investment Class Distribution Plan may not be amended to
increase materially the amount which may be spent thereunder without approval
by a majority of the outstanding shares of the Trust. All material amendments
of the Plan will require approval by a majority of the Trustees of the Trust
and of the Qualified Trustees.
The Trust has also adopted a Distribution Plan with respect to Class C shares
of the Trust. Class C shares are sold without a sales charge, but are subject
to a 12b-1 fee in addition to reimbursement of certain expenses, a fee will be
paid to the Distributor at an annual rate of .50% of each Fund's average daily
net assets attributable to Class C shares as compensation for its distribution-
related services. The Distributor may retain all or some of this payment and
may pay financial institutions and intermediaries such as banks, savings and
loan associations, insurance companies, investment counselors and subsidiaries,
as compensation for services in connection with distribution assistance or
provision of shareholder services.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and executive officers of the Trust, their respective dates of
birth and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during that
period. Unless otherwise noted, the business address of each Trustee and
executive officer is SEI Financial Management Corporation, 680 East Swedesford
Road, Wayne, PA 19087. Certain trustees and officers of the Trust also serve
as trustees and officers of some or all of the following: The Achievement Funds
Trust; The Advisors' Inner Circle Fund; The Arbor Fund; ARK Funds; Bishop Street
Funds; CoreFunds, Inc.; CrestFunds, Inc.; CUFUND; First American Funds, Inc.;
First American Investment Funds, Inc.; FMB Funds; Insurance Investment Products
Trust; Inventor Funds, Inc.; Marquis Funds(R); Monitor Funds; Morgan Grenfell
Investment Trust; The Pillar Funds; The PBHG Funds, Inc.; Rembrandt Funds(R);
SEI Asset Allocation Trust; SEI Daily Income Trust; SEI Index Funds; SEI
Institutional Managed Trust; SEI International Trust; SEI Liquid Asset Trust;
SEI Tax Exempt Trust; 1784 Funds; STI Classic Funds; and STI Classic Variable
Trust, each of which is an open-end management investment company managed by
SEI Financial Management Corporation and, except for Rembrandt Funds(R),
distributed by SEI Financial Services Company.
S-35
<PAGE> 222
WILLIAM R. HOWELL (DOB 02/28/22) - Chairman of the Board of Trustees- 445
South Figueroa Street, Los Angeles, CA 90071. Director, Current Income
Shares, Inc., Vice Chairman, Union Bank, from 1976 until retirement in 1982;
Director of Unionbanc Investment Management Company since 1977, until
retirement in 1982.
*ROBERT A. NESHER (DOB 08/17/46) - Trustee - 8 South Street, Kennebunkport, ME
04046. Retired since 1994. Executive Vice President of SEI, 1986-1994.
Director and Executive Vice President of the Administrator and the Distributor
September, 1981-1994.
MICHAEL L. NOEL (DOB 04/05/41) - Trustee - 445 South Figueroa Street, Los
Angeles, CA 90071. Vice President and Treasurer, Southern California Edison
Company, since 1980; Assistant Treasurer, Pacific Coast Electrical Association;
Director, Hancock Savings & Loan Association, since 1986; Director, Software
Toolworks, Inc., since July, 1989.
PAUL L. SMITH (DOB 04/25/18) - Trustee - 445 South Figueroa Street, Los
Angeles, CA 90071. Retired Director of Union Bank. Retired Vice Chairman and
member of the Office of the Chief Executive of Security Pacific Corporation.
Former Director and officer of numerous subsidiaries of such Corporation and
Security Pacific National Bank.
STEVEN K. JOINER (DOB 07/24/50) - Trustee - 3138 North Tenth Street, Arlington,
VA 22201. President, NAFCU Services Corporation, Inc., since 1993; Executive
Vice President, Credit Union Services, Inc., from 1979 to 1993.
DAVID G. LEE (DOB 04/16/52) - President and Chief Executive Officer - Senior
Vice President of the Distributor since 1993. Vice President of the
Distributor since 1991, President GW Sierra Trust Funds prior to 1991.
JEFFREY A. COHEN (DOB 04/22/61) - Controller and Chief Financial Officer - CPA,
Director, International and Domestic Funds Accounting - SEI Corporation from
1991 to present; Price Waterhouse, Audit Manager - prior to 1991.
KEVIN P. ROBINS (DOB 04/15/61) - Vice President and Assistant Secretary; Senior
Vice President, General Counsel and Secretary of SEI, the Administrator and
Distributor since 1994. Vice President and Assistant Secretary of SEI,
1992-1994.
KATHRYN L. STANTON (DOB 11/19/58) - Vice President, Assistant Secretary - Vice
President and Assistant Secretary of the Administrator and Distributor since
1994. Associate, Morgan, Lewis & Bockius LLP (law firm) 1989-1994.
SANDRA K. ORLOW (DOB 10/18/53) - Vice and Assistant Secretary - Vice President
and Assistant Secretary of the Administrator and Distributor since 1983.
TODD CIPPERMAN (DOB 02/14/66) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor
since May, 1995, Associate, Dewey Ballantine (law firm) 1994-1995, Associate,
Winston & Strawn (law firm) 1991-1995.
S-36
<PAGE> 223
JOSEPH M. LYDON (DOB 09/27/59) - Vice President and Assistant Secretary -
Director of Business Administration, SEI Corporation since April, 1995; Vice
President of Fund Group, Vice President of the Advisor - Dreman Value
Management, LP, President of Dreman Financial Services, Inc. from 1989 to 1995.
RICHARD W. GRANT (DOB 10/25/45) - Secretary - 2000 One Logan Square,
Philadelphia, PA 19103, Partner of Morgan, Lewis & Bockius LLP (law firm),
Counsel to the Trust, Administrator and Distributor.
___________________________
*Mr. Nesher is a Trustee who may be deemed to be an "interested" person of the
Trust as the term is defined in the Investment Company Act of 1940.
The Trustees And Officers Of The Trust Own Less Than 1% Of The Outstanding
Shares Of The Trust.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM REGISTRANT
AGGREGATE RETIREMENT AND FUND
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL COMPLEX PAID TO
FROM REGISTRANT AS PART OF THE BENEFITS UPON DIRECTORS FOR
NAME OF PERSON AND POSITION FOR FYE 1/31/96 FUND EXPENSES RETIREMENT FYE 1/31/96
<S> <C> <C> <C> <C>
William R. Howell - Chairman $19,000 $ 0 $ 0 $19,000 for
& Trustee services on 1
board
Robert A. Nesher - Trustee $ 0 $ 0 $ 0 $ 0 for
services on 1
board
Michael L. Noel - Trustee $17,000 $ 0 $ 0 $17,000 for
services on 1
board
Paul L. Smith - Trustee $19,000 $ 0 $ 0 $19,000 for
services on 1
board
Steven K. Joiner - Trustee $17,000 $ 0 $ 0 $17,000 for
services on 1
board
</TABLE>
REPORTING
The Trust issues unaudited financial information semi-annually and audited
financial statements annually. The Trust furnishes proxy statements and other
Shareholder reports to Shareholders of record.
PERFORMANCE
Yields. Yields are one basis upon which investors may compare the Funds with
other funds; however, yields of other funds and other investment vehicles may
not be comparable because of the factors set forth below and differences in the
methods used in valuing portfolio instruments.
S-37
<PAGE> 224
The yields of these Money Market Funds fluctuate, and the annualization of a
week's dividend is not a representation by the Trust as to what an investment
in the Fund will actually yield in the future. Actual yields will depend on
such variables as asset quality, average asset maturity, the type of
instruments the Fund invests in, changes in interest rates on money market
instruments, changes in the expenses of the Fund and other factors.
Money Market Fund Yields. From time to time the Treasury Money Market, Money
Market, and California Tax-Free Money Market Funds (the "Money Market Funds")
advertise their "current yield" and "effective compound yield". Both yield
figures are based on historical earnings and are not intended to indicate
future performance. The "current yield" of the Money Market Funds refers to
the income generated by an investment in a Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized".
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly
but, when annualized, the income earned by an investment in a Fund is assumed
to be reinvested. The "effective yield" will be slightly higher than the
"current yield" because of the compounding effect of this assumed reinvestment.
The current yield of the Money Market Funds will be calculated daily based upon
the seven days ending on the date of calculation ("base period"). The yield is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing shareholder account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing such net change
by the value of the account at the beginning of the same period to obtain the
base period return and multiplying the result by (365/7). Realized and
unrealized gains and losses are not included in the calculation of the yield.
The effective compound yield of the Funds is determined by computing the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
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
compounding the base period return by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result, according to the
following formula: Effective Yield = (Base Period Return + 1) 365/7) - 1. The
current and the effective yields reflect the reinvestment of net income earned
daily on portfolio assets.
The California Tax-Free Money Market Fund may also calculate tax-equivalent
yields. Tax equivalent yields are computed by dividing that portion of a
Fund's yield which is tax-exempt by one minus a stated federal and/or state
income tax rate and adding the product to that portion, if any, of the Fund's
yield that is not tax-exempt. (Tax equivalent yields assume the payment of
Federal income taxes at a rate of 31% and California income taxes at a rate of
11%.)
For the 7-day period ended January 31, 1996, the Money Market, Treasury Money
Market and California Tax-Free Money Market Funds' current, effective and
tax-equivalent yields were as follows:
<TABLE>
<CAPTION>
7-DAY
7-DAY TAX-
7-DAY TAX-EQUIVALENT EQUIVALENT
EFFECTIVE YIELD EFFECTIVE
PORTFOLIO 7-DAY YIELD YIELD YIELD
<S> <C> <C> <C> <C>
Investment Class:
</TABLE>
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<PAGE> 225
<TABLE>
<CAPTION>
7-DAY
7-DAY TAX-
7-DAY TAX-EQUIVALENT EQUIVALENT
EFFECTIVE YIELD EFFECTIVE
PORTFOLIO 7-DAY YIELD YIELD YIELD
<S> <C> <C> <C> <C>
Treasury Money Market Fund 4.87 4.99 N/A N/A
Money Market Fund 4.81 4.92 N/A N/A
California Tax-Free Money 2.71 2.74 4.67 4.72
Market Fund
Institutional Class:
Treasury Money Market Fund 5.12 5.25 N/A N/A
Money Market Fund 5.05 5.17 N/A N/A
California Tax-Free Money 3.04 3.08 5.24 5.31
Market Fund
</TABLE>
Other Yields. From time to time, Growth Equity, Value Momentum, Balanced,
Intermediate-Term Bond, Emerging Growth, Blue Chip Growth, Convertible
Securities, Government Bond and Limited Maturity Government Funds may advertise
a 30 day yield, and the California Intermediate Tax-Free Bond Fund may
advertise a 30 day yield and a 30 day tax equivalent yield. These figures
will be based on historical earnings and are not intended to indicate future
performance. The 30 day yield of these Funds refers to the annualized income
generated by an investment in the Funds over a specified 30 day period. The
yield is calculated by assuming that the income generated by the investment
during that period generated each period over one year and is shown as a
percentage of the investment. In particular, yield will be calculated
according to the following formula:
Yield = (2 (a-b/cd + 1)6 - 1) where a = dividends and interest earned during
the period; b = expenses accrued for the period (net of reimbursement); c = the
current daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
Tax equivalent yields are computed by dividing that portion of a Fund's yield
which is tax-exempt by one minus a stated federal and/or state income tax rate
and adding the product to that portion, if any, of the Fund's yield that is not
tax-exempt. (Tax equivalent yields assume the payment of Federal income taxes
at a rate of 31% and California income taxes at a rate of 11%.)
For the 30 day period ended January 31, 1996, the yields on the Funds, other
than the Money Market Funds, were as follows:
<TABLE>
<CAPTION>
30-DAY
30-DAY TAX-EQUIVALENT
PORTFOLIO YIELD YIELD
<S> <C> <C>
Investment Class:
</TABLE>
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<PAGE> 226
<TABLE>
<CAPTION>
30-DAY
30-DAY TAX-EQUIVALENT
PORTFOLIO YIELD YIELD
<S> <C> <C>
Growth Equity Fund 0.44 N/A
Value Momentum Fund 1.63 N/A
Balanced Fund 2.38 N/A
Intermediate-Term Bond Fund 5.07 N/A
Limited Maturity Government Fund 5.63 N/A
California Intermediate Tax-Free Bond 4.42 7.62
Fund
Blue Chip Growth Fund N/A N/A
Convertible Securities Fund N/A N/A
Emerging Growth Fund N/A N/A
Government Securities Fund N/A N/A
International Equity Fund N/A N/A
Institutional Class:
Growth Equity Fund 0.68 N/A
Value Momentum Fund 1.95 N/A
Balanced Fund 2.73 N/A
Intermediate-Term Fund 5.23 N/A
Limited Maturity Government Fund 5.60 N/A
California Intermediate Tax-Free Bond 4.56 7.86
Fund
Blue Chip Growth Fund 1.43 N/A
Convertible Securities Fund 3.94 N/A
Emerging Growth Fund 0.09 N/A
Government Securities Fund 4.92 N/A
International Equity Fund N/A N/A
</TABLE>
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Total Return. From time to time, the Funds may advertise total return on an
"average annual total return" basis and on an "aggregate total return" basis
for various periods. Average annual total return reflects the average annual
percentage change in the value of an investment in a Fund over a particular
measuring period. Aggregate total return reflects the cumulative percentage
change in value over the measuring period. Aggregate total return is computed
according to a formula prescribed by the SEC. The formula can be 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; and ERV = ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
designated time period as of the end of such period or the life of the fund.
The formula for calculating aggregate total return can be expressed as
(ERV/P)-1.
The calculation of total return assumes reinvestment of all dividends and
capital gain distribution on the reinvestment dates during the period and that
the entire investment is redeemed at the end of the period. In addition the
maximum sales charge for each Fund is deducted from the initial $1000 payment.
Total return may also be shown without giving effect to any sales charges.
Based on the foregoing, the average annual and aggregate total returns for the
Funds from inception through January 31, 1996, were as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
CLASS/WITHOUT LOAD ONE SINCE INCEPTION
PORTFOLIO WITH LOAD YEAR
<S> <C> <C> <C>
Treasury Money Market Fund Institutional 5.52 4.01
Investment Without Load 5.26 3.85
Money Market Fund Institutional 5.57 4.39
Investment Without Load 5.31 4.01
California Tax-Free Money Institutional 3.48 2.88
Market Fund Investment Without Load 3.14 2.54
Growth Equity Fund Institutional 32.93 14.39
Investment Without Load 32.79 12.64
Investment With Load 26.78 11.43
Value Momentum Fund Institutional 40.88 16.04
Investment Without Load 40.77 15.96
Investment With Load 34.44 14.58
Balanced Fund Institutional 28.93 12.37
Investment Without Load 28.73 12.46
Investment With Load 22.93 10.87
</TABLE>
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
CLASS/WITHOUT LOAD ONE SINCE INCEPTION
PORTFOLIO WITH LOAD YEAR
<S> <C> <C> <C>
Intermediate-Term Bond Fund Institutional 16.58 9.00
Investment Without Load 16.48 7.76
Investment With Load 12.97 6.95
Limited Maturity Government Institutional 8.34 3.68
Fund
Investment Without Load 8.33 3.76
Investment With Load 8.33 3.76*
California Intermediate Tax- Institutional 15.83 4.28
Free Bond Fund
Investment Without Load 15.84 4.24
Investment With Load 12.33 2.86
Blue Chip Growth Fund Institutional 36.95 15.22
Investment Without Load N/A N/A
Investment With Load N/A N/A
Convertible Securities Fund Institutional 19.67 6.18
Investment Without Load N/A N/A
Investment With Load N/A N/A
Emerging Growth Fund Institutional 30.24 11.56
Investment Without Load N/A N/A
Investment With Load N/A N/A
Government Securities Fund Institutional 16.16 5.35
Investment Without Load N/A N/A
Investment With Load N/A N/A
International Equity Fund Institutional 13.60 13.56
Investment Without Load N/A N/A
Investment With Load N/A N/A
</TABLE>
*For the fiscal year ended January 31, 1996, shares were sold without a sales
charge.
(1)The Institutional Class of each of the Funds commenced operations on
February 1, 1991 except the Treasury Money Market Fund, which commenced
operations on December 1, 1992, the California Tax-
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<PAGE> 229
Free Money Market Fund, which commenced operations on June 10, 1991, the
Limited Maturity Government Fund, which commenced operations May 7, 1993 the
California Intermediate Tax-Free Bond Fund which commenced operations on
October 15, 1993. The Investment Classes commenced operations as follows:
Money Market Fund, May 28, 1991; California Tax-Free Money Market Fund, June
25, 1991; Growth Equity Fund, November 14, 1991; Value Momentum Fund, April 2,
1992; Balanced Fund, November 13, 1992; Intermediate-Term Bond Fund, February
3, 1992; Treasury Money Market Fund, March 5, 1993; Limited Maturity Government
Fund, August 19, 1993 and California Intermediate Tax-Free Bond Fund, October
15, 1993; the Blue Chip Growth Fund, February 1, 1994; Convertible Securities
Fund, February 1, 1994; Emerging Growth Fund, February 1, 1994; and Government
Securities Fund, February 1, 1994. The International Equity Fund commenced
operations as of February 1, 1995.
The Funds may quote various measures of volatility and benchmark correlation in
advertising, and may compare these measures to those of other funds. Measures
of volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Funds may be made on days on which
both the New York Stock Exchange and the Federal Reserve wire systems are open
for business.
It is currently the Trust's policy to pay for the redemptions in cash. The
Trust retains the right, however, to alter this policy to provide for
redemptions in whole or in part by a distribution in-kind of securities held by
the Funds other than the Money Market Funds in lieu of cash. Shareholders may
incur brokerage charges on the sale of any such securities so received in
payment of redemptions. However, a Shareholder will at all times be entitled
to aggregate cash redemptions from all Funds of the Trust during any 90-day
period of up to the lesser of $250,000 or 1% of the Trust's net assets.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the Securities and Exchange Commission by rule or
regulation) as a result of disposal or valuation of the Fund's securities is
not reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted. The Trust also reserves the right
to suspend sales of shares of the Fund for any period during which the New York
Stock Exchange, the Advisor, the Administrator and/or the Custodian are not
open for business.
A Fund with portfolio securities listed on foreign exchanges which trade on
Saturdays or other customary United States national business holidays would be
expected to disclose to their investors, if the Fund does not price on these
days, that the portfolio will trade and the net asset of the Fund's redeemable
securities may be significantly affected on days when the investor has no
access to the Fund.
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<PAGE> 230
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Treasury Money Market, Money Market and
California Tax-Free Money Market Funds is calculated by adding the value of
securities and other assets, subtracting liabilities and dividing by the number
of outstanding shares. Securities will be valued by the amortized cost method
which involves valuing a security at its cost on the date of purchase and
thereafter (absent unusual circumstances) assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuations
in general market rates of interest on the value of the instrument. While this
method provides certainty in valuation, it may result in periods during which a
security's value, as determined by this method, is higher or lower than the
price the Fund would receive if it sold the instrument. During periods of
declining interest rates, the daily yield of the Funds may tend to be higher
than a like computation made by a company with identical investments utilizing
a method of valuation based upon market prices and estimates of market prices
for all of its portfolio securities. Thus, if the use of amortized cost by the
Funds resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Funds would be able to obtain a somewhat higher
yield than would result from investment in a company utilizing solely market
values, and existing investors in the Fund would experience a lower yield. The
converse would apply in a period of rising interest rates.
The Funds' use of amortized cost and the maintenance of the Funds' net asset
value at $1.00 are permitted by regulations promulgated by Rule 2a-7 under the
Investment Company Act of 1940, provided that certain conditions are met.
These conditions currently require that the Trust maintain a dollar-weighted
average maturity in the Funds of 90 days or less, not purchase any instrument
having a remaining maturity of more than one year, and will limit its
investments to those U.S. dollar-denominated instruments which the Trustees
determine to present minimal credit risks and which are of "high quality" as
determined by any major rating service or, if not rated, are determined by the
Trustees to be of comparable quality. The regulations also require the
Trustees to establish procedures which are reasonably designed to stabilize the
net asset value per share at $1.00 for the Funds. Such procedures include the
determination of the extent of deviation, if any, of the Funds' current net
asset value per share calculated using available market quotations from the
Funds' amortized cost price per share at such intervals as the Trustees deem
appropriate and reasonable in light of market conditions and periodic reviews
of the amount of the deviation and the methods used to calculate such
deviation. In the event that such deviation exceeds 1/2 of 1%, the Trustees
are required to consider promptly what action, if any, should be initiated,
and, if the Trustees believe that the extent of any deviation may result in
material dilution or other unfair results to Shareholders, the Trustees are
required to take such corrective action as they deem appropriate to eliminate
or reduce such dilution or unfair results to the extent reasonably practicable.
Such actions may include the sale of portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding dividends; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations. In addition, if the
Funds incur a significant loss or liability, the Trustees have the authority to
reduce pro rata the number of shares of the Funds in each Shareholder's account
and to offset each Shareholder's pro rata portion of such loss or liability
from the Shareholder's accrued but unpaid dividends or from future dividends
while each other Fund must annually distribute at least 90% of its investment
company taxable income.
The securities of the Funds other than the Money Market Funds are valued by the
Administrator pursuant to valuations provided by an independent pricing
service. The pricing service relies primarily on prices of actual market
transactions as well as trader quotations. However, the service may also use a
matrix system to determine valuations, which system considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at valuations. The procedures of
the pricing service and its valuations are reviewed by the officers of the
Trust under the general supervision of the Trustees. Although the methodology
and procedures are
S-44
<PAGE> 231
identical, the net asset value per share of Institutional Class and Investment
Class shares of Funds other than the Money Market Funds may differ because of
the distribution expenses charged to Investment Class shares.
TAXES
FEDERAL INCOME TAX
The following is only a summary of certain income tax considerations generally
affecting a Fund and its Shareholders and is not intended as a substitute for
careful tax planning. Shareholders are urged to consult their tax advisers
with specific reference to their own tax situations, including state and local
income tax liabilities.
ALL FUNDS
In order to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended (the "Code"), each Fund
must distribute annually to its Shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) (the "Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of stock or securities, or certain other income; (ii) the
Fund must derive less than 30% of its gross income each taxable year from the
sale or other disposition of stocks, securities or certain other investments
held for less than three months; (iii) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities, with such other securities limited, in respect
to any one issuer, to an amount that does not exceed 5% of the value of the
Fund's assets and that does not represent more than 10% of the outstanding
voting securities of such issuer; and (iv) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its assets may be
invested in securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer or two or more issuers engaged in same or
similar businesses if the Fund owns at least 20% of the voting power of such
issuers.
Notwithstanding the Distribution Requirement described above, which only
requires a Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), a Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year 98% of its ordinary income
for that year and 98% of its capital gain net income for the one-year period
ending on October 31 of that year, plus certain other amounts.
A dividends received deduction is available to corporations that receive
dividends form domestic corporations. Dividends paid by a Fund will be
eligible for the dividends received deduction for corporate shareholders to the
extent they are derived from dividends from domestic corporations and to the
extent that the respective security has been held for at least three months.
Shareholders will be advised each year of the portion of ordinary income
dividends eligible for the deduction.
Individual shareholders are not entitled to the dividends received deduction.
ADDITIONAL CONSIDERATION FOR CALIFORNIA TAX-FREE MONEY MARKET AND TAX-FREE BOND
FUNDS
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<PAGE> 232
As noted in the Prospectuses for the California Tax-Free Money Market and
Tax-Free Bond Funds, exempt interest dividends are generally excludable from a
Shareholder's gross income for regular federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the alternative
minimum tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code
or the environmental tax (the "Environmental Tax") imposed by Section 59A of
the Code. The Alternative Minimum Tax is imposed at the rate of 26% (with a
maximum rate of 28%) in the case of non-corporate taxpayers and at the rate of
20% in the case of corporate taxpayers, to the extent it exceeds the taxpayer's
regular tax liability. The Environmental Tax is imposed at the rate of 0.12%
and applies only to corporate taxpayers. The Alternative Minimum Tax and the
Environmental Tax may be imposed in two circumstances. First, exempt-interest
dividends derived from certain "private activity bonds" issued after August 7,
1986, will generally be an item of tax preference (and therefore potentially
subject to the Alternative Minimum Tax for both corporate and non-corporate
taxpayers and the Environmental Tax for corporate taxpayers only). Second, in
the case of exempt-interest dividends received by corporate Shareholders, all
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined
in Section 56(g) of the Code, in calculating the corporation's alternative
minimum taxable income for purposes of determining the Alternative Minimum Tax
and the Environmental Tax.
Any gain or loss recognized on a sale or redemption of shares of either Fund by
a Shareholder who is not a dealer in securities will generally be treated as a
long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise will be generally treated as a short-term capital
gain or loss. Any loss recognized by a Shareholder upon the sale or redemption
of shares of either Fund held for six months or less, however, will be
disallowed to the extent of any exempt-interest dividends received by the
Shareholder with respect to such shares. If shares on which a net capital gain
distribution has been received are subsequently sold or redeemed and such
shares have been held for six months or less, any loss recognized will be
treated as a long- term capital loss to the extent of the long-term capital
gain distribution.
Interest on indebtedness incurred by Shareholders to purchase or carry shares
of the fund will not be deductible for federal income tax purposes to the
extent that the Fund distributes exempt interest dividends during the taxable
year. The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a portion
of exempt-interest dividends received or accrued during any taxable year.
Certain foreign corporations engaged in a trade or business in the United
States will be subject to a "branch profits tax" on their "dividend equivalent
amount" for the taxable year, which will include exempt-interest dividends.
Certain Subchapter S corporations may also be subject to taxes on their
"passive investment income", which could include exempt-interest dividends. Up
to 85% (up to 50% for years prior to 1994) of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends)
plus 50 percent of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.
The Funds may not be an appropriate investment for persons (including
corporations and other business entities) who are "substantial users" (or
persons related to such users) of facilities financed by industrial development
or private activity bonds. A "substantial user" is defined generally to
include certain persons who regularly use a facility financed by the proceeds
of such bonds in their trade or business. Such entities or persons should
consult their tax advisors before purchasing shares of either Fund.
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<PAGE> 233
Issuers of bonds purchased by the Fund (or the beneficiary of such bonds) may
have made certain representations or covenants in connection with the issuance
of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Investors should be aware
that exempt-interest dividends derived from such bonds may become subject to
federal income taxation retroactively to the date of issuance of such bonds to
which such dividends are attributable if such representations are determined to
have been inaccurate or if the issuer of such bonds (or the beneficiary of such
bonds) fails to comply with such covenants.
If a Fund should fail to qualify as a regulated investment company for any
taxable year, the Fund would pay tax on its taxable investment income and
capital gains at regular corporate rates without any deductions for amounts
distributed to Shareholders. In addition, all of the Fund's distributions to
Shareholders would be taxable as ordinary income and would qualify for the
corporate dividends-received deduction in the case of corporate shareholders.
FOREIGN TAXES
Dividends and interest received by a Fund may be subject to income, withholding
or other taxes imposed by foreign countries and U.S. possessions that would
reduce the yield on the Fund's securities. Tax conventions between certain
countries and the United States may reduce or eliminate these taxes. Foreign
countries generally do not impose taxes on capital gains with respect to
investments by foreign investors. If a Fund meets the Distribution Requirement
and if more than 50% of the value of the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to file an election with the Internal Revenue Service that will
enable Shareholders, in effect, to receive the benefit of the foreign tax
credit with respect to any foreign and U.S. possessions income taxes paid by
the Fund. Pursuant to the election, the Fund will treat those taxes as
dividends paid to its Shareholders. Each Shareholder will be required to
include a proportionate share of those taxes in gross income as income received
from a foreign source and must treat the amount so included as if the
Shareholder had paid the foreign tax directly. The Shareholder may then either
deduct the taxes deemed paid by him or her in computing his or her taxable
income or, alternatively, use the foregoing information in calculating the
foreign tax credit against the Shareholder's federal income tax. If a Fund
makes the election, it will report annually to its Shareholders the respective
amounts per share of the Fund's income from sources within, and taxes paid to,
foreign countries and U.S. possessions.
STATE TAXES
A Fund is generally not liable for any income or franchise tax in Massachusetts
if it qualifies as a RIC for federal income tax purposes. Depending upon
applicable state and local law, distributions by the Funds to Shareholders and
the ownership of shares may be subject to state and local taxes.
Many states allow income received from certain United States Government
obligations that is tax exempt when received directly to be tax exempt when
received as income dividends from an investment company. Not all states permit
such income dividends to be tax exempt and some require that a certain minimum
percentage of an investment company's income dividend be derived from state
tax- exempt interest before any portion of the income dividends may be exempt.
The Funds will inform Shareholders annually of the percentage of income that is
derived from direct United States Government obligations. Shareholders should
consult their tax advisors to determine whether any portion of the income
dividends received from a Fund is considered tax exempt in their particular
states.
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FUND TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Trustees, the Advisor is responsible for placing the orders
to execute transactions for the Fund. In placing orders, it is the policy of
the Trust to seek to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved. While the Advisor generally seeks reasonably competitive spreads or
commissions, the Trust will not necessarily be paying the lowest spread or
commission available. The Trust will not purchase portfolio securities from
any affiliated person acting as principal except in conformity with the
regulations of the Securities and Exchange Commission (the "SEC").
The money market securities in which the Funds invest are traded primarily in
the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, the
Advisor will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually are acting as principal for their
own account. On occasion, securities may be purchased directly from the
issuer. Money market securities are generally traded on a net basis and do not
normally involve either brokerage commissions or transfer taxes. The cost of
executing portfolio securities transactions of the Trust will primarily consist
of dealer spreads and underwriting commissions.
The Trust does not expect to use one particular dealer, but subject to the
Trust's policy of seeking the best net results, dealers who provide
supplemental investment research to the Advisor may receive orders for
transactions by the Trust. Information so received will be in addition to and
not in lieu of the services required to be performed by the Advisor under the
Advisory Agreement, and the expenses of the Advisor will not necessarily be
reduced as a result of the receipt of such supplemental information.
It is expected that the Trust may execute brokerage or other agency
transactions through the Distributor or an affiliate of the Advisor, both of
which are registered broker-dealers, for a commission in conformity with the
1940 Act, the Securities Exchange Act of 1934 and rules promulgated by the SEC.
Under these provisions, the Distributor (or an affiliate of the Advisor) is
permitted to receive and retain compensation for effecting portfolio
transactions for the Trust on an exchange if a written contract is in effect
between the Distributor and the Trust expressly permitting the Distributor (or
an affiliate of the Advisor) to receive and retain such compensation. These
rules further require that commissions paid to the Distributor by the Trust for
exchange transactions not exceed "usual and customary" brokerage commissions.
The rules define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In addition, the
Funds may direct commission business to one more designated broker/dealers,
including the Distributor, in connection with such broker/dealer's payment of
certain of the Fund's expenses. The Trustees, including those who are not
"interested persons" of the Trust, have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
Since the Trust does not market its shares through intermediary broker-dealers,
it is not the trust's practice to allocate brokerage or principal business on
the basis of sales of its shares which may be made through such firms.
However, the Advisor may place Fund orders with qualified broker-dealers who
recommend the Trust to clients, and may, when a number of brokers and dealers
can provide
S-48
<PAGE> 235
best price and execution on a particular transaction, consider such
recommendations by a broker or dealer in selecting among broker- dealers.
The portfolio turnover rate for each non-money market Fund for the fiscal year
ended January 31, 1996, was as follows:
<TABLE>
<CAPTION>
FYE TURNOVER RATE
1995 1996
FUND
<S> <C> <C>
Growth Equity Fund 22% 24%
Value Momentum Fund 6% 20%
Balanced Fund 48% 26%
Intermediate-Term Bond Fund 95% 147%
Limited Maturity Government Fund 166% 186%
California Intermediate Tax-Free Bond Fund 22% 30%
Blue Chip Growth Fund 89% 69%
Convertible Securities Fund 36% 46%
Emerging Growth Fund 123% 131%
Government Securities Fund 184% 239%
International Equity Fund * 21%
</TABLE>
* Not in operation during such period.
The Brokerage Transactions and Commissions paid for each Fund for the Fiscal
Year ended January 31, 1996 was as follows:
<TABLE>
<CAPTION>
TOTAL
BROKERAGE
% TOTAL OF COMMISSIONS
TOTAL $ % OF TOTAL BROKERAGE PAID TO SFS
TOTAL $ AMOUNT OF BROKERAGE TRANSACTIONS IN TOTAL $
AMOUNT OF BROKERAGE COMMISSIONS EFFECTED CONNECTION AMOUNT OF
BROKERAGE COMMISSIONS PAID TO THROUGH WITH BROKERAGE
COMMISSIONS PAID TO AFFILIATED AFFILIATED REPURCHASE COMMISSIONS
PAID IN AFFILIATES BROKERS FOR BROKERS FOR AGREEMENT PAID FOR
FUND LAST YEAR IN LAST LAST YEAR LAST YEAR TRANSACTIONS RESEARCH
YEAR FOR LAST
YEAR
<S> <C> <C> <C> <C> <C> <C>
Treasury Money 114,370 114,370 100 100 114,370 0
Market Fund
Money Market 104,820 104,820 100 100 104,820 0
Fund
</TABLE>
S-49
<PAGE> 236
<TABLE>
<CAPTION>
TOTAL
BROKERAGE
% TOTAL OF COMMISSIONS
TOTAL $ % OF TOTAL BROKERAGE PAID TO SFS
TOTAL $ AMOUNT OF BROKERAGE TRANSACTIONS IN TOTAL $
AMOUNT OF BROKERAGE COMMISSIONS EFFECTED CONNECTION AMOUNT OF
BROKERAGE COMMISSIONS PAID TO THROUGH WITH BROKERAGE
COMMISSIONS PAID TO AFFILIATED AFFILIATED REPURCHASE COMMISSIONS
PAID IN AFFILIATES BROKERS FOR BROKERS FOR AGREEMENT PAID FOR
FUND LAST YEAR IN LAST LAST YEAR LAST YEAR TRANSACTIONS RESEARCH
YEAR FOR LAST
YEAR
<S> <C> <C> <C> <C> <C> <C>
California Tax- 0 0 0 0 0 0
Free Money
Market Fund
Growth Equity 71,326 5,052 7 72 5,052 0
Fund
Value Momentum 119,509 5,816 5 67 5,816 0
Fund
Balanced Fund 196,141 8,355 4 73 8,355 0
Intermediate- 4,340 4,340 100 100 4,340 0
Term Bond Fund
Limited 1,555 1,555 100 100 1,555 0
Maturity
Government Fund
California 0 0 0 0 0 0
Intermediate
Tax-Free Bond
Fund
Blue Chip 142,498 887 1 44 887 0
Growth Fund
Convertible 2,085 180 9 94 180 0
Securities Fund
Emerging Growth 139,450 2,709 2 67 2,709 0
Fund
Government 805 163 20 99 163 0
Securities Fund
International 165,472 1,684 1 48 1,684 0
Equity Fund
</TABLE>
<TABLE>
<CAPTION>
TOTAL $ AMOUNT OF BROKERAGE
TOTAL $ AMOUNT OF BROKERAGE COMMISSIONS
COMMISSIONS PAID PAID TO AFFILIATES IN
FUND 1994-1995 1995
1994 1995
<S> <C> <C> <C>
Treasury Money Market Fund 0 71,721 71,271
Money Market Fund 0 129,034 129,034
</TABLE>
S-50
<PAGE> 237
<TABLE>
<CAPTION>
TOTAL $ AMOUNT OF BROKERAGE
TOTAL $ AMOUNT OF BROKERAGE COMMISSIONS
COMMISSIONS PAID PAID TO AFFILIATES IN
FUND 1994-1995 1995
<S> <C> <C> <C>
California Tax-Free Money Market 0 0 0
Fund
Growth Equity Fund 154,013 63,600 4,728
Value Momentum Fund 127,867 69,408 7,304
Balanced Fund 232,020 169,370 5,139
Intermediate-Term Bond Fund 0 3,256 3,256
Limited Maturity Government Fund 0 1,500 1,500
California Intermediate Tax-Free 0 0 0
Bond Fund
Blue Chip Growth Fund 0 101,414 3,085
Convertible Securities Fund 0 800 661
Emerging Growth Fund 0 62,763 2,542
Government Securities Fund 0 1,092 1,092
International Equity Fund 0 0 0
</TABLE>
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of each series and of each class of shares thereof. Each Institutional
and Investment Class share of that Fund represents an equal proportionate
interest in that Fund with each other Institutional and Investment Class shares
of that Fund. Shares are entitled upon liquidation to a pro rata share in the
net assets of the Funds, Shareholders have no preemptive rights. The
Declaration of Trust provides that the Trustees of the Trust may create
additional series of shares. All consideration received by the Trust for
shares of any additional series and all assets in which such consideration is
invested would belong to that series and would be subject to the liabilities
related thereto. Share certificates representing shares will not be issued.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. Even if, however, the Trust were held to be a partnership, the
possibility of the Shareholders'
incurring financial loss for that reason appears remote because The Trust's
Declaration of Trust contains an express disclaimer of Shareholder liability
for obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or executed by
or on behalf of the Trust or the Trustees, and because the Declaration of Trust
provides for indemnification out of the Trust property for any Shareholder held
personally liable for the obligations of the Trust.
S-51
<PAGE> 238
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisors, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the Trust. However,
nothing in the Declaration of Trust shall protect or indemnify a Trustee
against any liability for his willful misfeasance, bad faith, gross negligence
or reckless disregard of his duties.
5% SHAREHOLDERS
As of March 5, 1996 the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owner) of 5% or more of
the shares of the Funds. The Trust believes that most of the shares referred
to below were held by the persons indicated in accounts for their fiduciary,
agency, or custodial customers.
INSTITUTIONAL CLASS
Money Market Fund
<TABLE>
<CAPTION>
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 115,351,018.270 22.45
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
BOTT Pension 31,222,481.100 6.08
c/o Bank of Tokyo Trust Co.
Attn: Dennis Demetropolious
100 Broadway
New York, NY 10005
Union Bank 367,068,640.000 71.45
Attn: Jessica Hickman
P.O. Box 109
San Diego, CA 92112
</TABLE>
S-52
<PAGE> 239
<TABLE>
<CAPTION>
Treasury Money Market Fund
--------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Union Bank 185,057,005.00 97.90
Attn: Jessica Hickman
P.O. Box 109
San Diego, CA 92112
</TABLE>
<TABLE>
<CAPTION>
California Tax-Free Money Market Fund
-------------------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Union Bank 34,262,229.000 100.00
Attn: Jessica Hickman
P.O. Box 109
San Diego, CA 92112
</TABLE>
<TABLE>
<CAPTION>
Growth Equity Fund
------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 10,097,960.818 99.49
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
</TABLE>
<TABLE>
<CAPTION>
Convertible Securities Fund
---------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
BOTT Pension 1,560,179.877 95.85
c/o Bank of Tokyo Trust Co.
Attn: Dennis Demetropolious
100 Broadway
New York, NY 10005
</TABLE>
<TABLE>
<CAPTION>
Value Momentum Fund
-------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 12,245,573.094 98.67
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
</TABLE>
S-53
<PAGE> 240
<TABLE>
<CAPTION>
Blue Chip Growth Fund
---------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 758,841.037 14.66
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
BOTT Pension 4,418,510.277 85.34
c/o Bank of Tokyo Trust Co.
Attn: Dennis Demetropolious
100 Broadway
New York, NY 10005
</TABLE>
<TABLE>
<CAPTION>
Emerging Growth Fund
--------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 555,497.020 15.53
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
BOTT Pension 3,022,179.997 84.47
c/o Bank of Tokyo Trust Co.
Attn: Dennis Demetropolious
100 Broadway
New York, NY 10005
</TABLE>
<TABLE>
<CAPTION>
Intermediate-Term Bond Fund
---------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 12,743,871.935 99.61
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
</TABLE>
<TABLE>
<CAPTION>
Balanced Fund
-------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 16,426,491.722 96.35
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
</TABLE>
S-54
<PAGE> 241
Government Securities Fund
<TABLE>
<CAPTION>
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 402,718.763 8.30
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
BOTT Pension 4,452,115.527 91.70
c/o Bank of Tokyo Trust Co.
Attn: Dennis Demetropolious
100 Broadway
New York, NY 10005
</TABLE>
<TABLE>
<CAPTION>
Limited Maturity Government Fund
--------------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 3,612,354.649 98.87
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
</TABLE>
<TABLE>
<CAPTION>
California Intermediate Tax-Free Bond Fund
------------------------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 457,002.689 100.00
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
</TABLE>
<TABLE>
<CAPTION>
International Equity Fund
-------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Lane & Company 1,219,379.980 99.58
c/o Union Bank
Attn: Linda Brown
P.O. Box 109
San Diego, CA 92112
</TABLE>
S-55
<PAGE> 242
<TABLE>
<CAPTION>
INVESTMENT CLASS
----------------
Money Market Fund
-----------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 265,634,712.970 100.00
For Exclusive Benefit of Customers
Attn: Sal Macca
1 World Financial Center
200 Liberty Street, 4th Fl.
New York, NY 10281
</TABLE>
<TABLE>
<CAPTION>
Treasury Money Market Fund
--------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 236,331,716.960 100.00
For Exclusive Benefit of Customers
Attn: Sal Macca
1 World Financial Center
200 Liberty Street, 4th Fl.
New York, NY 10281
</TABLE>
<TABLE>
<CAPTION>
California Tax-Free Money Market Fund
-------------------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 87,315,849.330 100.00
For Exclusive Benefit of Customers
Attn: Sal Macca
1 World Financial Center
200 Liberty Street, 4th Fl.
New York, NY 10281
</TABLE>
<TABLE>
<CAPTION>
Growth Equity Fund
------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
Post & Co. 25,194.000 17.26
c/o The Bank of New York
Attn: Bill Sauer Mutual Funds Reorg. Dept.
P.O. Box 1066
Wall Street Station
New York, NY 10268
National Financial Services Corp. 108,054.830 74.04
For Exclusive Benefit of Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
S-56
<PAGE> 243
<TABLE>
<CAPTION>
Value Momentum Fund
-------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 662,642.307 100.00
For Exclusive Benefit of Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
<TABLE>
<CAPTION>
Intermediate-Term Bond Fund
---------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 601,899.698 100.00
For Exclusive Benefit of Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
<TABLE>
<CAPTION>
Balanced Fund
-------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 586,005.818 100.00
For Exclusive Benefit of Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
<TABLE>
<CAPTION>
Limited Maturity Government Fund
--------------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 65,095.705 100.00
For Exclusive Benefit of Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
<TABLE>
<CAPTION>
California Intermediate Tax-Free Bond Fund
------------------------------------------
Name Number of Shares Percent of Fund
- ---- ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 454,551.420 100.00
For Exclusive Benefit of Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
S-57
<PAGE> 244
EXPERTS
The financial statements included in this Statement of Additional Information
and the Selected Per Share Data and Ratios included in the Prospectuses have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report, with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving the report.
S-58
<PAGE> 245
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Treasury Money Market Fund
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (34.0%)
U.S. Treasury Bills
5.480%, 02/01/96 . . . . . . . . . . . $ 5,000 $ 5,000
5.420%, 02/08/96 . . . . . . . . . . . 5,000 4,995
5.290%, 02/29/96 . . . . . . . . . . . 5,000 4,979
5.280%, 03/07/96 . . . . . . . . . . . 5,000 4,974
5.300%, 04/04/96 . . . . . . . . . . . 5,000 4,954
5.510%, 05/02/96 . . . . . . . . . . . 15,000 14,801
5.220%, 05/16/96 . . . . . . . . . . . 5,000 4,924
4.980%, 05/23/96 . . . . . . . . . . . 15,000 14,771
4.990%, 06/20/96 . . . . . . . . . . . 5,000 4,903
5.010%, 07/25/96 . . . . . . . . . . . 5,000 4,878
5.330%, 08/22/96 . . . . . . . . . . . 5,000 4,850
5.010%, 10/17/96 . . . . . . . . . . . 5,000 4,820
U.S. Treasury Notes
7.875%, 02/15/96 . . . . . . . . . . . 16,435 16,450
5.500%, 04/30/96 . . . . . . . . . . . 5,000 4,997
5.880%, 05/31/96 . . . . . . . . . . . 10,000 10,009
6.130%, 07/31/96 . . . . . . . . . . . 10,000 10,019
6.500%, 09/30/96 . . . . . . . . . . . 10,000 10,052
7.250%, 11/15/96 . . . . . . . . . . . 5,000 5,080
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
-------
- ------------------------------------------------------------------
<S> <C>
Total U.S. Treasury Obligations
(Cost $135,456,447) . . . . . . . 135,456
- ------------------------------------------------------------------
REPURCHASE AGREEMENTS (69.9%)
SBC Capital Markets
5.88%, dated 01/31/96, matures
02/01/96, repurchase price
$17,669,843 (collateralized by
U.S. Treasury Bond, par value
$12,910,000, 10.375%, matures
11/15/12: market value $18,057,115) . . . . . . . 17,667
Deutsche Morgan Grenfell/C.J.
Lawrence 5.88%, dated 01/31/96,
matures 02/01/96, repurchase
price $91,268,889 (collateralized
by various U.S. Treasury Notes,
total par value $89,014,000,
5.125%-7.50%, 08/31/96-03/31/00:
total market value $93,079,931) . . . . . . . . . 91,254
Barclays De Zoete Wedd Securities
5.88%, dated 01/31/96, matures,
02/01/96, repurchase price
$15,015,956 (collateralized by
various U.S. Treasury STRIPS,
total par value $33,926,000,
02/15/98-08/15/09: total
market value $15,313,823) . . . . . . . . . . . . 15,014
Morgan Stanley & Companies
5.88%, dated 01/31/96, matures
02/01/96, repurchase price
$15,065,513 (collateralized by U.S.
Treasury Note, par value
$14,990,000, 5.50%, matures
09/30/97: market value
$15,378,411) . . . . . . . . . . . . . . . . . . . 15,063
UBS Securities,
5.88%, dated 01/31/96, matures
02/01/96, repurchase price
$90,037,921 (collateralized by various
U.S. Treasury Notes, total par
value $89,029,000, 5.00%-9.125%,
11/30/98-07/31/99: total
market value $91,828,617) . . . . . . . . . . . . 90,023
J P Morgan Securities
5.88%, dated 01/31/96, matures
02/01/96, repurchase price
$15,020,641 (collateralized by various
U.S. Treasury Investment Growth
Receipts, total par value
$1,684,375, 02/15/98-05/15/04:
U.S. Treasury STRIPS, par value
$31,280,000, matures 05/15/09:
total market value $15,320,396) . . . . . . . . . 15,018
Merrill Lynch Government Securities
5.88%, dated 01/31/96, matures
02/01/96, repurchase price
$16,264,495 (collateralized by U.S.
Treasury Non-callable STRIPS, par
value $21,360,000, 8.50%, matures
11/15/00: market value $16,587,321) . . . . . . . 16,262
</TABLE>
13
<PAGE> 246
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Treasury Money Market Fund (cont'd)
<TABLE>
<CAPTION>
VALUE
(000)
-------
<S> <C>
REPURCHASE AGREEMENTS (CONTINUED)
Nomura Securities International
5.88%, dated 01/31/96, matures
02/01/96, repurchase price
$17,804,732 (collateralized by
various U.S. Treasury Notes, total
par value $17,534,000, 4.75%-7.25%,
02/15/98-11/30/00: total
market value $18,158,645) . . . . . . . . . . . $ 17,802
- ------------------------------------------------------------------
Total Repurchase Agreements
(Cost $278,102,568) . . . . . . . . . . . . . 278,103
- ------------------------------------------------------------------
Total Investments (103.9%)
(Cost $413,559,015) . . . . . . . . . . . . . 413,559
- ------------------------------------------------------------------
Other Assets and Liabilities (-3.9%) . . . . . . . . (15,553)
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 182,267,812
outstanding shares of beneficial
interest . . . . . . . . . . . . . . . . . . . $182,267
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 215,740,733
outstanding shares of beneficial
interest . . . . . . . . . . . . . . . . . . . . 215,741
Accumulated Net Realized Loss
on Investments . . . . . . . . . . . . . . . . . (2)
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . . . . . . $398,006
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . . . . . . $1.00
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS . . . . . . . . . . . . . . . . $1.00
==================================================================
</TABLE>
STRIPS--Separate Trading of Registered Interest and Principal of Securities
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 247
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Money Market Fund
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
CERTIFICATES OF DEPOSIT -- YANKEE (14.5%)
Banque Nationale de Paris, New York
5.820%, 02/14/96 . . . . . . . . . . . $20,000 $20,000
Bayerische Hypotheken Und Wechsel
5.650%, 06/27/96 . . . . . . . . . . . 10,000 9,995
Lloyds Bank PLC
5.220%, 07/24/96 . . . . . . . . . . . 30,000 30,000
Royal Bank of Canada, New York
5.500%, 06/17/96 . . . . . . . . . . . 25,000 25,000
Swiss Bank Corp, New York
5.670%, 03/25/96 . . . . . . . . . . . 25,000 24,998
- ------------------------------------------------------------------
Total Certificates of Deposit -- Yankee
(Cost $109,982,237) . . . . . . . 109,993
- ------------------------------------------------------------------
CERTIFICATES OF DEPOSIT -- EURO (12.1%)
Abbey National Bank, London
5.710%, 03/11/96 . . . . . . . . . . . 32,000 31,999
Deutsche Bank AG, London
5.730%, 02/20/96 . . . . . . . . . . . 30,000 29,999
Toronto Dominion Bank
5.430%, 04/09/96 . . . . . . . . . . . 30,000 30,002
- ------------------------------------------------------------------
Total Certificates of Deposit -- Euro
(Cost $91,996,869) . . . . . . . . 92,000
- ------------------------------------------------------------------
CERTIFICATES OF DEPOSIT -- DOMESTIC (3.9%)
Wachovia Bank of Georgia, N.A.
5.420%, 02/27/96 . . . . . . . . . . . 30,000 30,000
- ------------------------------------------------------------------
Total Certificates of Deposit -- Domestic
(Cost $39,987,732) . . . . . . . . 30,000
- ------------------------------------------------------------------
COMMERCIAL PAPER (41.8%)
AT&T
5.640%, 02/22/96 . . . . . . . . . . . 30,000 29,901
Ciesco
5.650%, 02/08/96 . . . . . . . . . . . 20,000 19,978
5.390%, 03/18/96 . . . . . . . . . . . 14,600 14,499
Commonwealth Bank of Australia
5.250%, 04/12/96 . . . . . . . . . . . 25,000 24,741
Ford Motor Credit
5.650%, 02/05/96 . . . . . . . . . . . 30,000 29,981
General Electric
5.400%, 03/11/96 . . . . . . . . . . . 15,985 15,891
Goldman Sachs
5.650%, 02/01/96 . . . . . . . . . . . 25,000 25,000
Merrill Lynch
5.400%, 03/15/96 . . . . . . . . . . . 30,000 29,807
Morgan Stanley Group
5.700%, 02/12/96 . . . . . . . . . . . 30,000 29,948
NationsBank
5.670%, 02/02/96 . . . . . . . . . . . 25,000 24,996
Societe Generale North America
5.270%, 04/23/96 . . . . . . . . . . . 30,000 29,640
Westpac Capital
5.510%, 04/08/96 . . . . . . . . . . . 25,000 24,744
WMX Technologies
5.500%, 03/08/96 . . . . . . . . . . . 20,000 19,890
- ------------------------------------------------------------------
Total Commercial Paper
(Cost $319,016,402) . . . . . . . 319,016
- ------------------------------------------------------------------
CORPORATE OBLIGATIONS (11.8%)
Bank of America, Illinois
5.730%, 03/05/96 . . . . . . . . . . . 10,000 10,000
5.360%, 04/18/96 . . . . . . . . . . . 20,000 20,000
Bank of Hawaii, Honolulu
5.500%, 01/03/97 . . . . . . . . . . . 10,000 10,004
Bear Stearns Floating Rate Note
5.730%, 05/15/96 (A) . . . . . . . . . 20,000 20,000
First of America Bank Michigan, N.A.
6.450%, 06/04/96 . . . . . . . . . . . 10,000 10,017
5.600%, 02/23/96 . . . . . . . . . . . 20,000 20,001
- ------------------------------------------------------------------
Total Corporate Obligations
(Cost $80,048,171) . . . . . . . . 90,022
- ------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (5.2%)
U.S. Treasury Notes
5.500%, 04/30/96 . . . . . . . . . . . 10,000 9,993
5.880%, 05/31/96 . . . . . . . . . . . 5,000 5,001
4.380%, 08/15/96 . . . . . . . . . . . 15,000 14,887
6.500%, 09/30/96 . . . . . . . . . . . 10,000 10,051
- ------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $39,931,624) . . . . . . . 39,932
- ------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATIONS (1.2%)
FNMA
5.680%, 10/07/96 . . . . . . . . . . . 9,200 9,209
- ------------------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Obligations
(Cost $9,208,951) . . . . . . . . 9,209
- ------------------------------------------------------------------
</TABLE>
15
<PAGE> 248
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Money Market Fund (cont'd)
<TABLE>
<CAPTION>
VALUE
(000)
-------
<S> <C>
REPURCHASE AGREEMENTS (9.5%)
Deutsche Morgan Grenfell/
C.J. Lawrence,
5.95%, dated 01/31/96, matures
02/01/96, repurchase price
$72,250,917 (collateralized by various
FHLMC obligations total par value
$180,156,295, 0.00%-7.50%,
02/01/96-02/15/24: FNMA
obligations total par value
$41,435,979, 0.00%-7.48%,
07/25/17-10/25/23: FHLB
obligation, par value $2,000,000,
8.10%, 03/25/96: U.S. Treasury
Bond, par value $3,000,000,
7.625%, 11/15/22: U.S. Treasury
Notes total par value $13,097,000,
7.25%-7.625%, 04/30/96-02/15/98:
total market value $73,684,413. . . . . . . . . . $ 72,239
- ------------------------------------------------------------------
Total Repurchase Agreements
(Cost $72,238,978) . . . . . . . . . . . . . 72,239
- ------------------------------------------------------------------
Total Investments (100.0%)
(Cost $762,410,964) . . . . . . . . . . . . 762,411
- ------------------------------------------------------------------
Other Assets and Liabilities (0.0%) . . . . . . . . 277
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no
par value) based on 504,073,683
outstanding shares of beneficial
interest . . . . . . . . . . . . . . . . . . . $504,073
Fund shares of Investment Class
(unlimited authorization--no
par value) based on 259,783,048
outstanding shares of beneficial
interest . . . . . . . . . . . . . . . . . . . 259,782
Undistributed Net Investment Income . . . . . . . 1
Accumulated Net Realized Loss
on Investments . . . . . . . . . . . . . . . . (1,168)
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . . . . . . $762,688
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . . . . . . $1.00
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS . . . . . . . . . . . . . . . . $1.00
==================================================================
</TABLE>
(A) Floating Rate Security--The rate reflected on the Statement of Net Assets
is the rate in effect on January 31, 1996.
FHLB--Federal Home Loan Bank
FHLMC--Federal Home Loan Mortgage Association
FNMA--Federal National Mortgage Association
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 249
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone California Tax-Free Money Market Fund
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (98.8%)
Alameda County, Multi-Family
Housing, VRDN, RB (A) (B) (C)
2.950%, 02/07/96 . . . . . . . . . . . $ 900 $ 900
California Department of Water
Resources, Central Valley Project,
Ser N, VRDN, RB, CGIC Insured
(A) (B)
3.100%, 02/07/96 . . . . . . . . . . . 3,000 3,000
California Education Facilities,
Carnegie, TECP
3.100%, 05/03/96 . . . . . . . . . . . 1,000 1,000
California Health Facilities Financing
Authority, Kaiser Permanente,
Ser A, RB (A) (B)
6.500%, 10/01/96 . . . . . . . . . . . 500 510
California Health Facilities Financing
Authority, Catholic Health Care,
Ser A, VRDN, RB, MBIA Insured
(A) (B)
2.850%, 02/07/96 . . . . . . . . . . . 1,000 1,000
California Health Facilities Financing
Authority, Ser B, VRDN, RB, FGIC
Insured (A) (B)
2.900%, 02/07/96 . . . . . . . . . . . 500 500
California Health Facilities Financing
Authority, Santa Barbara, VRDN,
RB (A) (B) (C)
2.800%, 02/07/96 . . . . . . . . . . . 2,900 2,900
California Health Facilities Financing
Authority, Sutter Community
Hospital, Ser A, VRDN, RB (A) (B)
3.300%, 02/07/96 . . . . . . . . . . . 400 400
California Health Facilities Financing
Authority, Adventist Health Systems,
VRDN, RB (A) (B) (C)
2.800%, 02/07/96 . . . . . . . . . . . 1,500 1,500
California Health Facilities Financing
Authority, Children's Hospital,
VRDN, RB, MBIA Insured
2.900%, 02/07/96 . . . . . . . . . . . 900 900
California Health Facilities Financing
Authority, Memorial Health
Services, VRDN, RB (A) (B)
2.800%, 02/07/96 . . . . . . . . . . . 5,040 5,040
California Health Facilities Financing
Authority, Kaiser Permanente,
Ser A, VRDN, RB (A) (B)
2.800%, 02/07/96 . . . . . . . . . . . 5,000 5,000
California Health Facilities Financing
Authority, St. Joseph's Hospital,
VRDN, RB (A) (B)
3.250%, 02/07/96 . . . . . . . . . . . 600 600
California Pollution Control Finance
Authority, Pac-88c, TECP
3.350%, 02/07/96 . . . . . . . . . . . 1,000 1,000
California Pollution Control Finance
Authority, TECP (C)
3.150%, 05/10/96 . . . . . . . . . . . 1,000 1,000
California Pollution Control Finance
Authority, Minnesota Mining &
Manufacturing Project, VRDN,
RB (A) (B)
3.050%, 11/01/96 . . . . . . . . . . . 400 400
California Pollution Control Finance
Authority, Shell Oil, Ser A, VRDN,
RB (A) (B)
3.250%, 02/07/96 . . . . . . . . . . . 2,400 2,400
California Pollution Control Finance
Authority, Shell Oil, VRDN,
RB (A) (B)
3.250%, 02/07/96 . . . . . . . . . . . 1,400 1,400
California Pollution Control Finance
Authority, Southern California
Edison, Ser A, VRDN, RB (A) (B)
3.700%, 02/07/96 . . . . . . . . . . . 1,600 1,600
California Pollution Control Finance
Authority, Southern California
Edison, Ser D, VRDN, RB (A) (B)
3.700%, 02/07/96 . . . . . . . . . . . 400 400
California Pollution Control Finance
Authority, Southern California
Edison, Ser B, VRDN, RB (A) (B)
3.700%, 02/07/96 . . . . . . . . . . . 600 600
</TABLE>
17
<PAGE> 250
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (cont'd)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
California Pollution Control Finance
Authority, Southern California
Edison, Ser C, VRDN, RB (A) (B)
3.700%, 02/07/96 . . . . . . . . . . . $3,200 $ 3,200
California Pollution Control Finance
Authority, Shell Oil, Ser A, VRDN,
RB, MBIA Insured (A) (B)
3.250%, 02/07/96 . . . . . . . . . . . 200 200
California Pollution Control Finance
Authority, Exxon Project, VRDN,
RB (A) (B) (C)
3.500%, 02/07/96 . . . . . . . . . . . 5,000 5,000
California Revenue Anticipation
Warrants, FGIC Insured
5.750%, 04/25/96 . . . . . . . . . . . 470 472
California Statewide Community
Development Authority, St. Joseph
Health System, VRDN, RB (A) (B)
2.800%, 02/07/96 . . . . . . . . . . . 1,600 1,600
3.200%, 02/07/96 . . . . . . . . . . . 3,700 3,700
California Statewide Community
Development Authority, Sutter
Health Group, VRDN, RB,
AMBAC Insured
3.300%, 02/07/96 . . . . . . . . . . . 1,100 1,100
City of San Diego Multi-Family
Housing, University Apartments,
VRDN, RB (A) (B)
2.950%, 02/07/96 . . . . . . . . . . . 1,500 1,500
Contra Costa Transportation Authority,
Sales Tax Revenue, Ser A, VRDN,
RB, FGIC Insured (A) (B)
2.900%, 02/07/96 . . . . . . . . . . . 3,500 3,500
County of San Diego
Teeter Obligation, TECP (C)
3.300%, 04/04/96 . . . . . . . . . . . 1,000 1,000
Del Mar Race Track Authority.
TECP (C)
3.650%, 02/22/96 . . . . . . . . . . . 1,000 1,000
Eastern Municipal Water District,
COP, Ser B, VRDN, RB, FGIC
Insured (A) (B)
2.900%, 02/07/96 . . . . . . . . . . . 100 100
Escondido Unified School District,
Ser A, GO, FGIC Insured
3.400%, 09/01/96 . . . . . . . . . . . 1,000 1,000
Golden Empire School Finance
Authority, Kern High School,
VRDN, RB (A) (B) (C)
2.950%, 02/07/96 . . . . . . . . . . . 600 600
Healdsburg Community
Redevelopment Agency, VRDN,
RB (A) (B) (C)
3.500%, 02/07/96 . . . . . . . . . . . 3,760 3,760
Huntington Park Redevelopment
Agency, VRDN, RB (A) (B) (C)
3.550%, 02/07/96 . . . . . . . . . . . 1,170 1,170
Irvine Ranch Water District,
VRDN, GO (A) (B) (C)
4.150%, 02/07/96 . . . . . . . . . . . 2,700 2,700
Irvine Ranch Water District,
Capital Improvement Project,
COP, VRDN, RB (A) (B)
3.800%, 02/07/96 . . . . . . . . . . . 500 500
Long Beach Harbor Revenue, RB
6.500%, 05/15/96 . . . . . . . . . . . 1,200 1,209
Los Angeles County Transportation
Commission, Sales Tax Revenue,
RB, Pre-Refunded 07/01/96 @ 102
7.600%, 07/01/06 . . . . . . . . . . . 1,355 1,403
Los Angeles Metro Transportation
Authority, TECP (C)
3.150%, 02/01/96 . . . . . . . . . . . 2,000 2,000
Los Angeles Waste Water, TECP (C)
3.650%, 02/16/96 . . . . . . . . . . . 3,000 3,000
Los Angeles Department of
Water & Power, TECP
3.650%, 02/08/96 . . . . . . . . . . . 3,000 3,000
Modesto, COP, High School & City
School District, VRDN, RB
(A) (B) (C)
3.050%, 02/07/96 . . . . . . . . . . . 1,400 1,400
Riverside County Transportation
Commission, TECP (C)
3.900%, 02/08/96 . . . . . . . . . . . 1,000 1,000
</TABLE>
18
<PAGE> 251
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (cont'd)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
Sacramento County Multi-Family
Housing, VRDN, RB (A) (B) (C)
3.400%, 02/07/96 . . . . . . . . . . . $2,800 $ 2,800
San Bernadino Transportation
Authority, Sales Tax Revenue,
VRDN, RB (A) (B) (C)
3.150%, 02/07/96 . . . . . . . . . . . 3,500 3,500
San Bernadino County Housing
Authority, Victoria Terrace,
Project A, VRDN, RB (A) (B) (C)
3.000%, 02/07/96 . . . . . . . . . . . 5,000 5,000
San Bernardino Multi-Family Housing,
Western #3 Project,
VRDN, RB (A) (B) (C)
3.000%, 02/07/96 . . . . . . . . . . . 2,500 2,500
San Bernardino Multi-Family Housing,
Western #4 Project,
VRDN, RB (A) (B) (C)
3.000%, 02/07/96 . . . . . . . . . . . 2,500 2,500
San Diego Transportation Authority,
TECP (C)
3.250%, 02/07/96 . . . . . . . . . . . 2,500 2,500
3.050%, 03/06/96 . . . . . . . . . . . 1,600 1,600
San Diego Water Authority, TECP
3.200%, 04/12/96 . . . . . . . . . . . 1,000 1,000
San Jose Unified School District,
County of Santa Clara, TRAN
4.750%, 09/19/96 . . . . . . . . . . . 2,000 2,008
San Mateo, TRAN
4.500%, 07/01/96 . . . . . . . . . . . 2,000 2,004
Santa Clara Transport Authority,
VRDN, RB (A) (B) (C)
3.650%, 02/07/96 . . . . . . . . . . . 1,000 1,000
Santa Clara Water District, RB,
Pre-Refunded 06/01/96 @ 100
5.750%, 06/01/96 . . . . . . . . . . . 1,400 1,410
Santa Cruz County, TRAN
4.500%, 07/11/96 . . . . . . . . . . . 2,000 2,004
Solano County, TRAN
4.500%, 11/01/96 . . . . . . . . . . . 2,500 2,512
Southern California Metro Water,
TECP (C)
3.650%, 02/22/96 . . . . . . . . . . . 1,000 1,000
Tracy Sycamore Multi-Family Housing,
VRDN, RB (A) (B) (C)
3.200%, 02/07/96 . . . . . . . . . . . 2,300 2,300
Tri City Hospital District, Imperial
Municipal Services Group, RB,
Pre-Refunded 02/01/96 @ 100
9.875%, 02/01/09 . . . . . . . . . . . 1,900 1,900
Vallejo Housing Authority, Multi-
Family Revenue, VRDN, RB,
FNMA Insured (A) (B)
2.950%, 02/07/96 . . . . . . . . . . . 900 900
Vallejo Housing Authority, Multi-
Family Revenue, VRDN, RB
(A) (B) (C)
3.200%, 02/07/96 . . . . . . . . . . . 5,000 5,000
West Covina Redevelopment Agency,
Lakes Public Parking Project,
VRDN, RB (A) (B) (C)
3.650%, 02/07/96 . . . . . . . . . . . 2,025 2,025
- ------------------------------------------------------------------
Total California Municipal Bonds
(cost $122,626,892) . . . . . . . 122,627
- ------------------------------------------------------------------
CASH EQUIVALENT (2.2%) . . . . . . . . . .
SEI California Tax Free Money
Market Portfolio (A)
3.180% . . . . . . . . . . . . . . . . 2,713
- ------------------------------------------------------------------
Total Cash Equivalent
(Cost $2,712,612) . . . . . . . . 2,713
- ------------------------------------------------------------------
Total Investments (101.0%)
(Cost $125,339,504) . . . . . . . 125,340
- ------------------------------------------------------------------
Other Assets and Liabilities (-1.0%) . . . (1,240)
- ------------------------------------------------------------------
</TABLE>
19
<PAGE> 252
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (cont'd)
<TABLE>
<CAPTION>
VALUE
(000)
-------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 42,920,481
outstanding shares of beneficial
interest . . . . . . . . . . . . . . $ 42,920
Fund shares of Investment Class
unlimited authorization--no par
value) based on 81,181,155
outstanding shares of beneficial
interest . . . . . . . . . . . . . . 81,182
Accumulated Net Realized
Loss on Investments . . . . . . . . (2)
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $124,100
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $1.00
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS . . . . . . . . . . . $1.00
==================================================================
</TABLE>
(A) Floating Rate Security--The rate reflected on the Statement of Net Assets
is the rate in effect on January 31, 1996.
(B) Put and Demand Feature--The date reported is the lesser of the maturity or
the put date.
(C) Securities are held in conjunction with a letter of credit by a major
commercial bank or financial institution.
AMBAC--American Municipal Bond Assurance Company
COP--Certificate of Participation
CGIC--California Guaranty Insurance Company
FGIC--Financial Guaranty Insurance Company
FNMA--Federal National Mortgage Association
GO--General Obligation
MBIA--Municipal Bond Investors Assurance
RB--Revenue Bond
Ser--Series
TECP--Tax Exempt Commercial Paper
TRAN--Tax and Revenue Anticipation Note
VRDN--Variable Rate Demand Note
The accompanying notes are an integral part of the financial statements.
20
<PAGE> 253
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Intermediate-Term Bond Fund
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
CORPORATE OBLIGATIONS (38.2%)
American Telephone & Telegraph
7.500%, 06/01/06 . . . . . . . . . . . $3,000 $3,330
Arkansas Electric Cooperative
7.330%, 06/30/08 . . . . . . . . . . . 2,492 2,701
Avco Financial Services
7.375%, 08/15/01 . . . . . . . . . . . 3,500 3,745
Bankers Trust, NY
7.250%, 01/15/03 . . . . . . . . . . . 3,500 3,679
7.500%, 11/15/15 . . . . . . . . . . . 1,500 1,552
Banponce
6.750%, 12/15/05 . . . . . . . . . . . 2,000 2,022
Ford Motor Credit
8.200%, 02/15/02 . . . . . . . . . . . 4,000 4,450
Province of British Columbia
6.500%, 01/15/26 . . . . . . . . . . . 5,000 4,956
Province of Manitoba
6.125%, 01/19/04 . . . . . . . . . . . 3,000 3,015
Province of Ontario
7.380%, 01/27/03 . . . . . . . . . . . 4,000 4,315
Pacific Gas & Electric
8.750%, 01/01/01 . . . . . . . . . . . 780 872
6.250%, 08/01/03 . . . . . . . . . . . 2,000 2,010
Panhandle Eastern
7.880%, 08/15/04 . . . . . . . . . . . 3,000 3,308
Pepsico
5.880%, 06/01/00 . . . . . . . . . . . 3,500 3,531
Ralston Purina
7.750%, 10/01/15 . . . . . . . . . . . 1,000 1,072
Salomon Brothers
7.750%, 05/15/00 . . . . . . . . . . . 2,000 2,100
Southern California Edison First
Mortgage
5.630%, 10/01/02 . . . . . . . . . . . 4,000 3,915
Union Electric
6.880%, 08/01/04 . . . . . . . . . . . 2,500 2,647
- ------------------------------------------------------------------
Total Corporate Obligations
(cost $50,713,720) . . . . . . . . 53,220
- ------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (42.0%)
United States Treasury Bonds
7.130%, 02/15/23 . . . . . . . . . . . 3,900 4,418
6.880%, 08/15/25 . . . . . . . . . . . 2,500 2,788
United States Treasury Notes
6.380%, 07/15/99 . . . . . . . . . . . 1,000 1,039
6.250%, 05/31/00 . . . . . . . . . . . 7,000 7,274
6.130%, 07/31/00 . . . . . . . . . . . 13,100 13,556
6.130%, 09/30/00 . . . . . . . . . . . 9,000 9,319
5.880%, 02/15/04 . . . . . . . . . . . 12,000 12,258
7.250%, 08/15/04 . . . . . . . . . . . 3,500 3,893
6.250%, 08/15/23 . . . . . . . . . . . 4,000 4,072
- ------------------------------------------------------------------
Total U.S. Treasury Obligations
(cost $56,820,022) . . . . . . . . 58,617
- ------------------------------------------------------------------
ASSET BACKED SECURITIES (5.8%)
American Express Master Trust
7.150%, 08/15/99 . . . . . . . . . . . 4,000 4,181
Bridgestone Firestone Master Trust
6.250%, 12/01/99 . . . . . . . . . . . 1,000 1,001
J.C. Penney Master Credit Card Trust
9.630%, 06/15/00 . . . . . . . . . . . 2,500 2,877
- ------------------------------------------------------------------
Total Asset Backed Securities
(Cost $7,538,833) . . . . . . . . 8,059
- ------------------------------------------------------------------
REPURCHASE AGREEMENTS (12.6%)
Deutsche Morgan Grenfell/
C.J. Lawrence,
5.95%, dated 01/31/96, matures
02/01/96, repurchase price
$17,548,455 (collateralized by U.S.
Treasury Notes, total par value
$17,129,000, 5.875%--8.00%,
10/15/96--06/30/00: total market
value $17,897,140) . . . . . . . . . 17,546
- ------------------------------------------------------------------
Total Repurchase Agreements
(cost $17,545,555) . . . . . . . . 17,546
- ------------------------------------------------------------------
Total Investments (98.6%)
(cost $132,618,130) . . . . . . . 137,442
- ------------------------------------------------------------------
Other Assets and Liabilities (1.4%) . . . 1,917
- ------------------------------------------------------------------
</TABLE>
21
<PAGE> 254
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Intermediate-Term Bond Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
-------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 12,516,925
outstanding shares of beneficial
interest . . . . . . . . . . . . . . $129,017
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 604,695 outstanding
shares of beneficial interest . . . 6,793
Undistributed Net Investment Income . 137
Accumulated Net Realized Loss
on Investments . . . . . . . . . . . (1,412)
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 4,824
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $139,359
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $10.62
- ------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS . . $10.61
- ------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($10.61/97%) . . . . $10.94
==================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE> 255
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Limited Maturity Government Fund
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS (27.9%)
FFCB
6.640%, 05/18/96 (A) . . . . . . . . . $1,750 $ 1,756
FHLB
5.420%, 11/20/96 . . . . . . . . . . . 600 601
8.260%, 12/31/96 (A) . . . . . . . . . 2,000 2,043
6.180%, 11/20/97 (A) . . . . . . . . . 1,400 1,420
5.625%, 12/15/00 . . . . . . . . . . . 750 755
FHLMC
6.210%, 05/13/96 . . . . . . . . . . . 2,500 2,507
5.570%, 08/20/97 . . . . . . . . . . . 1,000 1,007
- ------------------------------------------------------------------
Total U.S. Government Agency
Obligations (cost $10,003,111) . . 10,089
- ------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (19.5%)
United States Treasury Bond
5.500%, 12/31/2000 . . . . . . . . . . 900 909
United States Treasury Notes
5.880%, 05/31/96 . . . . . . . . . . . 1,000 1,002
4.380%, 08/15/96 . . . . . . . . . . . 1,000 996
5.880%, 08/15/98 . . . . . . . . . . . 1,000 1,020
7.130%, 09/30/99 . . . . . . . . . . . 1,000 1,065
6.130%, 07/31/00 . . . . . . . . . . . 2,000 2,070
- ------------------------------------------------------------------
Total U.S. Treasury Obligations
(cost $6,876,047) . . . . . . . . 7,062
- ------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS (40.7%)
FHLMC, Gold 5 Year Balloon Program
6.000%, 03/01/98 . . . . . . . . . . . 1,273 1,284
6.000%, 04/01/99 . . . . . . . . . . . 863 871
7.500%, 10/01/99 . . . . . . . . . . . 2,137 2,215
8.000%, 01/01/00 . . . . . . . . . . . 1,611 1,670
8.000%, 03/01/00 . . . . . . . . . . . 1,743 1,808
GNMA
8.500%, 12/15/01 . . . . . . . . . . . 40 43
8.000%, 04/15/02 . . . . . . . . . . . 537 563
8.000%, 05/15/02 . . . . . . . . . . . 100 105
8.000%, 07/15/02 . . . . . . . . . . . 487 510
7.500%, 06/15/07 . . . . . . . . . . . 95 99
7.500%, 05/15/08 . . . . . . . . . . . 185 192
7.500%, 06/15/08 . . . . . . . . . . . 161 167
7.500%, 02/15/09 . . . . . . . . . . . 192 199
7.500%, 03/15/09 . . . . . . . . . . . 585 607
7.500%, 06/15/09 . . . . . . . . . . . 682 707
8.500%, 07/15/09 . . . . . . . . . . . 118 125
7.500%, 10/15/09 . . . . . . . . . . . 234 244
8.000%, 11/15/09 . . . . . . . . . . . 346 363
7.500%, 01/15/10 . . . . . . . . . . . 675 700
8.500%, 03/15/10 . . . . . . . . . . . 778 819
8.000%, 04/15/10 . . . . . . . . . . . 601 630
7.500%, 07/15/10 . . . . . . . . . . . 767 796
- ------------------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Obligations
(cost $14,437,452) . . . . . . . . 14,717
- ------------------------------------------------------------------
BANKERS ACCEPTANCE (3.8%)
Chemical Bank, New York
5.640%, 02/29/96 . . . . . . . . . . . 1,106 1,102
NationsBank N.A.
5.730%, 04/02/96 . . . . . . . . . . . 142 141
5.730%, 04/08/96 . . . . . . . . . . . 111 111
- ------------------------------------------------------------------
Total Bankers Acceptance
(Cost $1,353,588) . . . . . . . . 1,354
- ------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (2.9%)
Northern Trust, Chicago
9.010%, 02/03/97 . . . . . . . . . . . 1,000 1,036
- ------------------------------------------------------------------
Total Certificates of Deposit
(cost $1,033,382) . . . . . . . . 1,036
- ------------------------------------------------------------------
REPURCHASE AGREEMENT (4.5%)
Morgan Stanley & Company,
Incorporated 5.82% dated 01/31/96,
matures 02/01/96, repurchase price
$1,633,142 (collateralized by FNMA,
par value $1,650,000, 6.68%, matures
01/01/11: total market value
$1,673,882) . . . . . . . . . . . . . 1,633
- ------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,632,877) . . . . . . . . . 1,633
- ------------------------------------------------------------------
Total Investments (99.3%)
(Cost $35,336,457) . . . . . . . . 35,891
- ------------------------------------------------------------------
Other Assets and Liabilities (0.7%) . . . 255
- ------------------------------------------------------------------
</TABLE>
23
<PAGE> 256
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Limited Maturity Government Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
-------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization - no par
value) based on 3,661,323
outstanding shares of beneficial
interest . . . . . . . . . . . . . . $36,625
Fund shares of Investment Class
(unlimited authorization - no par
value) based on 64,695 outstanding
shares of beneficial interest . . . 739
Overdistributed Net Investment Income (6)
Accumulated Net Realized Loss
on Investments . . . . . . . . . . . (1,767)
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 555
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $36,146
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $9.70
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS . . . . . . . . . . . $9.71
==================================================================
</TABLE>
(A) The dates reported are the lesser of the maturity date or the call date.
FFCB-Federal Farm Credit Bank
FHLB-Federal Home Loan Bank
FHLMC-Federal Home Loan Mortgage Corporation
GNMA-Government National Mortgage Association
The accompanying notes are an integral part of the financial statements.
24
<PAGE> 257
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone California Tax-Free Bond Fund
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (94.4%)
Alameda County, Santa Rita Jail
Project, COP, MBIA Insured
5.250%, 12/01/04 . . . . . . . . . . . $500 $524
Anaheim Public Financing Authority,
Electric Utililty Projects, RB, Callable
04/01/05 @ 100, MBIA Insured
5.500%, 10/01/10 . . . . . . . . . . . 250 254
Antioch Public Finance Authority,
Police Facilities Project, Lease RB,
MBIA Insured
4.550%, 01/01/03 . . . . . . . . . . . 500 502
Berkeley Unified School District,
GO, Ser D
8.250%, 08/01/05 . . . . . . . . . . . 345 437
California Educational Faciltities,
Pepperdine University, RB,
Callable 01/15/97 @ 102
6.750%, 01/15/06 . . . . . . . . . . . 500 522
California State, GO
4.200%, 09/01/02 . . . . . . . . . . . 250 243
Contra Costa Transportation
Authority, Sales Tax RB, SER A,
Escrowed to Maturity
6.300%, 03/01/00 . . . . . . . . . . . 250 270
Cupertino, COP, Callable
01/01/03 @ 102
5.500%, 01/01/05 . . . . . . . . . . . 500 515
Gilroy Unified School District, COP,
Measure J Capital Projects
5.750%, 09/01/05 . . . . . . . . . . . 235 251
Los Angeles Department of Airports,
RB, SER B, FGIC Insured
6.500%, 05/15/04 . . . . . . . . . . . 500 568
Los Angeles, GO, Callable
09/01/03 @ 101
5.400%, 09/01/06 . . . . . . . . . . . 300 314
Los Angeles, Wastewater System RB,
SER B, Callable 06/01/03 @ 102,
MBIA Insured
5.400%, 06/01/08 . . . . . . . . . . . 300 309
Moulton-Niguel Water District, COP,
Callable 09/01/03 @ 102,
AMBAC Insured
4.750%, 09/01/04 . . . . . . . . . . . 300 303
M-S-R Public Power Agency, San Juan
Project, RB, SER F, Callable
07/01/03 @ 102, Callable
07/01/05 @ 100
6.000%, 07/01/08 . . . . . . . . . . . 230 248
Sacramento Municipal Utility
District, Electric Revenue,
SER C, FGIC Insured
5.750%, 11/15/08 . . . . . . . . . . . 550 580
San Diego County Water Authority,
COP, SER A, Callable 05/01/03
@ 100, Callable 05/01/01 @ 102
6.250%, 05/01/04 . . . . . . . . . . . 480 528
San Francisco City & County, GO,
Utility Public Safety Improvement
Project, SER F, FGIC Insured
6.500%, 06/15/08 . . . . . . . . . . . 350 380
San Francisco Building Authority,
Department General Services,
Lease RB, SER A
4.500%, 10/01/00 . . . . . . . . . . . 300 300
Santa Clara, COP, AMBAC Insured
6.000%, 05/15/12 . . . . . . . . . . . 400 419
Santa Cruz County, Public Facilities
Financing Authority, Tax Allocation,
Callable 09/01/03 @ 102, MBIA
Insured
5.100%, 09/01/05 . . . . . . . . . . . 500 519
- ------------------------------------------------------------------
Total California Municipal Bonds
(Cost $7,773,603) . . . . . . . . 7,986
- ------------------------------------------------------------------
</TABLE>
25
<PAGE> 258
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
California Tax-Free Bond Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
-------
<S> <C>
CASH EQUIVALENT (3.4%)
Provident California Tax Free
Money Market (A)
2.990%, 02/07/96 . . . . . . . . . . . $ 147
SEI California Tax Free Money
Market Portfolio (A)
3.180%, 02/07/96 . . . . . . . . . . . 145
- ------------------------------------------------------------------
Total Cash Equivalent
(Cost $292,366) . . . . . . . . . 292
- ------------------------------------------------------------------
Total Investments (97.8%)
(Cost $8,065,969) . . . . . . . . 8,278
- ------------------------------------------------------------------
Other Assets and Liabilities (2.2%) . . . 184
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 425,808 outstanding
shares of beneficial interest . . . 5,235
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 433,486 outstanding
shares of beneficial interest . . . 4,310
Undistributed Net Investment Income . 13
Accumulated Net Realized
Loss on Investments . . . . . . . . (1,308)
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 212
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $8,462
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $ 9.85
- ------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS . . $ 9.84
- ------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($9.84/97%) . . . . . $10.14
==================================================================
</TABLE>
(A) Floating Rate Security-The rate reflected on the Statement of Net Assets is
the rate in effect on January 31, 1996.
AMBAC--American Municipal Bond Assurance Company
COP--Certificates of Participation
FGIC--Financial Guaranty Insurance Corporation
GO--General Obligation
MBIA--Municipal Bond Investors Assurance
RB--Revenue Bond
Ser--Series
The accompanying notes are an integral part of the financial statements.
26
<PAGE> 259
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Convertible Security Fund
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
CONVERTIBLE BONDS (61.9%)
AMR
6.130%, 11/01/24 . . . . . . . . . . . $ 300 $ 309
Airborne Freight
6.750%, 08/15/01 . . . . . . . . . . . 150 152
Alza
0.000%, 07/14/14 . . . . . . . . . . . 700 304
Automatic Data Processing
0.000%, 02/20/12 . . . . . . . . . . . 500 263
Bay Networks (144A)
5.250%, 05/15/03 . . . . . . . . . . . 175 198
Boston Chicken
0.000%, 06/01/15 . . . . . . . . . . . 1,200 358
Browning Ferris Industries
6.250%, 08/15/12 . . . . . . . . . . . 200 201
Chiron
5.250%, 05/21/02 . . . . . . . . . . . 225 235
Chubb Capital
6.000%, 05/15/98 . . . . . . . . . . . 200 238
Columbia HCA Healthcare
6.750%, 10/01/06 . . . . . . . . . . . 150 151
Comcast
1.130%, 04/15/07 . . . . . . . . . . . 425 218
Conner Peripherals
6.750%, 03/01/01 . . . . . . . . . . . 300 315
Consolidated Natural Gas
7.250%, 12/15/15 . . . . . . . . . . . 250 260
Cooper Industries
7.050%, 01/01/15 . . . . . . . . . . . 113 117
Federated Department Stores
5.000%, 10/01/03 . . . . . . . . . . . 400 398
Fifth Third Bank
4.250%, 01/15/98 . . . . . . . . . . . 250 282
First Data
5.000%, 12/15/99 . . . . . . . . . . . 240 408
General Instruments
5.000%, 06/15/00 . . . . . . . . . . . 225 246
Horace Mann Educators
6.500%, 12/01/99 . . . . . . . . . . . 250 256
Inco Limited
7.750%, 03/15/16 . . . . . . . . . . . 150 160
Integrated Health Services
5.750%, 01/01/01 . . . . . . . . . . . 300 301
Legg Mason
5.250%, 05/01/03 . . . . . . . . . . . 100 119
Liberty Property Trust
8.000%, 07/01/01 . . . . . . . . . . . 300 330
Lowe's
3.000%, 07/22/03 . . . . . . . . . . . 150 184
Magna International
5.000%, 10/15/02 . . . . . . . . . . . 250 250
Motorola
0.000%, 09/27/13 . . . . . . . . . . . 475 354
Noble Affiliates
4.250%, 11/01/03 . . . . . . . . . . . 175 175
Olsten
4.880%, 05/15/03 . . . . . . . . . . . 250 296
Seagate Technology
6.750%, 05/01/12 . . . . . . . . . . . 150 209
Softkey International (144A)
5.500%, 11/01/00 . . . . . . . . . . . 325 231
Sports and Recreation
4.250%, 11/01/00 . . . . . . . . . . . 200 119
Staples
4.500%, 10/01/00 . . . . . . . . . . . 325 327
Texas Instrument
2.750%, 09/29/02 . . . . . . . . . . . 100 115
3Com (144A)
10.250%, 11/01/01 . . . . . . . . . . . 200 314
Thermo Electron (144A)
4.250%, 01/01/03 . . . . . . . . . . . 375 430
Time Warner
0.000%, 06/22/13 . . . . . . . . . . . 500 208
8.750%, 01/10/15 . . . . . . . . . . . 82 85
U.S. Cellular
0.000%, 06/15/15 . . . . . . . . . . . 675 242
U.S. Filter (144A)
6.000%, 09/15/05 . . . . . . . . . . . 250 284
WMX Technologies
2.000%, 01/24/05 . . . . . . . . . . . 300 263
Whirlpool
0.000%, 05/14/11 . . . . . . . . . . . 500 197
Worldcom
5.000%, 08/15/03 . . . . . . . . . . . 200 214
- ------------------------------------------------------------------
Total Convertible Bonds
(Cost $9,722,218) . . . . . . . . 10,316
- ------------------------------------------------------------------
</TABLE>
27
<PAGE> 260
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Convertible Securities Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCKS (12.0%)
AUTOMOTIVE (6.2%)
Chrysler . . . . . . . . . . . . . . . . . 12,778 $ 738
Ford Motor . . . . . . . . . . . . . . . . 9,796 290
- ------------------------------------------------------------------
1,028
- ------------------------------------------------------------------
BANKS (1.5%)
Barnett Banks of Florida . . . . . . . . . 4,430 259
- ------------------------------------------------------------------
259
- ------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (1.3%)
Motorola . . . . . . . . . . . . . . . . . 4,000 215
- ------------------------------------------------------------------
215
- ------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.4%)
ConAgra . . . . . . . . . . . . . . . . . 5,343 245
- ------------------------------------------------------------------
245
- ------------------------------------------------------------------
RAILROADS (1.6%)
Burlington Northern Santa Fe . . . . . . . 3,191 261
- ------------------------------------------------------------------
261
- ------------------------------------------------------------------
Total Common Stocks
(Cost $2,007,437) . . . . . . . . 2,008
- ------------------------------------------------------------------
PREFERRED STOCKS (18.5%)
COMPUTER SOFTWARE/SERVICES (4.7%)
General Motors Electronics
$3.25, Cl E . . . . . . . . . . . . . 10,100 789
- ------------------------------------------------------------------
789
- ------------------------------------------------------------------
BANKS (3.6%)
Banc One $3.50, Ser C . . . . . . . . . . 3,000 198
Citicorp $5.375, Ser B . . . . . . . . . 2,000 403
- ------------------------------------------------------------------
601
- ------------------------------------------------------------------
COMMERCIAL SERVICES (1.3%)
SCI Finance LLC 3.125% . . . . . . . . . . 3,000 228
- ------------------------------------------------------------------
228
- ------------------------------------------------------------------
FINANCIAL SERVICES (2.6%)
Conseco * 7.00% . . . . . . . . . . . . . 6,500 430
- ------------------------------------------------------------------
430
- ------------------------------------------------------------------
PAPER & PAPER PRODUCTS (0.9%)
International Paper . . . . . . . . . . . 3,000 145
- ------------------------------------------------------------------
145
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
---------- -------
<S> <C> <C>
REAL ESTATE (1.8%)
Merry Land & Investment $2.15,
Ser C . . . . . . . . . . . . . . . . 10,000 299
- ------------------------------------------------------------------
299
- ------------------------------------------------------------------
RETAIL (1.0%)
Best Buy Capital 6.50% . . . . . . . . . . 5,000 163
- ------------------------------------------------------------------
163
- ------------------------------------------------------------------
STEEL & STEEL WORKS (1.0%)
WHX $3.75 Ser B . . . . . . . . . . . . . 3,500 168
- ------------------------------------------------------------------
168
- ------------------------------------------------------------------
WHOLESALE (1.6%)
Alco Standard $2.375, Ser AA . . . . . . . 3,000 261
- ------------------------------------------------------------------
261
- ------------------------------------------------------------------
Total Preferred Stocks
(Cost $2,569,357) . . . . . . . . 3,084
- ------------------------------------------------------------------
TIME DEPOSITS (7.3%)
Sanwa Bank Limited
5.750%, 02/01/96 . . . . . . . . . . . $ 1,208 1,208
- ------------------------------------------------------------------
Total Time Deposits
(Cost $1,208,119) . . . . . . . . 1,208
- ------------------------------------------------------------------
Total Investments (99.7%)
(Cost $15,507,131) . . . . . . . . 16,616
- ------------------------------------------------------------------
Other Assets and Liabilities (0.3%) . . . 52
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 1,597,511
outstanding shares of beneficial
interest . . . . . . . . . . . . . . 15,594
Undistributed Net Investment
Income . . . . . . . . . . . . . . . 22
Accumulated Net Realized Loss on
Investments . . . . . . . . . . . . (57)
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 1,109
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $16,668
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $10.43
==================================================================
</TABLE>
* Non-income producing security
Cl--Class
Ser--Series
(144A)--Private Placement Security
28
<PAGE> 261
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Government Securities Fund
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
--------- -------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (76.3%)
United States Treasury Bonds
5.500%, 12/31/00 . . . . . . . . . . . $1,000 $1,010
7.630%, 02/15/25 . . . . . . . . . . . 100 121
6.880%, 08/15/25 . . . . . . . . . . . 9,500 10,595
United States Treasury Notes
5.630%, 06/30/97 . . . . . . . . . . . 3,750 3,785
7.380%, 11/15/97 . . . . . . . . . . . 2,000 2,081
6.000%, 11/30/97 . . . . . . . . . . . 750 764
5.380%, 11/30/97 . . . . . . . . . . . 500 504
5.880%, 08/15/98 . . . . . . . . . . . 1,000 1,020
5.500%, 11/15/98 . . . . . . . . . . . 5,750 5,816
7.000%, 04/15/99 . . . . . . . . . . . 1,500 1,583
6.880%, 08/31/99 . . . . . . . . . . . 250 264
7.750%, 01/31/00 . . . . . . . . . . . 1,500 1,637
7.500%, 11/15/01 . . . . . . . . . . . 500 553
6.380%, 08/15/02 . . . . . . . . . . . 3,000 3,157
7.880%, 11/15/04 . . . . . . . . . . . 1,500 1,734
6.500%, 05/15/05 . . . . . . . . . . . 500 531
5.880%, 11/15/05 . . . . . . . . . . . 500 511
- ------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $34,788,128) . . . . . . . . 35,666
- ------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (11.0%)
Aid-Israel
7.125%, 08/15/99 . . . . . . . . . . . 2,000 2,103
FNMA
5.880%, 02/02/06 . . . . . . . . . . . 2,000 2,003
Tennessee Valley Authority
6.380%, 06/15/05 . . . . . . . . . . . 1,000 1,036
- ------------------------------------------------------------------
Total U.S. Government Agency
Obligations (Cost $4,984,197) . . 5,142
- ------------------------------------------------------------------
CORPORATE OBLIGATIONS (10.3%) . . . . . . .
Chrysler Financial
5.880%, 02/07/01 . . . . . . . . . . . 1,500 1,500
Ford Motor Credit
5.750%, 01/25/01 . . . . . . . . . . . 1,000 999
Meditrust
7.250%, 08/16/99 . . . . . . . . . . . 1,250 1,309
Salomon Brothers
7.970%, 03/10/97 . . . . . . . . . . . 1,000 1,021
- ------------------------------------------------------------------
Total Corporate Obligations
(Cost $4,739,030) . . . . . . . . 4,829
- ------------------------------------------------------------------
TIME DEPOSITS (5.0%) . . . . . . . . . . .
Sanwa Bank Limited
5.750%, 02/01/96 . . . . . . . . . . . 2,324 2,324
- ------------------------------------------------------------------
Total Time Deposits
(Cost $2,323,878) . . . . . . . . 2,324
- ------------------------------------------------------------------
Total Investments (102.6%)
(Cost $46,835,233) . . . . . . . . 47,961
- ------------------------------------------------------------------
Other Assets and Liabilities (-2.6%) . . . (1,236)
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 4,700,940
outstanding shares of beneficial
interest . . . . . . . . . . . . . . 45,904
Undistributed Net Investment
Income . . . . . . . . . . . . . . . 78
Accumulated Net Realized Loss
on Investments . . . . . . . . . . . (383)
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 1,126
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $46,725
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $9.94
==================================================================
</TABLE>
FNMA--Federal National Mortgage Association
The accompanying notes are an integral part of the financial statements.
29
<PAGE> 262
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCKS (63.3%)
AEROSPACE & DEFENSE (1.2%)
Litton Industries* . . . . . . . . . . . . 30,000 $ 1,477
Loral . . . . . . . . . . . . . . . . . . 10,000 463
Watkins Johnson . . . . . . . . . . . . . 21,600 832
- ------------------------------------------------------------------
2,772
- ------------------------------------------------------------------
AIR TRANSPORTATION (0.4%)
KLM Royal Dutch Air* . . . . . . . . . . 35,000 1,085
- ------------------------------------------------------------------
1,085
- ------------------------------------------------------------------
AIRCRAFT (2.5%)
Lockheed Martin . . . . . . . . . . . . . 30,000 2,261
Textron . . . . . . . . . . . . . . . . . 20,000 1,573
United Technologies . . . . . . . . . . . 22,000 2,258
- ------------------------------------------------------------------
6,092
- ------------------------------------------------------------------
APPAREL/TEXTILES (0.3%)
Springs Industries, Cl A . . . . . . . . . 20,000 800
- ------------------------------------------------------------------
800
- ------------------------------------------------------------------
AUTOMOTIVE (0.5%)
Chrysler . . . . . . . . . . . . . . . . . 22,805 1,317
- ------------------------------------------------------------------
1,317
- ------------------------------------------------------------------
BANKS (1.7%)
Bank of New York . . . . . . . . . . . . . 24,000 1,230
Bank of Boston . . . . . . . . . . . . . . 25,000 1,144
First Union . . . . . . . . . . . . . . . 10,000 579
J.P. Morgan . . . . . . . . . . . . . . . 13,000 1,056
- ------------------------------------------------------------------
4,009
- ------------------------------------------------------------------
CHEMICALS (4.3%)
Cabot . . . . . . . . . . . . . . . . . . 33,000 1,897
Dow Chemical . . . . . . . . . . . . . . . 13,900 1,036
E.I. Du Pont De Nemours . . . . . . . . . 17,500 1,345
First Mississippi . . . . . . . . . . . . 40,000 985
Georgia Gulf . . . . . . . . . . . . . . 28,400 905
Monsanto . . . . . . . . . . . . . . . . . 10,000 1,303
Morton International . . . . . . . . . . . 25,000 925
W.R. Grace . . . . . . . . . . . . . . . . 20,000 1,233
Wellman . . . . . . . . . . . . . . . . . 33,400 668
- ------------------------------------------------------------------
10,297
- ------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (2.1%)
Harris . . . . . . . . . . . . . . . . . . 17,600 1,102
ITT Industries . . . . . . . . . . . . . . 15,000 390
ITT* . . . . . . . . . . . . . . . . . . . 15,000 832
Motorola . . . . . . . . . . . . . . . . . 24,000 1,290
Nimbus CD International* . . . . . . . . . 25,000 191
Sprint . . . . . . . . . . . . . . . . . . 27,100 1,169
- ------------------------------------------------------------------
4,974
- ------------------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (3.3%)
Compaq Computer * . . . . . . . . . . . . 32,500 1,532
Computer Associates International . . . . 40,750 2,786
Hewlett Packard . . . . . . . . . . . . . 18,000 1,525
IBM . . . . . . . . . . . . . . . . . . . 15,000 1,631
Tandem Computers* . . . . . . . . . . . . 75,000 703
- ------------------------------------------------------------------
8,177
- ------------------------------------------------------------------
CONCRETE & MINERAL PRODUCTS (0.5%)
Hanson PLC, ADR . . . . . . . . . . . . . 85,000 1,318
- ------------------------------------------------------------------
1,318
- ------------------------------------------------------------------
DRUGS (4.1%)
American Home Products . . . . . . . . . . 20,000 2,040
Baxter International . . . . . . . . . . . 26,200 1,192
Bristol-Myers Squibb . . . . . . . . . . . 15,000 1,328
Mallinckrodt Group . . . . . . . . . . . . 35,000 1,404
Merck . . . . . . . . . . . . . . . . . . 15,000 1,054
SmithKline Beecham . . . . . . . . . . . . 23,000 1,294
Warner Lambert . . . . . . . . . . . . . . 15,000 1,406
- ------------------------------------------------------------------
9,718
- ------------------------------------------------------------------
ELECTRICAL UTILITIES (0.9%)
General Public Utilities . . . . . . . . . 22,800 775
Nipsco Industries . . . . . . . . . . . . 15,000 572
Ohio Edison . . . . . . . . . . . . . . . 37,500 895
- ------------------------------------------------------------------
2,242
- ------------------------------------------------------------------
ENTERTAINMENT (0.7%)
Walt Disney . . . . . . . . . . . . . . . 25,000 1,606
- ------------------------------------------------------------------
1,606
- ------------------------------------------------------------------
</TABLE>
30
<PAGE> 263
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
Balanced Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
FINANCIAL SERVICES (3.5%)
Allstate . . . . . . . . . . . . . . . . . 15,759 $ 687
American Express . . . . . . . . . . . . . 25,000 1,150
Bear Stearns . . . . . . . . . . . . . . . 15,000 345
BRE Properties, Cl A . . . . . . . . . . 26,800 995
CBL and Associates Properties . . . . . . 25,000 513
Donaldson, Lufkin, & Jenrette . . . . . . 15,000 459
FNMA . . . . . . . . . . . . . . . . . . . 60,000 2,070
ITT Hartford Group* . . . . . . . . . . . 15,000 752
Travelers . . . . . . . . . . . . . . . . 24,733 1,626
- ------------------------------------------------------------------
8,597
- ------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (3.3%)
Archer-Daniels-Midland . . . . . . . . . . 67,250 1,278
Hudson Foods, Cl A . . . . . . . . . . . . 50,300 836
IBP . . . . . . . . . . . . . . . . . . . 60,000 1,598
Pepsico . . . . . . . . . . . . . . . . . 22,400 1,336
Philip Morris . . . . . . . . . . . . . . 14,400 1,339
Sara Lee . . . . . . . . . . . . . . . . . 15,000 506
Universal Foods . . . . . . . . . . . . . 26,000 1,004
- ------------------------------------------------------------------
7,897
- ------------------------------------------------------------------
FORESTRY (0.4%)
Rayonier . . . . . . . . . . . . . . . . . 25,000 906
- ------------------------------------------------------------------
906
- ------------------------------------------------------------------
GAS/NATURAL GAS (1.4%)
Coastal . . . . . . . . . . . . . . . . . 15,000 568
Questar . . . . . . . . . . . . . . . . . 18,000 587
Westcoast Energy . . . . . . . . . . . . . 30,400 475
Williams . . . . . . . . . . . . . . . . . 38,800 1,829
- ------------------------------------------------------------------
3,459
- ------------------------------------------------------------------
HOTELS & LODGING (0.5%)
Hilton Hotels . . . . . . . . . . . . . . 15,000 1,166
- ------------------------------------------------------------------
1,166
- ------------------------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES (0.2%)
Leggett & Platt . . . . . . . . . . . . . 21,200 509
- ------------------------------------------------------------------
509
- ------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.6%)
Sunbeam Oster . . . . . . . . . . . . . . 50,000 800
Whirlpool . . . . . . . . . . . . . . . . 14,100 767
- ------------------------------------------------------------------
1,567
- ------------------------------------------------------------------
INSURANCE (2.8%)
AFLAC . . . . . . . . . . . . . . . . . . 20,000 953
AMBAC . . . . . . . . . . . . . . . . . . 11,700 560
Equifax . . . . . . . . . . . . . . . . . 40,000 745
Lincoln National . . . . . . . . . . . . . 30,000 1,586
Progressive of Ohio . . . . . . . . . . . 23,800 1,205
Providian . . . . . . . . . . . . . . . . 15,800 693
USF&G . . . . . . . . . . . . . . . . . . 60,000 960
- ------------------------------------------------------------------
6,702
- ------------------------------------------------------------------
LEASING & RENTING (0.6%)
Comdisco . . . . . . . . . . . . . . . . . 42,750 914
Xtra . . . . . . . . . . . . . . . . . . . 15,000 639
- ------------------------------------------------------------------
1,553
- ------------------------------------------------------------------
LUMBER & WOOD PRODUCTS (0.3%)
Louisiana-Pacific . . . . . . . . . . . . 32,800 836
- ------------------------------------------------------------------
836
- ------------------------------------------------------------------
MACHINERY (3.9%)
Briggs & Stratton . . . . . . . . . . . . 20,000 878
Commercial Intertech . . . . . . . . . . . 50,000 925
Cummins Engine . . . . . . . . . . . . . . 25,000 966
Deere . . . . . . . . . . . . . . . . . . 37,500 1,406
Dresser Industries . . . . . . . . . . . . 50,000 1,300
General Electric . . . . . . . . . . . . . 16,600 1,274
Global Industries Technologies * . . . . . 31,000 705
JLG Industries . . . . . . . . . . . . . . 44,800 1,193
Parker-Hannifin . . . . . . . . . . . . . 15,000 512
- ------------------------------------------------------------------
9,159
- ------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (1.1%)
Bausch & Lomb . . . . . . . . . . . . . . 40,000 1,555
Columbia/HCA Healthcare . . . . . . . . . 10,000 557
Tenet Healthcare* . . . . . . . . . . . . 30,000 641
- ------------------------------------------------------------------
2,753
- ------------------------------------------------------------------
PAPER & PAPER PRODUCTS (2.0%)
Avery Dennison . . . . . . . . . . . . . . 20,000 1,068
Kimberly-Clark . . . . . . . . . . . . . . 10,000 806
Mead . . . . . . . . . . . . . . . . . . . 19,000 1,050
Weyerhaeuser . . . . . . . . . . . . . . . 20,000 922
Willamette Industries . . . . . . . . . . 19,000 1,059
- ------------------------------------------------------------------
4,905
- ------------------------------------------------------------------
</TABLE>
31
<PAGE> 264
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Balanced Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
PETROLEUM & FUEL PRODUCTS (0.9%)
Occidental Petroleum . . . . . . . . . . . 50,000 $1,075
Union Pacific Resources Group . . . . . . 38,400 998
- ------------------------------------------------------------------
2,073
- ------------------------------------------------------------------
PETROLEUM REFINING (4.1%)
Ashland . . . . . . . . . . . . . . . . . 29,000 1,066
Chevron . . . . . . . . . . . . . . . . . 28,000 1,453
Diamond Shamrock R&M . . . . . . . . . . . 35,000 997
Imperial Oil . . . . . . . . . . . . . . . 36,300 1,316
Mobil . . . . . . . . . . . . . . . . . . 15,000 1,661
Royal Dutch Petroleum, ADR . . . . . . . . 9,800 1,362
USX-Marathon Group . . . . . . . . . . . . 62,000 1,163
Unocal . . . . . . . . . . . . . . . . . . 30,000 896
- ------------------------------------------------------------------
9,914
- ------------------------------------------------------------------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (0.9%)
Eastman Kodak . . . . . . . . . . . . . . 15,000 1,101
Xerox . . . . . . . . . . . . . . . . . . 8,000 989
- ------------------------------------------------------------------
2,090
- ------------------------------------------------------------------
PRECIOUS METALS (0.9%)
Barrick Gold . . . . . . . . . . . . . . . 48,636 1,429
Firstmiss Gold* . . . . . . . . . . . . . 28,338 765
- ------------------------------------------------------------------
2,194
- ------------------------------------------------------------------
PRINTING & PUBLISHING (1.3%)
Belo, Cl A . . . . . . . . . . . . . . . . 28,400 1,015
Houghton Mifflin . . . . . . . . . . . . . 25,000 1,041
Media General . . . . . . . . . . . . . . 30,000 1,001
- ------------------------------------------------------------------
3,057
- ------------------------------------------------------------------
RAILROADS (1.7%)
Burlington Northern Santa Fe . . . . . . . 25,000 2,047
Conrail Holding . . . . . . . . . . . . . 16,400 1,160
Union Pacific . . . . . . . . . . . . . . 15,000 1,000
- ------------------------------------------------------------------
4,207
- ------------------------------------------------------------------
REAL ESTATE (0.8%)
First Industrial Realty Trust . . . . . . 35,000 805
JP Realty . . . . . . . . . . . . . . . . 52,000 1,040
- ------------------------------------------------------------------
1,845
- ------------------------------------------------------------------
REPAIR SERVICES (0.8%)
PHH . . . . . . . . . . . . . . . . . . . 21,000 1,082
Rollins Truck Leasing . . . . . . . . . . 92,800 974
- ------------------------------------------------------------------
2,056
- ------------------------------------------------------------------
RETAIL (2.8%)
American Stores . . . . . . . . . . . . . 33,000 858
Heilig-Meyers . . . . . . . . . . . . . . 22,500 349
J.C. Penney . . . . . . . . . . . . . . . 25,000 1,225
Kroger* . . . . . . . . . . . . . . . . . 25,000 869
May Department Stores . . . . . . . . . . 28,000 1,246
Morrison Restaurants . . . . . . . . . . . 59,100 945
Sears Roebuck . . . . . . . . . . . . . . 17,000 705
Waban* . . . . . . . . . . . . . . . . . . 32,400 624
- ------------------------------------------------------------------
6,821
- ------------------------------------------------------------------
RUBBER & PLASTIC (0.8%)
Mark IV Industries . . . . . . . . . . . . 38,640 807
Premark International . . . . . . . . . . 20,000 1,035
- ------------------------------------------------------------------
1,842
- ------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (1.1%)
Intel . . . . . . . . . . . . . . . . . . 30,000 1,657
National Semiconductor * . . . . . . . . . 60,000 1,035
- ------------------------------------------------------------------
2,692
- ------------------------------------------------------------------
STEEL & STEEL WORKS (0.2%)
Texas Industries . . . . . . . . . . . . . 9,600 539
- ------------------------------------------------------------------
539
- ------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (2.9%)
A T & T . . . . . . . . . . . . . . . . . 12,271 821
Airtouch Communications* . . . . . . . . . 40,000 1,130
Bell Atlantic . . . . . . . . . . . . . . 20,000 1,377
Comsat . . . . . . . . . . . . . . . . . . 20,000 375
Frontier . . . . . . . . . . . . . . . . . 33,400 994
GTE . . . . . . . . . . . . . . . . . . . 25,000 1,150
NYNEX . . . . . . . . . . . . . . . . . . 20,000 1,072
- ------------------------------------------------------------------
6,919
- ------------------------------------------------------------------
TRANSPORTATION SERVICES (0.4%)
GATX . . . . . . . . . . . . . . . . . . . 23,400 1,082
- ------------------------------------------------------------------
1,082
- ------------------------------------------------------------------
</TABLE>
32
<PAGE> 265
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
Balanced Fund (cont'd)
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
---------- -------
<S> <C> <C>
TRUCKING (0.1%)
Wabash National . . . . . . . . . . . . . 15,000 $ 311
- ------------------------------------------------------------------
311
- ------------------------------------------------------------------
WHOLESALE (0.5%)
Arrow Electronics* . . . . . . . . . . . . 23,000 989
Hughes Supply . . . . . . . . . . . . . . 10,100 290
- ------------------------------------------------------------------
1,279
- ------------------------------------------------------------------
Total Common Stocks
(Cost $112,461,794) . . . . . . . 153,337
- ------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (13.9%)
U.S. Treasury Notes
7.500%, 01/31/97 . . . . . . . . . . . . $1,000 1,025
5.750%, 09/30/97 . . . . . . . . . . . 1,500 1,519
7.000%, 04/15/99 . . . . . . . . . . . 1,000 1,055
6.380%, 07/15/99 . . . . . . . . . . . 1,000 1,039
7.130%, 09/30/99 . . . . . . . . . . . 1,500 1,597
7.500%, 10/31/99 . . . . . . . . . . . 1,000 1,078
7.750%, 11/30/99 . . . . . . . . . . . 1,000 1,088
7.130%, 02/29/00 . . . . . . . . . . . 1,500 1,604
5.500%, 04/15/00 . . . . . . . . . . . 2,000 2,027
6.130%, 09/30/00 . . . . . . . . . . . 1,500 1,553
5.750%, 10/31/00 . . . . . . . . . . . 700 714
7.500%, 11/15/01 . . . . . . . . . . . 6,000 6,640
6.380%, 08/15/02 . . . . . . . . . . . 2,000 2,105
6.250%, 02/15/03 . . . . . . . . . . . 1,000 1,046
6.500%, 05/15/05 . . . . . . . . . . . 4,500 4,784
6.500%, 08/15/05 . . . . . . . . . . . 4,500 4,790
- ------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $31,963,015) . . . . . . . . 33,664
- ------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED BONDS (4.2%)
FNMA
7.500%, 08/01/01 . . . . . . . . . . . 3,357 3,453
GNMA
6.500%, 09/15/08 . . . . . . . . . . . 4,106 4,157
6.000%, 11/15/08 . . . . . . . . . . . 2,537 2,525
- ------------------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Bonds
(cost $10,093,688) . . . . . . . . 10,135
- ------------------------------------------------------------------
CORPORATE OBLIGATIONS (11.2%)
American Telephone & Telegraph
7.500%, 06/01/06 . . . . . . . . . . . 2,000 2,220
Associates
7.880%, 09/30/01 . . . . . . . . . . . 2,000 2,198
Avco Financial Services
7.380%, 08/15/01 . . . . . . . . . . . 2,000 2,140
Bankers Trust NY
7.500%, 11/15/15 . . . . . . . . . . . 2,000 2,070
Chemical Banking
6.700%, 08/15/08 . . . . . . . . . . . 1,500 1,536
Chesapeake & Potomac Telephone
of Maryland
6.000%, 05/01/03 . . . . . . . . . . . 1,500 1,498
First National Bank of Boston
8.000%, 09/15/04 . . . . . . . . . . . 2,000 2,210
General Motors Acceptance
8.000%, 10/01/96 . . . . . . . . . . . 1,000 1,016
Joseph E. Seagram and Sons
7.000%, 04/15/08 . . . . . . . . . . . 1,500 1,573
Metropolitan of Tokyo
7.500%, 03/18/97 . . . . . . . . . . . 1,300 1,332
Mobil
7.250%, 03/15/99 . . . . . . . . . . . 1,000 1,050
Panhandle Eastern
7.880%, 08/15/04 . . . . . . . . . . . 1,000 1,103
Province of British Columbia
7.000%, 01/15/03 . . . . . . . . . . . 1,500 1,603
Ralston Purina
7.750%, 10/01/15 . . . . . . . . . . . 2,000 2,145
Royal Bank of Scotland
6.380%, 02/01/11 . . . . . . . . . . . 1,500 1,485
</TABLE>
33
<PAGE> 266
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Stepstone Balanced Fund
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
---------- -------
<S> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
Texaco Capital
9.000%, 11/15/96 . . . . . . . . . . . $1,000 $ 1,029
Waste Management
6.380%, 07/01/97 . . . . . . . . . . . 1,000 1,015
- ------------------------------------------------------------------
Total Corporate Obligations
(cost $25,668,433) . . . . . . . . 27,223
- ------------------------------------------------------------------
ASSET BACKED SECURITIES (2.0%)
American Express 1994-1A
7.150%, 08/15/99 . . . . . . . . . . . 1,500 1,568
Banc One Credit Card Master Trust,
Ser 1994-A, Cl A
7.150%, 11/15/96 . . . . . . . . . . . 2,000 2,030
J.C.Penney's Master Credit Card Trust,
Ser C, Cl A
9.630%, 06/15/00 . . . . . . . . . . . 1,000 1,151
- ------------------------------------------------------------------
Total Asset Backed Securities
(cost $4,486,259) . . . . . . . . 4,749
- ------------------------------------------------------------------
EQUITY OPTIONS (-0.0%)
Computer Associates
February 65 Calls* 02/17/96 . . . . . (44)
Loral February 45 Calls* 02/17/96 . . (14)
- ------------------------------------------------------------------
Total Equity Options
(Cost $(35,279)) . . . . . . . . . (58)
- ------------------------------------------------------------------
REPURCHASE AGREEMENTS (4.7%)
Deutsche Morgan Grenfell/
C.J. Lawrence
5.95%, dated 01/31/96, matures
02/01/96, repurchase price
$11,431,154 (collateralized by U.S.
Treasury Bond, par value $368,000,
9.25%, matures 02/15/16: U.S.
Treasury Notes, total par value
$10,815,000, 5.125%-7.875%,
03/31/96-10/15/98: total market
value $11,658,037) . . . . . . . . . . 11,429
- ------------------------------------------------------------------
Total Repurchase Agreements
(Cost $11,429,265) . . . . . . . . 11,429
- ------------------------------------------------------------------
Total Investments (99.3%)
(Cost $196,067,175) . . . . . . . 240,479
- ------------------------------------------------------------------
Other Assets and Liabilities (0.7%) . . . 1,821
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 16,804,563
outstanding shares of beneficial
interest . . . . . . . . . . . . . . 189,220
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 605,309 outstanding
shares of beneficial interest . . . 7,223
Undistributed Net
Investment Income . . . . . . . . . 351
Accumulated Net Realized Gain
on Investments . . . . . . . . . . . 1,095
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 44,411
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . 242,300
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $13.92
- ------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS . . $13.91
- ------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($13.91/95.5%) . . . $14.57
==================================================================
</TABLE>
* Non-income producing security
ADR--American Depository Receipt
Cl--Class
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
Ser--Series
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 267
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Growth Equity Fund
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
--------- -------
<S> <C> <C>
COMMON STOCK (94.0%)
AEROSPACE & DEFENSE (0.3%)
Watkins Johnson . . . . . . . . . . . . . 16,000 $ 616
- ------------------------------------------------------------------
616
- ------------------------------------------------------------------
AUTOMOTIVE (1.4%)
Chrysler . . . . . . . . . . . . . . . . . 24,894 1,438
Magna International, Cl A . . . . . . . . 27,000 1,117
- ------------------------------------------------------------------
2,555
- ------------------------------------------------------------------
BANKS (2.7%)
Banc One . . . . . . . . . . . . . . . . . 33,000 1,250
Fleet Financial Group . . . . . . . . . . 16,000 640
U.S. Bancorp . . . . . . . . . . . . . . . 90,780 2,984
- ------------------------------------------------------------------
4,874
- ------------------------------------------------------------------
BEAUTY PRODUCTS (0.9%)
International Flavors & Fragrances . . . . 34,000 1,704
- ------------------------------------------------------------------
1,704
- ------------------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (0.9%)
Capital Cities/ABC . . . . . . . . . . . . 12,000 1,544
- ------------------------------------------------------------------
1,544
- ------------------------------------------------------------------
CHEMICALS (4.2%)
Georgia Gulf . . . . . . . . . . . . . . . 24,000 765
Great Lakes Chemical . . . . . . . . . . . 37,800 2,821
IMC Fertilizer Group . . . . . . . . . . . 60,500 2,269
Lilly (Eli) . . . . . . . . . . . . . . . 8,000 460
W.R. Grace . . . . . . . . . . . . . . . . 20,000 1,232
- ------------------------------------------------------------------
7,547
- ------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (1.7%)
ADC Telecommunications* . . . . . . . . . 8,000 309
DSC Communications* . . . . . . . . . . . 47,000 1,369
Motorola . . . . . . . . . . . . . . . . . 20,000 1,075
Nimbus CD International* . . . . . . . . . 20,000 152
- ------------------------------------------------------------------
2,905
- ------------------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (20.5%)
Cisco Systems* . . . . . . . . . . . . . . 84,600 7,043
Compaq Computer* . . . . . . . . . . . . . 32,000 1,508
CUC International* . . . . . . . . . . . . 181,655 6,699
Computer Associates International . . . . . 36,000 2,461
Compuware* . . . . . . . . . . . . . . . . 48,700 889
First Data . . . . . . . . . . . . . . . . 75,683 5,355
Fiserv* . . . . . . . . . . . . . . . . . 41,000 1,107
Hewlett Packard . . . . . . . . . . . . . 40,800 3,458
Microsoft* . . . . . . . . . . . . . . . . 35,000 3,237
Olsten . . . . . . . . . . . . . . . . . . 40,000 1,590
Silicon Graphics* . . . . . . . . . . . . 109,200 3,071
Wonderware* . . . . . . . . . . . . . . . 40,000 640
- ------------------------------------------------------------------
37,058
- ------------------------------------------------------------------
CONTAINERS & PACKAGING (0.1%)
Brockway Standard Holdings* . . . . . . . 18,400 239
- ------------------------------------------------------------------
239
- ------------------------------------------------------------------
DRUGS (3.4%)
Alza * . . . . . . . . . . . . . . . . . . 16,000 452
Mallinckrodt Group . . . . . . . . . . . . 45,700 1,834
Schering Plough . . . . . . . . . . . . . 71,200 3,853
- ------------------------------------------------------------------
6,139
- ------------------------------------------------------------------
ELECTRICAL UTILITIES (1.5%)
Illinova . . . . . . . . . . . . . . . . . 25,000 747
Ohio Edison . . . . . . . . . . . . . . . 16,000 382
Pinnacle West Capital . . . . . . . . . . 56,500 1,667
- ------------------------------------------------------------------
2,796
- ------------------------------------------------------------------
ENTERTAINMENT (1.2%)
Ambassador International* . . . . . . . . 72,000 684
Walt Disney . . . . . . . . . . . . . . . 24,000 1,542
- ------------------------------------------------------------------
2,226
- ------------------------------------------------------------------
FINANCIAL SERVICES (5.0%)
FNMA . . . . . . . . . . . . . . . . . . . 136,800 4,720
MBNA . . . . . . . . . . . . . . . . . . . 108,300 4,413
- ------------------------------------------------------------------
9,133
- ------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (2.1%)
IBP . . . . . . . . . . . . . . . . . . . 16,000 426
PepsiCo . . . . . . . . . . . . . . . . . 29,800 1,777
Philip Morris . . . . . . . . . . . . . . 17,700 1,646
- ------------------------------------------------------------------
3,849
- ------------------------------------------------------------------
GAS/NATURAL GAS (1.7%)
Coastal . . . . . . . . . . . . . . . . . 40,000 1,515
Williams . . . . . . . . . . . . . . . . . 32,000 1,508
- ------------------------------------------------------------------
3,023
- ------------------------------------------------------------------
</TABLE>
35
<PAGE> 268
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Growth Equity (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCK (CONTINUED)
HOUSEHOLD FURNITURE & FIXTURES (0.5%)
Leggett & Platt . . . . . . . . . . . . . 40,000 $ 960
- ------------------------------------------------------------------
960
- ------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.6%)
Danaher . . . . . . . . . . . . . . . . . 31,200 995
- ------------------------------------------------------------------
995
- ------------------------------------------------------------------
INSURANCE (9.8%)
AFLAC . . . . . . . . . . . . . . . . . . 32,000 1,524
AMBAC . . . . . . . . . . . . . . . . . . 64,200 3,073
Healthcare Compare* . . . . . . . . . . . 56,000 2,716
MBIA . . . . . . . . . . . . . . . . . . . 26,600 1,962
Oxford Health Plan* . . . . . . . . . . . 36,000 2,484
Progressive of Ohio . . . . . . . . . . . 17,000 861
U.S. Healthcare . . . . . . . . . . . . . 102,900 4,991
- ------------------------------------------------------------------
17,611
- ------------------------------------------------------------------
LEISURE PRODUCTS (1.1%)
Mattel . . . . . . . . . . . . . . . . . . 62,500 2,016
- ------------------------------------------------------------------
2,016
- ------------------------------------------------------------------
MACHINERY (2.1%)
General Electric . . . . . . . . . . . . . 35,100 2,694
Varity* . . . . . . . . . . . . . . . . . 28,000 1,036
- ------------------------------------------------------------------
3,730
- ------------------------------------------------------------------
MANUFACTURING (0.6%)
West Marine* . . . . . . . . . . . . . . . 34,000 1,165
- ------------------------------------------------------------------
1,165
- ------------------------------------------------------------------
MARINE TRANSPORTATION (1.8%)
Carnival, Cl A . . . . . . . . . . . . . . 121,000 3,267
- ------------------------------------------------------------------
3,267
- ------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (2.0%)
Nellcor* . . . . . . . . . . . . . . . . . 32,800 2,034
Vivra* . . . . . . . . . . . . . . . . . . 63,225 1,596
- ------------------------------------------------------------------
3,630
- ------------------------------------------------------------------
PAPER & PAPER PRODUCTS (0.6%)
Willamette Industries . . . . . . . . . . 20,000 1,115
- ------------------------------------------------------------------
1,115
- ------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.3%)
Schlumberger . . . . . . . . . . . . . . . 8,000 561
- ------------------------------------------------------------------
561
- ------------------------------------------------------------------
PETROLEUM REFINING (3.6%)
Amoco . . . . . . . . . . . . . . . . . . 16,000 1,126
Ashland . . . . . . . . . . . . . . . . . 12,900 474
British Petroleum PLC, ADR . . . . . . . 28,300 2,763
Chevron . . . . . . . . . . . . . . . . . 24,000 1,245
Exxon . . . . . . . . . . . . . . . . . . 8,400 674
- ------------------------------------------------------------------
6,282
- ------------------------------------------------------------------
PROFESSIONAL SERVICES (2.2%)
Medaphis* . . . . . . . . . . . . . . . . 65,800 2,632
U.S. Delivery Systems* . . . . . . . . . . 42,100 1,289
- ------------------------------------------------------------------
3,921
- ------------------------------------------------------------------
RAILROADS (2.6%)
Burlington Northern Santa Fe . . . . . . . 28,000 2,292
Kansas City Southern Industries . . . . . 53,400 2,430
- ------------------------------------------------------------------
4,722
- ------------------------------------------------------------------
REAL ESTATE (0.3%)
Innkeepers USA Trust . . . . . . . . . . . 64,000 600
- ------------------------------------------------------------------
600
- ------------------------------------------------------------------
RETAIL (7.6%)
Corporate Express* . . . . . . . . . . . . 61,000 1,609
Kohls* . . . . . . . . . . . . . . . . . . 49,600 2,796
Landry's Seafood Restaurants* . . . . . . 48,300 718
McDonald's . . . . . . . . . . . . . . . . 58,600 2,945
Papa John's International* . . . . . . . . 41,000 1,712
Pep Boys-Manny, Moe & Jack . . . . . . . . 88,500 2,566
Toys R Us* . . . . . . . . . . . . . . . . 39,400 872
Wal-Mart Stores . . . . . . . . . . . . . 29,800 607
- ------------------------------------------------------------------
13,825
- ------------------------------------------------------------------
</TABLE>
36
<PAGE> 269
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
Growth Equity Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCK (CONTINUED)
RUBBER & PLASTIC (1.1%)
Goodyear Tire & Rubber . . . . . . . . . . 24,000 $ 1,149
Mark IV Industries . . . . . . . . . . . . 44,100 921
- ------------------------------------------------------------------
2,070
- ------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (4.9%)
Applied Materials* . . . . . . . . . . . . 32,000 1,184
Aavid Thermal Technologies* . . . . . . . 24,000 240
Integrated Device Technology* . . . . . . 127,400 1,672
Intel . . . . . . . . . . . . . . . . . . 70,200 3,877
National Semiconductor* . . . . . . . . . 49,000 845
Recoton* . . . . . . . . . . . . . . . . . 60,000 1,035
- ------------------------------------------------------------------
8,853
- ------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (3.8%)
Cincinnati Bell . . . . . . . . . . . . . 65,000 2,112
MCI Communications . . . . . . . . . . . . 78,800 2,256
SBC Communications . . . . . . . . . . . . 43,200 2,446
- ------------------------------------------------------------------
6,814
- ------------------------------------------------------------------
TRUCKING (1.0%)
Wabash National . . . . . . . . . . . . . 83,125 1,725
- ------------------------------------------------------------------
1,725
- ------------------------------------------------------------------
Total Common Stock
(Cost $101,921,272) . . . . . . . 170,070
- ------------------------------------------------------------------
REPURCHASE AGREEMENTS (6.0%)
Deutsche Morgan Grenfell/C.J. Lawrence
5.950%, dated 01/31/96, matures
02/01/96, repurchase price $10,793,191
(collateralized by various U.S. Treasury
Notes, total par value $9,523,000,
5.750%--6.125%, 05/15/98--10/31/00:
U.S. Treasury Bond par value $759,000,
12.750%, 11/15/10: total market value
$11,008,112) . . . . . . . . . . . . 10,791
- ------------------------------------------------------------------
Total Repurchase Agreements
(Cost $10,791,408) . . . . . . . . 10,791
- ------------------------------------------------------------------
Total Investments (100.0%)
(Cost $112,712,680) . . . . . . . 180,861
- ------------------------------------------------------------------
Other Assets and Liabilities (0.0%) . . . 74
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 10,136,971
outstanding shares of beneficial
interest . . . . . . . . . . . . . . 110,100
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 133,148 outstanding
shares of beneficial interest . . . 1,932
Undistributed Net Investment Income . 228
Accumulated Net Realized Gain
on Investments . . . . . . . . . . . 527
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 68,148
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $180,935
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $17.62
- ------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS . . $17.61
- ------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($17.61/95.5%) . . . $18.44
==================================================================
</TABLE>
* Non-income producing security
ADR--American Depository Receipt
Cl--Class
The accompanying notes are an integral part of the financial statements.
37
<PAGE> 270
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Value Momentum Fund
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
--------- -------
<S> <C> <C>
COMMON STOCKS (91.7%)
AEROSPACE & DEFENSE (2.3%)
Loral . . . . . . . . . . . . . . . . . . 67,200 $3,108
Rockwell International . . . . . . . . . . 40,000 2,345
- ------------------------------------------------------------------
5,453
- ------------------------------------------------------------------
AIRCRAFT (1.1%)
Textron . . . . . . . . . . . . . . . . . 33,000 2,595
- ------------------------------------------------------------------
2,595
- ------------------------------------------------------------------
APPAREL/TEXTILES (0.5%)
Springs Industries, Cl A . . . . . . . . . 30,000 1,200
- ------------------------------------------------------------------
1,200
- ------------------------------------------------------------------
AUTOMOTIVE (2.4%)
Arvin Industries . . . . . . . . . . . . . 40,000 785
Fleetwood Enterprises . . . . . . . . . . 40,000 1,020
Ford Motor . . . . . . . . . . . . . . . . 45,000 1,333
General Motors, Cl E . . . . . . . . . . . 17,000 944
TRW . . . . . . . . . . . . . . . . . . . 14,000 1,183
- ------------------------------------------------------------------
5,265
- ------------------------------------------------------------------
BANKS (3.4%)
BankAmerica . . . . . . . . . . . . . . . 30,000 2,021
Bankers Trust New York . . . . . . . . . . 20,000 1,298
First Union . . . . . . . . . . . . . . . 45,000 2,604
J.P. Morgan . . . . . . . . . . . . . . . 25,000 2,031
- ------------------------------------------------------------------
7,954
- ------------------------------------------------------------------
CHEMICALS (5.6%)
Cabot . . . . . . . . . . . . . . . . . . 53,000 3,047
Du Pont (E.I.) de Nemours . . . . . . . . 40,000 3,075
Eastman Chemical . . . . . . . . . . . . . 5,500 364
Monsanto . . . . . . . . . . . . . . . . . 12,000 1,563
W.R. Grace . . . . . . . . . . . . . . . . 64,000 3,944
Wellman . . . . . . . . . . . . . . . . . 60,000 1,200
- ------------------------------------------------------------------
13,193
- ------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (1.9%)
CTS . . . . . . . . . . . . . . . . . . . 55,800 2,148
Harris . . . . . . . . . . . . . . . . . . 35,000 2,192
- ------------------------------------------------------------------
4,340
- ------------------------------------------------------------------
COMPUTERS & SERVICES (3.9%)
Cisco Systems* . . . . . . . . . . . . . . 30,000 2,497
Hewlett Packard . . . . . . . . . . . . . 50,000 4,237
International Business Machines . . . . . 22,000 2,393
- ------------------------------------------------------------------
9,127
- ------------------------------------------------------------------
DRUGS (4.7%)
American Home Products . . . . . . . . . . 15,000 1,530
Bristol Myers Squibb . . . . . . . . . . . 13,000 1,150
Mallinckrodt Group . . . . . . . . . . . . 65,000 2,608
Merck . . . . . . . . . . . . . . . . . . 45,000 3,161
SmithKline Beecham, ADR . . . . . . . . . 47,000 2,644
- ------------------------------------------------------------------
11,093
- ------------------------------------------------------------------
ELECTRICAL UTILITIES (1.1%)
General Public Utilities . . . . . . . . . 75,000 2,550
- ------------------------------------------------------------------
2,550
- ------------------------------------------------------------------
FINANCIAL SERVICES (7.3%)
Allstate . . . . . . . . . . . . . . . . . 39,467 1,722
BRE Properties, Cl A . . . . . . . . . . 60,000 2,227
Bear Stearns . . . . . . . . . . . . . . . 86,150 1,981
CBL Associates Properties . . . . . . . . 59,800 1,226
Dean Witter Discover . . . . . . . . . . . 45,000 2,436
Federal National Mortgage
Association . . . . . . . . . . . . . . 120,000 4,140
Real Estate Investment Trust
of California . . . . . . . . . . . . 28,300 580
Travelers . . . . . . . . . . . . . . . . 40,001 2,630
- ------------------------------------------------------------------
16,942
- ------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (6.2%)
American Brands . . . . . . . . . . . . . 29,000 1,323
IBP . . . . . . . . . . . . . . . . . . . 130,000 3,461
Philip Morris . . . . . . . . . . . . . . 35,000 3,255
Sara Lee . . . . . . . . . . . . . . . . . 60,000 2,025
Schweitzer-Manduit
International* . . . . . . . . . . . . 1,000 25
Unilever NV, ADR . . . . . . . . . . . . . 9,000 1,304
Universal Foods . . . . . . . . . . . . . 75,000 2,897
- ------------------------------------------------------------------
14,290
- ------------------------------------------------------------------
</TABLE>
38
<PAGE> 271
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
Value Momentum Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GAS/NATURAL GAS (4.3%)
Coastal . . . . . . . . . . . . . . . . . 45,000 $1,704
MCN . . . . . . . . . . . . . . . . . . . 75,000 1,847
Questar . . . . . . . . . . . . . . . . . 42,000 1,370
Sonat . . . . . . . . . . . . . . . . . . 40,000 1,380
Westcoast Energy . . . . . . . . . . . . . 70,000 1,094
Williams . . . . . . . . . . . . . . . . . 55,000 2,592
- ------------------------------------------------------------------
9,987
- ------------------------------------------------------------------
GLASS PRODUCTS (0.5%)
PPG Industries . . . . . . . . . . . . . . 27,000 1,262
- ------------------------------------------------------------------
1,262
- ------------------------------------------------------------------
HOTELS & LODGING (0.7%)
Hilton Hotels . . . . . . . . . . . . . . 20,000 1,555
- ------------------------------------------------------------------
1,555
- ------------------------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES (0.6%)
Leggett & Platt . . . . . . . . . . . . . 61,000 1,464
- ------------------------------------------------------------------
1,464
- ------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.7%)
Whirlpool . . . . . . . . . . . . . . . . 30,000 1,631
- ------------------------------------------------------------------
1,631
- ------------------------------------------------------------------
INSURANCE (3.9%)
Chubb . . . . . . . . . . . . . . . . . . 15,000 1,556
Equifax . . . . . . . . . . . . . . . . . 100,000 1,863
Lincoln National . . . . . . . . . . . . . 40,000 2,115
Providian . . . . . . . . . . . . . . . . 50,000 2,194
Torchmark . . . . . . . . . . . . . . . . 30,000 1,421
- ------------------------------------------------------------------
9,149
- ------------------------------------------------------------------
LEASING & RENTING (2.1%)
Comdisco . . . . . . . . . . . . . . . . . 135,000 2,886
Xtra . . . . . . . . . . . . . . . . . . . 45,000 1,918
- ------------------------------------------------------------------
4,804
- ------------------------------------------------------------------
MACHINERY (3.6%)
Deere . . . . . . . . . . . . . . . . . . 69,000 2,587
Dresser Industries . . . . . . . . . . . . 90,000 2,340
General Electric . . . . . . . . . . . . . 45,000 3,454
- ------------------------------------------------------------------
8,381
- ------------------------------------------------------------------
MEASURING DEVICES (0.7%)
Perkin Elmer . . . . . . . . . . . . . . . 35,000 1,654
- ------------------------------------------------------------------
1,654
- ------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (0.9%)
Becton, Dickinson . . . . . . . . . . . . 25,000 2,159
- ------------------------------------------------------------------
2,159
- ------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (0.5%)
Novacare* . . . . . . . . . . . . . . . . 50,000 300
Tenet Healthcare* . . . . . . . . . . . . 36,000 769
- ------------------------------------------------------------------
1,069
- ------------------------------------------------------------------
MISCELLANEOUS CONSUMER SERVICES (0.2%)
CPI . . . . . . . . . . . . . . . . . . . 30,000 443
- ------------------------------------------------------------------
443
- ------------------------------------------------------------------
MISCELLANEOUS TRANSPORTATION (0.8%)
Harsco . . . . . . . . . . . . . . . . . . 30,000 1,856
- ------------------------------------------------------------------
1,856
- ------------------------------------------------------------------
PAPER & PAPER PRODUCTS (4.7%)
Avery Dennison . . . . . . . . . . . . . . 52,000 2,776
Kimberly-Clark . . . . . . . . . . . . . . 58,360 4,705
Weyerhaeuser . . . . . . . . . . . . . . . 50,000 2,306
Willamette Industries . . . . . . . . . . 22,000 1,227
- ------------------------------------------------------------------
11,014
- ------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.3%)
Union Pacific Resources . . . . . . . . . 30,000 780
- ------------------------------------------------------------------
780
- ------------------------------------------------------------------
PETROLEUM REFINING (4.7%)
Ashland . . . . . . . . . . . . . . . . . 30,000 1,103
Chevron . . . . . . . . . . . . . . . . . 30,000 1,556
Imperial Oil . . . . . . . . . . . . . . . 30,000 1,087
</TABLE>
39
<PAGE> 272
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Value Momentum Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PETROLEUM REFINING (CONTINUED)
Mobil . . . . . . . . . . . . . . . . . . 28,000 $3,101
Royal Dutch Petroleum, ADR . . . . . . . . 13,000 1,807
Unocal . . . . . . . . . . . . . . . . . . 48,000 1,434
Valero Energy . . . . . . . . . . . . . . 40,000 990
- ------------------------------------------------------------------
11,078
- ------------------------------------------------------------------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (1.8%)
Eastman Kodak . . . . . . . . . . . . . . 35,000 2,568
Xerox . . . . . . . . . . . . . . . . . . 13,000 1,607
- ------------------------------------------------------------------
4,175
- ------------------------------------------------------------------
PRINTING & PUBLISHING (2.1%)
Houghton Mifflin . . . . . . . . . . . . . 40,000 1,665
Wallace Computer Services . . . . . . . . 60,000 3,323
- ------------------------------------------------------------------
4,988
- ------------------------------------------------------------------
RAILROADS (1.6%)
Burlington Northern Santa Fe . . . . . . . 22,000 1,801
Union Pacific . . . . . . . . . . . . . . 30,000 1,999
- ------------------------------------------------------------------
3,800
- ------------------------------------------------------------------
REAL ESTATE (2.0%)
First Industrial Realty Trust . . . . . . 110,000 2,530
JP Realty . . . . . . . . . . . . . . . . 108,000 2,160
- ------------------------------------------------------------------
4,690
- ------------------------------------------------------------------
REPAIR SERVICES (2.1%)
PHH . . . . . . . . . . . . . . . . . . . 65,000 3,348
Rollins Truck Leasing . . . . . . . . . . 160,000 1,680
- ------------------------------------------------------------------
5,028
- ------------------------------------------------------------------
RETAIL (2.8%)
Dayton-Hudson . . . . . . . . . . . . . . 18,000 1,346
Kroger* . . . . . . . . . . . . . . . . . 55,000 1,911
May Department Stores . . . . . . . . . . 55,000 2,447
Sears Roebuck . . . . . . . . . . . . . . 21,000 872
- ------------------------------------------------------------------
6,576
- ------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (2.2%)
Intel . . . . . . . . . . . . . . . . . . 70,000 3,866
National Semiconductor * . . . . . . . . . 75,000 1,294
- ------------------------------------------------------------------
5,160
- ------------------------------------------------------------------
STEEL & STEEL WORKS (1.1%)
Aluminum Company of America . . . . . . . 20,000 1,110
Engelhard . . . . . . . . . . . . . . . . 67,500 1,561
- ------------------------------------------------------------------
2,671
- ------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (4.3%)
A T & T . . . . . . . . . . . . . . . . . 18,449 1,234
Airtouch Communications* . . . . . . . . . 16,000 452
Comsat . . . . . . . . . . . . . . . . . . 70,000 1,313
Century Telephone Enterprises . . . . . . 50,000 1,694
Frontier . . . . . . . . . . . . . . . . . 90,000 2,677
GTE . . . . . . . . . . . . . . . . . . . 60,000 2,760
- ------------------------------------------------------------------
10,130
- ------------------------------------------------------------------
TRANSPORTATION SERVICES (1.0%)
GATX . . . . . . . . . . . . . . . . . . . 51,000 2,359
- ------------------------------------------------------------------
2,359
- ------------------------------------------------------------------
WHOLESALE (1.1%)
Avnet . . . . . . . . . . . . . . . . . . 40,000 1,715
Universal . . . . . . . . . . . . . . . . 40,000 935
- ------------------------------------------------------------------
2,650
- ------------------------------------------------------------------
Total Common Stocks
(Cost $145,722,213) . . . . . . . 214,515
- ------------------------------------------------------------------
WARRANTS (0.0%)
Chase Manhattan Warrants* . . . . . . . . 125 4
4
- ------------------------------------------------------------------
REPURCHASE AGREEMENT (7.8%)
Deutsche Morgan Grenfell/C.J. Lawrence
5.950%, dated 01/31/96, matures
02/01/96, repurchase price
$18,216,550 (collateralized by various
FHLMC obligations, total par value
$2,560,000, 0%--6.445%, 02/01/96--
10/21/02: U.S. Treasury Notes, total
par value $15,415,000, 5.50%--6.875%,
02/28/97--04/15/00, total market value
$18,578,180) . . . . . . . . . . . . 18,214
- ------------------------------------------------------------------
Total Repurchase Agreement
(Cost $18,213,541) . . . . . . . . 18,214
- ------------------------------------------------------------------
</TABLE>
40
<PAGE> 273
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
Value Momentum Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
-------
<S> <C>
Total Investments (99.5%)
(Cost $163,935,754) . . . . . . . $232,733
- ------------------------------------------------------------------
Other Assets and Liabilities (0.5%) . . . 1,133
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 12,303,530
outstanding shares of beneficial
interest . . . . . . . . . . . . . . 151,322
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 653,860 outstanding
shares of beneficial interest . . . 8,425
Undistributed Net Investment Income . 210
Accumulated Net Realized Gain
on Investments . . . . . . . . . . . 5,111
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 68,798
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $233,866
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $18.05
- ------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS . . $18.05
- ------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($18.05/95.5%) . . . $18.90
==================================================================
</TABLE>
* Non-income producing security
ADR--American Depository Receipt
Cl--Class
FHLMC--Federal Home Loan Mortgage Corporation
The accompanying notes are an integral part of the financial statements.
41
<PAGE> 274
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Blue Chip Growth Fund
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
--------- -------
<S> <C> <C>
COMMON STOCKS (95.6%)
AIR TRANSPORTATION (2.5%)
AMR * . . . . . . . . . . . . . . . . . . 11,000 $ 836
Federal Express * . . . . . . . . . . . . 10,000 761
- ------------------------------------------------------------------
1,597
- ------------------------------------------------------------------
AUTOMOTIVE (1.8%)
Chrysler . . . . . . . . . . . . . . . . . 10,000 578
Eaton . . . . . . . . . . . . . . . . . . 5,400 313
General Motors, Cl E . . . . . . . . . . . 5,000 278
- ------------------------------------------------------------------
1,169
- ------------------------------------------------------------------
BANKS (6.6%)
Bank of Boston . . . . . . . . . . . . . 14,400 659
Citicorp . . . . . . . . . . . . . . . . . 10,500 775
CoreStates Finance . . . . . . . . . . . . 15,000 600
Fifth Third Bancorp . . . . . . . . . . . 12,000 568
PNC Bank . . . . . . . . . . . . . . . . . 20,000 600
Republic New York . . . . . . . . . . . . 5,000 291
Wells Fargo . . . . . . . . . . . . . . . 3,000 704
- ------------------------------------------------------------------
4,197
- ------------------------------------------------------------------
BEAUTY PRODUCTS (0.9%)
Proctor & Gamble . . . . . . . . . . . . . 7,000 587
- ------------------------------------------------------------------
587
- ------------------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (1.2%)
Capital Citites/ABC . . . . . . . . . . . 3,500 450
Viacom, Cl B* . . . . . . . . . . . . . . 8,000 324
- ------------------------------------------------------------------
774
- ------------------------------------------------------------------
CHEMICALS (4.6%)
Dow Chemical . . . . . . . . . . . . . . . 7,500 559
Du Pont (E.I.) de Nemours . . . . . . . . 8,200 630
Eastman Chemical . . . . . . . . . . . . . 3,500 231
IMC Fertilizer Group . . . . . . . . . . . 15,000 563
Lilly (Eli) . . . . . . . . . . . . . . . 9,426 542
Union Carbide Holding . . . . . . . . . . 10,000 421
- ------------------------------------------------------------------
2,946
- ------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (1.5%)
ITT Industries . . . . . . . . . . . . . . 5,000 130
ITT* . . . . . . . . . . . . . . . . . . . 5,000 277
Motorola . . . . . . . . . . . . . . . . . 6,000 323
Picturetel * . . . . . . . . . . . . . . . 5,000 196
- ------------------------------------------------------------------
926
- ------------------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (8.8%)
3Com* . . . . . . . . . . . . . . . . . . 10,000 459
Automatic Data Processing . . . . . . . . 10,000 399
Cisco Systems* . . . . . . . . . . . . . . 4,000 333
Compaq Computer * . . . . . . . . . . . . 4,000 189
Computer Associates International . . . . 9,500 649
Dell Computer . . . . . . . . . . . . . . 8,000 219
Gateway 2000 Incorporated* . . . . . . . . 20,000 518
Hewlett Packard . . . . . . . . . . . . . 7,000 593
International Business Machines . . . . . 7,000 761
Microsoft* . . . . . . . . . . . . . . . . 8,000 740
Oracle Systems . . . . . . . . . . . . . . 5,000 239
Sun Microsystems* . . . . . . . . . . . . 11,000 506
- ------------------------------------------------------------------
5,605
- ------------------------------------------------------------------
CONCRETE & MINERAL PRODUCTS (0.9%)
Minnesota Mining & Manufacturing . . . . . 9,000 581
- ------------------------------------------------------------------
581
- ------------------------------------------------------------------
DRUGS (7.5%)
Abbott Labs . . . . . . . . . . . . . . . 8,000 338
Amgen* . . . . . . . . . . . . . . . . . . 18,000 1,082
Bristol-Myers Squibb . . . . . . . . . . . 7,000 620
Johnson & Johnson . . . . . . . . . . . . 13,000 1,248
Merck . . . . . . . . . . . . . . . . . . 13,000 913
Schering Plough . . . . . . . . . . . . . 10,000 541
- ------------------------------------------------------------------
4,742
- ------------------------------------------------------------------
ELECTRICAL SERVICES (5.7%)
American Electric Power . . . . . . . . . 10,000 443
Baltimore Gas & Electric . . . . . . . . . 20,000 575
Dominion Resources . . . . . . . . . . . . 20,000 857
Duke Power . . . . . . . . . . . . . . . . 13,200 657
Houston Industries . . . . . . . . . . . . 20,000 480
Texas Utilities . . . . . . . . . . . . . 15,000 613
- ------------------------------------------------------------------
3,625
- ------------------------------------------------------------------
ELECTRICAL TECHNOLOGY (0.5%)
Komag * . . . . . . . . . . . . . . . . . 10,000 291
- ------------------------------------------------------------------
291
- ------------------------------------------------------------------
ENTERTAINMENT (0.8%)
Walt Disney . . . . . . . . . . . . . . . 8,000 514
- ------------------------------------------------------------------
514
- ------------------------------------------------------------------
</TABLE>
42
<PAGE> 275
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
Blue Chip Growth Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES (4.0%)
American Express . . . . . . . . . . . . . 8,000 $ 368
Bear Stearns . . . . . . . . . . . . . . . 25,000 575
Charles Schwab . . . . . . . . . . . . . . 10,000 250
ITT Hartford Group* . . . . . . . . . . . 15,000 752
Merrill Lynch . . . . . . . . . . . . . . 10,000 569
- ------------------------------------------------------------------
2,514
- ------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (7.4%)
Coca Cola . . . . . . . . . . . . . . . . 11,000 829
IBP . . . . . . . . . . . . . . . . . . . 22,000 586
Kellogg . . . . . . . . . . . . . . . . . 2,700 207
PepsiCo . . . . . . . . . . . . . . . . . 10,000 596
Philip Morris . . . . . . . . . . . . . . 15,000 1,395
Tootsie Roll Industries . . . . . . . . . 15,000 585
Wm. Wrigley, Jr. . . . . . . . . . . . . . 8,000 476
- ------------------------------------------------------------------
4,674
- ------------------------------------------------------------------
GLASS PRODUCTS (0.5%)
PPG Industries . . . . . . . . . . . . . . 7,000 327
- ------------------------------------------------------------------
327
- ------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.8%)
Gillette . . . . . . . . . . . . . . . . . 10,000 536
- ------------------------------------------------------------------
536
- ------------------------------------------------------------------
INSURANCE (3.5%)
American International Group . . . . . . . 5,000 484
Pacificare Health Systems, Cl A* . . . . 8,000 724
Pacificare Health Systems, Cl B* . . . . 4,000 369
United Healthcare . . . . . . . . . . . . 10,000 629
- ------------------------------------------------------------------
2,206
- ------------------------------------------------------------------
LUMBER & WOOD PRODUCTS (0.4%)
Georgia-Pacific . . . . . . . . . . . . . 3,200 235
- ------------------------------------------------------------------
235
- ------------------------------------------------------------------
MACHINERY (6.2%)
Black & Decker . . . . . . . . . . . . . . 6,000 203
Caterpillar . . . . . . . . . . . . . . . 12,100 779
Case . . . . . . . . . . . . . . . . . . . 12,000 568
Deere . . . . . . . . . . . . . . . . . . 18,000 675
General Electric . . . . . . . . . . . . . 22,000 1,689
- ------------------------------------------------------------------
3,914
- ------------------------------------------------------------------
MARINE TRANSPORTATION (0.3%)
Royal Caribbean Cruises . . . . . . . . . 10,000 221
- ------------------------------------------------------------------
221
- ------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (3.7%)
Guidant . . . . . . . . . . . . . . . . . 8,330 382
Medtronic . . . . . . . . . . . . . . . . 13,000 743
St. Jude Medical . . . . . . . . . . . . . 9,000 397
Varian Associates . . . . . . . . . . . . 6,000 289
Columbia HCA Healthcare . . . . . . . . . 10,000 556
- ------------------------------------------------------------------
2,367
- ------------------------------------------------------------------
PAPER & PAPER PRODUCTS (0.4%)
International Paper . . . . . . . . . . . 5,800 237
- ------------------------------------------------------------------
237
- ------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.3%)
Schlumberger . . . . . . . . . . . . . . . 3,000 210
- ------------------------------------------------------------------
210
- ------------------------------------------------------------------
PETROLEUM REFINING (7.4%)
Amoco . . . . . . . . . . . . . . . . . . 10,000 704
Exxon . . . . . . . . . . . . . . . . . . 15,400 1,236
Mobil . . . . . . . . . . . . . . . . . . 11,100 1,229
Phillips Petroleum . . . . . . . . . . . . 7,500 244
Royal Dutch Petroleum, ADR . . . . . . . . 8,000 1,112
Texaco . . . . . . . . . . . . . . . . . . 2,000 162
- ------------------------------------------------------------------
4,687
- ------------------------------------------------------------------
PROFESSIONAL SERVICES (0.7%)
Dun & Bradstreet . . . . . . . . . . . . . 6,000 390
- ------------------------------------------------------------------
390
- ------------------------------------------------------------------
RAILROADS (0.6%)
Burlington Northern Santa Fe . . . . . . . 5,000 409
- ------------------------------------------------------------------
409
- ------------------------------------------------------------------
RETAIL (4.1%)
Alberto Culver, Cl A . . . . . . . . . . . 20,000 670
Borders Group* . . . . . . . . . . . . . . 10,000 211
Home Depot . . . . . . . . . . . . . . . . 8,000 368
McDonald's . . . . . . . . . . . . . . . . 15,000 754
Pep Boys-Manny, Moe & Jack . . . . . . . . 13,000 377
Wal-Mart Stores . . . . . . . . . . . . . 10,000 204
- ------------------------------------------------------------------
2,584
- ------------------------------------------------------------------
RUBBER & PLASTIC (1.1%)
Agrium . . . . . . . . . . . . . . . . . . 24,000 330
Goodyear Tire & Rubber . . . . . . . . . . 8,000 383
- ------------------------------------------------------------------
713
- ------------------------------------------------------------------
</TABLE>
43
<PAGE> 276
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Blue Chip Growth Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------- -------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SEMI-CONDUCTORS/INSTRUMENTS (1.8%)
AMP . . . . . . . . . . . . . . . . . . . 5,200 $ 203
Applied Materials * . . . . . . . . . . . 5,000 185
Intel . . . . . . . . . . . . . . . . . . 10,000 552
Micron Technology . . . . . . . . . . . . 5,000 171
- ------------------------------------------------------------------
1,111
- ------------------------------------------------------------------
SPECIALTY MACHINERY (0.4%)
U.S. Filter * . . . . . . . . . . . . . . 10,000 258
- ------------------------------------------------------------------
258
- ------------------------------------------------------------------
STEEL & STEEL WORKS (0.7%)
Aluminum Company of America . . . . . . . 8,400 466
- ------------------------------------------------------------------
466
- ------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (7.1%)
A T & T . . . . . . . . . . . . . . . . . 22,000 1,471
Ameritech . . . . . . . . . . . . . . . . 15,200 914
Ascend Communications* . . . . . . . . . . 6,000 233
Bellsouth . . . . . . . . . . . . . . . . 10,000 429
Cascade Communications* . . . . . . . . . 4,000 313
GTE . . . . . . . . . . . . . . . . . . . 9,000 414
US West . . . . . . . . . . . . . . . . . 15,000 527
Vodafone Group PLC, ADR* . . . . . . . . . 5,000 179
- ------------------------------------------------------------------
4,480
- ------------------------------------------------------------------
WHOLESALE (0.9%)
Cordis* . . . . . . . . . . . . . . . . . 5,000 539
- ------------------------------------------------------------------
539
- ------------------------------------------------------------------
Total Common Stocks
(Cost $48,977,502) . . . . . . . . 60,632
- ------------------------------------------------------------------
PERFERRED STOCKS (0.4%)
AUTOMOTIVE (0.4%)
General Motors Cl E . . . . . . . . . . . 3,000 234
- ------------------------------------------------------------------
Total Preferred Stocks
(Cost $169,680) . . . . . . . . . 234
- ------------------------------------------------------------------
EQUITY OPTIONS (-0.2%)
Ascend Communications
February 35 Calls* 02/17/96 . . . . . . (15)
Ascend Communications
February 37.5 Calls* 02/17/96 . . . . . (10)
Caterpillar February 65 Calls* 02/17/96 . . (5)
Komag March 30 Calls* 03/16/96 . . . . . . (21)
Pacificare, Cl B February 95 Calls* 02/17/96 (10)
Picturetel February 40 Calls* 02/17/96 . . (10)
St Jude Medical February
45 Calls* 02/17/96 . . . . . . . . . . (8)
Sun Microsystems February
45 Calls* 02/17/96 . . . . . . . . . . (7)
Sun Microsystems March 45 Calls* 03/16/96 . (21)
- ------------------------------------------------------------------
Total Equity Options
(Cost $(136,248)) . . . . . . . . (107)
- ------------------------------------------------------------------
REPURCHASE AGREEMENTS (6.8%)
Morgan Stanley & Company
5.82%, dated 01/31/96, matures
02/01/96, repurchase price
$4,301,642 (collateralized by various
FNMA obligations, total par value
$4,398,274, 6.00%--7.50%, 03/01/01--
01/01/03: total market value $4,410,079) 4,301
- ------------------------------------------------------------------
Total Repurchase Agreements
(Cost $4,300,946) . . . . . . . . 4,301
- ------------------------------------------------------------------
Total Investments (102.6%)
(Cost $53,311,880) . . . . . . . . 65,060
- ------------------------------------------------------------------
Other Assets and Liabilities (-2.6%) . . . (1,650)
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 5,019,548
outstanding shares of beneficial
interest . . . . . . . . . . . . . . . 51,155
Undistributed Net Investment Income . . . 16
Accumulated Net Realized Gain
on Investments . . . . . . . . . . . . 491
Net Unrealized Appreciation
on Investments . . . . . . . . . . . . 11,748
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . $63,410
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $12.63
==================================================================
</TABLE>
* Non-income producing security
ADR--American Depository Reciept
Cl--Class
FNMA--Federal National Mortgage Association
The accompanying notes are an integral part of the financial statements.
44
<PAGE> 277
STEPSTONE OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Emerging Growth Fund
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------- ------
<S> <C> <C>
COMMON STOCKS (84.7%)
AGRICULTURE (0.4%)
Veterinary Centers of America* . . . . . . 10,000 $ 154
- ------------------------------------------------------------------
154
- ------------------------------------------------------------------
AIR TRANSPORTATION (0.7%)
Atlantic Southeast Airlines . . . . . . . 9,000 166
Comair Holdings . . . . . . . . . . . . . 1,500 37
Vanguard Airlines* . . . . . . . . . . . . 15,000 90
- ------------------------------------------------------------------
293
- ------------------------------------------------------------------
BANKS (5.7%)
Amsouth Bancorp . . . . . . . . . . . . . 5,000 198
Astoria Financial . . . . . . . . . . . . 5,000 246
Crestar Financial . . . . . . . . . . . . 5,000 289
Cullen/Frost Bankers . . . . . . . . . . . 3,700 180
Dauphin Deposit Bank & Trust . . . . . . . 1,400 39
Deposit Guaranty . . . . . . . . . . . . . 3,500 151
First Security . . . . . . . . . . . . . . 2,500 92
First Virginia Banks . . . . . . . . . . . 3,500 135
Hibernia, Cl A . . . . . . . . . . . . . . 12,500 134
Merchantile Bancorp . . . . . . . . . . . 5,000 218
Old Kent Financial . . . . . . . . . . . . 3,675 147
Roosevelt Financial Group . . . . . . . . 10,000 174
Union Planters . . . . . . . . . . . . . . 8,000 244
United Jersey Bank Financial . . . . . . . 3,500 125
- ------------------------------------------------------------------
2,372
- ------------------------------------------------------------------
BEAUTY PRODUCTS (0.3%)
Alberto Culver, Cl A . . . . . . . . . . . 4,000 134
- ------------------------------------------------------------------
134
- ------------------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (1.4%)
Citicaster* . . . . . . . . . . . . . . . 7,500 183
Infinity Broadcasting * . . . . . . . . . 7,500 298
Young Broadcasting, Cl A* . . . . . . . . 3,500 98
- ------------------------------------------------------------------
579
- ------------------------------------------------------------------
BUILDING & CONSTRUCTION (0.2%)
Southern Energy Homes* . . . . . . . . . . 6,250 103
- ------------------------------------------------------------------
103
- ------------------------------------------------------------------
CHEMICALS (0.6%)
Cytec Industries* . . . . . . . . . . . . 3,500 267
- ------------------------------------------------------------------
267
- ------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (2.3%)
ADC Telecommunications* . . . . . . . . . 2,800 108
Intervoice* . . . . . . . . . . . . . . . 8,000 175
Network Express* . . . . . . . . . . . . . 9,000 35
Octel Communications * . . . . . . . . . . 3,000 110
Picturetel * . . . . . . . . . . . . . . . 5,000 196
Tellabs* . . . . . . . . . . . . . . . . . 2,500 110
Teltrend* . . . . . . . . . . . . . . . . 6,000 238
- ------------------------------------------------------------------
972
- ------------------------------------------------------------------
COMPUTER & SOFTWARE SERVICES (18.2%)
3Com* . . . . . . . . . . . . . . . . . . 23,415 1,074
Adobe Systems . . . . . . . . . . . . . . 4,160 141
Alternative Resources* . . . . . . . . . . 2,500 72
Baan NV* . . . . . . . . . . . . . . . . . 5,000 217
Brooktrout Tech* . . . . . . . . . . . . . 8,000 250
Cadence Design Systems* . . . . . . . . . 10,000 391
Castelle* . . . . . . . . . . . . . . . . 10,000 83
Ciber* . . . . . . . . . . . . . . . . . . 8,000 168
Cisco Systems* . . . . . . . . . . . . . . 10,000 833
CUC International* . . . . . . . . . . . . 18,250 673
Datalogix International* . . . . . . . . . 5,000 59
Dataware Technologies* . . . . . . . . . . 2,500 18
Eagle Point Software* . . . . . . . . . . 10,000 165
Electroglas* . . . . . . . . . . . . . . . 2,500 52
Electronic Arts* . . . . . . . . . . . . . 5,000 120
HBO . . . . . . . . . . . . . . . . . . . 5,000 420
Mentor Graphics* . . . . . . . . . . . . . 6,500 92
Micros Systems* . . . . . . . . . . . . . 2,500 122
Norrell . . . . . . . . . . . . . . . . . 5,000 139
Oracle Systems . . . . . . . . . . . . . . 11,500 549
Physician Computer Networks* . . . . . . . 10,000 109
Pinnacle Micro* . . . . . . . . . . . . . 11,250 167
Proxim* . . . . . . . . . . . . . . . . . 15,000 285
Quarterdeck Office Systems* . . . . . . . 10,000 160
Sierra On-Line* . . . . . . . . . . . . . 7,500 187
Softkey International* . . . . . . . . . . 8,000 111
Spectrum Holobyte* . . . . . . . . . . . . 7,500 43
Sterling Software . . . . . . . . . . . . 5,000 296
</TABLE>
45
<PAGE> 278
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Emerging Growth Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------- ------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COMPUTER & SOFTWARE SERVICES (CONTINUED)
Sun Microsystems* . . . . . . . . . . . . 5,000 $ 230
S3* . . . . . . . . . . . . . . . . . . . 3,000 36
Symantec * . . . . . . . . . . . . . . . . 7,100 84
Sync Research* . . . . . . . . . . . . . . 2,000 56
TCSI Corp* . . . . . . . . . . . . . . . . 7,500 139
Unisys * . . . . . . . . . . . . . . . . . 10,000 75
- ------------------------------------------------------------------
7,616
- ------------------------------------------------------------------
CONSUMER PRODUCTS (0.6%)
Wolverine World Wide . . . . . . . . . . . 9,750 247
- ------------------------------------------------------------------
247
- ------------------------------------------------------------------
DRUGS (3.1%)
Autoimmune* . . . . . . . . . . . . . . . 5,000 67
Boston Scientific * . . . . . . . . . . . 6,200 318
IDEC Pharmaceuticals Corp* . . . . . . . . 10,000 215
Interneuron Pharmeceutical* . . . . . . . 6,500 195
Liposome * . . . . . . . . . . . . . . . 16,500 396
Sybron International* . . . . . . . . . . 4,500 109
- ------------------------------------------------------------------
1,300
- ------------------------------------------------------------------
ELECTRICAL UTILITIES (0.1%)
Accom* . . . . . . . . . . . . . . . . . . 7,400 49
- ------------------------------------------------------------------
49
- ------------------------------------------------------------------
ELECTRICAL TECHNOLOGY (0.7%)
Komag* . . . . . . . . . . . . . . . . . . 10,000 291
- ------------------------------------------------------------------
291
- ------------------------------------------------------------------
ENTERTAINMENT (0.5%)
Mirage Resorts * . . . . . . . . . . . . . 5,500 215
- ------------------------------------------------------------------
215
- ------------------------------------------------------------------
ENVIRONMENTAL SERVICES (0.7%)
Sanifill* . . . . . . . . . . . . . . . . 4,000 145
USA Waste Services* . . . . . . . . . . . 7,500 156
- ------------------------------------------------------------------
301
- ------------------------------------------------------------------
FINANCIAL SERVICES (3.6%)
CWM Mortgage Holdings . . . . . . . . . . 10,000 173
Credit Acceptance * . . . . . . . . . . . 15,000 313
Finova Group . . . . . . . . . . . . . . . 5,000 252
First American, Tennessee . . . . . . . . 5,000 239
Mercer International* . . . . . . . . . . 3,500 67
Mercury Finance . . . . . . . . . . . . . 10,500 134
Stormedia * . . . . . . . . . . . . . . . 3,500 102
Waterhouse Investor Services . . . . . . . 10,000 236
- ------------------------------------------------------------------
1,516
- ------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.5%)
Canandaigua Wine, Cl A* . . . . . . . . . 15,500 577
Pete's Brewing Company* . . . . . . . . . 2,500 46
- ------------------------------------------------------------------
623
- ------------------------------------------------------------------
HOTELS & LODGING (1.0%)
HFS* . . . . . . . . . . . . . . . . . . . 5,000 415
- ------------------------------------------------------------------
415
- ------------------------------------------------------------------
INSURANCE (1.4%)
Healthcare Compare* . . . . . . . . . . . 2,500 121
Penncorp Financial Group . . . . . . . . . 6,000 180
United Healthcare . . . . . . . . . . . . 4,500 283
- ------------------------------------------------------------------
584
- ------------------------------------------------------------------
LEASING & RENTING (0.5%)
Kinetic Concepts . . . . . . . . . . . . . 15,000 186
- ------------------------------------------------------------------
186
- ------------------------------------------------------------------
LUMBER & WOOD PRODUCTS (0.5%)
Cavalier Homes . . . . . . . . . . . . . . 10,000 200
- ------------------------------------------------------------------
200
- ------------------------------------------------------------------
MACHINERY (0.2%)
General Instrument * . . . . . . . . . . . 3,650 83
- ------------------------------------------------------------------
83
- ------------------------------------------------------------------
MEASURING DEVICES (1.6%)
Advanced Energy Industries* . . . . . . . 10,000 88
Epic Design Technology* . . . . . . . . . 8,000 240
Input/Output . . . . . . . . . . . . . . . 8,000 194
LTX * . . . . . . . . . . . . . . . . . . 7,000 60
Thermedics* . . . . . . . . . . . . . . . 4,000 103
- ------------------------------------------------------------------
685
- ------------------------------------------------------------------
</TABLE>
46
<PAGE> 279
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
Emerging Growth Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------- ------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEDICAL PRODUCTS & SERVICES (4.9%)
Biochem Pharma* . . . . . . . . . . . . . 11,000 $ 484
Biomet* . . . . . . . . . . . . . . . . . 3,000 56
Datascope* . . . . . . . . . . . . . . . . 9,000 223
Endosonics* . . . . . . . . . . . . . . . 15,000 206
Gulf South Medical Supply* . . . . . . . . 9,000 266
Heartstream* . . . . . . . . . . . . . . . 2,000 26
Stryker . . . . . . . . . . . . . . . . . 6,000 335
St. Jude Medical . . . . . . . . . . . . . 10,200 450
- ------------------------------------------------------------------
2,046
- ------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (4.5%)
Columbia HCA Healthcare . . . . . . . . . 9,032 502
Community Health Systems* . . . . . . . . 2,500 96
Concord EFS* . . . . . . . . . . . . . . . 18,562 473
FHP International * . . . . . . . . . . . 10,000 289
Renal Treatment Centers* . . . . . . . . . 8,500 389
Rotech Medical* . . . . . . . . . . . . . 4,500 136
- ------------------------------------------------------------------
1,885
- ------------------------------------------------------------------
MISCELLANEOUS CONSUMER SERVICES (1.8%)
Corestaff* . . . . . . . . . . . . . . . . 7,000 262
Jenny Craig* . . . . . . . . . . . . . . . 10,000 98
Service International . . . . . . . . . . 9,000 390
- ------------------------------------------------------------------
750
- ------------------------------------------------------------------
MISCELLANEOUS MANUFACTURING (0.9%)
Department 56* . . . . . . . . . . . . . . 9,000 357
- ------------------------------------------------------------------
357
- ------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.6%)
Pride Petroleum Services* . . . . . . . . 10,000 91
Reading & Bates * . . . . . . . . . . . . 9,000 153
- ------------------------------------------------------------------
244
- ------------------------------------------------------------------
PRINTING & PUBLISHING (1.1%)
Books-A-Million * . . . . . . . . . . . . 5,000 41
Cadmus Communications . . . . . . . . . . 5,000 143
Gartner Group, Cl A* . . . . . . . . . . . 5,000 276
- ------------------------------------------------------------------
460
- ------------------------------------------------------------------
PROFESSIONAL SERVICES (0.5%)
Medaphis* . . . . . . . . . . . . . . . . 5,000 200
- ------------------------------------------------------------------
200
- ------------------------------------------------------------------
RAILROADS (0.4%)
Wisconsin Central Transportation * . . . . 2,000 150
- ------------------------------------------------------------------
150
- ------------------------------------------------------------------
RETAIL (8.9%)
Apple South . . . . . . . . . . . . . . . 3,000 53
Boston Chicken* . . . . . . . . . . . . . 10,500 357
Corporate Express* . . . . . . . . . . . . 4,500 119
Daka International* . . . . . . . . . . . 5,000 114
Gadzooks* . . . . . . . . . . . . . . . . 6,000 149
Garden Ridge* . . . . . . . . . . . . . . 10,000 330
Lone Star Steakhouse & Saloon* . . . . . . 15,000 489
Omnicare . . . . . . . . . . . . . . . . . 15,000 698
Staples . . . . . . . . . . . . . . . . . 10,000 246
Sunglass Hut International* . . . . . . . 13,800 384
Viking Office Products* . . . . . . . . . 11,000 561
Whole Foods Market* . . . . . . . . . . . 5,000 74
Williams Sonoma* . . . . . . . . . . . . . 10,000 153
- ------------------------------------------------------------------
3,727
- ------------------------------------------------------------------
RUBBER & PLASTIC (0.5%)
Lernout & Hauspie Speech* . . . . . . . . 7,500 208
- ------------------------------------------------------------------
208
- ------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (4.4%)
Altera * . . . . . . . . . . . . . . . . . 3,500 231
Applied Magnetics * . . . . . . . . . . . 10,000 145
Arc Capital, Cl A* . . . . . . . . . . . . 10,000 16
Atmel* . . . . . . . . . . . . . . . . . . 10,000 285
Oak Technology* . . . . . . . . . . . . . 13,000 650
Read-Rite* . . . . . . . . . . . . . . . . 5,100 92
Recoton * . . . . . . . . . . . . . . . . 10,000 172
Vitesse Semiconductor* . . . . . . . . . . 20,000 252
- ------------------------------------------------------------------
1,843
- ------------------------------------------------------------------
</TABLE>
47
<PAGE> 280
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
Emerging Growth Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------- ------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPECIALTY MACHINERY (0.8%)
Standex International . . . . . . . . . . 2,500 $ 74
U.S. Filter* . . . . . . . . . . . . . . . 10,000 258
- ------------------------------------------------------------------
332
- ------------------------------------------------------------------
STEEL & STEEL WORKS (0.2%)
Align-Rite International* . . . . . . . . 7,500 83
- ------------------------------------------------------------------
83
- ------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (3.6%)
Aspect Telecommunications* . . . . . . . . 4,000 148
Cascade Communications* . . . . . . . . . 3,500 274
Cidco* . . . . . . . . . . . . . . . . . . 1,500 45
Mitel* . . . . . . . . . . . . . . . . . . 10,000 57
Qualcomm* . . . . . . . . . . . . . . . . 5,000 224
Worldcom* . . . . . . . . . . . . . . . . 20,390 747
- ------------------------------------------------------------------
1,495
- ------------------------------------------------------------------
TESTING LABORATORIES (0.6%)
Martek Biosciences* . . . . . . . . . . . 2,500 88
Primark * . . . . . . . . . . . . . . . . 4,500 150
- ------------------------------------------------------------------
238
- ------------------------------------------------------------------
WHOLESALE (5.2%)
Cardinal Health . . . . . . . . . . . . . 13,000 775
Chronimed* . . . . . . . . . . . . . . . . 2,000 38
Citrix Systems* . . . . . . . . . . . . . 6,500 206
Cordis* . . . . . . . . . . . . . . . . . 5,000 539
Ha Lo Industries* . . . . . . . . . . . . 5,000 130
Hughes Supply . . . . . . . . . . . . . . 10,000 287
Silicon Storage Technology* . . . . . . . 7,000 77
Secure Computing* . . . . . . . . . . . . 3,000 117
- ------------------------------------------------------------------
2,169
- ------------------------------------------------------------------
Total Common Stocks
(Cost $29,308,084) . . . . . . . . 35,372
- ------------------------------------------------------------------
EQUITY OPTIONS (-0.1%)
Cisco Systems February 75 Calls* 02/17/96 (14)
Cisco Systems April 75 Calls* 04/20/96 . . (20)
Cisco Systems February 65 Puts* 02/17/96 . --
Cisco Systems April 65 Puts* 04/20/96 . . 2
Picturetel February 40 Calls* 02/17/96 . . (10)
Qualcomm February 45 Calls* 02/17/96 . . . (4)
Qualcom February 35 Puts* 02/17/96 . . . . 1
Read-Rite February 25 Puts* 02/17/96 . . 13
Sun Microsystems March 45 Calls* 03/16/96 (21)
- ------------------------------------------------------------------
Total Equity Options
(Cost ($20,655)) . . . . . . . . . (53)
- ------------------------------------------------------------------
REPURCHASE AGREEMENTS (15.5%)
Morgan Stanley & Company
5.82%, dated 01/31/96, matures
02/01/96, repurchase price
$6,481,911 (collaterized by various
FNMA , par value $15,788,629,
6.50%--9.50%, 08/01/97--
01/01/16: total market
value $6,631,179) . . . . . . . . . . 6,481
- ------------------------------------------------------------------
Total Repurchase Agreements
(Cost $6,480,863) . . . . . . . . 6,481
- ------------------------------------------------------------------
Total Investments (100.1%)
(Cost $35,768,292) . . . . . . . . 41,800
- ------------------------------------------------------------------
Other Assets and Liabilities (-0.1%) . . . (30)
- ------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par
value) based on 3,497,444
outstanding shares of beneficial
interest . . . . . . . . . . . . . . 35,266
Overdistributed Net Investment Income (2)
Accumulated Net Realized Gain
on Investments . . . . . . . . . . . 474
Net Unrealized Appreciation
on Investments . . . . . . . . . . . 6,032
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $41,770
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $11.94
==================================================================
</TABLE>
* Non-income producing security
Cl-Class
FNMA-Federal National Mortgage Association
48
<PAGE> 281
STEPSTONE OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
Stepstone International Equity Fund
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------- ------
<S> <C> <C>
FOREIGN COMMON STOCKS (93.6%)
FRANCE (9.0%)
Accor . . . . . . . . . . . . . . . . . . 1,755 $ 229
Alcatel Alsthom . . . . . . . . . . . . . 2,594 237
Banque Nationale Paris . . . . . . . . . . 3,854 163
Carnaud Metal Box . . . . . . . . . . . . 4,800 205
Carrefour . . . . . . . . . . . . . . . . 450 289
Castorama . . . . . . . . . . . . . . . . 2,090 367
Chargeurs . . . . . . . . . . . . . . . . 770 177
Eaux Generale . . . . . . . . . . . . . . 1,500 159
Danone . . . . . . . . . . . . . . . . . . 1,500 238
Essilor International . . . . . . . . . . 750 159
GAN* . . . . . . . . . . . . . . . . . . . 5,800 184
Lafarge . . . . . . . . . . . . . . . . . 2,830 191
LVMH Moet Hennesey . . . . . . . . . . . . 1,800 401
Peugeot . . . . . . . . . . . . . . . . . 1,400 204
Schneider . . . . . . . . . . . . . . . . 5,000 204
Societe Generale . . . . . . . . . . . . . 1,754 206
Elf Aquitaine . . . . . . . . . . . . . . 2,385 178
Valeo . . . . . . . . . . . . . . . . . . 3,500 177
- ------------------------------------------------------------------
3,968
- ------------------------------------------------------------------
GERMANY (8.8%)
Allianz . . . . . . . . . . . . . . . . . 214 417
BASF . . . . . . . . . . . . . . . . . . . 800 191
BMW . . . . . . . . . . . . . . . . . . . 400 227
Bayer . . . . . . . . . . . . . . . . . . 950 283
Bankgesellschaft Berlin . . . . . . . . . 650 166
Daimler-Benz . . . . . . . . . . . . . . . 400 220
Degussa . . . . . . . . . . . . . . . . . 500 183
Deutsche Bank . . . . . . . . . . . . . . 4,000 200
Gehe . . . . . . . . . . . . . . . . . . . 625 314
Karstadt . . . . . . . . . . . . . . . . . 550 219
Preussag . . . . . . . . . . . . . . . . . 700 207
RWE . . . . . . . . . . . . . . . . . . . 750 294
Siemens . . . . . . . . . . . . . . . . . 700 398
Schering . . . . . . . . . . . . . . . . . 3,100 224
Veba . . . . . . . . . . . . . . . . . . . 8,000 356
- ------------------------------------------------------------------
3,899
- ------------------------------------------------------------------
HONG KONG (3.3%)
China Light & Power . . . . . . . . . . . 30,000 145
Hong Kong Telecommunications . . . . . . . 100,000 190
HSBC Holdings . . . . . . . . . . . . . . 15,195 252
Hutchison Whampoa . . . . . . . . . . . . 50,000 325
New World Development . . . . . . . . . . 60,000 303
Swire Pacific . . . . . . . . . . . . . . 30,000 262
- ------------------------------------------------------------------
1,477
- ------------------------------------------------------------------
JAPAN (33.2%)
Amada Metrecs . . . . . . . . . . . . . . 27,000 430
Asahi Breweries . . . . . . . . . . . . . 36,000 415
Best Denki . . . . . . . . . . . . . . . . 29,000 413
Daiwa Securities . . . . . . . . . . . . . 28,000 419
Fuji Bank . . . . . . . . . . . . . . . . 21,000 478
Fuji Photo Film . . . . . . . . . . . . . 14,000 396
Fujisawa Pharmaceutical . . . . . . . . . 43,000 388
Hitachi Cable . . . . . . . . . . . . . . 57,000 427
Japan Synthetic Rubber . . . . . . . . . . 70,000 442
Kaneka . . . . . . . . . . . . . . . . . . 62,000 403
Kansai Electric Power . . . . . . . . . . 16,700 392
Katokichi . . . . . . . . . . . . . . . . 20,000 431
Komatsu . . . . . . . . . . . . . . . . . 51,000 431
Long Term Credit Bank Japan . . . . . . . 54,000 395
Maeda . . . . . . . . . . . . . . . . . . 41,000 422
Matsushita Electric Works . . . . . . . . 40,000 423
Mitsubishi Heavy Industries . . . . . . . 49,000 389
Mitsui Marine & Fire . . . . . . . . . . . 59,000 435
Mitsui Trust & Banking . . . . . . . . . . 38,000 413
Nintendo . . . . . . . . . . . . . . . . . 5,000 367
Nomura Securities . . . . . . . . . . . . 21,000 456
Olympus Optical . . . . . . . . . . . . . 44,000 445
Onward Kashiyama . . . . . . . . . . . . . 28,000 417
Ryobi Limited . . . . . . . . . . . . . . 78,000 408
Sanden . . . . . . . . . . . . . . . . . . 64,000 418
Sanyo Electric . . . . . . . . . . . . . . 71,000 419
Shinmaywa Industries . . . . . . . . . . . 48,000 437
Sumitomo Bank . . . . . . . . . . . . . . 20,000 384
Takara Standard . . . . . . . . . . . . . 37,000 395
Tokio Marine & Fire . . . . . . . . . . . 34,000 427
</TABLE>
49
<PAGE> 282
STEPSTONE OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
International Equity Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------- ------
<S> <C> <C>
FOREIGN COMMON STOCK (CONTINUED)
JAPAN (CONTINUED)
Tokyo Electric Power . . . . . . . . . . . 15,900 $ 405
Toppan Printing . . . . . . . . . . . . . 31,000 415
Toshiba . . . . . . . . . . . . . . . . . 58,000 452
Toyo Ink . . . . . . . . . . . . . . . . . 78,000 422
Yamato Transportation . . . . . . . . . . 39,000 449
- ------------------------------------------------------------------
14,658
- ------------------------------------------------------------------
MALAYSIA (3.1%)
AMMB Holdings . . . . . . . . . . . . . . 20,000 227
Hume Industries . . . . . . . . . . . . . 40,000 189
Malayan Banking . . . . . . . . . . . . . 20,000 179
Petronas Gas . . . . . . . . . . . . . . . 60,000 225
Sime Darby . . . . . . . . . . . . . . . . 100,000 268
Telekom Malaysia* . . . . . . . . . . . . 20,000 166
United Engineers . . . . . . . . . . . . . 20,000 130
- ------------------------------------------------------------------
1,384
- ------------------------------------------------------------------
NETHERLANDS (7.7%)
Aegon . . . . . . . . . . . . . . . . . . 5,052 207
Akzo . . . . . . . . . . . . . . . . . . . 3,000 319
Ahold . . . . . . . . . . . . . . . . . . 5,151 212
Elsevier . . . . . . . . . . . . . . . . . 25,000 348
IHC Caland . . . . . . . . . . . . . . . 10,000 356
KPN . . . . . . . . . . . . . . . . . . . 4,062 156
OCE-Vander Grinten . . . . . . . . . . . . 4,000 274
Phillips Electronics* . . . . . . . . . . 5,000 199
Royal Dutch Petroleum . . . . . . . . . . 2,000 277
Unilever . . . . . . . . . . . . . . . . . 2,000 288
VNU . . . . . . . . . . . . . . . . . . . 2,500 370
Wolters Kluwer . . . . . . . . . . . . . . 4,044 397
- ------------------------------------------------------------------
3,403
- ------------------------------------------------------------------
SINGAPORE (3.8%)
Cerebos Pacific . . . . . . . . . . . . . 20,000 166
City Developments . . . . . . . . . . . . 35,000 284
Development Bank of Singapore* . . . . . . 18,000 255
Keppel . . . . . . . . . . . . . . . . . . 15,000 141
Natsteel . . . . . . . . . . . . . . . . . 50,000 102
Singapore Airlines . . . . . . . . . . . . 25,000 263
United Overseas Bank . . . . . . . . . . . 42,000 453
- ------------------------------------------------------------------
1,664
- ------------------------------------------------------------------
SWEDEN (0.2%)
Astra* . . . . . . . . . . . . . . . . . . 2,500 102
- ------------------------------------------------------------------
102
- ------------------------------------------------------------------
SWITZERLAND (7.9%)
Alusuisse Lonza . . . . . . . . . . . . . 250 195
BBC Brown Boveri . . . . . . . . . . . . . 300 346
Ciba Geigy . . . . . . . . . . . . . . . . 400 333
CS Holdings . . . . . . . . . . . . . . . 4,000 375
Nestle . . . . . . . . . . . . . . . . . . 400 421
Roche Holdings . . . . . . . . . . . . . . 90 658
SMH PC . . . . . . . . . . . . . . . . . . 600 344
Schweiz Bankverein . . . . . . . . . . . . 500 180
Union Bank of Switzerland* . . . . . . . . 250 260
Sulzer Gerbruder . . . . . . . . . . . . . 220 131
Zurich Versicherungs . . . . . . . . . . . 950 258
- ------------------------------------------------------------------
3,501
- ------------------------------------------------------------------
UNITED KINGDOM (15.3%)
Assocociated British Ports . . . . . . . . 50,000 218
British Airport Authority . . . . . . . . 60,000 440
BTR . . . . . . . . . . . . . . . . . . . 100,000 501
Rexam . . . . . . . . . . . . . . . . . . 50,000 287
Cable & Wireless . . . . . . . . . . . . . 60,000 403
Enterprise Oil . . . . . . . . . . . . . . 50,000 278
General Accident . . . . . . . . . . . . . 60,000 588
Hanson . . . . . . . . . . . . . . . . . . 75,000 230
Hardy Oil & Gas . . . . . . . . . . . . . 40,000 120
Hays PLC . . . . . . . . . . . . . . . . 50,000 277
Johnson Matthey . . . . . . . . . . . . . 45,000 368
Marks & Spencer . . . . . . . . . . . . . 75,000 492
National Grid Group* . . . . . . . . . . . 33,000 100
National Power . . . . . . . . . . . . . . 50,000 329
Prudential* . . . . . . . . . . . . . . . 50,000 325
RTZ . . . . . . . . . . . . . . . . . . . 30,269 419
Reuters Holdings . . . . . . . . . . . . . 25,000 234
Lloyd's TSB Group* . . . . . . . . . . . 111,648 545
Southern Electric . . . . . . . . . . . . 46,500 582
Whitbread . . . . . . . . . . . . . . . 1,286 14
- ------------------------------------------------------------------
6,750
- ------------------------------------------------------------------
</TABLE>
50
<PAGE> 283
STEPSTONE FUNDS(R) January 31,1996
- --------------------------------------------------------------------------------
International Equity Fund (cont'd)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------- ------
<S> <C> <C>
FOREIGN COMMON STOCK (CONTINUED)
OTHER (1.3%)
Latin America Equity Fund . . . . . . . . 35,000 $ 564
- ------------------------------------------------------------------
564
- ------------------------------------------------------------------
Total Foreign Common Stocks
(Cost $37,033,875) . . . . . . . . 41,370
- ------------------------------------------------------------------
FOREIGN PREFERRED STOCK (0.3%)
GERMANY (0.3%)
Jungheinrich . . . . . . . . . . . . . . . 700 116
- ------------------------------------------------------------------
Total Foreign Preferred Stocks
(Cost $164,208) . . . . . . . . . 116
- ------------------------------------------------------------------
REPURCHASE AGREEMENT (5.7%)
J.P. Morgan Securities, 5.80%, dated
01/31/96, matures 02/01/96,
repurchase price $2,539,137
(collateralized by U.S. Treasury
Note, total par value $2,520,000, 5.50%,
02/28/99, market value $2,603,077) . 2,538
- ------------------------------------------------------------------
Total Repurchase Agreements
(Cost $2,538,336) . . . . . . . . 2,538
- ------------------------------------------------------------------
Total Investments (99.6%)
(Cost $39,736,419) . . . . . . . . 44,024
- ------------------------------------------------------------------
Other Assets and Liabilities, Net (0.4%) . 164
- ------------------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization--no par
value) based on 1,178,705
outstanding shares of beneficial
interest . . . . . . . . . . . . . . $39,586
Accumulated net realized gain
on investments . . . . . . . . . . . 45
Accumulated net realized
gain on foreign currency
transactions . . . . . . . . . . . . 179
Undistributed net
investment income . . . . . . . . . 2
Net unrealized appreciation on
foreign currency and translation
of other assets and liabilities
in foreign currency . . . . . . . . 89
Net unrealized appreciation
on investments . . . . . . . . . . . 4,287
- ------------------------------------------------------------------
Total Net Assets: (100.0%) . . . . . . . . $44,188
- ------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS . . . . . . . . . $37.49
==================================================================
</TABLE>
* Non-income producing securities.
The accompanying notes are an integral part of the financial statements.
51
<PAGE> 284
[THIS PAGE INTENTIONALLY LEFT BLANK]
52
<PAGE> 285
STATEMENT OF OPERATIONS For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
Stepstone Funds
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------------
TREASURY CALIFORNIA TAX-FREE
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income . . . . . . . . . . . . . . $18,032 $39,551 $4,339
- --------------------------------------------------------------------------------------------
Expenses:
Administrative Fee . . . . . . . . . . 415 895 157
Investment Adviser Fee . . . . . . . . 930 2,002 351
Investment Adviser Fee Waiver . . . . . (155) -- (241)
Custodian/Wire Agent Fee . . . . . . . 33 79 11
Professional Fees . . . . . . . . . . . 57 122 14
Registration Fees . . . . . . . . . . . 55 71 14
Distribution Fee (1) . . . . . . . . . 572 720 285
Distribution Fee Waiver . . . . . . . . (214) (270) (49)
Insurance Expenses . . . . . . . . . . 3 7 1
Trustees Fees . . . . . . . . . . . . . 6 20 2
Printing Expenses . . . . . . . . . . . 20 75 11
Miscellaneous Expenses . . . . . . . . 25 46 1
Amortization of Deferred Organizational Costs 6 6 6
- --------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . 1,753 3,773 563
- --------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . 16,279 35,778 3,776
- --------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments . . 5 (13) --
- --------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations $16,284 $35,765 $3,776
============================================================================================
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) All distribution fees are incurred in the Investment Class
The accompanying notes are in integral part of the financial statements.
53
<PAGE> 286
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Stepstone Funds
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------------
LIMITED CALIFORNIA
INTERMEDIATE- MATURITY TAX-FREE CONVERTIBLE
TERM BOND GOVERNMENT BOND SECURITIES
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Interest Income . . . . . . . . . . . . . . . . . $ 8,623 $2,231 $ 670 $ 460
Dividend Income . . . . . . . . . . . . . . . . . -- -- -- 181
Less: Foreign Taxes withheld, net of
reclaims . . . . . . . . . . . . . . . . . . . -- -- -- --
- ------------------------------------------------------------------------------------------------
Total Investment Income . . . . . . . . 8,623 2,231 670 641
- ------------------------------------------------------------------------------------------------
Expenses:
Administrative Fee . . . . . . . . . . . . . . 174 47 17 17
Investment Adviser Fee . . . . . . . . . . . . 648 106 64 77
Investment Adviser Fee Waiver . . . . . . . . -- -- (61) --
Custodian/Wire Agent Fee . . . . . . . . . . . 14 6 2 2
Professional Fees . . . . . . . . . . . . . . 20 8 2 3
Registration Fees . . . . . . . . . . . . . . 9 3 3 2
Distribution Fee (1) . . . . . . . . . . . . . 26 3 18 --
Distribution Fee Waiver . . . . . . . . . . . (26) (3) (18) --
Insurance Fees . . . . . . . . . . . . . . . . 1 1 -- --
Trustees Fees . . . . . . . . . . . . . . . . 2 1 1 1
Printing Fees . . . . . . . . . . . . . . . . 10 5 1 2
Miscellaneous Fees . . . . . . . . . . . . . . 1 8 1 1
Amortization of Deferred Organizational
Costs . . . . . . . . . . . . . . . . . . . 6 1 -- 4
- ------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . 885 186 30 109
- ------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . 7,738 2,045 640 532
- ------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments . . . . . 3,766 (119) (598) (14)
- ------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Option Contracts . . -- -- -- 1
- ------------------------------------------------------------------------------------------------
Net Realized Gain on Foreign Currency
Transactions . . . . . . . . . . . . . . . . . -- -- -- --
- ------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation on Investments 8,187 905 2,004 1,682
- ------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation on Foreign
Currency . . . . . . . . . . . . . . . . . . -- -- -- --
- ------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments . 11,953 786 1,406 1,669
- ------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from
Operations . . . . . . . . . . . . . . . . . . $19,691 $2,831 $2,046 $2,201
================================================================================================
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) All distribution fees are incurred in the Investment Class.
(2) Commenced operations February 1, 1995.
The accompanying notes are in integral part of the financial statements.
54
<PAGE> 287
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------
GOVERNMENT GROWTH VALUE BLUE CHIP EMERGING INTERNATIONAL
SECURITIES BALANCED EQUITY MOMENTUM GROWTH GROWTH EQUITY
FUND FUND FUND FUND FUND FUND FUND(2)
<S> <C> <C> <C> <C> <C> <C>
$2,467 $ 5,238 $ 620 $ 676 $ 172 $ 307 $ 235
-- 3,024 1,786 4,912 970 98 841
-- -- -- -- -- -- (96)
- --------------------------------------------------------------------------
2,467 8,262 2,406 5,588 1,142 405 980
- --------------------------------------------------------------------------
50 277 218 261 65 43 54
186 1,239 973 1,169 289 255 376
-- -- -- -- -- -- (77)
7 25 20 24 8 7 61
11 38 30 36 13 10 8
6 23 16 18 8 6 17
-- 30 7 42 -- -- --
-- (23) (6) (32) -- -- --
1 2 2 2 -- -- --
1 6 5 6 1 1 1
7 24 20 23 7 7 4
6 11 8 14 4 2 12
4 6 6 6 4 4 5
- --------------------------------------------------------------------------
279 1,658 1,299 1,569 399 335 461
- --------------------------------------------------------------------------
2,188 6,604 1,107 4,019 743 70 519
- --------------------------------------------------------------------------
1,661 6,254 11,047 9,006 3,514 1020 167
- --------------------------------------------------------------------------
-- 104 182 -- (379) (107) --
- --------------------------------------------------------------------------
-- -- -- -- -- -- 179
- --------------------------------------------------------------------------
1,677 38,493 32,685 52,751 10,866 7,122 4,287
- --------------------------------------------------------------------------
-- -- -- -- -- -- 89
- --------------------------------------------------------------------------
3,338 44,851 43,914 61,757 14,001 8,035 4,722
- --------------------------------------------------------------------------
$5,526 $51,455 $45,021 $65,776 $14,744 $8,105 $5,241
==========================================================================
</TABLE>
55
<PAGE> 288
STATEMENT OF CHNAGES IN NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Funds
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------
TREASURY CALIFORNIA TAX-FREE
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
----------------------- ----------------------- -----------------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income . . . . . . . . . . . . . $ 16,279 $ 7,672 $ 35,778 $ 23,714 $ 3,776 $ 3,080
Net Realized Gain (Loss) on Investments . . . . 5 (3) (13) (1,770) -- (2)
- ----------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting From Operations 16,284 7,669 35,765 21,944 3,776 3,078
- ----------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class . . . . . . . . . . . . (8,954) (5,797) (26,497) (20,599) (1,571) (1,684)
Investment Class . . . . . . . . . . . . . . (7,325) (1,875) (9,276) (3,119) (2,205) (1,396)
Capital Gains:
Institutional Class . . . . . . . . . . . . -- -- -- -- -- --
Investment Class . . . . . . . . . . . . . . -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (16,279) (7,672) (35,773) (23,718) (3,776) (3,080)
- ----------------------------------------------------------------------------------------------------------------------------
Change in Net Assets . . . . . . . . . . . . . . . 5 (3) (8) (1,774) 0 (2)
- ----------------------------------------------------------------------------------------------------------------------------
Share Transactions (All at $1.00 Per Share):
Institutional Class:
Shares Issued . . . . . . . . . . . . . . . 1,141,639 1,154,823 3,642,987 4,039,913 307,913 428,596
Shares Issued in Lieu of Cash Distributions 2,164 132 12,994 2,932 632 --
Shares Redeemed . . . . . . . . . . . . . . (1,104,578) (1,182,795) (3,689,649) (4,003,889) (317,672) (429,526)
---------- ---------- ---------- ---------- -------- --------
Total Institutional Share Transactions . 39,225 (27,840) (33,668) 38,956 (9,127) (930)
Investment Class:
Shares Issued . . . . . . . . . . . . . . . 467,443 259,095 420,652 245,168 143,423 114,291
Shares Issued in Lieu of Cash Distributions 6,283 1,483 8,172 2,916 1,956 1,342
Shares Redeemed . . . . . . . . . . . . . . (387,009) (160,743) (280,481) (222,938) (113,696) (118,359)
---------- ---------- ---------- ---------- -------- --------
Total Investment Share Transactions . . . 86,717 99,835 148,343 25,146 31,683 (2,726)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets From
Share Transactions . . . . . . . . . . . . . . . 125,942 71,995 114,675 64,102 22,556 (3,656)
- ----------------------------------------------------------------------------------------------------------------------------
Direct Contribution of Capital (1) . . . . . . . . -- -- -- 607 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets . 125,947 71,992 114,667 62,935 22,556 (3,658)
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period . . . . . . . . . . . . . . 272,059 200,067 648,021 585,086 101,544 105,202
End of Period . . . . . . . . . . . . . . . . . $ 398,006 $ 272,059 $ 762,688 $ 648,021 $124,100 $101,544
============================================================================================================================
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) See note 3 of the financial statements.
The accompanying notes are an integral part of the financial statements.
56
<PAGE> 289
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Funds
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------------
INTERMEDIATE- LIMITED MATURITY CALIFORNIA
TERM BOND GOVERNMENT TAX-FREE BOND
FUND FUND FUND
---------------- ---------------- ----------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95TO 01/31/96 TO 01/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income . . . . . . . . . . . . . $ 7,738 $ 7,277 $ 2,045 $ 1,685 $ 640 $ 1,079
Net Realized Gain (Loss) on Investments . . . . 3,766 (5,179) (119) (1,639) (598) (711)
Change in Unrealized Appreciation (Depreciation) on
Investments . . . . . . . . . . . . . . . . 8,187 (7,862) 905 (384) 2,004 (2,030)
Change in Unrealized Appreciation on Foreign Currency -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting From Operations 19,691 (5,764) 2,831 (338) 2,046 (1,662)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class . . . . . . . . . . . . (7,330) (6,835) (2,021) (1,580) (429) (835)
Investment Class . . . . . . . . . . . . . . (383) (477) (42) (83) (224) (247)
Capital Gains:
Institutional Class . . . . . . . . . . . . -- (168) -- -- -- --
Investment Class . . . . . . . . . . . . . . -- (11) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (7,713) (7,491) (2,063) (1,663) (653) (1,082)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets . . . . . . . . . . . . . . . 11,978 (13,255) 768 (2,001) 1,393 (2,744)
- -----------------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Shares Issued . . . . . . . . . . . . . . . 42,987 17,791 4,715 10,856 1,685 1,005
Shares Issued in Lieu of Cash Distributions 7,227 6,843 2,005 1,550 18 17
Shares Redeemed . . . . . . . . . . . . . . (38,490) (32,744) (5,203) (11,266) (11,244) (8,205)
-------- -------- -------- -------- -------- --------
Total Institutional Share Transactions . 11,724 (8,110) 1,517 1,140 (9,541) (7,183)
Investment Class:
Shares Issued . . . . . . . . . . . . . . . 78 1,196 41 416 337 3,502
Shares Issued in Lieu of Cash Distributions 383 488 42 82 224 247
Shares Redeemed . . . . . . . . . . . . . . (1,297) (3,442) (222) (2,767) (1,626) (1,174)
-------- -------- -------- -------- -------- --------
Total Investment Share Transactions . . . (836) (1,758) (139) (2,269) (1,065) 2,575
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets From Share Transactions 10,888 (9,868) 1,378 (1,129) (10,606) (4,608)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets . 22,866 (23,123) 2,146 (3,130) (9,213) (7,352)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period . . . . . . . . . . . . . . 116,493 139,616 34,000 37,130 17,675 25,027
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . $139,359 $116,493 $36,146 $34,000 $ 8,462 $17,675
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Institutional Shares:
Issued . . . . . . . . . . . . . . . . . . . 4,225 1,775 491 1,108 178 109
Issued in Lieu of Cash Distributions . . . . 710 692 209 161 2 2
Redeemed . . . . . . . . . . . . . . . . . . (3,773) (3,269) (542) (1,165) (1,183) (894)
-------- -------- -------- -------- -------- --------
Total Institutional Share Transactions . 1,162 (802) 158 104 (1,003) (783)
Investment Shares:
Issued . . . . . . . . . . . . . . . . . . . 7 117 4 41 35 368
Issued in Lieu of Cash Distributions . . . . 38 49 4 9 24 27
Redeemed . . . . . . . . . . . . . . . . . . (128) (347) (23) (285) (171) (131)
-------- -------- -------- -------- -------- --------
Total Investment Share Transactions . . . (83) (181) (15) (253) (112) 264
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions . . . 1,079 (983) 143 (131) (1,115) (519)
===================================================================================================================================
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
57
<PAGE> 290
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Funds
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------
CONVERTIBLE SECURITIES GOVERNMENT SECURITIES BALANCED
FUND FUND FUND
----------------------- ----------------------- -----------------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income . . . . . . . . . . . . . . . . . $ 532 $ 287 $ 2,188 $ 1,592 $ 6,604 $ 5,777
Net Realized Gain (Loss) on Investments . . . . . . . . (14) (44) 1,661 (2,044) 6,254 569
Net Realized Gain (Loss ) on Option Contracts . . . . . 1 -- -- -- 104 --
Net Realized Gain on Foreign Currency Transactions . . . -- -- -- -- -- --
Change in Unrealized Appreciation (Depreciation)
on Investments . . . . . . . . . . . . . . . . . . . 1,682 (573) 1,677 (551) 38,493 (10,690)
Change in Unrealized Appreciation on Foreign Currency . -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting From Operations 2,201 (330) 5,526 (1,003) 51,455 (4,344)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class . . . . . . . . . . . . . . . . . (522) (275) (2,167) (1,535) (6,372) (5,505)
Investment Class . . . . . . . . . . . . . . . . . . -- -- -- -- (235) (259)
Capital Gains:
Institutional Class . . . . . . . . . . . . . . . . . -- -- -- -- (5,794) (49)
Investment Class . . . . . . . . . . . . . . . . . . -- -- -- -- (213) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . (522) (275) (2,167) (1,535) (12,614) (5,815)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets . . . . . . . . . . . . . . . . . . . 1,679 (605) 3,359 (2,538) 38,841 (10,159)
- -----------------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Shares Issued . . . . . . . . . . . . . . . . . . . . 7,325 12,990 26,500 41,604 66,771 60,233
Shares Issued in Lieu of Cash
Distributions . . . . . . . . . . . . . . . . . . . 522 275 2,167 1,535 12,136 5,545
Shares Redeemed . . . . . . . . . . . . . . . . . . . (3,155) (2,363) (17,479) (8,423) (49,861) (40,859)
-------- -------- -------- -------- -------- --------
Total Institutional Share Transactions . . . . . . 4,692 10,902 11,188 34,716 29,046 24,919
Investment Class:
Shares Issued . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 495 1,527
Shares Issued in Lieu of Cash Distributions . . . . . . -- -- -- -- 448 262
Shares Redeemed . . . . . . . . . . . . . . . . . . . . -- -- -- -- (1,092) (1,468)
-------- -------- -------- -------- -------- --------
Total Investment Share Transactions . . . . . . . . -- -- -- -- (149) 321
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets From Share Transactions . . . . 4,692 10,902 11,188 34,716 28,897 25,240
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets . . . . . . 6,371 10,297 14,547 32,178 67,738 15,081
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . . . 10,297 -- 32,178 -- 174,562 159,481
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . $16,668 $10,297 $46,725 $32,178 $242,300 $174,562
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Institutional Shares:
Issued . . . . . . . . . . . . . . . . . . . . . . . 728 1,358 2,753 4,306 5,157 5,240
Issued in Lieu of Cash Distributions . . . . . . . . 53 29 228 168 921 483
Redeemed . . . . . . . . . . . . . . . . . . . . . . (317) (254) (1,829) (925) (3,894) (3,564)
-------- -------- -------- -------- -------- --------
Total Institutional Share Transactions . . . . . . 464 1,133 1,152 3,549 2,184 2,159
Investment Shares:
Issued . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 37 131
Issued in Lieu of Cash Distributions . . . . . . . . -- -- -- -- 34 23
Redeemed . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- (88) (128)
-------- -------- -------- -------- -------- --------
Total Investment Share Transactions . . . . . . . . -- -- -- -- (17) 26
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Share Transactions . . . . . . . . . . . . 464 1,133 1,152 3,549 2,167 2,185
====================================================================================================================================
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) Commenced operations on February 1, 1995.
The accompanying notes are an integral part of the financial statements.
58
<PAGE> 291
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
INTERNATIONAL
GROWTH EQUITY VALUE MOMENTUM BLUE CHIP GROWTH EMERGING GROWTH EQUITY
FUND FUND FUND FUND FUND
- --------------------- ---------------------- ---------------------- ---------------------- ------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94 02/01/95(1)
TO 01/31/96TO 01/31/95TO 01/31/96 TO 01/31/95 TO 01/31/96TO 01/31/95 TO 01/31/96 TO 01/31/95 TO 01/31/96
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,107 $ 957 $ 4,019 $ 3,633 $ 743 $ 561 $ 70 $ 164 $ 519
11,047 (1,230) 9,006 1,742 3,514 (1,859) 1020 469 167
182 23 -- -- (379) 140 (107) 67 --
-- -- -- -- -- -- -- -- 179
32,685 (7,247) 52,751 (10,607) 10,866 882 7,122 (1,091) 4,287
-- -- -- -- -- -- -- -- 89
- --------------------------------------------------------------------------------------------------------
45,021 (7,497) 65,776 (5,232) 14,744 (276) 8,105 (391) 5,241
- --------------------------------------------------------------------------------------------------------
(1,121) (901) (3,872) (3,373) (762) (526) (88) (147) (517)
(11) (9) (209) (231) -- -- -- -- --
(9,394) (1,753) (4,808) (584) (925) -- (867) (108) (122)
(102) (19) (258) (39) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
(10,628) (2,682) (9,147) (4,227) (1,687) (526) (955) (255) (639)
- --------------------------------------------------------------------------------------------------------
34,393 (10,179) 56,629 (9,459) 13,057 (802) 7,150 (646) 4,602
- --------------------------------------------------------------------------------------------------------
33,917 32,462 44,290 37,157 20,422 44,610 17,160 28,965 44,605
10,453 2,638 8,517 3,881 1,687 526 955 255 639
(36,487) (31,007) (34,471) (22,646) (10,075) (6,015) (7,423) (4,646) (5,658)
-------- -------- -------- -------- -------- -------- -------- -------- --------
7,883 4,093 18,336 18,392 12,034 39,121 10,692 24,574 39,586
683 410 875 2,309 -- -- -- -- --
113 28 467 270 -- -- -- -- --
(227) (166) (2,356) (1,552) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
569 272 (1,014) 1,027 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
8,452 4,365 17,322 19,419 12,034 39,121 10,692 24,574 39,586
- --------------------------------------------------------------------------------------------------------
42,845 (5,814) 73,951 9,960 25,091 38,319 17,842 23,928 44,188
- --------------------------------------------------------------------------------------------------------
138,090 143,904 159,915 149,955 38,319 -- 23,928 -- --
- --------------------------------------------------------------------------------------------------------
$180,935 $138,090 $233,866 $159,915 $63,410 $38,319 $41,770 $23,928 $44,188
- --------------------------------------------------------------------------------------------------------
2,017 2,284 2,744 2,746 1,769 4,605 1,579 3,007 1,320
617 187 515 289 145 56 84 27 18
(2,167) (2,212) (2,161) (1,683) (917) (639) (704) (495) (159)
-------- -------- -------- -------- -------- -------- -------- -------- --------
467 259 1,098 1,352 997 4,022 959 2,539 1,179
39 28 53 170 -- -- -- -- --
7 2 28 20 -- -- -- -- --
(13) (11) (157) (115) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
33 19 (76) 75 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
500 278 1,022 1,427 997 4,022 959 2,539 1,179
========================================================================================================
</TABLE>
59
<PAGE> 292
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stepstone Funds
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
---------------------------- ----------------------
NET NET NET
ASSET NET REALIZED ASSET ASSETS,
VALUE, NET AND UNREALIZED NET CONTRIBUTION VALUE, END
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL OF END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS CAPITAL OF PERIOD RETURN (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------
TREASURY MONEY MARKET FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.054 -- (0.054) -- -- 1.00 5.52% 182,286
1995 1.00 0.039 -- (0.039) -- -- 1.00 3.97% 143,035
1994 1.00 0.027 -- (0.027) -- -- 1.00 2.75% 170,879
1993 (1) 1.00 0.005 -- (0.005) -- -- 1.00 2.90%* 125,673
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.051 -- (0.051) -- -- 1.00 5.26% 215,720
1995 1.00 0.036 -- (0.036) -- -- 1.00 3.71% 129,024
1994 (2) 1.00 0.022 -- (0.022) -- -- 1.00 2.51%* 29,188
- -----------------
MONEY MARKET FUND
- -----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.054 -- (0.054) -- -- 1.00 5.57% 503,080
1995 1.00 0.039 (0.001) (0.039) -- 0.001 1.00 3.99% 536,754
1994 1.00 0.029 -- (0.029) -- -- 1.00 2.99% 498,795
1993 1.00 0.035 -- (0.035) -- -- 1.00 3.61% 521,664
1992 (3) 1.00 0.057 -- (0.057) -- -- 1.00 5.86% 240,341
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.052 -- (0.052) -- -- 1.00 5.31% 259,608
1995 1.00 0.037 -- (0.037) -- -- 1.00 3.78% 111,267
1994 1.00 0.027 -- (0.027) -- -- 1.00 2.77% 86,291
1993 1.00 0.033 -- (0.033) -- -- 1.00 3.36% 79,253
1992 (4) 1.00 0.036 -- (0.036) -- -- 1.00 4.74%* 144,086
</TABLE>
<TABLE>
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
RATIO TO AVERAGE NET INVESTMENT AVERAGE
OF EXPENSES NET ASSETS INCOME NET ASSETS
TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING
NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------
TREASURY MONEY MARKET FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.45% 0.50% 5.37% 5.32%
1995 0.44% 0.51% 3.85% 3.78%
1994 0.45% 0.55% 2.72% 2.62%
1993 (1) 0.45%* 0.55%* 2.81%* 2.71%*
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.70% 0.90% 5.10% 4.90%
1995 0.69% 0.90% 4.04% 3.83%
1994 (2) 0.71%* 0.96%* 2.45%* 2.20%*
- -----------------
MONEY MARKET FUND
- -----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.50% 0.50% 5.43% 5.43%
1995 0.50% 0.50% 3.93% 3.93%
1994 0.49% 0.49% 2.93% 2.93%
1993 0.46% 0.46% 3.47% 3.47%
1992 (3) 0.48% 0.51% 5.68% 5.65%
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.75% 0.90% 5.16% 5.01%
1995 0.70% 0.90% 3.79% 3.59%
1994 0.70% 0.89% 2.71% 2.52%
1993 0.69% 0.86% 3.41% 3.24%
1992 (4) 0.67%* 0.70%* 4.95%* 4.92%*
</TABLE>
* Annualized.
(1) Commenced operations on December 1, 1992.
(2) Commenced operations on March 5, 1993.
(3) Commenced operations on February 1, 1991.
(4) Commenced operations on May 28, 1991.
The accompanying notes are an integral part of the financial statements.
60
<PAGE> 293
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
---------------------------- ----------------------
NET NET NET
ASSET NET REALIZED ASSET ASSETS,
VALUE, NET AND UNREALIZED NET VALUE, END
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------
CALIFORNIA TAX-FREE MONEY MARKET
FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.034 -- (0.034) -- 1.00 3.48% 42,923
1995 1.00 0.026 -- (0.026) -- 1.00 2.67% 52,050
1994 1.00 0.021 -- (0.021) -- 1.00 2.13% 52,982
1993 1.00 0.025 -- (0.025) -- 1.00 2.61% 45,521
1992(5) 1.00 0.025 -- (0.025) -- 1.00 3.75%* 30,567
INVESTMENT CLASS(**)
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.031 -- (0.031) -- 1.00 3.14% 81,177
1995 1.00 0.023 -- (0.023) -- 1.00 2.33% 49,494
1994 1.00 0.018 -- (0.018) -- 1.00 1.80% 52,220
1993 1.00 0.022 -- (0.022) -- 1.00 2.27% 8,542
1992(6) 1.00 0.021 -- (0.021) -- 1.00 3.24%* 8,246
- ---------------------------
INTERMEDIATE-TERM BOND FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.67 0.609 0.951 (0.609) -- 10.62 16.58% 132,942
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11%) 09,848
1994 10.57 0.598 0.352 (0.595) (0.205) 10.72 9.22% 130,308
1993 10.49 0.650 0.409 (0.636) (0.343) 10.57 10.47% 112,806
1992 (3) 10.00 0.750 0.603 (0.745) (0.118) 10.49 14.05% 76,779
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 9.67 0.609 0.940 (0.609) -- 10.61 16.48% 6,417
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11%) 6,645
1994 10.57 0.615 0.335 (0.595) (0.205) 10.72 9.23% 9,308
1993 (11) 10.49 0.609 0.450 (0.636) (0.343) 10.57 10.59%* 2,897
</TABLE>
<TABLE>
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
RATIO TO AVERAGE NET INVESTMENT AVERAGE
OF EXPENSES NET ASSETS INCOME NET ASSETS PORTFOLIO
TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING TURNOVER
NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS RATE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------
CALIFORNIA TAX-FREE MONEY MARKET
FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.28% 0.49% 3.43% 3.22% --
1995 0.29% 0.50% 2.66% 2.45% --
1994 0.30% 0.54% 2.09% 1.85% --
1993 0.30% 0.54% 2.53% 2.29% --
1992(5) 0.30%* 0.57%* 3.82%* 3.55%* --
INVESTMENT CLASS(**)
FOR THE YEARS ENDED JANUARY 31,:
1996
1996 0.61% 0.88% 3.09% 2.82% --
1995 0.62% 0.90% 2.33% 2.05% --
1994 0.63% 0.94% 1.76% 1.45% --
1993 0.63% 0.94% 2.21% 1.90% --
1992(6) 0.61%* 0.88%* 3.44%* 3.17%* --
- ---------------------------
INTERMEDIATE-TERM BOND FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.68% 0.68% 5.97% 5.97% 147%
1995 0.71% 0.71% 5.89% 5.89% 95%
1994 0.69% 0.69% 5.56% 5.56% 72%
1993 0.67% 0.67% 6.16% 6.16% 88%
1992 (3) 0.72% 0.75% 7.37% 7.34% 126%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 0.68% 1.09% 5.99% 5.58% 147%
1995 0.71% 1.11% 5.87% 5.47% 95%
1994 0.69% 1.09% 5.51% 5.11% 72%
1993 (11) 0.65%* 1.05%* 6.01%* 5.61%* 88%
</TABLE>
* Annualized.
** Total return does not reflect the sales charge.
(3) Commenced operations on February 1, 1991.
(5) Commenced operations on June 10, 1991.
(6) Commenced operations on June 25, 1991.
(11) Commenced operations on February 3, 1992.
The accompanying notes are an integral part of the financial statements.
61
<PAGE> 294
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stepstone Funds
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
---------------------------- ----------------------
NET NET NET
ASSET NET REALIZED ASSET ASSETS,
VALUE, NET AND UNREALIZED NET VALUE, END
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------
LIMITED MATURITY GOVERNMENT FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.49 0.556 0.216 (0.561) -- 9.70 8.34% 35,518
1995 10.00 0.441 (0.517) (0.434) -- 9.49 (0.73%) 33,249
1994 (12) 10.00 0.253 0.004 (0.257) -- 10.00 3.56%* 33,982
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 9.50 0.562 0.208 (0.561) -- 9.71 8.33% 628
1995 10.01 0.454 (0.530) (0.434) -- 9.50 (0.73%) 751
1994 (13) 9.98 0.163 0.018 (0.151) -- 10.01 4.04%* 3,148
- -----------------------------
CALIFORNIA TAX-FREE BOND FUND
- -----------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 8.95 0.518 0.873 (0.487) -- 9.85 15.83% 4,196
1995 10.04 0.460 (1.098) (0.452) -- 8.95 (6.33%) 12,793
1994 (14) 10.00 0.117 0.028 (0.105) -- 10.04 5.01%* 22,197
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 8.94 0.470 0.918 (0.487) -- 9.84 15.84% 4,266
1995 10.03 0.439 (1.077) (0.452) -- 8.94 (6.33%) 4,882
1994 (14) 10.00 0.115 0.020 (0.105) -- 10.03 4.67%* 2,830
</TABLE>
<TABLE>
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
RATIO TO AVERAGE NET INVESTMENT AVERAGE
OF EXPENSES NET ASSETS INCOME NET ASSETS PORTFOLIO
TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING TURNOVER
NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS RATE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------
LIMITED MATURITY GOVERNMENT FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.53% 0.53% 5.80% 5.80% 186%
1995 0.55% 0.55% 4.54% 4.54% 166%
1994 (12) 0.58%* 0.58%* 3.49%* 3.49%* 77%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 0.53% 0.93% 5.80% 5.40% 186%
1995 0.51% 0.91% 4.36% 3.96% 166%
1994 (13) 0.75%* 1.15%* 3.41%* 3.01%* 77%
- -----------------------------
CALIFORNIA TAX-FREE BOND FUND
- -----------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.24% 0.71% 4.97% 4.50% 30%
1995 0.50% 0.72% 4.84% 4.62% 22%
1994 (14) 0.50%* 0.73%* 4.31%* 4.08% 19%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 0.23% 1.12% 4.93% 4.04% 30%
1995 0.50% 1.12% 4.92% 4.30% 22%
1994 (14) 0.50%* 1.13%* 4.26%* 3.63%* 19%
</TABLE>
* Annualized.
** Total return does not reflect the sales charge.
(12) Commenced operations on May 7, 1993.
(13) Commenced operations on August 18, 1993.
(14) Commenced operations on October 15, 1993.
The accompanying notes are an integral part of the financial statements.
62
<PAGE> 295
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
---------------------------- ----------------------
NET NET NET
ASSET NET REALIZED ASSET ASSETS,
VALUE, NET AND UNREALIZED NET VALUE, END
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------
CONVERTIBLE SECURITIES FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.08 0.407 1.350 (0.404) -- 10.43 19.67% 16,668
1995 (9) 10.00 0.354 (0.930) (0.343) -- 9.08 (5.83%) 10,297
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.07 0.556 0.870 (0.556) -- 9.94 16.16% 46,725
1995 (9) 10.00 0.491 (0.950) (0.475) -- 9.07 (4.49%) 32,178
- -------------
BALANCED FUND
- -------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 11.45 0.415 2.831 (0.417) (0.362) 13.92 28.93% 233,878
1995 12.21 0.390 (0.756) (0.391) (0.003) 11.45 (2.95%) 167,434
1994 11.50 0.394 0.928 (0.391) (0.221) 12.21 11.79% 152,189
1993 11.15 0.413 0.543 (0.408) (0.198) 11.50 8.86% 100,474
1992 (3) 10.00 0.471 1.250 (0.465) (0.106) 11.15 17.69% 67,098
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 11.45 0.406 2.825 (0.406) (0.362) 13.91 28.73% 8,422
1995 12.21 0.393 (0.758) (0.392) (0.003) 11.45 (2.95%) 7,128
1994 11.50 0.397 0.925 (0.391) (0.221) 12.21 11.79% 7,292
1993 (10) 11.30 0.092 0.404 (0.098) (0.198) 11.50 4.45%* 425
</TABLE>
<TABLE>
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
RATIO TO AVERAGE NET INVESTMENT AVERAGE
OF EXPENSES NET ASSETS INCOME NET ASSETS PORTFOLIO
TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING TURNOVER
NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS RATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------
CONVERTIBLE SECURITIES FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.85% 0.85% 4.14% 4.14% 46%
1995 (9) 0.85% 0.85% 3.87% 3.87% 36%
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.75% 0.75% 5.89% 5.89% 239%
1995 (9) 0.75% 0.75% 5.46% 5.46% 184%
- -------------
BALANCED FUND
- -------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.80% 0.80% 3.20% 3.20% 26%
1995 0.80% 0.80% 3.41% 3.41% 48%
1994 0.69% 0.79% 3.35% 3.25% 49%
1993 0.69% 0.79% 3.72% 3.62% 68%
1992 (3) 0.78% 0.91% 4.44% 4.31% 56%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 0.89% 1.20% 3.12% 2.81% 26%
1995 0.79% 1.19% 3.41% 3.01% 48%
1994 0.69% 1.19% 3.26% 2.76% 49%
1993 (10) 0.60%* 1.10%* 3.20%* 2.70%* 68%
</TABLE>
* Annualized.
** Total return does not reflect the sales charge.
(3) Commenced operations on February 1, 1991.
(9) Commenced operations on February 1, 1994.
(10) Commenced operations on November 13, 1992.
The accompanying notes are an integral part of the financial statements.
63
<PAGE> 296
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stepstone Funds
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
---------------------------- ----------------------
NET NET NET
ASSET NET REALIZED ASSET ASSETS,
VALUE, NET AND UNREALIZED NET VALUE, END
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------
GROWTH EQUITY FUND
- ------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 14.13 0.115 4.483 (0.118) (0.993) 17.62 32.93% 178,590
1995 15.16 0.097 (0.854) (0.092) (0.181) 14.13 (4.98%) 136,668
1994 13.79 0.066 1.370 (0.066) -- 15.16 10.48% 142,661
1993 12.69 0.091 1.101 (0.092) -- 13.79 9.48% 122,529
1992 (3) 10.00 0.103 2.703 (0.102) (0.014) 12.69 28.28% 93,260
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 14.13 0.101 4.480 (0.109) (0.993) 17.61 32.79% 2,345
1995 15.19 0.097 (0.884) (0.092) (0.181) 14.13 (5.17%) 1,422
1994 13.80 0.064 1.392 (0.066) -- 15.19 10.61% 1,243
1993 12.69 0.099 1.103 (0.092) -- 13.80 9.56% 43
1992 (7) 11.76 0.019 0.948 (0.023) (0.014) 12.69 39.11%* 13
- -------------------
VALUE MOMENTUM FUND
- -------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 13.40 0.331 5.063 (0.337) (0.408) 18.05 40.88% 222,065
1995 14.27 0.318 (0.817) (0.317) (0.054) 13.40 (3.48%) 150,138
1994 12.76 0.292 1.538 (0.290) (0.030) 14.27 14.56% 140,609
1993 11.68 0.310 1.103 (0.311) (0.022) 12.76 12.33% 92,636
1992 (3) 10.00 0.312 1.694 (0.302) (0.024) 11.68 20.27% 51,682
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 13.40 0.320 5.060 (0.323) (0.408) 18.05 40.77% 11,801
1995 14.27 0.321 (0.820) (0.317) (0.054) 13.40 (3.48%) 9,777
1994 12.75 0.297 1.543 (0.290) (0.030) 14.27 14.65% 9,346
1993 (8) 11.52 0.246 1.257 (0.251) (0.022) 12.75 15.97%* 3,162
</TABLE>
<TABLE>
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
RATIO TO AVERAGE NET INVESTMENT AVERAGE
OF EXPENSES NET ASSETS INCOME NET ASSETS PORTFOLIO
TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING TURNOVER
NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS RATE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------
GROWTH EQUITY FUND
- ------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.80% 0.80% 0.68% 0.68% 24%
1995 0.78% 0.78% 0.69% 0.69% 22%
1994 0.77% 0.79% 0.48% 0.46% 45%
1993 0.68% 0.78% 0.74% 0.64% 23%
1992 (3) 0.72% 0.85% 0.90% 0.77% 26%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 0.89% 1.19% 0.60% 0.30% 24%
1995 0.78% 1.17% 0.69% 0.30% 22%
1994 0.77% 1.18% 0.48% 0.07% 45%
1993 0.67% 1.17% 0.69% 0.19% 23%
1992 (7) 0.83%* 0.96%* 0.79%* 0.66%* 26%
- -------------------
VALUE MOMENTUM FUND
- -------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.80% 0.80% 2.07% 2.07% 20%
1995 0.81% 0.81% 2.36% 2.36% 6%
1994 0.77% 0.79% 2.19% 2.17% 5%
1993 0.68% 0.78% 2.59% 2.49% 3%
1992 (3) 0.78% 0.91% 2.88% 2.75% 5%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 0.89% 1.20% 2.00% 1.69% 20%
1995 0.81% 1.21% 2.37 1.97% 6%
1994 0.77% 1.20% 2.12% 1.69% 5%
1993 (8) 0.65%* 1.15%* 2.53%* 2.03%* 3%
</TABLE>
* Annualized.
** Total return does not reflect the sales charge.
(3) Commenced operations on February 1, 1991.
(7) Commenced operations on November 14, 1991.
(8) Commenced operations on April 2, 1992.
The accompanying notes are an integral part of the financial statements.
64
<PAGE> 297
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
---------------------------- ----------------------
NET NET NET
ASSET NET REALIZED ASSET ASSETS,
VALUE, NET AND UNREALIZED NET VALUE, END
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.53 0.174 3.311 (0.180) (0.203) 12.63 36.95% 63,410
1995 (9) 10.00 0.167 (0.479) (0.158) -- 9.53 (3.10%) 39,319
- --------------------
EMERGING GROWTH FUND
- --------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.42 0.026 2.807 (0.033) (0.277) 11.94 30.24% 41,770
1995 (9) 10.00 0.086 (0.535) (0.080) (0.051) 9.42 (4.48%) 23,928
- -------------------------
INTERNATIONAL EQUITY FUND
- -------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 (15) 33.51 0.447 4.084 (0.446) (0.105) 37.49 13.56% 44,188
</TABLE>
<TABLE>
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
RATIO TO AVERAGE NET INVESTMENT AVERAGE
OF EXPENSES NET ASSETS INCOME NET ASSETS PORTFOLIO
TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING TURNOVER
NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS RATE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 0.83% 0.83% 1.54% 1.54% 69%
1995 (9) 0.85% 0.85% 1.84% 1.84% 89%
- --------------------
EMERGING GROWTH FUND
- --------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.05% 1.05% 0.22% 0.22% 131%
1995 (9) 1.05% 1.05% 1.01% 1.01% 123%
- -------------------------
INTERNATIONAL EQUITY FUND
- -------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 (15) 1.16% 1.36% 1.31% 1.11% 21%
</TABLE>
(9) Commenced operations on February 1, 1994.
(15) Commenced operations on February 1, 1995.
The accompanying notes are in integral part of the financial statements.
65
<PAGE> 298
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stepstone Funds
1. Organization
Stepstone Funds (the "Trust" or the "Fund") was organized as a Massachusetts
business trust under a Declaration of Trust dated October 16, 1990.
The Trust is registered under the Investment Company Act of 1940, as amended,
as a diversified open-end investment company with fourteen funds: the Treasury
Money Market Fund, the Money Market Fund and the California Tax-Free Money
Market Fund (the "Money Market Funds") and the Intermediate-Term Bond Fund, the
Limited Maturity Government Fund, the California Tax-Free Bond Fund, the
Convertible Securities Fund, the Government Securities Fund, the Balanced Fund,
the Growth Equity Fund, the Value Momentum Fund, the Blue Chip Growth Fund, the
Emerging Growth Fund, and the International Equity Fund (the "Non-Money Market
Funds"). The Trust is registered to offer two classes of shares, Institutional
and Investment. The Funds' prospectus provides a description of each fund's
investment objectives, policies and strategies.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Trust.
Security Valuation -- Investment securities held by the Money Market
Funds are stated at amortized cost, which approximates market value.
Under this valuation method, purchase discounts and premiums are
accreted and amortized ratably to maturity and are included in
interest income.
Investments in equity securities held by the Non-Money Market Funds
which are traded on a national securities exchange (or reported on the
NASDAQ national market system) are stated at the last quoted sales
price if readily available for such equity securities on each business
day; other equity securities traded in the over-the-counter market and
listed equity securities for which no sale was reported on that date
are stated at the last quoted bid price. Option contracts are valued
at the last quoted bid price as quoted on the primary exchange or
board of trade which such option contracts are traded. Debt
obligations exceeding sixty days to maturity for which market
quotations are readily available are valued at the most recently
quoted bid price. Debt obligations with sixty days or less remaining
until maturity may be valued at their amortized cost. Restricted
securities for which quotations are not readily available are valued
at fair value using methods determined in good faith under general
Trustee supervision.
Foreign Currency Translation -- The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated
into U.S. dollars on the following basis: (I) market value of
investment securities, other assets and liabilities at the current
rate of exchange; and (II) purchases and sales of investment
securities, income and expenses at the relevant rates of exchange
prevailing on the respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on
investments in securities which is due to changes in the foreign
exchange rates from that which is due to changes in market prices of
such securities.
The Fund reports gains and losses on foreign currency related
transactions as realized and unrealized gains and losses for financial
reporting purposes, whereas such gains and losses are treated as
ordinary income or loss for U.S. Federal income tax purposes.
Federal Income Taxes -- It is each Fund's intention to continue to
qualify as a regulated investment company for Federal income tax
purposes and distribute all of its taxable income and net capital
gains. Accordingly, no provision for Federal income taxes is required.
The International Equity Fund may be subject to taxes imposed by
countries in which it invests with respect to its investments in
issuers existing or operating in such countries. Such taxes are
generally based on either income earned or repatriated. The
International Equity Fund accrues such taxes when the related income
is earned.
66
<PAGE> 299
January 31, 1996
- --------------------------------------------------------------------------------
Net Asset Value Per Share -- The net asset value per share is
calculated on each business day for each Fund. In general, it is
computed by dividing the assets of each Fund, less its liabilities, by
the number of outstanding shares of each Fund.
Discounts and Premiums -- Discounts and premiums are accreted or
amortized over the life of each security and are recorded as interest
income for each of the Funds using a method which approximates the
effective interest method.
Classes -- Class specific expenses are borne by that class. Income,
non-class specific expenses and realized/unrealized gains and losses
are allocated to the respective classes on the basis of the relative
daily net assets.
Repurchase Agreements -- Securities pledged as collateral for
Repurchase Agreements are held by the custodian bank until the
respective agreements mature. Provisions of repurchase agreements and
procedures adopted by the Adviser ensure that the market value of the
collateral is sufficient in the event of default by the counterparty.
If the counterparty defaults and the value of the collateral declines
or if the counterparty enters an insolvency proceeding, realization of
the collateral by the fund may be delayed or limited.
Options Transactions -- In order to produce incremental earnings,
protect gains, and facilitate buying and selling of securities for
investment purposes, the Growth Equity Fund, the Value Momentum Fund,
the Blue Chip Growth Fund, the Emerging Growth Fund, the Balanced and
International Equity Fund may write covered call options. A risk in
writing a call option is that the fund gives up the opportunity of
profit if the market price of the underlying security increases.
The Fund realizes a gain upon the expiration of a written call option.
When a written call option is closed prior to expiration by being
exercised, the proceeds on the sale are increased by the amount of
original premium received.
The Blue Chip Growth Fund, Emerging Growth Fund, the Balanced Fund and
International Equity may purchase options with respect to securities
that are permitted investments. The risk in purchasing options is
limited to the premium paid.
The Fund recognizes a gain when the underlying securities' market
price rises (in case of a call) or falls (in case of a put) to the
extent sufficient to cover the option premium and transaction costs.
Security Transactions and Investment
Income -- Security transactions are accounted for on the date the
security is purchased or sold (trade date). Costs used in determining
realized gains and losses on the sale of investment securities are
those of the specific securities sold adjusted for the accretion and
amortization of purchase discounts and premiums during the respective
holding periods. Interest income is recorded on the accrual basis;
dividend income is recorded on the ex-dividend date.
Distributions to Shareholders -- Dividends from net investment income
for the money market funds and the Limited Maturity Government Fund
are declared daily and paid monthly. Each of the non-money market
funds except the Limited Maturity Government Fund declare and pay
dividends from net investment income monthly. Any net realized capital
gains will be distributed at least annually for all Funds.
Reclassification on Components of Net Assets -- In accordance with
Statement of Position 93-2, "Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distribution by Investment Companies", $201,146, $134,711, $178,166
and $111,110 relating to differences attributable to the
classification of short-term capital gains and net investment income
for tax distribution purposes of the Growth Equity, Value Momentum,
Balanced and Intermediate-Term Bond Funds, respectively, as of january
31, 1996 have been reclassified between the Fund's accumulated net
realized gains/losses and undistributed net income accounts, as
appropriate. These reclassifications had no effect on net asset value.
67
<PAGE> 300
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Stepstone Funds
3. Transactions with Affiliates and Organization Costs
The Trust and SEI Financial Management Corporation (the "Administrator") are
parties to an Administration Agreement (the "Agreement") dated January 30,
1991, under which the Administrator provides the Trust with management,
administrative and shareholder services for an annual fee of .15% on the first
$1 billion of aggregate net assets, .12% on the aggregate net assets from $1
billion to $2 billion, and .10% on the aggregate net assets in excess of $2
billion. The Administrator's fee is allocated to the funds based on the
percentage of each fund's average net assets to the total average net assets of
the Trust.
SEI Financial Services Company (the "Distributor") and the Trust are parties to
a distribution agreement dated January 30, 1991. No compensation is paid to the
Distributor for services rendered to the Institutional Class under this
agreement. The Trust has adopted a Distribution Plan (the "Plan") on behalf of
the Investment Class shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. This Plan provides that the Investment Class will bear the cost of
its distribution expenses. The Plan also provides for additional payments to
the Distributor of up to an annual rate of .40% of the Fund's Investment Class
daily net assets.
Certain officers and/or Trustees of the Trust are also officers and/or
Directors of the Administrator. The Trust pays each unaffiliated Trustee an
annual fee for attendance at quarterly, interim and committee meetings.
Compensation of officers and affiliated Trustees is paid by the Administrator.
The aggregate amount of fees paid to unaffiliated Trustees during the year was
approximately $54,000.
Organizational costs incurred by the Trust have been capitalized by the Trust
and are being amortized over sixty months commencing with operations. In the
event any of the initial shares of the Trust are redeemed by thereof during the
period that the Trust is amortizing its organizational costs, the redemption
proceeds payable to the holder thereof by the Trust will be reduced by the
unamortized organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of redemption. Such costs include legal fees for organizational work
performed by a law firm of which an officer of the Fund is a partner.
During the period ended January 31, 1995, Union Bank, an affiliate of the
Advisor, purchased securities from the Money Market Fund for $19,912,500 which
represented the amortized cost and carrying value of the securities. The
securities aggregate market value was $19,305,900 at the time of purchase. This
transaction has been recorded on the books as a realized capital loss of
$606,600 on investment in the statement of operations, and as a contribution of
capital on the books for $606,600. the transactions did not change the net
asset value of the Fund.
4. Investment Advisory Agreement
The Trust and Union Capital Advisors, a division of Union Bank, (the "Advisor")
are parties to an Advisory Agreement. For its services, the Advisor is entitled
to receive a fee, which is calculated daily and paid monthly, at an annual rate
of .30% of the average daily net assets of the Treasury Money Market Fund, the
Money Market Fund, the California Tax-Free Money Market Fund and the Limited
Maturity Government Fund, .60% of the Growth Equity Fund, the Value Momentum
Fund, the Blue Chip Growth Fund, the Balanced Fund and the Convertible
Securities Fund, .50% of the Intermediate-Term Bond Fund, the Government
Securities Fund and the California Tax-Free Bond Fund, .80% of the Emerging
Growth Fund and .95% of the International Equity Fund. The Advisor has
voluntarily agreed, for an indefinite period of time to waive all or a portion
of
68
<PAGE> 301
January 31, 1996
- --------------------------------------------------------------------------------
its fee in the Treasury Money Market Fund, the California Tax-Free Money
Market Fund, the International Equity Fund, and the California Tax-Free Bond
Fund in order to limit the operating expenses of the Funds.
The Advisor and The Bank of Tokyo Trust Company are parties to a Sub-Advisory
Agreement on the Blue Chip Growth Fund, the Emerging Growth Fund, the
Convertible Securities Fund and the Government Securities Fund. The Bank of
Tokyo Trust Company is entitled to a fee which is calculated daily and paid
monthly by the Advisor.
The Advisor and The Bank of Tokyo Asset Management (U.K.) Limited are parties
to a Sub-Advisory Agreement on the International Equity Fund. The Bank of
Tokyo Asset Management (U.K.) Limited is entitled to a fee which is calculated
daily and paid monthly by the Advisor.
During the fiscal year ended January 31, 1996, Union Bank agreed to merge with
the Bank of California, N.A., effective on or about April 1, 1996. After the
merger, the resulting Bank will change its name to Union Bank of California,
N.A. Union Capital Advisors will be combined with Merus Capital Management and
re-named Merus-UCA Capital Management. Merus-UCA will operate as a separate
division of the Union Bank of California, N.A. The subadvisor, the Bank of
Tokyo Trust Company, will change its name to Bank of Tokyo-Mitsubishi Trust
Company upon the merger of the Bank of Tokyo Trust Company and Mitsubishi Bank
Trust Company of New York on or about April 1, 1996. These transactions will
result in the termination of the Stepstone Funds' investment advisory and
subadvisory agreements. The Funds have called a shareholder meeting to approve
new investment advisory and subadvisory contracts with Union Bank of
California, N.A. and Bank of Tokyo-Mitsubishi Trust Company, respectively. The
advisory fees will not be affected by these changes.
5. Investment Transactions
The purchases and sales of investment securities and United States Government
Obligations (other than short-term securities) were as follows:
<TABLE>
<CAPTION>
INVESTMENT U.S. GOVERNMENT
SECURITIES SECURITIES
------------------ --------------------
PURCHASES SALES PURCHASES SALES
(000'S) (000'S) (000'S) (000'S)
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Int.-Term Bond. . . . . . . $53,374 $67,771 $123,299 $105,852
Limited Maturity Govt.. . . 1,038 159 52,382 38,371
California Tax-Free Bond. . 3,709 14,150 -- --
Convertible Securities. . . 11,375 5,294 -- --
Government Securities . . . 20,702 18,081 76,536 65,515
Balanced. . . . . . . . . . 55,247 46,110 18,516 2,555
Growth Equity . . . . . . . 36,113 39,851 -- --
Value Momentum . . . . . . 42,995 36,545 -- --
Blue Chip Growth. . . . . . 47,725 31,408 -- --
Emerging Growth . . . . . . 46,462 35,295 -- --
International Equity. . . . 44,352 7,765 -- --
</TABLE>
At January 31, 1996 the total cost of securities and net realized gains or
losses on securities sold for Federal income tax purposes was not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation at January 31, 1996 for each
portfolio is as follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION TOTAL
(000'S) (000'S) (000'S)
------------- ------------ -------
<S> <C> <C> <C>
Int.-Term Bond . . . . $ 4,867 $ (43) $ 4,824
Limited Maturity Govt. 555 -- 555
California Tax-Free Bond 215 (3) 212
Convertible Securities 1,560 (451) 1,109
Government Securities . 1,140 (14) 1,126
Balanced . . . . . . . 46,268 (1,857) 44,411
Growth Equity . . . . . 70,366 (2,218) 68,148
Value Momentum . . . . 71,181 (2,383) 68,798
Blue Chip Growth . . . 12,382 (634) 11,748
Emerging Growth . . . . 7,689 (1,657) 6,032
International Equity . 4,997 (710) 4,287
</TABLE>
69
<PAGE> 302
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stepstone Funds
Subsequent to October 31, 1995, the Funds recognized net capital losses for tax
purposes that have been deferred to 1996 and can be used to offset future
capital gains at January 31, 1996. The funds also had capital loss
carryforwards at January 31, 1996, to the extent provided in the regulations
for federal income tax as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYOVER EXPIRES EXPIRES EXPIRES
1/31/96 2002 2003 2004
------------ -------- ---------- --------
<S> <C> <C> <C> <C>
Treasury MM . . . . . . $ 2,187 $ -- $ 2,187 $ --
Money Market . . . . . 1,163,215 -- 1,163,215 --
Cal T/F MM . . . . . . 1,863 -- 1,863 --
Int.-Term Bond . . . . 1,412,177 -- 1,412,177 --
Limited Maturity Govt. 1,766,916 3,154 873,702 890,060
Cal. Tax-Free Bond . . 1,309,688 -- 588,397 721,291
Convertible Securities 57,122 -- 39,362 17,760
Government Securities . 362,601 -- 362,601 --
</TABLE>
The Growth Equity and Blue Chip Funds utilized their entire capital loss
carryforward balance of $1,206,611 and $617,659, respectively, which was
carried over from the previous year. The Intermediate-Term Bond and Government
Securities Funds used $2,740,091 and $1,465,927, respectively, of its capital
loss carryforward from the previous year.
6. Concentration of Credit Risk
The California Tax-Free Money Market Fund and the California Tax-Free Bond Fund
invest in debt securities in the State of California. The ability of the
issuers of the securities held by the Funds to meet their obligations may be
affected by economic developments in that state.
The International Equity Fund invests in securities of foreign issuers
in various countries. These investments may involve certain considerations and
risks not typically associated with investments in the United States, as a
result of, among other factors, the possibility of future political and
economic developments and the level of governmental supervision and regulation
of securities markets in the respective countries.
70
<PAGE> 303
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
Stepstone Funds
7. Option Contracts
Transactions in covered call options and purchased put options during the
period ended January 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROWTH EQUITY
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- ----------
<S> <C> <C>
Option written and outstanding at
beginning of period . . . . . . . -- $ --
Call option written during period . 1,669 592,787
Call option exercised during period (639) (201,573)
Call option expired during period . (553) (217,375)
Call option closed during period . (477) (173,839)
---------- ----------
Option written and outstanding at
end of period . . . . . . . . . . -- --
========== ==========
</TABLE>
<TABLE>
<CAPTION>
BLUE CHIP GROWTH
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- ----------
<S> <C> <C>
Option written and outstanding at
beginning of period . . . . . . . 392 $ 62,027
Call option written during period . 7,439 2,271,388
Call option exercised during period (1,023) (198,890)
Call option expired during period (1,630) (381,581)
Call option closed during period . (4,718) (1,616,696)
---------- ----------
Option written and outstanding at
end of period . . . . . . . . . . 460 136,248
========== ==========
</TABLE>
<TABLE>
<CAPTION>
EMERGING GROWTH
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- ----------
<S> <C> <C>
Option written and outstanding at
beginning of period . . . . . . . 188 $ 35,793
Call option written during period . 3,765 1,525,251
Call option exercised during period (528) (145,844)
Call option expired during period . (808) (190,597)
Call option closed during period . (2,467) (1,179,711)
---------- ----------
Option written and outstanding at
end of period . . . . . . . . . . 150 44,892
========== ==========
</TABLE>
<TABLE>
<CAPTION>
BALANCED
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- ----------
<S> <C> <C>
Option written and outstanding at
beginning of period . . . . . . . -- $ --
Call option written during period . 921 93,380
Call option exercised during period (81) (19,778)
Call option expired during period . (620) (104,191)
Call option closed during period . (20) (4,690)
---------- ----------
Option written and outstanding at
end of period . . . . . . . . . . 200 35,279
========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE SECURITIES
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- ----------
<S> <C> <C>
Option written and outstanding at
beginning of period . . . . . . . . -- $ --
Call option written during period . 10 1,529
Call option exercised during period -- --
Call option expired during period . -- --
Call option closed during period . (10) (1,529)
---------- ----------
Option written and outstanding at
end of period . . . . . . . . . . -- --
========== ==========
</TABLE>
<TABLE>
<CAPTION>
BLUE CHIP GROWTH
-------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- ----------
<S> <C> <C>
Purchased put option outstanding at
beginning of period . . . . . . . . -- $ --
Put option purchased during period 912 162,650
Put option sold during period . . . (650) (118,256)
Put option expired during period . (97) (12,867)
Put option exercised during period (165) (31,527)
---------- ----------
Purchased put option outstanding
at end of period. . . . . . . . . -- --
========== ==========
</TABLE>
<TABLE>
<CAPTION>
EMERGING GROWTH
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- ----------
<S> <C> <C>
Purchase call option outstanding at
beginning of period . . . . . . . . -- $ --
Call option purchased during period 881 168,903
Call option sold during period . . (230) (51,315)
Call option expired during period . (336) (47,344)
Call option exercised during period (215) (46,007)
---------- ----------
Purchased call option outstanding at
end of period. . . . . . . . . . 100 24,237
========== ==========
</TABLE>
71
<PAGE> 304
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of the
Stepstone Funds:
We have audited the accompanying statements of net assets of the Treasury Money
Market, Money Market, California Tax-Free Money Market, Intermediate-Term
Bond,Limited Maturity Government, California Tax-Free Bond, Convertible
Securities, Government Securities, Balanced, Growth Equity, Value Momentum,
Blue Chip Growth, Emerging Growth, and International Equity Funds (fourteen of
the Funds constituting Stepstone Funds) as of January 31, 1996, and the related
statements of operations, statements of changes in net assets and financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Treasury Money Market, Money Market, California Tax-Free Money Market,
Intermediate-Term Bond,Limited Maturity Government, California Tax-Free Bond,
Convertible Securities, Government Securities, Balanced, Growth Equity, Value
Momentum, Blue Chip Growth, Emerging Growth, and International Equity Funds of
Stepstone Funds as of January 31, 1996, the results of their operations,
changes in their net assets and financial highlights for the periods presented,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 21, 1996
72
<PAGE> 305
APPENDIX
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by Advisor or, where applicable, SubAdvisor with
regard to portfolio investments for the Funds include Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), and Fitch
Investors Service, Inc. ("Fitch"). Set forth below is a description of the
relevant ratings of each such NRSRO. The NRSROs that may be utilized by
Midlantic Bank, N.A. and the description of each NRSRO's ratings is as of the
date of this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the four highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2, and 3) in each rating category to indicate
the security's ranking within the category):
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." 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
are generally 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 risk 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 and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time 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.
Description of the four highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A-1
<PAGE> 306
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits 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
debt in this category than in higher rated categories.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA Bonds 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 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
issues is generally rated "[-]+."
A Bonds 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.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by many of the following
characteristics:
-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.
-Well-established access to a range of financial
markets and assured sources of alternate
liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt
obligations. This will normally be evidenced
A-2
<PAGE> 307
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively
high financial leverage. Adequate alternate liquidity is
maintained.
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have
extremely strong safety characteristics are denoted with a
plus sign (+).
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not
as high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
Fitch's description of its three highest short-term debt ratings:
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 assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
or F-1 ratings.
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.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
A-3
<PAGE> 308
S&P's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
A-4