<PAGE> 1
As filed with the Securities and Exchange Commission on
October 13, 1998
Registration No. 33-12608 and 811-5059
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
____ PRE-EFFECTIVE AMENDMENT NO. __
____ POST-EFFECTIVE AMENDMENT NO. __
(Check appropriate box or boxes)
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HIGHMARK FUNDS
(Exact Name of Registrant as Specified in Charter)
One Freedom Valley Drive
Oaks, PA 19456
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
1-800-433-6884
(AREA CODE AND TELEPHONE NUMBER)
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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)
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Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective on November 12,
1998 pursuant to Rule 488.
Title of securities being registered: Units of beneficial interest.
No filing fee is due because of reliance on Section 24(f).
<PAGE> 2
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET
---------------------
FORM N-14 ITEM CAPTION IN COMBINED PROSPECTUS/PROXY STATEMENT
- -------------- ----------------------------------------------
<S> <C>
1 Cross-Reference Sheet; Front Cover
2 Table of Contents
3 Synopsis and Risk Factors
4 Proposal (1) -- Approval of Plan of Reorganization; Introduction; Proposal
Regarding Approval or Disapproval of Plan of Reorganization; Background
and Reasons for the Proposed Reorganization; Information about the
Reorganization
5 & 6 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
7 Introduction; Proposal Regarding Approval or Disapproval of Plan of
Reorganization; Information About the Reorganization; Voting Information
8 Interest of Certain Persons in the Transaction
9 Not Applicable
CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
----------------------------------------------
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
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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
HighMark Funds
The document you hold in your hands contains your combined registration
statement/proxy statement 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 your Fund. The proxy card may be completed by checking the
appropriate box voting for or against the specific proposals relating to your
Fund. 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 of
HighMark Funds.
We urge you to take the time to read the proxy statement, fill out the proxy
card, and return it to us. Voting your proxy, and doing so promptly, ensures
that the Funds will not need to conduct additional mailings. When shareholders
do not return their proxies in sufficient numbers, we will incur the expense of
follow-up solicitations.
Please take a few moments to exercise your right to vote. Thank you.
(Front Cover of Combined Registration Statement/Proxy Package)
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<PAGE> 4
HIGHMARK FUNDS
One Freedom Valley Drive
Oaks, PA 19456
November 16, 1998
To the Shareholders:
Enclosed you will find several documents being furnished to you in
connection with a special meeting of the shareholders of HighMark Funds to be
held on December 18, 1998, at SEI Investments Mutual Fund Services, One Freedom
Valley Drive, 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 Board of Trustees of HighMark Funds is recommending that
shareholders of the HighMark Blue Chip Growth Fund ("Blue Chip Growth Fund") and
the HighMark Government Securities Fund ("Government Securities Fund" and,
collectively, the "Consolidating Funds") approve a reorganization in which each
Fund will transfer all of its assets to the HighMark Growth Fund ("Growth Fund")
and the HighMark Bond Fund ("Bond Fund" and, collectively, the "Consolidated
Funds"), respectively, in return for Fiduciary Shares of such Consolidated Fund
and the assumption by such Consolidated Fund of all of the liabilities of such
Consolidating Fund. After the transfer, Shares of each Consolidated Fund will be
distributed to the corresponding Consolidating Fund's shareholders tax-free in
liquidation of such Consolidating Fund. As a result of these transactions, your
shares of such Consolidating Fund would, in effect, be exchanged at net asset
value and on a tax-free basis for Shares of such Consolidated Fund.
HighMark Capital Management, Inc. has advised the Board of Trustees of
HighMark Funds that it believes that the above-described transactions regarding
the Blue Chip Growth Fund and Government Securities Fund offer the shareholders
of such Funds an opportunity to pursue similar investment objectives more
effectively and with resulting economies of scale and potentially lower expense
ratios over time.
THE BOARD OF TRUSTEES OF HIGHMARK FUNDS BELIEVES THAT THE PROPOSED
COMBINATIONS OF THE BLUE CHIP GROWTH FUND WITH THE GROWTH FUND AND THE
GOVERNMENT SECURITIES FUND WITH THE BOND FUND ARE IN THE BEST INTERESTS OF SUCH
FUND AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSAL.
The Notices 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 HIGHMARK FUNDS 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,
Mark E. Nagle
President
HighMark Funds
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<PAGE> 5
HIGHMARK FUNDS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of the HighMark Blue Chip Growth Fund and the HighMark
Government Securities Fund:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders
("Meeting") of the HighMark Blue Chip Growth Fund ("Blue Chip Growth Fund") and
the HighMark Government Securities Fund ("Government Securities Fund"), separate
series of HighMark Funds, will be held at SEI Investments Mutual Funds Services,
One Freedom Valley Drive, Oaks, Pennsylvania on Friday, December 18, 1998 at
3:00 p.m., Eastern time, for the following purposes:
1. To consider and act upon a Plan of Reorganization ("Plan")
adopted by HighMark Funds providing for the transfer of all of
the assets of the Blue Chip Growth Fund and the Government
Securities Fund (the Government Securities Fund and the Blue Chip
Growth Fund each a "Consolidating Fund" and, collectively, the
"Consolidating Funds") to the HighMark Growth Fund and the
HighMark Bond Fund, respectively (the Growth Fund and the Bond
Fund each a "Consolidated Fund" and, collectively, the
"Consolidated Funds") in exchange for Fiduciary Shares of the
Consolidated Fund and the assumption by such Consolidated Fund of
all of the liabilities of the Consolidating Fund, followed by the
dissolution and liquidation of such Consolidating Fund, and the
distribution of Shares of such Consolidated Fund to the
shareholders of the Consolidating Fund.
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 Plan is appended as Exhibit A thereto.
Pursuant to instructions of the Board of Trustees of HighMark Funds,
the close of business on September 30, 1998, 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 THE
BOARD OF TRUSTEES OF HIGHMARK FUNDS. 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 HIGHMARK FUNDS 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
Kevin P. Robins
Secretary
HIGHMARK FUNDS
One Freedom Valley Drive
Oaks, Pennsylvania
November 16, 1998
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<PAGE> 6
QUESTION & ANSWER SECTION
Q. WHY IS THE BOARD OF TRUSTEES OF HIGHMARK FUNDS PROPOSING TO MERGE THE
HIGHMARK BLUE CHIP GROWTH FUND INTO THE HIGHMARK GROWTH FUND AND THE
HIGHMARK GOVERNMENT SECURITIES FUND INTO THE HIGHMARK BOND FUND?
A. As part of a wide ranging effort to maximize efficiencies in HighMark
Funds, serious consideration was given to the future of the Blue Chip
Growth Fund and the Government Securities Fund. After considering a variety
of options, the Board of Trustees of HighMark Funds approved the
consolidation of these Funds into the HighMark Growth and HighMark Bond
Funds, respectively. The Board of Trustees of HighMark Funds based its
decision on a number of considerations, including the tax-free nature of
the consolidation, the potential the consolidation will provide to
shareholders to pursue similar investment objectives more effectively, the
opportunities for increased economies of scale, and the superior long-term
performance of the HighMark Growth and HighMark Bond Funds.
After careful consideration, the Board of Trustees of HighMark Funds
determined that the proposed Plan of Reorganization is in the best interest
of shareholders. Through this proxy, the Board of Trustees of HighMark
Funds is submitting the proposal to you -- the shareholders -- for a vote.
Q. WHAT WILL HAPPEN TO MY INVESTMENT IN THE HIGHMARK BLUE CHIP GROWTH FUND
AND/OR GOVERNMENT SECURITIES FUND IF THIS PROPOSAL IS APPROVED?
A. The assets of the Blue Chip Growth Fund and the Government Securities Fund
(collectively, the "Consolidating Funds") will be transferred to the
HighMark Growth Fund ("Growth Fund") and the HighMark Bond Fund ("Bond
Fund," and, collectively, the "Consolidated Funds"), respectively, in
return for Fiduciary Shares of such Consolidated Fund and the assumption by
such Consolidated Fund of all of the liabilities of such Consolidating
Fund.
After the transfer, shares of each Consolidated Fund will be distributed to
the corresponding Consolidating Fund's shareholders tax-free in liquidation
of such Consolidating Fund. As a result of these transactions, your shares
of such Consolidating Fund would, in effect, be exchanged at net asset
value and on a tax-free basis for shares of such Consolidated Fund.
Q. HOW CAN I GET MORE INFORMATION ABOUT THE GROWTH FUND AND/OR THE BOND FUND?
A. Please see the combined prospectus and proxy statement for more information
about the Growth Fund and the Bond Fund. If you have any questions about
the Funds, please contact your account administrator, investment
representative, or HighMark Funds directly at 1-800-433-6884.
Q. WHAT IF I DO NOT RETURN MY PROXY VOTING BALLOT?
A. In order to conduct the Shareholder Meeting a quorum must be present, in
person or by proxy. A quorum is defined as representation of over 50% of
the shares outstanding for each Fund as of September 30, 1998. In the event
that not enough shareholders return the enclosed proxy ballot card to
achieve quorum, we will be forced to incur additional expenses associated
with additional solicitations. In order to avoid additional costs, please
return the completed proxy ballot as soon as possible.
Q. HOW DOES THE BOARD OF TRUSTEES OF HIGHMARK FUNDS SUGGEST THAT I VOTE?
A. After careful consideration, the Board of Trustees of HighMark Funds,
including the independent members, recommends that you vote "FOR" all of
the items on the enclosed proxy ballot. The Board of
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<PAGE> 7
Trustees of HighMark Funds also wishes to remind you to vote and return ALL
of the proxy ballot cards you receive.
Q. WHO SHOULD I CALL WITH QUESTIONS ABOUT THIS PROXY?
A. If you have any questions regarding this proxy, please contact your account
administrator, investment representative, or HighMark Funds directly at
1-800-433-6884.
THE INFORMATION PROVIDED IN THIS "Q&A" IS SUPPORTED BY DISCLOSURES
CONTAINED IN THE ACCOMPANYING PROXY STATEMENT.
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<PAGE> 8
PROSPECTUS/PROXY STATEMENT
NOVEMBER 16, 1998
HighMark Funds
One Freedom Valley Drive
Oaks, PA 19456
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 HighMark Funds for use at a Special Meeting of
Shareholders of HighMark Funds to approve a Plan of Reorganization adopted by
HighMark Funds dated as of October 13, 1998 ("Plan"), a copy of which is
attached hereto as Appendix A, and the consummation of the transactions
(collectively, the "Transaction") contemplated therein. The Plan contemplates
the transfer of all of the assets and liabilities of the HighMark Blue Chip
Growth Fund ("Blue Chip Growth Fund") and the HighMark Government Securities
Fund (the "Government Securities Fund") to the HighMark Growth Fund ("Growth
Fund") and the HighMark Bond Fund (the "Bond Fund"), respectively, (the Blue
Chip Growth Fund and the Government Securities Fund, each a "Consolidating Fund"
and, collectively, the "Consolidating Funds" and the Growth Fund and the Bond
Fund, each a "Consolidated Fund" and, collectively, the "Consolidated Funds" and
the Consolidating and Consolidated Funds, collectively, the "HighMark Funds") in
exchange for Fiduciary Shares only of the corresponding Consolidated Fund,
followed by the dissolution and liquidation of the respective Consolidating Fund
and the distribution of Shares to the shareholders of the respective
Consolidating Fund. As a result of the proposed Transaction, each shareholder of
the Consolidating Funds will receive on a tax-free basis, a number of full and
fractional Shares of the corresponding Consolidated Fund equal at the date of
the exchange to the value of the net assets of each Consolidating Fund
transferred to the corresponding Consolidated Fund attributable to the
shareholder (based on the proportion of the outstanding shares of the
Consolidating Fund owned at that time by the shareholder).
This Combined Prospectus/Proxy Statement explains concisely what you
should know before investing in the Consolidated Funds. Please read it and keep
it for future reference. This Combined Prospectus/Proxy Statement is accompanied
by the prospectus relating to the HighMark Equity Funds and Fixed Income Funds,
Fiduciary Shares, dated November 30, 1997, as amended, (the "HighMark Funds
Prospectus"), which is incorporated into this Combined Prospectus/Proxy
Statement by reference. The current Statement of Additional Information for
HighMark Funds, dated November 28, 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
Funds may be obtained, without charge, by writing SEI Investments Distribution
Co., One Freedom Valley Drive, Oaks, PA 19456 or by calling 1-800-433-6884. In
addition, a Statement of Additional Information dated November 16, 1998 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
Investments Distribution Co. 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, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-8-
<PAGE> 9
THE SHARES OF HIGHMARK FUNDS 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 FUNDS SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN HIGHMARK FUNDS 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
HIGHMARK FUNDS. THIS COMBINED PROSPECTUS/PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFERING BY HIGHMARK FUNDS IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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<PAGE> 11
TABLE OF CONTENTS
Page
----
PROPOSAL (1) APPROVAL OF
PLAN OF REORGANIZATION ............................................... 12
FEE TABLES ............................................................ 13
SYNOPSIS .............................................................. 16
RISK FACTORS .......................................................... 26
INTRODUCTION .......................................................... 28
PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF
PLAN OF REORGANIZATION ............................................... 28
BACKGROUND AND REASONS FOR THE PROPOSED
REORGANIZATION ........................................................ 29
INFORMATION ABOUT THE REORGANIZATION ................................. 30
HIGHMARK FUNDS ........................................................ 32
FINANCIAL STATEMENTS .................................................. 33
VOTING INFORMATION .................................................... 33
INFORMATION FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ................................................... 36
FORM OF PLAN OF REORGANIZATION
APPENDIX A ........................................................... A1
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<PAGE> 12
PROPOSAL (1) -- APPROVAL OF
---------------------------
PLAN OF REORGANIZATION AND TRANSACTION THEREUNDER
-------------------------------------------------
At a meeting held on September 23, 1998, the Board of Trustees of
HighMark Funds unanimously approved a Plan of Reorganization providing for the
transfer of all of the assets of each Consolidating Fund to its corresponding
Consolidated Fund in exchange for Fiduciary Shares of such Consolidated Fund and
the assumption by such Consolidated Fund of all of the liabilities of the
Consolidating Fund.
Following the transfer, the Consolidating Funds will be dissolved and
the Fiduciary Shares received by the Consolidating Funds will be distributed to
the respective shareholders of the Consolidating Funds in liquidation of the
Consolidating Funds. As a result of the proposed Transaction, shareholders of
each Consolidating Fund will receive, on a tax-free basis, a number of full and
fractional Fiduciary Shares equal in value at the date of the exchange to the
value of the net assets of the Consolidating Fund transferred to the
corresponding Consolidated Fund attributable to the shareholder (based on the
proportion of the outstanding shares of the Consolidating Fund owned at the time
by the shareholder).
For the reasons set forth below under "Background and Reasons for the
Proposed Reorganization," the Board of Trustees of HighMark Funds, including
Trustees of HighMark Funds who are not "interested persons" of HighMark Funds 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 HighMark Funds 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 Board of Trustees of HighMark Funds
considered, among other things, the qualifications and experience of HighMark
Capital Management, Inc. (the "Advisor"); the potential economies of scale which
could be realized over time by former Consolidating Fund shareholders as each
Consolidated Fund increases in size; the recommendation of the Advisor in favor
of the Transaction; the fact that the Transaction will be free from Federal
income taxes to HighMark Funds and their shareholders; the assumption of the
cost of the Transaction by the Advisor and/or its affiliates; and the superior
long-term performance histories of the HighMark Growth and HighMark Bond Funds.
FEE TABLES
- ----------
The following tables show the current fees for each Consolidating Fund
followed by those currently charged by the corresponding Consolidated Fund. If
the reorganization is approved, you would pay the fees shown for the
Consolidated Fund. Because the fees for the Consolidated Funds following the
Transaction will be identical to the current fees for the Consolidated Funds as
set forth in the following fee tables, no pro forma fee tables are provided.
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<PAGE> 13
<TABLE>
<CAPTION>
FEE TABLES
Blue Chip
Growth Fund Growth Fund
Fiduciary Shares Fiduciary Shares
---------------- ----------------
<S> <C> <C>
Shareholder Transaction Expenses(a)
- -----------------------------------
Maximum Sales Load Imposed
on Purchases (as a percentage
of offering price) 0% 0%
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) 0% 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 0% 0%
Exchange Fee(a) $ 0 $ 0
Annual Operating Expenses
- -------------------------
(as a percentage of net assets)
Management Fees
0.60% 0.60%
12b-1 Fees 0% 0%
Other Expenses (after voluntary
reduction)(c) 0.22% 0.31%
----- -----
Total Fund Operating Expenses
(after voluntary reduction)(d) 0.82% 0.91%
===== =====
</TABLE>
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<PAGE> 14
<TABLE>
<CAPTION>
Government
Securities Fund Bond Fund
Fiduciary Shares Fiduciary Shares
---------------- ----------------
<S> <C> <C>
Shareholder Transaction Expenses(a)
- -----------------------------------
Maximum Sales Load Imposed
on Purchases (as a percentage
of offering price) 0% 0%
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) 0% 0%
Redemption Fees (as a percentage
of amount redeemed, if applicable)(b) 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 0% 0%
Other Expenses (after voluntary
reduction)(c) 0.25% 0.25%
----- -----
Total Fund Operating Expenses
(after voluntary reduction)(d) 0.75% 0.75%
===== =====
</TABLE>
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<PAGE> 15
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>
Blue Chip Growth Fund Fiduciary Shares $ 8 $26 $46 $101
Growth Fund Fiduciary Shares $ 9 $29 $50 $112
Government Securities Fund Fiduciary Shares $ 8 $24 $42 $ 93
Bond Fund Fiduciary Shares $ 8 $24 $42 $ 93
</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. 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.)
(b) A wire redemption charge of $15 is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See
REDEMPTION OF SHARES.)
(c) Absent voluntary fee waivers, OTHER EXPENSES would be 0.49% for the
Fiduciary Shares of the Blue Chip Growth Fund, 0.48% for the Fiduciary
Shares of the Growth Fund, 0.52% for the Fiduciary Shares of the
Government Securities Fund and 0.51% for the Fiduciary Shares of the
Bond Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be:
1.09% for the Fiduciary Shares of the Blue Chip Growth Fund, 1.08% for
the Fiduciary Shares of the Growth Fund, 1.02% for the Fiduciary Shares
of the Government Securities Fund and 1.01% for the Fiduciary Shares of
the Bond Fund.
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<PAGE> 16
SYNOPSIS OF PROSPECTUS
----------------------
INVESTMENT OBJECTIVES AND POLICIES. Below is a brief comparison of the
investment objectives and policies of each Consolidating Fund and the
corresponding Consolidated Fund. Following the Fund by Fund comparisons, there
is a brief comparison of investment policies and techniques that are common to
the Funds. The following discussion is qualified in its entirety by the
disclosure on such subjects contained in the HighMark Funds Prospectus
accompanying this Combined Prospectus/Proxy Statement. For a full and detailed
description of permitted investments, see the HighMark Funds Prospectus.
The securities currently held by each Consolidating Fund are
substantially similar to those securities which the corresponding Consolidated
Fund may hold. Consequently, the proposed reorganizations of the Consolidating
Funds should not result in higher than normal portfolio turnover due to the
corresponding Consolidated Fund's disposal of investment securities.
BLUE CHIP GROWTH FUND AND GROWTH FUND. As its investment objective, 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 for the Growth Fund.
Under normal market conditions, both the Blue Chip Growth Fund and the
Growth Fund invest at least 65% of its total assets in equity securities,
including common stocks, warrants to purchase common stocks, American Depository
Receipts, preferred stocks and securities (including debt securities)
convertible into or exercisable for common stocks. The Blue Chip Growth Fund
primarily invests in equity securities of seasoned, large capitalization
companies. For these purposes, a seasoned company is generally a company with an
operating history of 3 years or more and 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 consist of dividend-paying securities.
In comparison, the Growth Fund emphasizes a well diversified portfolio
of equity securities of growth-oriented companies. Such companies will range
from medium to large capitalization growth companies (capitalization in excess
of $500 million) with a record of above average growth in earnings. Currently,
the Growth Fund is primarily invested in large capitalization growth companies.
The Growth Fund focuses on companies that the Advisor believes to have enduring
quality and above average earnings growth.
Both the Blue Chip Growth Fund and the Growth Fund may write covered
calls on its equity securities and enter into closing transactions with respect
to covered call options. The assets of both the Blue Chip Growth Fund and the
Growth Fund may also be invested in options, futures contracts and options on
futures, Standard & Poor's Depository Receipts, 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 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. The Blue Chip Growth Fund
and the Growth 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 any such Fund's total assets.
Under normal market conditions, both the Blue Chip Growth Fund and the
Growth Fund may invest up to 35% of their total assets in money market
instruments. 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.
GOVERNMENT SECURITIES FUND AND BOND FUND. As its investment objective,
the Government Securities Fund seeks to achieve total return consistent with the
preservation of capital by investing in a
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<PAGE> 17
diversified portfolio of obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities ("U.S. Government Securities"). The Bond
Fund seeks current income through investments in long-term fixed income
investments. While not required to do so by its investment objective, the Bond
Fund may have significant holdings of U.S. Government Securities.
Under normal market conditions, the Government Securities Fund will
invest at least 80% of its assets in U.S. Government Securities, including
mortgage-backed securities issued or guaranteed by U.S. government agencies such
as the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation and
repurchase agreements backed by such securities. The Government Securities Fund
may invest any remaining assets in corporate bonds that are rated at the time of
purchase as investment grade or determined by its 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 Fund has no maturity limitation.
The Advisor of the Government Securities Fund seeks to enhance its
yield by taking advantage of yield disparities or other factors that occur in
the government securities and money markets. The Government Securities Fund
seeks to achieve capital gains by taking advantage of price appreciation caused
by interest rate changes.
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. 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 dollar-weighted average portfolio maturity of the Bond Fund will be
from five to twenty years.
Both the Bond Fund and the Government Securities Fund 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 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.
Under normal market conditions, the Government Securities Fund may
invest up to 20% of its total assets in money market instruments, whereas the
Bond 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, each of the Bond Fund and the Government Securities
Fund may exceed its respective limit on total assets invested in money market
instruments.
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<PAGE> 18
OTHER INVESTMENTS
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Each HighMark Fund limits investments in illiquid securities to 15% or
less of its net assets, 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 Board of Trustees of HighMark Funds.
Each HighMark Fund may lend portfolio securities in an amount
representing up to 33 1/3% of the value of its total assets.
Each HighMark Fund may enter into repurchase agreements and reverse
repurchase agreements.
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.
Each HighMark Fund may purchase securities of money market funds of
other investment companies and may purchase securities of variable funds of
other investment companies, subject to the terms of the 1940 Act and HighMark
Funds' exemptive order.
INVESTMENT RESTRICTIONS. The following discussion is qualified by the
disclosure regarding investment restrictions contained in the Statement of
Additional Information of HighMark Funds which is incorporated by reference into
this Combined Prospectus/Proxy Statement.
HighMark Funds revised and simplified its fundamental investment
restrictions for the Blue Chip Growth and the Government Securities Funds, as
well as for a number of other HighMark Funds not involved in the proposed
transaction. It is the intent of HighMark Funds to conform the fundamental
investment restrictions of the remaining HighMark Funds, including the Growth
Fund and the Bond Fund (both of which commenced operations prior to the adoption
of the new format) to the simplified format used by the Consolidating Funds by
means of a proxy vote within the next two years. The fundamental investment
restrictions for the Blue Chip Growth and Government Securities 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, 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.
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<PAGE> 19
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 Consolidating Funds have been
adopted to avoid wherever possible the necessity of shareholder meetings
otherwise required by the 1940 Act. However, the Consolidating Funds also have
adopted nonfundamental limitations as 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 HighMark Fund's
shareholders prior to effectiveness.
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 Consolidating Funds are
nonfundamental policies. Each such 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
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 Funds may invest
in futures contracts and options on futures contracts, as disclosed in the
prospectus) 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 Funds may obtain short-term
credits as necessary for the clearance of security transactions.
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<PAGE> 20
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 Funds, an officer, trustee, partner or director of HighMark Funds or
the Advisor or sub-advisors of HighMark Funds 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 for the Growth Fund and the
Bond Fund provide that the Funds 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 a 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 a Fund's total assets
may be invested without regard to these limitations);
2. Purchase any securities that would cause more than 25% of a 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;
4. Purchase securities on margin (except that the 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 the Fund;
5. Purchase or sell commodities, commodity contracts (excluding options
and financial and currency futures contracts), oil, gas or mineral exploration
leases or development programs, or real estate (although investments by a Fund
in marketable securities of companies engaged in such activities and investments
by a Fund in securities secured by real estate or interests therein, are not
hereby precluded to the extent the investment is appropriate to each Fund's
investment objective and policies);
6. Invest in any issuer for purposes of exercising control or
management;
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<PAGE> 21
7. Purchase or retain securities of any issuer if the officers or
Trustees of HighMark Funds 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;
8. 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 a 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
9. 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 Fund 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 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
- -----------------------------------------
The following information was provided by the Annual Report to
Shareholders of HighMark Funds ("Annual Report") for the period ended July 31,
1998. The Management Discussion found in the Annual Report in its entirety, is
as follows:
HIGHMARK GROWTH FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Growth Fund returned
22.59% (Fiduciary Shares).(1) In comparison, the Lipper Growth Funds Average
rose 13.15% during the period and the Standard & Poor's 500 Composite Index was
up 19.28%. In recognition of the Fund's performance, Morningstar, Inc. recently
awarded the Fund a five-star rating out of a possible five stars for the
three-year period ending 7/31/98.(2) The Fund was rated among 2,545 funds in the
equity category.
- --------------------
(1) The HighMark Growth Fund (Retail Class A Shares) produced a total
return of 22.26% for the period. Including the maximum sales charge of 4.50%,
the total return for the Fund's Retail Class A Shares was 16.76%. The Fund's
Retail Class B Shares, launched on 2/2/98, produced a total synthetic return of
22.06% for the period. Including the maximum contingent deferred sales charge of
5.00%, the total synthetic return for the Fund's Retail Class B Shares was
17.21%.
(2) The ratings are subject to change every month. Past performance is
no guarantee of future results. Morningstar ratings are calculated from a fund's
three-, five- and ten-year average annual returns (if available) in excess of
90-day Treasury bill returns. The Fund received five stars for the three-year
period ending 7/31/98. The top 10% of funds within a rating category receive
five stars.
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<PAGE> 22
FACTORS AFFECTING PERFORMANCE
There are three key reasons why the Fund produced superior performance:
Timely sector weightings. In October 1997, our valuation discipline led
us to underweight technology companies after the sector had significantly
outperformed the S&P 500 Index. Meanwhile, the consumer staple sector became
more attractively priced after a sell-off on concerns that the rising U.S.
dollar might result in lower translated foreign earnings, and that consumer
demand from the Far East might slow due to currency devaluations. Indeed, during
the period, the technology sector underperformed and investors returned to
consumer staple companies.
Underweighting energy. The price of oil dropped 41% during the year,
which caused the energy sector to sharply underperform the market. The
commodity-based energy sector generally does not meet our criteria for
consistent, sustainable superior earnings growth, but the Fund did benefit when
one energy holding, Dresser Industries, agreed to be acquired by Halliburton,
another oil service company.
Good stock selection. Two additions to the portfolio performed
particularly well during the period. IMS Health provides pharmaceutical
companies with prescription market share data used for measuring sales and
marketing effectiveness. The company has a 90% market share and multiyear
contracts with the world's leading pharmaceutical companies. Berkshire Hathaway,
a diversified holding company controlled by the legendary Warren Buffett,
derives two-thirds of its earnings from 100% ownership in businesses that have
grown at a 24% annual rate for the past 30 years. The other third of Berkshire's
earnings come from its well-publicized minority positions in companies such as
Coca-Cola, Gillette, American Express and Walt Disney.
CURRENT STRATEGY & OUTLOOK
The growth style of investing typically outperforms when the economy
slows, as investors yearn for consistent and reliable earnings growth. In
managing the Fund, we will continue to seek a projected composite earnings
growth rate superior to that of the S&P 500 Index, yet the price-earnings
multiple of the composite portfolio is only slightly higher than the S&P 500
Index. We continue to seek companies with excellent growth potential at
reasonable prices and our long-term outlook is positive.
HIGHMARK BLUE CHIP GROWTH FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Blue Chip Growth Fund
returned 8.67% (Fiduciary Shares). In comparison, the Lipper Growth Funds
Average rose 13.15% during the period while the Standard & Poor's 500 Index was
up 19.28%.
FACTORS AFFECTING PERFORMANCE
The Fund underperformed its benchmark for several reasons, including
being overweighted in technology companies. In many cases, the Asian economic
crisis caused orders to be deferred or cancelled. We believed that this
situation would correct itself over time and that the stocks' underperformance
represented good value. Our patience, however, was not rewarded during this
twelve-month period. Moreover, the Fund was overweighted in the health care
services industry, which also underperformed. Managed care companies faced
rising medical costs and lower rates of growth in Medicare reimbursement rates.
As the market corrected in late July, we took the opportunity to add several
large blue-chip companies such as Coca-Cola, General Electric, Gillette, Johnson
& Johnson and McDonalds.
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<PAGE> 23
CURRENT STRATEGY & OUTLOOK
We believe that the rate of growth in the economy is slowing and that
investors will favor strong, multinational blue-chip growth companies for their
reliable and consistent earnings growth. Low interest rates, low inflation,
strong fund inflows and continued strong earnings growth should sustain
valuation levels and position blue-chip growth stocks well for future
performance.
HIGHMARK GOVERNMENT SECURITIES FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Government Securities
Fund returned 7.08% (Fiduciary Shares). In comparison, the Lipper General U.S.
Government Funds Average rose 7.32% during the period while the Lehman Brothers
Intermediate Government Bond Index was up 6.82%.
FACTORS AFFECTING PERFORMANCE
The Fund benefited from being heavily weighted in U.S. Treasury and
government agency securities. Treasury bonds have rallied very strongly as
investors around the world sought liquidity and credit safety. In addition to
this flight to quality, U.S. government securities have benefited from a long
period of low inflation. The Fund benefited from the drop in interest rates by
maintaining a longer duration than the index, especially during calendar 1998.
Recently, corporate bond exposure has been detrimental to the Fund's
performance. Despite the extra yield provided by corporates, they have not been
able to keep pace with the total return provided by comparable Treasury bonds.
CURRENT STRATEGY & OUTLOOK
The Fund continues to be positioned for a further decline in interest
rates. Inflation is likely to remain subdued as increased competition,
deregulation, globalization, and weak overseas economies limit pricing
flexibility for corporations. The Fund remains overweighted in U.S. government
agency securities that provide similar liquidity and credit characteristics
compared to Treasuries, but a higher yield to maturity. Some high-quality
corporate bonds could be added to the portfolio if their yield advantages
continue to widen.
HIGHMARK BOND FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Bond Fund produced a
total return of 7.41% (Fiduciary Shares).(3) In comparison, the Lipper Corporate
A-Rated Debt Funds Average produced a 7.04% return and the unmanaged Lehman
Brothers Aggregate Bond Index reflected a return of 7.86%.
FACTORS AFFECTING PERFORMANCE
Interest rates generally declined during the period, boosting bond
prices. The benchmark 30-year U.S. Treasury bond yield fell from 6.45% on August
1, 1997 to 5.71% on July 31, 1998. Similarly, the 10-year U.S. Treasury note
fell from 6.18% on August 1, 1997 to 5.49% on July 31, 1998. The portfolio was
favorably affected by longer-than-average durations (sensitivity to interest
rates) in a falling interest rate environment.
- --------------------------
(3) The HighMark Bond Fund (Retail Class A Shares) produced a total
return of 7.47% for the period. Including the maximum sales charge of 3.00%, the
total return for the Fund's Retail Class A Shares was 4.22%.
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<PAGE> 24
Although a falling interest rate environment is good for most bonds, it
generally causes mortgage-backed securities to underperform Treasury bonds. In a
period of falling interest rates, homeowners tend to refinance their mortgages,
causing bondholders to reinvest at lower rates.
The Asian economic crisis has caused investors to become concerned
about U.S. economic growth, which in turn impacts the creditworthiness of
corporations. As a result, corporate bonds underperformed U.S. government bonds,
which benefited from the global flight to quality.
CURRENT STRATEGY & OUTLOOK
Because of the relative underperformance of corporate bonds, yields are
relatively high compared to Treasury bonds. In some cases, we are able to earn
as much as 90 basis points more for a high-quality corporate bond. That is why
we have recently increased our proportion of corporate bonds in both portfolios,
adding issues by Merrill Lynch, Cable & Wireless, Fannie Mae, Phillips
Petroleum, Raytheon and Travelers. We continue to focus on higher quality
issues. The HighMark Bond Fund carries average credit ratings of AA1 and AA3,
respectively.(4)
OPERATING PROCEDURES.
PURCHASE PROCEDURES. Purchases and redemption of Shares of HighMark
Funds may be made on days on which The New York Stock Exchange is open for
business ("Business Days"). Shares are sold on a continuous basis by the
Distributor, either by mail or by wire. The minimum investment requirement is
generally $1,000 and the subsequent minimum investment requirement is generally
$100.
Purchase orders for Shares of HighMark Funds are executed at a per
Share price equal to the asset value next determined after the purchase order is
effective. No sales charges are imposed on Fiduciary Shares and therefore no
sales charges will be imposed on the Fiduciary Shares of the Consolidated Funds
distributed by HighMark Funds in the Transaction.
Both the Blue Chip Growth Fund and the Government Securities Fund only
offer Fiduciary Shares. However, the Growth Fund offers three classes of Shares:
Fiduciary, Class A and Class B Shares (Class A and B Shares are known as "Retail
Shares") and the Bond Fund offers two classes of Shares: Fiduciary and Class A
Shares.
EXCHANGE PRIVILEGES. Shareholders in the Consolidating Funds and the
Consolidated Funds enjoy identical exchange privileges. Each HighMark Fund's
shares may be exchanged for shares of the class of the various other Funds of
HighMark Funds 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
Funds' 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 Funds' 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 are made on the basis of the relative net asset values of the
shares exchanged plus any applicable sales charge. HighMark Funds do not impose
a charge for processing exchanges of shares.
REDEMPTION PROCEDURES. Redemption procedures are identical for each
HighMark Fund. HighMark Funds redeems shares at their net asset value next
determined after receipt by the Distributor of the redemption
- ---------------------
(4) Moody's ratings as of 7/31/98.
-24-
<PAGE> 25
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 or by
telephone. HighMark Funds reserves the right to make payment on redemptions in
securities rather than cash.
DISTRIBUTIONS. The net investment income for HighMark Funds is 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. Dividends paid in additional shares receive the same tax treatment as
dividends paid in cash.
The amount of dividends payable on Fiduciary Shares of HighMark Funds
generally will be more than dividends payable on Retail Shares of HighMark Funds
because of the distribution expenses charged to Retail Shares, but not charged
to Fiduciary Shares.
NET ASSET VALUE. The net asset value of shares of HighMark Funds is
determined daily as of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any
Business Day.
Investments by HighMark 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. Investments by HighMark
Funds in securities for which the principal market 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 the Board
of Trustees of HighMark Funds. 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 HighMark Funds receives 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 Consolidating Funds,
their shareholders or the Consolidated Funds.
INVESTMENT ADVISOR
HighMark Capital Management, Inc., a subsidiary of UnionBanCal
Corporation, serves as the investment advisor to HighMark Funds. Subject to the
general supervision of the Board of Trustees of HighMark Funds, 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, the Advisor receives an identical fee from the
Government Securities 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, and an identical fee from the Blue Chip Growth Fund
and the 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. Following the reorganization, the advisory fees will remain the same.
All investment decisions for the Consolidated Funds are made by a team
of investment professionals, all of whom take an active part in the decision
making process. The Blue Chip Growth and Growth Funds have the same team leaders
as do the Government Securities and Bond Funds. The team leaders are as follows:
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<PAGE> 26
Scot Chapman, Vice President of the Advisor, has served as team leader
of the Growth Fund since 1993 and of the Blue Chip Growth Fund since
July 28, 1998. He has been with the Advisor and its predecessors,
Union Bank of California, N.A. and The Bank of California, N.A., since
1991. Mr. Chapman has an M.B.A. from Golden Gate University and a B.S.
in accounting from Santa Clara University.
E. Jack Montgomery, Vice President of the Advisor, has served as team
leader for the Bond Fund since 1994 and of the Intermediate-Term Bond
Fund since 1995 and of the Government Securities Fund since July 28,
1998. He has been with the Advisor and its predecessors, Union Bank of
California, N.A. and The Bank of California, N.A., since 1994. From
1990 to 1994, Mr. Montgomery was employed by the San Francisco
Employees' Retirement System. Mr. Montgomery has an M.B.A. from the
University of Oregon and a B.A. from the University of Oklahoma.
RISK FACTORS
------------
This discussion is qualified in its entirety by the disclosure set
forth in the HighMark Funds Prospectus accompanying this Combined
Prospectus/Proxy Statement and the HighMark Funds Statement of Additional
Information.
BLUE CHIP GROWTH AND GROWTH FUNDS
- ---------------------------------
Because of similarities in investment objectives and policies, the Blue
Chip Growth Fund and Growth Fund are subject to substantially similar investment
risk factors. For both Funds, changes in the value of portfolio securities will
not affect cash income, if any, derived from those securities, but will affect
the Funds' net asset value. Because the Funds invest primarily in equity
securities, which fluctuate in value, Funds' Shares will fluctuate in value. At
times, this fluctuation may be significant and thus the Funds may be more
suitable for long-term investors who can bear the risk of short-term
fluctuations.
Both the Blue Chip Growth Fund and Growth Fund may invest in foreign
securities through American Depository Receipts. 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 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 a Fund.
GOVERNMENT SECURITIES AND BOND FUNDS
- ------------------------------------
Investments by the Government Securities and Bond Funds in U.S.
Government Securities 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. Nonetheless, U.S.
Government Securities are generally much less subject to credit risk, which
relates to the ability of an issuer to make payments of principal and interest,
than bonds issued
-26-
<PAGE> 27
or guaranteed only by non-governmental parties. Because the Government
Securities Fund is required to invest 80% of its assets in U.S. Government
Securities, the Government Securities Fund may be significantly less exposed to
credit risk than the Bond Fund, which may invest all of its assets in bonds and
other obligations of non-governmental issuers. Credit risk may lead to losses
which will cause a Fund's Shares to decline in value, resulting in a loss of
principal.
In contrast to credit risk, all bonds are subject to 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
fixed income investments and a decline in interest rates will generally increase
the value of those investments. Accordingly, the net asset value of each of the
Government Securities and Bond 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, 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. 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. 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, debt securities may be
purchased 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.
Both the Government Securities Fund and the Bond Fund may invest in
securities rated BBB by S&P or Baa by Moody's, which are considered investment
grade, but are deemed by these rating services to have some speculative
characteristics. 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 Funds may invest in foreign securities. 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 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
-27-
<PAGE> 28
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.
SPECIAL MEETING OF SHAREHOLDERS
-------------------------------
Proxies will be solicited by and on behalf of the Board of Trustees of
HighMark Funds for use at a Special Meeting of Shareholders of HighMark Funds
(the "Meeting"). The Meeting is to be held on December 18, 1998 at 3:00 p.m.,
Eastern time, at SEI Investments Mutual Funds Services, One Freedom Valley
Drive, Oaks, PA 19456. This Combined Prospectus/Proxy Statement and the enclosed
form of proxy are being mailed to shareholders on or about November 18, 1998.
Any shareholder giving a proxy has the power to revoke it. The
shareholder revoking such proxy must either submit to HighMark Funds a
subsequently dated proxy, deliver to HighMark Funds 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
Consolidating Funds by the transfer of all of their assets to the corresponding
Consolidated Funds, in exchange for Fiduciary Shares of the corresponding
Consolidated Fund and the assumption by the corresponding Consolidated Fund of
all of the liabilities of the Consolidating Fund followed by the dissolution and
liquidation of each Consolidating Fund and the distribution of Shares to the
shareholders of the Consolidating Funds.
Only shareholders of record on September 30, 1998 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 September 30, 1998.
The Board of Trustees of HighMark Funds knows 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.
PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF
PLAN OF REORGANIZATION
----------------------
The shareholders of the Blue Chip Growth Fund and the Government
Securities Fund are being asked to approve or disapprove the Plan of
Reorganization adopted by HighMark dated as of October 13, 1998 (the "Plan"), a
copy of which is attached to this Combined Prospectus/Proxy Statement as
Appendix A. The Plan provides, among other things, for the transfer of all of
the assets of each Consolidating Fund to the corresponding Consolidated Fund in
exchange for the assumption by the corresponding Consolidated Fund of all of the
liabilities of the Consolidating Fund and for a number of Shares calculated
based on the value of the net assets of the Consolidating Fund acquired by the
Consolidated Fund and the net asset value per share of the Consolidated Fund,
all as more fully described below under "Information about the Reorganization."
After receipt of Shares each Consolidating Fund will dissolve, distributing the
Shares to its shareholders in complete liquidation, and each Consolidating Fund
will be terminated. Prior to the date of such transfer (the "Exchange Date"),
each Consolidating Fund will declare a distribution to its shareholders which,
together with all previous distributions, will have the effect of distributing
to its 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 September 23, 1998, the Trustees of HighMark Funds
in attendance voted unanimously to approve the Transaction and to recommend that
shareholders of each Consolidating Fund also approve the Transaction. Approval
of each reorganization of a Consolidating Fund requires the affirmative vote
-28-
<PAGE> 29
of a majority of all votes attributable to the voting securities of that
Consolidating 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 Consolidating 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 Consolidating Fund.
A shareholder of any Consolidating Fund objecting to the proposed
Transaction is not entitled under either Massachusetts law or HighMark Funds'
Declaration of Trust to demand payment for and an appraisal of his or her
particular HighMark Fund shares if the Transaction is consummated over his or
her objection. However, shares of HighMark Funds are redeemable for cash at
their net asset value on any Business Day.
In the event that this proposal is not approved by the shareholders of
the Consolidating Fund, such Consolidating Fund will continue to be managed as a
separate fund in accordance with its current investment objectives and policies,
and the Trustees of HighMark Funds may consider alternatives in the best
interests of the shareholders. However, the reorganization of the Consolidating
Fund for which approval of the Plan is obtained will be consummated.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION
------------------------------------------------------
A meeting was held on September 23, 1998 for the Board of Trustees of
HighMark Funds, at which meeting all of the Trustees of HighMark Funds,
including the Independent Trustees, unanimously determined that the
reorganization would be in the best interests of HighMark Funds and existing
shareholders and that the economic interests of the existing shareholders would
not be diluted as a result of effecting the reorganization. The Trustees of
HighMark Funds, including the Independent Trustees, unanimously approved the
proposed reorganization and have unanimously recommended its approval by the
Consolidating Funds' shareholders.
In electing to approve the Plan and recommend it to shareholders of
the Consolidating Funds, the Board of Trustees of HighMark Funds acted upon
information provided to them, indicating that the proposed Transaction would
operate in the best interests of HighMark Funds' shareholders. In particular,
the Trustees determined that the proposed transaction offered the following
benefits:
o Superior Long-Term Investment Performance: The Trustees
considered favorably that the long-term performance of the
Consolidated Funds was superior to that of the Consolidating
Funds.
o Opportunities For Economies of Scale: The Trustees considered
favorably the potential the consolidation held for increased
economies of scale for the Consolidated Funds that could result
in reduced expenses, and consequent increased performance. The
Trustees concluded that this could allow shareholders of the
Consolidating Funds to pursue similar investment objectives more
effectively through ownership of shares of the Consolidated
Funds.
o Tax-Free Nature of Transaction: The Trustees of HighMark Funds
were informed that the proposed Transaction would be accomplished
without the imposition of federal income taxes on the
Consolidating Funds or their respective shareholders.
o No Dilution of Shareholder Interests: The Trustees of HighMark
Funds were informed that the interests of the shareholders of
HighMark Funds would not be materially diluted as a result of the
proposed Transaction, and that the shareholders of the
Consolidating Funds would receive shares of the Consolidated
Funds equal in value to the market value of the assets of the
Consolidating Funds.
-29-
<PAGE> 30
Currently, after waiver of certain fees, the total operating expenses
of the Fiduciary Shares of the Growth Fund are higher than the total operating
expenses for the Blue Chip Growth Fund. The Trustees have been informed by
HighMark Funds' management that, should the consolidation of the Blue Chip
Growth Fund not be approved, all fee waivers currently in place would be
reassessed. Absent fee waivers, the total expenses of the Blue Chip Growth Fund
would be 1.09%, while those of the Growth Fund would be 1.08%. The total
operating expenses of the Fiduciary Shares of the Government Securities Fund and
the Bond Fund are identical. Absent fee waivers, the total expenses of the
Government Securities Fund would be 1.02%, while those of the Bond Fund would be
1.01%. The total operating expenses of the Funds are compared below.
Fiduciary Shares
----------------
Blue Chip Growth: 0.82%
Growth Fund: 0.91%
Fiduciary Shares
----------------
Government Securities Fund: 0.75%
Bond Fund: 0.75%
INFORMATION ABOUT THE REORGANIZATION
------------------------------------
PLAN OF REORGANIZATION. The proposed Plan provides that each
Consolidated Fund will acquire all of the assets of the corresponding
Consolidating Fund in exchange for the assumption by the Consolidated Fund of
all of the liabilities of the corresponding Consolidating Fund and for Shares
all as of the Exchange Date (defined in the Plan to be January 11, 1999, or such
other dates as may be decided by HighMark Funds). The following discussion of
the Plan is qualified in its entirety by the full text of the Plan, which is
attached as Appendix A to this Combined Prospectus/Proxy Statement.
As a result of the Transaction, each shareholder of the Consolidating
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
Consolidating Fund transferred to the corresponding Consolidated Fund
attributable to the shareholder (based on the proportion of the outstanding
shares of the Consolidating Fund owned by the shareholder as of the Valuation
Time). The portfolio securities of the Consolidating Funds will be valued in
accordance with the generally employed valuation procedures of HighMark Funds.
Each reorganization is being accounted for as a tax-free business combination.
Immediately following the Exchange Date, each Consolidating 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 Consolidating Funds will be liquidated and dissolved. Such liquidation and
distribution will be accomplished by the establishment of accounts on the share
records of the Consolidated Funds in the name of such Consolidating Fund's
shareholders, each account representing the respective number of full and
fractional Shares due such shareholder. All shareholders of the Consolidating
Funds will receive Fiduciary Shares only of the corresponding Consolidated Fund.
Each HighMark Funds' Share will be fully paid and nonassessable when
issued, will be transferable without restriction, and will have no preemptive or
conversion rights. HighMark Funds' Declaration of Trust permits HighMark Funds
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 of HighMark Funds may determine.
-30-
<PAGE> 31
The consummation of the reorganization is subject to the conditions set
forth in the Plan. The Plan may be terminated and the reorganization abandoned
by HighMark Funds at any time, before or after approval by the shareholders,
prior to the Exchange Date by HighMark Funds.
Under Massachusetts law, HighMark Funds' shareholders, could, under
certain circumstances, be held personally liable for the obligations of HighMark
Funds. However, the Declaration of Trust disclaims shareholder liability for
acts or obligations of HighMark Funds. The Declaration of Trust provides for
indemnification out of HighMark Funds' property for all loss and expense of any
shareholder held personally liable for the obligations of HighMark Funds. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which HighMark Funds would be unable to
meet its obligations. The likelihood of such circumstances is remote.
FEES AND EXPENSES REORGANIZATION. 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 the Advisor and/or its affiliates
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.
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 Consolidating 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 the Consolidating Fund on the distribution of
Shares to them in exchange for their shares of the Consolidating Fund; (iii)
under Section 358 of the Code, the basis of shares that any shareholder receives
in place of his or her Consolidating Fund's shares will be the same as the basis
of the shares exchanged; and (iv) under Section 1223(1) of the Code, a
shareholder's holding period for the Consolidated Fund's Shares received
pursuant to the Plan will be determined by including the holding period for the
shares exchanged for the Consolidated Fund's Shares provided that the
shareholder held the Consolidating Fund's Shares as a capital asset. As a
condition to HighMark Funds' obligation to consummate the reorganization,
HighMark Funds will receive an opinion from Ropes & Gray, counsel to HighMark
Funds, to the effect that, on the basis of the existing provisions of the Code,
current administrative rules, court decisions, and based upon certain
representations and assumptions and subject to certain qualifications, for
federal income tax purposes the above stated tax consequences will be applicable
to the Transaction.
VOTING RIGHTS. Each shareholder of a HighMark Fund is entitled to one
vote per share and a proportionate fractional vote for any fractional share. The
former shareholders of the Consolidated Funds, as holders of Fiduciary Shares of
the Consolidated 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 HighMark Funds. When the former
shareholders of the Consolidating Funds vote in the aggregate as shareholders of
each corresponding Consolidated Fund, the voting power they will have will be
less than the voting power they had when the Consolidating Funds voted in the
aggregate. For a more detailed discussion of HighMark Funds' voting procedures,
see the HighMark Funds' Prospectuses "GENERAL INFORMATION --Miscellaneous."
CAPITALIZATION. The following tables set forth as of July 31, 1998, (i)
the capitalization of each Consolidating Fund, (ii) the capitalization of each
Consolidated Fund, and (iii) the pro forma capitalization of each Consolidating
Fund as adjusted giving effect to the proposed acquisition of assets at net
asset value:
-31-
<PAGE> 32
Capitalization Tables as of 7/31/98
HIGHMARK GROWTH FUND AND HIGHMARK BLUE CHIP GROWTH FUND (UNAUDITED)
<TABLE>
<CAPTION>
HIGHMARK BLUE CHIP
HIGHMARK GROWTH FUND GROWTH FUND PRO FORMA COMBINED (1)
------------------------------- ------------------------------ ------------------------------
FIDUCIARY RETAIL A RETAIL B FIDUCIARY RETAIL A RETAIL B FIDUCIARY RETAIL A RETAIL B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS (000'S) $499,060 $17,173 $1,948 $127,295 N/A N/A $626,355 $17,173 $1,948
SHARES (000'S) 29,493 1,014 116 7,936 N/A N/A 37,016(2) 1,014 116
NET ASSET VALUE PER SHARE $16.92 $16.93 $16.85 $16.04 N/A N/A $16.92 $16.93 $16.85
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of July 31, 1998 for information purposes only. The actual
Effective Time of the Reorganization is expected to be January 11, 1999
at which time the results would be reflective of the actual composition
of the shareholders' equity at that date.
(2) Assumes that the HighMark Blue Chip Growth Fund has executed a reverse
stock split on January 8, 1999 immediately preceding the
Reorganization, to allow the Net Asset Values of the HighMark Blue Chip
Growth Fund Fiduciary shares to match the Net Asset Values of the
HighMark Growth Fund Fiduciary shares. Accordingly, this resulted in an
adjustment to the number of shares outstanding in the HighMark Blue
Chip Growth Fund of 413 in the Fiduciary 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 July 31, 1998
and the Reorganization date.
HIGHMARK BOND FUND AND HIGHMARK GOVERNMENT SECURITIES FUND (UNAUDITED)
<TABLE>
<CAPTION>
HIGHMARK GOVERNMENT
HIGHMARK BOND FUND SECURITIES FUND PRO FORMA COMBINED (1)
------------------------------ ------------------------------- ------------------------------
FIDUCIARY RETAIL A RETAIL B FIDUCIARY RETAIL A RETAIL B FIDUCIARY RETAIL A RETAIL B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS (000'S) $206,125 $1,912 N/A $113,948 N/A N/A $320,073 $1,912 N/A
SHARES (000'S) 19,061 178 N/A 11,659 N/A N/A 29,602(2) 178 N/A
NET ASSET VALUE PER SHARE $10.81 $10.73 N/A $9.77 N/A N/A $10.81 $10.73 N/A
</TABLE>
(1) The adjusted balances are presented as if the Reorganization were
effective as of July 31, 1998 for information purposes only. The actual
Effective Time of the Reorganization is expected to be January 11, 1999
at which time the results would be reflective of the actual composition
of the shareholders' equity at that date.
(2) Assumes that the HighMark Government Securities Fund has executed a
reverse stock split on January 8, 1998 immediately preceding the
Reorganization, to allow the Net Asset Values of the HighMark
Government Securities Fund Fiduciary shares to match the Net Asset
Values of the HighMark Bond Fund Fiduciary shares. Accordingly, this
resulted in an adjustment to the number of shares outstanding in the
HighMark Government Securities Fund of 1,118 in the Fiduciary Class.
If the Reorganization is consummated, the actual adjustments to the number of
shares outstanding in each respective class of HighMark Fund may vary from the
numbers above due to changes in the Net Asset Values between July 31, 1998 and
the Reorganization date.
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<PAGE> 33
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION
- ----------------------------------------------
HighMark Capital Management, Inc. may be deemed to have an interest in
the Plan of Reorganization and the Transaction because it provides investment
advisory services to HighMark Funds pursuant to an advisory agreement. HighMark
Capital Management, Inc. receives compensation from HighMark Funds for services
it provides pursuant to that Agreement. The terms and provisions of these
arrangements are described in the HighMark Funds Prospectus. Union Bank of
California, N.A. serves as custodian and sub-administrator to HighMark Funds for
which services it receives a fee as described in HighMark Funds Prospectus.
Union Bank of California, N.A. may also act as a service provider pursuant to
the Shareholder Service Plan adopted by HighMark Funds for which services it
would also receive a fee as described in the HighMark Funds Prospectus.
FINANCIAL STATEMENTS
--------------------
The financial statements and financial highlights for HighMark Funds
for the periods indicated therein ended July 31, 1998, July 31, 1997 and July
31, 1996 included in HighMark Funds Prospectus 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. The financial highlights for the fiscal periods ended
July 31, 1995 and prior were audited by other auditors whose report, dated
September 22, 1995, expressed an unqualified opinion on those statements. The
financial highlights for the fiscal periods ended January 31, 1997 and prior
were audited by other auditors, whose report, dated March 15, 1997, expressed an
unqualified opinion on those statements.
VOTING INFORMATION
------------------
Proxies are being solicited from shareholders of Blue Chip Growth Fund
and Government Securities Fund by the Board of Trustees of HighMark Funds for
the Special Meeting of Shareholders ("Meeting") to be held on December 18, 1998
at 3:00 p.m., Eastern time, at SEI Investments Mutual Fund Services, One Freedom
Valley Drive, 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 HighMark Funds a subsequently dated proxy, delivering a written
notice of revocation to HighMark Funds at One Freedom Valley Drive, 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 Plan. The
Transaction contemplated by the Plan will be consummated only if approved by the
affirmative vote of a majority of all votes attributable to the voting
securities of each Consolidating Fund voting separately as a Fund, as described
above. In the event the shareholders do not approve the reorganization, the
Trustees of HighMark Funds will consider possible alternative arrangements in
the best interests of the Fund and its shareholders.
Proxies are being solicited by mail. Shareholders of record of Blue
Chip Growth Fund and Government Securities Fund at the close of business on
September 30, 1998, (the "Record Date"), will be entitled to vote at the Meeting
of or any adjournment thereof. The holders of a majority of votes attributable
to the outstanding voting shares of a 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 Consolidating 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 the Consolidating Fund. 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
-33-
<PAGE> 34
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 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 September 30, 1998, there were issued and outstanding
8,215,824.476 Fiduciary Shares of the Blue Chip Growth Fund; 11,159,565.288
Fiduciary Shares of the Government Securities Fund; 29,056,548.449 Fiduciary,
933,779.895 Class A and 202,502.597 Class B Shares of the Growth Fund; and
19,499,966.587 Fiduciary and 227,324.645 Class A Shares of the Bond Fund.
The votes of the shareholders of the Growth Fund and the Bond Fund are
not being solicited, since their approval or consent is not necessary for
approval of the Plan. As of September 30, 1998, the officers and Trustees of
HighMark Funds as a group beneficially owned less than 1% of the outstanding
Retail and Fiduciary shares of HighMark Funds. At September 30, 1998, to the
best of the knowledge of HighMark Funds, the following beneficially owned 5% or
more of the outstanding shares of:
<TABLE>
<CAPTION>
BLUE CHIP GROWTH FUND - FIDUCIARY
---------------------------------
Name and Address Percentage of Ownership
---------------- -----------------------
<S> <C>
BTM U.S. Agency Retirement Plan 15.70%
1251 Avenue of the Americas
New York, NY 10020
TDK USA Pension Plan 6.35%
12 Harbor Park Drive
Port Washington, NY 11050
BOTT Pension 61.58%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas Fl. 10
New York, NY 10020-1104
Lane & Company 32.84%
c/o Union Bank of California
Attn: Kathleen Heilman
PO Box 120109
San Diego, CA 92112-0109
Lane & Company 5.57%
c/o Union Bank of California
Attn: Kathleen Heilman
PO Box 120109
San Diego, CA 92112-0109
<CAPTION>
GOVERNMENT SECURITIES - FIDUCIARY
---------------------------------
Name and Address Percentage of Ownership
---------------- -----------------------
<S> <C>
BTM U.S. Agency Retirement Plan 14.36%
1251 Avenue of the Americas
New York, NY 10020
Marubeni America Retirement Plan 8.03%
450 Lexington Avenue
New York, NY 10017
Tokio Marine Retirement Plan 7.12%
101 Park Avenue
New York, NY 10178
TDK USA Pension Plan 6.96%
12 Harbor Park Drive
Port Washington, NY 11050
BOTT Pension 87.58%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas Fl. 10
New York, NY 10020-1104
Lane & Company 8.69%
c/o Union Bank of California
Attn: Kathleen Heilman
PO Box 120109
San Diego, CA 92112-0109
</TABLE>
-34-
<PAGE> 35
<TABLE>
<CAPTION>
GROWTH FUND - FIDUCIARY
-----------------------
Name and Address Percentage of Ownership
---------------- -----------------------
<S> <C>
Union Bank of California Retirement Plan 17.81%
350 California Street
San Francisco, CA 94104
Union Bank of California 401(k) Plan 17.72%
350 California Street
San Francisco, CA 94104
<CAPTION>
GROWTH FUND - RETAIL
--------------------
Name and Address Percentage of Ownership
---------------- -----------------------
<S> <C>
NFSC FEBO # PC1-039918 6.07%
The Kendall Jackson Fndtn Inc
Wendy Petersen
421 Aviation Blvd.
Santa Rosa, CA 95403-1069
<CAPTION>
BOND FUND - FIDUCIARY
---------------------
Name and Address Percentage of Ownership
---------------- -----------------------
<S> <C>
Union Bank of California 401(k) Plan 6.68%
350 California Street
San Francisco, CA 94104
<CAPTION>
BOND FUND - RETAIL
------------------
Name and Address Percentage of Ownership
---------------- -----------------------
<S> <C>
Northern Trust Bank CA TTEE 9.77%
H. David Bradshaw Charitable
Remainder Unitrust A/C 02-88975
PO Box 92956
Chicago, IL 60675-2956
NFSC FEBO # 0BP-356638 6.07%
Alice A. Swenning TTEE
The Swenning Fam Trust
U/A 9/23/91
1467 21st Ave.
Kingsburg, CA 93531-2027
Northwestern Trust & Advisry Co 7.77%
1201 3rd Ave Ste 2010
Seattle, WA 98101-3000
Exchange Bank TTEE 6.68%
FBO Helen Kelly Trust
PO Box 208
Santa Rosa, CA 95402-0208
</TABLE>
THE BOARD OF TRUSTEES OF HIGHMARK FUNDS, INCLUDING THE INDEPENDENT TRUSTEES,
UNANIMOUSLY RECOMMEND APPROVAL OF THE PLAN.
-35-
<PAGE> 36
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 Funds
has 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 HighMark Funds Prospectuses and related statement of additional
information which are incorporated by reference herein are Registration No.
33-12608 and 811-5059.
HighMark Funds is 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 Funds 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.
-36-
<PAGE> 37
EXHIBIT A
HIGHMARK FUNDS
PLAN OF REORGANIZATION
This Plan of Reorganization having been approved by the Board of Trustees
of HighMark Funds is made as of October 13, 1998 by HighMark Funds (the "Plan").
The capitalized terms used herein shall have the meaning ascribed to them in
this Plan.
OVERVIEW OF PLAN OF REORGANIZATION
(1) The HighMark Blue Chip Growth Fund (the "Blue Chip Growth Fund") and
the HighMark Government Securities Fund ("Government Securities Fund"), each an
"Consolidating Fund" and, collectively, the "Consolidating Funds") will sell,
assign, convey, transfer and deliver to the HighMark Growth Fund (the "Growth
Fund") and the HighMark Bond Fund (the "Bond Fund" and the Growth Fund, each an
"Consolidated Fund" and, collectively, the "Consolidated Funds"), respectively,
on the Exchange Date all of the properties and assets existing at the Valuation
Time in the Consolidating Funds. In consideration therefor, each Consolidated
Fund shall, on the Exchange Date, assume all of the liabilities of the
corresponding Consolidating Fund for a number of full and fractional shares of
the Consolidating Fund having an aggregate net asset value equal to the value of
the assets of the Consolidating Fund transferred to the corresponding
Consolidated Fund on such date less the value of the liabilities of the
Consolidating Fund assumed by the corresponding Consolidated Fund on that date.
It is intended that the reorganization described in this Plan shall be a
tax-free reorganization under the Internal Revenue Code of 1986, as amended (the
"Code").
(2) Upon consummation of the transactions described in paragraph (1) of this
Plan, each Consolidating Fund shall distribute in complete liquidation to its
respective shareholders of record as of the Exchange Date the shares of the
corresponding Consolidated Fund received by it, each shareholder being entitled
to receive the number of such shares of the corresponding Consolidated Fund
equal to the proportion which the number of shares of beneficial interest of the
Consolidating Fund held by such shareholder bears to the number of such shares
of the Consolidating Fund outstanding on such date.
FACTUAL BASIS OF THE PLAN
1. (a) HighMark Funds 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 the transactions involved under this
Plan. Each of the Blue Chip
A1
<PAGE> 38
Growth Fund, the Growth Fund, the Government Securities Fund, and the Bond Fund
(each a "HighMark Fund" and, collectively, the "HighMark Funds") has all
necessary federal, state and local authorizations to carry on its business as
now being conducted and to carry out this Plan.
(b) HighMark Funds 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 HighMark 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 each HighMark Fund qualifies and intends to
continue to qualify as a regulated investment company for the taxable year
ending upon its liquidation. Each HighMark Fund has been regulated as an
investment company under such Sections of the Code at all times since its
inception.
(c) The statement of assets and liabilities, statement of operations, and
statements of changes in net assets, financial highlights and schedule of
investments (indicating their market values) for each HighMark Fund for the year
ended July 31, 1998, such statements and schedules having been audited by
Deloitte & Touche LLP, independent accountants to HighMark Funds, fairly present
the financial position of each HighMark Fund as of such date and said statements
of operations and changes in net assets and financial highlights fairly reflect
the results of operations, changes in net assets and financial highlights for
the periods covered thereby in conformity with generally accepted accounting
principles.
(d) The prospectuses of each HighMark Fund dated November 30, 1997, as
amended February 9, 1998, as filed with the Securities and Exchange Commission
(the "Commission") (the Prospectuses") and the Statement of Additional
Information for HighMark Funds, dated November 28, 1997, as filed with the
Commission did not as of their such dates, and will not as of the Exchange Date
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 Funds, threatened against HighMark
Funds which assert liability on the part of HighMark Funds.
(f) The Consolidating Funds do not have any known liabilities of a material
nature, contingent or otherwise, other than those shown as belonging to it on
its respective statement of assets and liabilities as of July 31, 1998 referred
to in Section 1(c) hereof and those incurred in the ordinary course of HighMark
Funds' business as an investment company since that date.
(g) As used in this Plan, the term "Investments" shall mean the
Consolidating Funds' investments shown on their respective schedule of portfolio
investments as of July 31, 1998
A2
<PAGE> 39
referred to in Section 1(c) hereof as supplemented with such changes as HighMark
Funds or the Consolidating Funds shall make after that date.
(h) HighMark Funds and each HighMark Fund has filed or will file all
federal and state tax returns which, to the knowledge of HighMark Funds'
officers, are required to be filed by HighMark Funds and has paid or will pay
all federal and state taxes shown to be due on said returns or on any
assessments received by HighMark Funds or each HighMark Fund. All tax
liabilities of HighMark Funds and each HighMark Fund have been adequately
provided for on its books, and no tax deficiency or liability of HighMark Funds
or 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) At both the Valuation Time and the Exchange Date and except for
shareholder approval, HighMark Funds, on behalf of the Consolidating Funds, will
have full right, power and authority to sell, assign, transfer and deliver the
Investments and any other assets and liabilities transferred by it pursuant to
this Plan. At the Exchange Date, subject only to the delivery of the shares,
Investments and any such other assets and liabilities as contemplated by this
Plan, HighMark Funds, on behalf of the Consolidated Funds, will acquire the
Investments and any such other assets subject to no encumbrances, liens or
security interests whatsoever and without any restrictions upon the transfer
thereof.
(j) At both the Valuation Time and the Exchange Date, HighMark Funds and
each Consolidated Fund will have full right, power and authority to purchase the
Investments and any other assets and assume the liabilities of the corresponding
Consolidating Fund to be transferred to it pursuant to this Plan.
(k) Each HighMark Fund 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.
(l) At the Exchange Date, each Consolidating Fund will have sold such of
its assets, if any, as necessary to assure that, after giving effect to the
acquisition of its assets pursuant to this Plan, each Consolidated Fund 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 its Prospectus and Statement of Additional Information.
SPECIFICS OF PLAN
2. Reorganization. (a) Subject to the requisite approval of the respective
shareholders of each Consolidating Fund and to the other terms and conditions
contained herein (including each Consolidating Fund's distribution to its
respective shareholders of all of its investment company taxable income and net
capital gain (as described in Section 7(l)), each Consolidating Fund will sell,
assign, convey, transfer and deliver to the corresponding Consolidated Fund
A3
<PAGE> 40
and each Consolidated Fund will acquire from the corresponding Consolidating
Fund, on the Exchange Date all of the Investments and all of the cash and other
assets of the Consolidating Fund in exchange for that number of shares of
beneficial interest of the corresponding Consolidated Fund provided for in
Section 3 and the assumption by the corresponding Consolidated Fund of all of
the liabilities of such Consolidating Fund. Pursuant to this Plan, each
Consolidating Fund will, as soon as practicable after the Exchange Date,
distribute in liquidation all of the Consolidated Fund's shares received by it
to its shareholders in exchange for their shares of beneficial interest of each
Consolidating Fund.
(b) HighMark Funds, on behalf of each Consolidating Fund, will pay or cause
to be paid to the corresponding Consolidated Fund any interest and cash
dividends received by it on or after the Exchange Date with respect to the
Investments transferred to such Consolidated Fund hereunder. HighMark Funds, on
behalf of each Consolidating Fund, will transfer to the corresponding
Consolidated Fund any rights, stock dividends or other securities received by it
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 the
corresponding Consolidated 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 each Consolidating Fund.
3. Exchange Date; Valuation Time. On the Exchange Date, each Consolidated Fund
will deliver to the corresponding Consolidating Fund a number of shares of the
respective Consolidated Fund having an aggregate net asset value equal to the
value of the assets of the corresponding Consolidating Fund, less the value of
the liabilities of the corresponding Consolidating Fund assumed, determined as
hereafter provided in this Section.
(a) The valuation time shall be 4:00 pm. (Eastern time) January 8, 1999 or
such earlier or later day as may be established by the proper officers of
HighMark Funds (the "Valuation Time").
(b) The net asset value of shares of each Consolidated Fund to be delivered
to the corresponding Consolidating Fund, the value of the assets of each
Consolidating Fund, and the value of the liabilities of each Consolidating Fund
to be assumed by the corresponding Consolidated Fund in each case shall be
computed as of the Valuation Time pursuant to the valuation procedures
customarily used by HighMark Funds.
(c) No formula will be used to adjust the net asset value of each HighMark
Fund to take into account differences in realized and unrealized gains and
losses.
(d) HighMark Funds, on behalf of each Consolidated Fund, shall issue shares
of each Consolidated Fund to the corresponding Consolidating Fund on one share
deposit receipt registered in the name of the corresponding Consolidating Fund.
Each Consolidating Fund
A4
<PAGE> 41
shall distribute in liquidation shares of the corresponding Consolidated Fund
received by it hereunder pro rata to its respective shareholders by redelivering
such share deposit receipt to HighMark Funds' transfer agent, which will as soon
as practicable set up open accounts for each shareholder of each Consolidating
Fund in accordance with written instructions furnished by HighMark Funds.
(e) Each Consolidated Fund shall assume all liabilities of the
corresponding Consolidating Fund, whether accrued or contingent, in connection
with the acquisition of assets and subsequent dissolution of the respective
Consolidating Fund or otherwise, except that recourse for assumed liabilities
relating to each Consolidating Fund will be limited to the respective
Consolidated Fund.
4. Expenses and Fees. 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 this Plan
will be borne by HighMark Capital Management, Inc. and/or its affiliates
including the costs of proxy materials, proxy solicitation, and legal expenses.
Fees and expenses not incurred directly in connection with the consummation of
the Plan will be borne by the party incurring such fees and expenses.
(b) Notwithstanding any other provisions of this Plan, if for any reason
the transaction contemplated by this Plan is not consummated, no entity shall be
liable to the other entity for any damages resulting therefrom, including,
without limitation, consequential damages.
5. Exchange Date. Delivery of the assets of each Consolidating Fund to be
transferred, assumption of the liabilities of each Consolidating Fund to be
assumed, and the delivery of the corresponding Consolidated Fund's shares to be
issued shall be made at the offices of HighMark Funds, One Freedom Valley Road,
Oaks, Pennsylvania 19456, at 9:00 a.m. Eastern time on the next full business
day following the Valuation Time, or at such other time and date established by
the proper officers of HighMark Funds, the date and time upon which such
delivery is to take place being referred to herein as the "Exchange Date."
6. Special Meeting of Shareholders: Dissolution. (a) Each Consolidating Fund
agrees to call a special meeting of its respective shareholders as soon as is
practicable after the effective date of the registration statement filed with
the Commission by HighMark Funds on Form N-14 relating to the shares of the
Growth Fund and the Government Securities Fund issuable hereunder (the
"Registration Statement"), and the proxy statement of each of the Blue Chip
Growth Fund and the Government Securities Fund included therein (the "Proxy
Statement") for the purpose of considering the sale of all of the assets of each
Consolidating Fund to and the assumption of all of the liabilities of each
Consolidating Fund by the corresponding Consolidated Fund as herein provided,
adopting this Plan, and authorizing the liquidation and dissolution of the
Consolidating Funds, and it shall be a condition to the obligations of each of
the parties hereto that the holders of the shares of beneficial interest of the
Consolidating Funds shall have approved this Plan and the transactions
contemplated herein in the manner
A5
<PAGE> 42
required by law and HighMark Funds' Declaration of Trust at such a meeting on or
before the Valuation Time.
(b) Each Consolidating Fund will liquidate and dissolve in the manner
provided in HighMark Funds' Declaration of Trust and in accordance with
applicable law, provided that each Consolidating Fund will not make any
distributions of shares of the corresponding Consolidated Funds to its
shareholders without first paying or adequately providing for the payment of all
of its debts, obligations and liabilities.
7. Conditions to Be Met Regarding the Transaction. The intention of HighMark
Funds to consummate each of the transactions described herein is subject to the
following conditions:
(a) This Plan shall have been adopted and the transactions contemplated
hereby, including the liquidation and dissolution of the Consolidating Funds,
shall have been approved by their respective shareholders in the manner required
by law.
(b) The officers of HighMark Funds shall cause the preparation of a
statement the assets of the Consolidating Funds and liabilities, with values
determined as provided in Section 3, together with a list of Investments with
their respective tax costs, all as of the Valuation Time, certified on HighMark
Funds' behalf by its President (or any Vice President) and Treasurer, and a
certificate of both such officers, dated the Exchange Date, that there has been
no material adverse change in the financial position of the Consolidating Funds
since July 31, 1998, 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 Consolidating Fund, dividends paid or losses from
operations.
(c) The officers of HighMark Funds shall cause the preparation of a
statement of the Consolidated Funds' net assets, together with a list of
portfolio holdings with values determined as provided in Section 3 hereof, all
as of the Valuation Time certified on HighMark Funds' behalf by its President
(or any Vice President) and Treasurer.
(d) The President (or any Vice President) and Treasurer of HighMark Funds
shall certify that as of the Valuation Time and as of the Exchange Date all the
elements in Section 1 of this Plan are true and correct in all material respects
as if made at and as of such dates and that each HighMark Fund has complied with
and satisfied all the conditions on its part under the Plan to be performed or
satisfied at or prior to such dates.
(e) HighMark Funds shall have received a letter from Deloitte & Touche LLP
dated the Exchange Date stating that such firm reviewed (i) the federal and
state income tax returns of the Consolidating Funds related to the year ended
July 31, 1998 and (ii) to the extent returns have not been prepared or filed,
all available information of the Consolidating Funds for the period from July
31, 1998 to the Exchange Date, and that, in the course of such review, nothing
came to their attention which caused them to believe that such returns and/or
available
A6
<PAGE> 43
information did not properly reflect, in all material respects, the federal and
state income taxes of the Consolidating Funds for the periods covered thereby,
or that each Consolidating Fund would not qualify as a regulated investment
company for federal income tax purposes.
(f) There shall not be any material litigation pending with respect to the
matters contemplated by this Plan.
(g) HighMark Funds shall have received an opinion of Ropes & Gray dated the
Exchange Date to the effect that: (i) HighMark Funds is a business trust duly
established and validly existing under the laws of the Commonwealth of
Massachusetts, and neither HighMark Funds nor any HighMark Fund is, to the
knowledge of such counsel, required to qualify to do business as a foreign
association in any jurisdiction; (ii) HighMark Funds, on behalf of each
Consolidating Fund, has the 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 Plan,
HighMark Funds, on behalf of each Consolidating Fund, will have duly sold,
assigned, conveyed, transferred and delivered such Investments and other assets
to the corresponding Consolidated Fund; (iii) the adoption of this Plan did not,
and the consummation of the transactions contemplated hereby will not, violate
HighMark Funds' Declaration of Trust or Code of Regulations, as amended, or any
provision of any agreement known to such counsel to which HighMark Funds is a
party or by which it is bound; (iv) no consent, approval, authorization or order
of any court or governmental authority is required for the consummation by
HighMark Funds of the transactions contemplated hereby, except such as have been
obtained under the Securities Act of 1933 (the "1933 Act"), the Securities
Exchange Act of 1934 ("the 1934 Act") and the 1940 Act; (v) this Plan has been
duly authorized, executed and delivered by HighMark Funds and is a valid and
binding obligation of HighMark Funds; and (vi) the shares of each Consolidated
Fund to be delivered to the corresponding Consolidating Fund as provided for by
this Plan are duly authorized and upon such delivery will be validly issued and
will be fully paid and nonassessable by HighMark Funds and no shareholder of
HighMark Funds has any preemptive right to subscription or purchase in respect
thereof.
(h) With respect to each transaction, HighMark Funds shall have received an
opinion of Ropes & Gray addressed to HighMark Funds and dated the Exchange Date
to the effect that for Federal income tax purposes: (i) no gain or loss will be
recognized by the Consolidating Fund upon the transfer of the assets and
Investments to the corresponding Consolidated Fund in exchange for shares of the
corresponding Consolidated Fund and the assumption by the corresponding
Consolidated Fund of the liabilities of such Consolidating Fund or upon the
distribution of shares of the corresponding Consolidating Fund by such
Consolidating Fund to its shareholders in liquidation; (ii) no gain or loss will
be recognized by the shareholders of the Consolidating Fund upon the exchange of
its shares for the shares of the corresponding Consolidated Fund; (iii) the
basis of the shares of the Consolidated Fund's shares a shareholder of the
corresponding Consolidating Fund receives in connection with the exchange will
be the same as the basis of his or her Consolidating Fund's shares exchanged
A7
<PAGE> 44
therefor; (iv) a Consolidating Fund's shareholder's holding period for his or
her corresponding Consolidated Fund's shares will be determined by including the
period for which he or she held the shares of the Consolidating Fund exchanged
therefor, provided that he or she held such shares of the Consolidating Fund as
capital assets; (v) no gain or loss will be recognized by the Consolidating Fund
upon the receipt of the assets transferred to the corresponding Consolidated
Fund pursuant to this Plan in exchange for the shares of the corresponding
Consolidated Fund and the assumption by the corresponding Consolidated Fund of
the liabilities of such Consolidating Fund; (vi) the basis in the hands of the
Consolidated Fund of the assets of the corresponding Consolidating Fund will be
the same as the basis of the assets in the hands of the corresponding
Consolidating Fund immediately prior to the transfer; and (vii) the Consolidated
Fund's holding periods of the assets of the corresponding Consolidating Fund
will include the period for which such assets were held by the corresponding
Consolidating Fund.
(i) The assets of each Consolidating Fund to be Consolidating by the
corresponding Consolidated Fund will include no assets which the corresponding
Consolidated Fund, by reason of limitations contained in HighMark Funds'
Declaration of Trust or of investment restrictions disclosed in its Prospectus
in effect on the Exchange Date, may not properly acquire.
(j) The Registration Statement shall have become effective under the 1933
Act, and no stop order suspending such effectiveness shall have been instituted
or to the knowledge of HighMark Funds, contemplated by the Commission.
(k) HighMark Funds shall have received from the Commission such order or
orders as Ropes & Gray deems reasonably necessary or desirable under the 1933
Act, the 1934 Act, the 1940 Act in connection with the transactions contemplated
hereby, and that all such orders shall be in full force and effect.
(l) Prior to the Exchange Date, each Consolidating Fund shall have declared
a dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to its respective shareholders all of its
investment company taxable income for its taxable years ending on or after July
31, 1998 and on or prior to the Exchange Date (computed without regard to any
deduction for dividends paid), and all of its net capital gain realized in each
of its taxable years ending on or after July 31, 1998 and on or prior to the
Exchange Date (after reduction for any capital loss carryover).
(m) The custodian of HighMark Funds shall have delivered to HighMark Funds
a certificate identifying all of the assets of the Consolidating Funds held by
such custodian as of the Valuation Time.
(n) The transfer agent of HighMark Funds shall have provided to HighMark
Funds (i) a certificate setting forth the number of shares of each Consolidating
Fund outstanding as of the
A8
<PAGE> 45
Valuation Time and (ii) the name and address of each holder of record of any
such shares of each Consolidating Fund and the number and class of shares held
of record by each such shareholder.
(o) HighMark Funds, on behalf of each Consolidating Fund, shall have
executed and delivered an Assumption of Liabilities dated as of the Exchange
Date pursuant to which each Consolidating Fund will assume all of the
liabilities of the corresponding Consolidating Fund existing at the Valuation
Time in connection with the transactions contemplated by this Plan.
(p) HighMark Funds, on behalf of each Consolidating Fund, shall have
executed and delivered an instrument of transfer ("Transfer Document") and any
other certificates or documents HighMark Funds may deem necessary or desirable
to transfer each Consolidating Fund's entire right, title and interest in and to
the Investments and all other assets.
8. No Broker. There is no person who has dealt with HighMark Funds or any
HighMark Fund 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 Plan.
9. Termination. HighMark Funds may, by consent of its trustees, terminate this
Plan, and HighMark Funds, after consultation with counsel, may modify this Plan
in any manner deemed necessary or desirable.
10. Rule 145. Pursuant to Rule 145 under the 1933 Act, HighMark Funds will, in
connection with the issuance of any shares of the Consolidated Funds 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 Funds will issue stop transfer instructions to HighMark
Funds' transfer agent with respect to such shares.
11. Agreement and Declaration of Trust. Copies of the Agreement and Declaration
of Trust of HighMark Funds and any amendments thereto so filed is on file with
the Secretary of State of Massachusetts, and notice is hereby given that this
instrument is executed on behalf of the trustees of HighMark Funds, as trustees
and not individually, and that the obligations of
A9
<PAGE> 46
this instrument are not binding upon any of the trustees, officers or
shareholders of HighMark Funds individually but are binding only upon the assets
and property of HighMark Funds.
The names "HighMark Funds" and "Trustees of HighMark Funds" refer respectively
to the Trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under a Declaration of Trust filed on March
10, 1987, as amended, 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 the Trust personally, but bind only
the assets of the Trust, and all persons dealing with any series of Shares of
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
HighMark Funds
By: __________________________
A10
<PAGE> 47
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 of HighMark Funds dated November 16, 1998 (the
"Prospectus") relating to the transfer of the assets and liabilities of the
HighMark Blue Chip Growth Fund and the HighMark Government Securities Fund to
the HighMark Growth Fund and the HighMark Bond Fund, respectively. This
Statement of Additional Information 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 Prospectus may be obtained, without charge, by writing
SEI Investments Distribution Co., One Freedom Valley Drive, Oaks, PA 19456 or by
calling 1-800-734-2922.
The Statement of Additional Information for HighMark Funds, dated
November 28, 1997 has been filed with the Securities and Exchange Commission and
is incorporated herein by reference.
Audited financial statements for the Blue Chip Growth Fund, the Growth
Fund, the Government Securities Fund, and the Bond Fund for the period ended
July 31, 1998 are contained in the Annual Report, which is incorporated herein
by reference.
The date of this Statement of Additional Information is November 16,
1998.
B1
<PAGE> 48
TABLE OF CONTENTS
Financial Statements of the combined Funds
on a pro-forma basis for the year ended
July 31, 1998 (unaudited) ............................................... B-3
B2
<PAGE> 49
<TABLE>
<CAPTION>
BOND FUND
Schedule of Investments BOND FUND GOVERNMENT SECURITIES FUND PROFORMA BOND FUND
July 31, 1998 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Face Market Face Market Face Market
Amount (000) Value (000) Amount (000) Value (000) Amount (000) Value (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS--30.9%
AEROSPACE & DEFENSE--0.5%
Lockheed Martin
---------- -----------
7.700%, 06/15/08 1,500 $ 1,644 1,500 $ 1,644
---------- -----------
AUTOMOTIVE--3.9%
Ford Motor Credit
6.850%, 08/15/00 1,000 1,017 1,000 1,017
7.000%, 09/25/01 1,500 1,541 1,500 1,541
6.500%, 02/28/02 4,000 4,055 4,000 4,055
7.750%, 11/15/02 1,000 1,059 1,000 1,059
General Motors Acceptance
8.000%, 10/01/99 4,790 4,904 4,790 4,904
---------- -----------
12,576 12,576
---------- -----------
BANKS--4.0%
Bank of Boston
8.375%, 12/15/02 1,250 1,350 1,250 1,350
Citicorp
6.750%, 08/15/05 4,100 4,228 4,100 4,228
First Bank System
6.875%, 09/15/07 4,500 4,680 4,500 4,680
Lehman Brothers
8.375%, 02/15/99 1,000 1,012 1,000 1,012
Mercantile Bancorp
7.050%, 06/15/04 1,500 1,556 1,500 1,556
---------- -----------
12,826 12,826
---------- -----------
BEAUTY PRODUCTS--0.2%
Procter and Gamble
---------- -----------
8.500%, 08/10/09 500 594 500 594
---------- -----------
COMPUTERS & SERVICES--1.5%
IBM
---------- -----------
6.500%, 01/15/28 5,000 4,931 5,000 4,931
---------- -----------
ENTERTAINMENT--0.5%
Walt Disney
---------- -----------
6.375%, 03/30/01 1,500 1,521 1,500 1,521
---------- -----------
FINANCIAL SERVICES--6.7%
Associates Corporation of N.A.
6.500%, 07/15/02 1,000 1,013 1,000 1,013
6.500%, 04/15/03 2,000 1,987 2,000 1,987
Donaldson, Lufkin & Jenrette
6.500%, 06/01/08 5,000 5,019 5,000 5,019
General Electric Capital Services
6.500%, 11/01/06 3,500 3,601 3,500 3,601
Golden West Financial
6.700%, 07/01/02 2,800 2,849 2,800 2,849
Merrill Lynch & Co. Medium Term Note
6.330%, 08/25/00 3,000 3,023 3,000 3,023
Morgan Stanley
6.125%, 10/01/03 1,300 1,294 1,300 1,294
Salomon Brothers
7.300%, 05/15/02 1,000 1,038 1,000 1,038
Sears Finance
7.000%, 06/15/07 1,500 1,562 1,500 1,562
---------- ----------- -----------
15,354 6,032 21,386
---------- ----------- -----------
</TABLE>
B3
<PAGE> 50
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Face Market Face Market Face Market
Amount (000) Value (000) Amount (000) Value (000) Amount (000) Value (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOOD, BEVERAGE & TOBACCO--0.3%
Philip Morris
-------- ---------
7.750%, 01/15/27 1,000 1,069 1,000 1,069
-------- ---------
FOREIGN GOVERNMENTS--1.4%
Hydro Quebec
8.050%, 07/07/24 1,125 1,320 1,125 1,320
Province of British Columbia
7.000%, 01/15/03 1,500 1,556 1,500 1,556
Province of Ontario
7.375%, 01/27/03 1,500 1,579 1,500 1,579
-------- ---------
4,455 4,455
-------- ---------
INDUSTRIAL--1.0%
Caterpillar Tractor
-------- ---------
6.000%, 05/01/07 3,360 3,280 3,360 3,280
-------- ---------
INSURANCE--2.4%
American General
7.700%, 10/15/99 1,500 1,530 1,500 1,530
Travelers Property Casualty
6.750%, 04/15/01 6,000 6,113 6,000 6,113
-------- ---------
7,643 7,643
-------- ---------
METALS & MINING--0.5%
Potash
-------- ---------
7.125%, 6/15/07 1,500 1,541 1,500 1,541
-------- ---------
PETROLEUM REFINING--0.6%
Phillips Petroleum
Callable 03/15/08, 102.7 -------- ---------
7.125%, 03/15/28 2,000 2,018 2,000 2,018
-------- ---------
PRINTING & PUBLISHING--1.3%
E.W. Scripps
-------- ---------
6.375%, 10/15/02 4,000 4,030 4,000 4,030
-------- ---------
RETAIL--1.3%
Bass America
6.750%, 08/01/99 200 202 200 202
JC Penney
6.000%, 05/01/06 1,230 1,192 1,230 1,192
Wal-Mart Stores
6.375%, 03/01/03 2,850 2,903 2,850 2,903
-------- ---------
4,297 4,297
-------- ---------
SUPRA-NATIONAL--1.5%
Asian Development Bank
---------- ---------
5.750%, 05/19/03 5,000 4,981 5,000 4,981
---------- ---------
TELEPHONES & TELECOMMUNICATION--3.3%
Bell Atlantic
8.000%, 10/15/29 2,980 3,546 2,980 3,546
Cable and Wireless Communications
6.625%, 03/06/05 4,500 4,517 4,500 4,517
New England Telephone & Telegraph
6.250%, 03/15/03 1,500 1,513 1,500 1,513
7.875%, 11/15/29 1,000 1,180 1,000 1,180
--------- ----------
10,756 10,756
--------- ----------
--------- ---------- ----------
TOTAL CORPORATE BONDS (COST $97,348) 88,535 11,013 99,548
--------- ---------- ----------
</TABLE>
B4
<PAGE> 51
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Face Market Face Market Face Market
Amount (000) Value (000) Amount (000) Value (000) Amount (000) Value (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS--34.1%
AID-ISRAEL
7.125%, 08/15/99 2,000 2,027 2,000 2,027
FHLB
8.375%, 10/25/99 300 309 300 309
FHLMC
7.000%, 02/20/18 3,105 3,125 3,105 3,125
6.250%, 01/15/24 2,000 1,969 2,000 1,969
FNMA
9.050%, 04/10/00 3,000 3,161 3,000 3,161
5.625%, 03/15/01 (A) 18,500 18,483 18,500 18,483
6.200%, 09/25/02 2,000 1,995 2,000 1,995
5.250%, 01/15/03 13,500 13,238 13,500 13,238
5.450%, 10/10/03 3,800 3,744 3,800 3,744
5.750%, 06/15/05 6,000 5,963 6,000 5,963
6.850%, 09/12/05 2,000 2,032 2,000 2,032
6.700%, 11/10/05 1,000 1,012 1,000 1,012
5.750%, 02/15/08 (A) 2,000 1,981 11,750 11,639 13,750 13,620
6.000%, 05/15/08 1,250 1,261 1,250 1,261
6.500%, 03/25/13 1,500 1,496 1,500 1,496
6.500%, 03/01/24 1,323 1,317 1,323 1,317
8.000%, 08/01/24 257 266 257 266
8.000%, 09/01/24 38 40 38 40
8.000%, 10/01/24 140 146 140 146
8.500%, 05/01/25 899 938 899 938
6.500%, 01/01/26 780 776 780 776
6.500%, 05/01/26 884 880 884 880
8.000%, 07/01/26 1,309 1,357 1,309 1,357
6.000%, 12/01/27 1,978 1,924 1,978 1,924
6.500%, 01/01/28 1,006 1,001 1,006 1,001
6.500%, 02/01/28 1,975 1,966 1,975 1,966
6.500%, 03/01/28 1,996 1,988 1,996 1,988
6.500%, 04/01/28 4,939 4,915 4,939 4,915
6.000%, 07/22/28 1,000 971 1,000 971
GNMA
8.000%, 04/15/17 378 393 378 393
8.000%, 05/15/17 186 193 186 193
6.500%, 06/15/23 2,359 2,353 2,359 2,353
6.500%, 12/15/23 1,301 1,298 1,301 1,298
6.500%, 01/15/24 513 512 513 512
7.000%, 01/15/24 620 630 620 630
7.500%, 01/15/24 1,029 1,062 1,029 1,062
6.500%, 02/15/24 850 848 850 848
7.500%, 02/15/24 1,221 1,259 1,221 1,259
7.000%, 04/15/24 1,540 1,564 1,540 1,564
7.500%, 09/15/25 771 795 771 795
6.500%, 10/15/25 781 780 781 780
6.500%, 04/15/26 1,831 1,827 1,831 1,827
7.500%, 02/15/27 968 998 968 998
7.500%, 06/15/27 530 546 530 546
7.500%, 07/15/27 1,859 1,914 1,859 1,914
7.500%, 08/15/27 1,037 1,071 1,037 1,071
TOTAL U.S. GOVERNMENT AGENCY --------- --------- ----------
OBLIGATIONS (COST $107,832) 57,352 52,611 109,963
--------- --------- ----------
</TABLE>
B5
<PAGE> 52
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Face Market Face Market Face Market
Amount (000) Value (000) Amount (000) Value (000) Amount (000) Value (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS--23.4%
U.S. TREASURY BONDS
5.875%, 02/28/99 200 201 200 201
6.250%, 03/31/99 1,000 1,005 1,000 1,005
6.500%, 04/30/99 5,250 5,290 5,250 5,290
5.875%, 07/31/99 (A) 1,500 1,505 1,500 1,505
7.750%, 01/31/00 (A) 1,500 1,548 1,500 1,548
6.750%, 04/30/00 1,000 1,020 1,000 1,020
5.570%, 11/15/00 (A) 4,800 4,824 4,800 4,824
7.750%, 02/15/01 2,000 2,104 2,000 2,104
6.375%, 09/30/01 1,500 1,535 1,500 1,535
7.500%, 11/15/01 2,000 2,115 2,000 2,115
5.500%, 01/31/03 (A) 1,500 1,495 1,500 1,495
7.250%, 05/15/04 1,580 1,709 1,580 1,709
10.375%, 11/15/12(A) 3,000 3,993 3,000 3,993
7.250%, 05/15/16 9,850 11,426 9,850 11,426
8.125%, 08/15/19 (A) 1,000 1,277 1,000 1,277
8.750%, 08/15/20 4,860 6,612 4,860 6,612
7.250%, 08/15/22 (A) 1,500 1,775 1,500 1,775
7.125%, 02/15/23 2,800 3,272 2,800 3,272
6.625%, 02/15/27 (A) 11,700 13,066 11,700 13,066
6.125%, 11/15/27 (A) 8,250 8,716 8,250 8,716
U.S. TREASURY NOTES
8.500%, 11/15/00 420 447 420 447
6.625%, 06/30/01 300 309 300 309
---------- ----------- ------------
TOTAL U.S. TREASURY OBLIGATIONS ---------- ----------- ------------
(COST $69,704) 27,834 47,410 75,244
---------- ----------- ------------
ASSET- BACKED SECURITIES--5.1%
Chase Manhattan Auto Grantor Trust
6.610%, 09/15/02 660 665 660 665
Citibank Credit Card Master
Trust 1997-3 Cl A
6.839%, 02/10/04 2,700 2,755 2,700 2,755
Citibank Credit Card Master
Trust 1998-3 Cl A
5.800%, 02/07/05 2,000 1,969 2,000 1,969
EQCC Home Equity Loan
Trust 1995-2 Cl A4
7.800%, 12/15/10 2,200 2,302 2,200 2,302
EQCC Home Equity Loan
Trust 1996-3 Cl A6
7.400%, 12/15/19 2,500 2,605 2,500 2,605
Green Tree Financial 1995-9 Cl A5
6.800%, 01/15/27 2,500 2,577 2,500 2,577
J.C. Penney Master Credit Card Trust
9.625%, 06/15/00 1,500 1,615 1,500 1,615
Standard Credit Card Master
Trust 1993-3
5.500%, 02/07/00 2,000 1,998 2,000 1,998
TOTAL ASSET BACKED SECURITIES ---------- -----------
(COST $16,072) 16,486 16,486
---------- -----------
COLLATERALIZED MORTGAGE
OBLIGATIONS--3.8%
American Express Master
Trust 1998-1
5.900%, 04/15/04 4,000 4,040 4,000 4,040
Contimortgage Home Equity Loan
Trust 1994-4 Cl A3
8.090%, 09/15/09 1,675 1,752 1,675 1,752
Contimortgage Home Equity Loan
Trust 1995-2 Cl A4
8.050%, 07/15/12 1,000 1,050 1,000 1,050
Contimortgage Home Equity Loan
Trust, Ser 1995-3 Cl A4
7.440%, 09/15/12 1,000 1,043 1,000 1,043
Country Wide Mortgage 1993-2 Cl 4
6.750%, 04/25/08 393 395 393 395
GE Capital Mortgage Service
1994-1 Cl A6
6.500%, 01/25/24 2,650 2,638 2,650 2,638
</TABLE>
B6
<PAGE> 53
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Face Market Face Market Face Market
Amount (000) Value (000) Amount (000) Value (000) Amount (000) Value (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Residential Funding Mortgage
1992-S36 Cl A4
1,413 1,414 1,413 1,414
TOTAL COLLATERALIZED MORTGAGE --------- ---------
OBLIGATIONS (COST $11,828) 12,332 12,332
--------- ---------
COMMERCIAL PAPER--4.7%
EngleHard Corporation (B)
5.803%, 08/03/98 5,000 4,998 5,000 4,998
Mitsubishi Motors Credit (B)
5.697%, 08/05/98 5,000 4,997 5,000 4,997
SouthWestern Electric PLC (B)
5.725%, 08/20/98 5,000 4,985 5,000 4,985
TOTAL COMMERCIAL PAPER --------- --------
(COST $14,980) 14,980 14,980
--------- --------
CORPORATE OBLIGATION--1.6%
Household CCMT ABT 96, Ser A (B)
5.656%, 01/15/99 5,000 5,000 5,000
--------- --------
TOTAL CORPORATE OBLIGATION (COST $5,000) 5,000 5,000
--------- --------
REPURCHASE AGREEMENTS--6.9%
BZW Securities, Inc.
5.59%, dated 07/31/98, matures 08/03/98,
repurchase price $1,269,684
(collateralized by U.S.
Treasury Note, par value
$1,307,000, 5.50%,
11/15/98: market value
$ 1,322,446) 1,269 1,269 1,269 1,269
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98, matures 08/03/98,
repurchase price $3,657,906
(collateralized by U.S.
Treasury Bill, par $3,827,000,
0.00%, 07/22/98: market value
$3,729,531) 3,656 3,656 3,656 3,656
Lehman Brothers, Inc. (B)
5.75% dated 07/31/98,matures 08/03/98,
repurchase price $6,648,184
(collateralized by various
corporate obligations 0.00%-5.75%,
08/03/98-01/15/99; total market
value $6,777,900) 6,645 6,645 6,645 6,645
Lehman Brothers, Inc. (B)
5.75% dated 07/31/98,matures 08/03/98,
repurchase price $10,780,777
(collateralized by various
corporate obligations 0.00%-5.75%,
08/03/98-01/15/99; total market
value $10,991,126) 10,775 10,775 10,775 10,775
TOTAL REPURCHASE AGREEMENTS --------- --------- ----------
(COST $22,345) 10,301 12,044 22,345
--------- --------- ----------
TOTAL INVESTMENTS--110.5% --------- --------- ----------
(COST $345,109) 212,840 143,058 355,898
--------- --------- ----------
PAYABLE UPON RETURN OF SECURITIES
LOANED--(11.6%) (6,645) (30,755) (37,400)
OTHER ASSETS AND LIABILITIES,
NET--1.1% 1,842 1,645 3,487
--------- --------- ----------
TOTAL NET ASSETS--100.0% 208,037 113,948 321,985
--------- --------- ----------
</TABLE>
- -----------------------------------------------------------------------
(A) This security or a partial position of this security is on loan at July
31,1998. The total value of securities on loan at July 31, 1998 was
$6,505,604 and $29,701,858 for Bond and Government Securities, respectively.
(B) This security purchased with cash collateral held from securities lending.
(C) Floating Rate Security - The rate reflected on the Statement of Net Assets
is the rate in effect on July 31, 1998.
Cl - Class
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
B7
<PAGE> 54
<TABLE>
<CAPTION>
GROWTH FUND
Schedule of Investments GROWTH FUND BLUE CHIP GROWTH FUND PROFORMA GROWTH FUND
July 31, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Market Market Market
Shares Value Shares Value Shares Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS--97.7%
AEROSPACE & DEFENSE--0.4%
------- ------
B.F. Goodrich 63,265 2,566 63,265 2,566
------- ------
AIR TRANSPORTATION--0.9%
AMR*(A) 22,000 1,572 22,000 1,572
FDX* (A) 30,730 1,865 30,730 1,865
Southwest Airlines 78,610 2,589 78,610 2,589
------- ------- ------
4,454 1,572 6,026
------- ------- ------
AIRCRAFT--0.2%
------- ------
Allied Signal 33,200 1,444 33,200 1,444
------- ------
APPAREL/TEXTILES--1.0%
------- ------- ------
Cintas 102,800 5,224 20,000 1,016 122,800 6,240
------- ------- ------
BANKS--5.8%
Banc One (A) 22,102 1,142 22,102 1,142
BankAmerica 55,510 4,982 55,510 4,982
Bank of Boston 28,800 1,393 28,800 1,393
Chase Manhattan Bank 7,210 545 27,000 2,042 34,210 2,587
Citicorp 13,500 2,295 13,500 2,295
Comerica 30,000 2,021 30,000 2,021
First Union 29,322 1,767 29,322 1,767
Fleet Financial Group 14,880 1,279 14,880 1,279
NationsBank(A) 26,524 2,115 26,524 2,115
Northern Trust Corp. 33,610 2,475 33,610 2,475
STAR BANC (A) 29,500 2,076 29,500 2,076
State Street Bank (A) 36,980 2,563 36,980 2,563
U.S. Bancorp 125,481 5,772 33,000 1,518 158,481 7,290
Washington Mutual (A) 74,970 2,994 74,970 2,994
Wells Fargo 1,385 493 1,385 493
------- ------- ------
22,245 15,227 37,472
------- ------- ------
BEAUTY PRODUCTS--2.7%
Avon Products 103,670 8,967 15,000 1,297 118,670 10,264
Colgate-Palmolive (A) 57,190 5,287 13,200 1,220 70,390 6,507
Proctor & Gamble 8,730 693 8,730 693
------- ------- ------
14,947 2,517 17,464
------- ------- ------
BROADCASTING, NEWSPAPERS & ADVERTISING--2.8%
Comcast, Cl A (A) 186,270 8,458 27,600 1,253 213,870 9,711
Gannett 72,320 4,624 72,320 4,624
Interpublic Group (A) 43,840 2,641 43,840 2,641
Univision Communications* 34,660 1,265 34,660 1,265
------- ------- ------
16,988 1,253 18,241
------- ------- ------
</TABLE>
B8
<PAGE> 55
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Market Market Market
Shares Value Shares Value Shares Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHEMICALS--0.7%
------- ------
Du Pont (E. I.) de Nemours 75,740 4,696 75,740 4,696
------- ------
COMMUNICATIONS EQUIPMENT--0.6%
------- ------
Nokia - ADR 43,800 3,816 43,800 3,816
------- ------
COMPUTERS & SERVICES--2.5%
Cisco Systems* 53,157 5,090 25,000 2,394 78,157 7,484
Computer Sciences* 39,710 2,541 39,710 2,541
EMC* 80,240 3,932 45,000 2,205 125,240 6,137
------- ------- ------
11,563 4,599 16,162
------- ------- ------
COMPUTERS & SOFTWARE SERVICES--5.3%
America Online* (A) 53,670 6,279 16,000 1,872 69,670 8,151
Compaq Computer 80,290 2,640 80,290 2,640
Dell Computer* 5,696 619 21,000 2,280 26,696 2,899
Fiserv* (A) 93,712 4,135 93,712 4,135
HBO 10,600 312 10,600 312
Hewlett Packard 15,855 880 15,855 880
Microsoft* 112,660 12,386 21,000 2,309 133,660 14,695
Parametric Technology* (A) 18,800 256 18,800 256
Peoplesoft* (A) 8,300 313 8,300 313
------- ------- ------
27,195 7,086 34,281
------- ------- ------
DIVERSIFIED OPERATIONS--6.3%
Berkshire Hathaway, Cl B* (A) 8,572 20,076 1,680 3,935 10,252 24,011
General Electric 143,950 12,857 43,600 3,894 187,550 16,751
------- ------- ------
32,933 7,829 40,762
------- ------- ------
DRUGS--11.5%
Abbott Labs 74,524 3,097 74,524 3,097
Alza* (A) 129,555 5,036 129,555 5,036
Amgen* 19,246 1,413 19,246 1,413
Bristol-Myers Squibb 89,900 10,243 89,900 10,243
Eli Lilly 68,662 4,618 29,852 2,008 98,514 6,626
Forest Laboratories* 58,400 2,190 58,400 2,190
Johnson & Johnson 73,500 5,678 16,200 1,251 89,700 6,929
Merck 19,395 2,392 19,395 2,392
Pfizer 106,700 11,737 23,000 2,530 129,700 14,267
Schering Plough 76,210 7,373 16,000 1,548 92,210 8,921
Warner Lambert 136,140 10,287 38,700 2,924 174,840 13,211
------- ------- ------
61,874 12,451 74,325
------- ------- ------
ENTERTAINMENT--2.5%
Mirage Resorts* (A) 210,990 4,536 210,990 4,536
Walt Disney 269,244 9,272 72,800 2,507 342,044 11,779
------- ------- ------
13,808 2,507 16,315
------- ------- ------
ENVIRONMENTAL SERVICES--0.2%
------- ------
U.S. Filter* (A) 46,000 1,242 46,000 1,242
------- ------
</TABLE>
B9
<PAGE> 56
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Market Market Market
Shares Value Shares Value Shares Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL SERVICES--7.0%
American Express 79,965 8,826 17,000 1,876 96,965 10,702
Fannie Mae 161,075 9,987 40,700 2,523 201,775 12,510
Franklin Resources (A) 102,460 4,463 30,000 1,307 132,460 5,770
MBNA 77,367 2,592 77,367 2,592
Merrill Lynch (A) 15,400 1,501 15,400 1,501
Travelers Group(A) 175,845 11,782 175,845 11,782
------- ------- ------
37,650 7,207 44,857
------- ------- ------
FOOD, BEVERAGE & TOBACCO--5.4%
Coca Cola Company 222,196 17,928 56,000 4,519 278,196 22,447
Hershey Foods 68,340 4,314 1,500 95 69,840 4,409
PepsiCo 32,090 1,245 41,600 1,615 73,690 2,860
Philip Morris Companies 35,000 1,533 35,000 1,533
Sara Lee 27,600 1,383 27,600 1,383
Wrigley, Wm. Jr 25,770 2,311 25,770 2,311
------- ------- ------
25,798 9,145 34,943
------- ------- ------
HOUSEHOLD PRODUCTS--3.1%
Clorox 7,500 769 7,500 769
Gillette 289,594 15,168 71,000 3,719 360,594 18,887
------- ------- ------
15,168 4,488 19,656
------- ------- ------
INSURANCE--3.8%
Allstate 100,886 4,281 100,886 4,281
American International Group 47,816 7,211 12,900 1,945 60,716 9,156
First Health Group 17,380 428 17,380 428
Hartford Financial Services Group 48,220 2,510 48,220 2,510
Marsh & McLennan 82,755 5,053 82,755 5,053
Mutual Risk Management (A) 80,242 3,059 80,242 3,059
------- ------- ------
22,542 1,945 24,487
------- ------- ------
LEISURE PRODUCTS--3.2%
Carnival, Cl A 173,150 6,396 34,200 1,263 207,350 7,659
Mattel 283,632 10,902 48,400 1,860 332,032 12,762
Nike Cl B 10,952 487 10,952 487
------- ------- ------
17,785 3,123 20,908
------- ------- ------
MACHINERY--2.8%
Danaher 91,780 3,746 91,780 3,746
Dresser Industries 175,055 6,182 36,200 1,278 211,255 7,460
Emerson Electric 7,340 436 7,340 436
Illinois Tool Works (A) 77,400 4,339 77,400 4,339
Ingersoll Rand (A) 46,957 2,075 46,957 2,075
------- ------- ------
16,778 1,278 18,056
------- ------- ------
</TABLE>
B10
<PAGE> 57
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Market Market Market
Shares Value Shares Value Shares Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MEDICAL PRODUCTS & SERVICES--8.1%
Boston Scientific*(A) 35,300 2,705 35,300 2,705
Covance* 24,380 584 24,380 584
Healthsouth*(A) 75,500 1,897 75,500 1,897
IMS HEALTH Inc. 364,360 22,886 42,500 2,670 406,860 25,556
Medtronic 91,150 5,646 25,700 1,592 116,850 7,238
Safeskin* 280,640 10,542 32,700 1,228 313,340 11,770
Stryker (A) 53,900 2,341 53,900 2,341
------- ------- ------
41,999 10,092 52,091
------- ------- ------
MISCELLANEOUS BUSINESS SERVICES--1.7%
Automatic Data Processing 34,315 2,323 34,315 2,323
Cendant* 51,000 883 51,000 883
Electronic Data Systems 10,965 386 10,965 386
First Data (A) 15,801 457 15,801 457
Robert Half International* 107,844 5,743 23,400 1,246 131,244 6,989
------- ------- ------
8,909 2,129 11,038
------- ------- ------
MISCELLANEOUS CONSUMER SERVICES--0.3%
------- ------- ------
Service International 51,305 1,943 51,305 1,943
------- ------- ------
PETROLEUM REFINING--1.6%
Schlumberger (A) 111,440 6,749 111,440 6,749
Exxon 30,000 2,104 30,000 2,104
Mobil 15,800 1,102 15,800 1,102
Royal Dutch Petroleum 8,000 408 8,000 408
------- ------- ------
6,749 3,614 10,363
------- ------- ------
PRINTING & PUBLISHING--1.7%
McGraw-Hill 30,450 2,495 30,450 2,495
R.R. Donnelley & Sons 55,380 2,354 55,380 2,354
Tribune 22,000 1,480 22,000 1,480
Washington Post, Cl B 8,987 4,893 8,987 4,893
------- ------- ------
9,742 1,480 11,222
------- ------- ------
PROFESSIONAL SERVICES--1.2%
------- ------- ------
Devry* 333,500 6,795 30,100 613 363,600 7,408
------- ------- ------
RETAIL--9.1%
Bed Bath & Beyond* 28,000 1,208 28,000 1,208
Costco* (A) 176,125 9,995 14,500 823 190,625 10,818
CVS Corp. 40,000 1,640 40,000 1,640
General Nutrition* 30,500 873 30,500 873
Harley-Davidson (A) 83,700 3,317 32,700 1,296 116,400 4,613
Home Depot 218,304 9,141 40,000 1,675 258,304 10,816
Kohls* 187,090 9,167 25,400 1,245 212,490 10,412
Lowe's 40,000 1,540 40,000 1,540
McDonald's 98,428 6,576 19,200 1,283 117,628 7,859
Safeway* (A) 137,180 6,079 48,000 2,127 185,180 8,206
Staples* 30,000 986 30,000 986
------- ------- ------
44,275 14,696 58,971
------- ------- ------
</TABLE>
B11
<PAGE> 58
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Market Market Market
Shares Value Shares Value Shares Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEMI-CONDUCTORS/INSTRUMENTS--2.6%
Adaptec* 5,000 58 5,000 58
Applied Materials* (A) 64,740 2,169 64,740 2,169
Intel 100,538 8,489 22,700 1,917 123,238 10,406
Texas Instruments 44,790 2,657 44,790 2,657
Xilinx* (A) 32,630 1,224 32,630 1,224
------- ------- -------
14,539 1,975 16,514
------- ------- -------
SPECIALTY MACHINERY--0.5%
------- ------- -------
Solectron* 55,850 2,681 12,500 600 68,350 3,281
------- ------- -------
TELEPHONES & TELECOMMUNICATION--2.2%
AirTouch Communications* 110,550 6,502 22,500 1,323 133,050 7,825
Lucent Technologies 38,866 3,593 38,866 3,593
WorldCom* (A) 50,000 2,644 50,000 2,644
------- ------- -------
10,095 3,967 14,062
------- ------- -------
------- ------- -------
TOTAL COMMON STOCKS (COST $463,238) 505,757 125,095 630,852
------- ------- -------
- --------------------------------------------------------------------------------------------------------------------------------
Face Market Shares Value Face Market
Amount (000) Value (000) (000) (000) Amount (000) Value (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER--7.8%
Bridgestone/Firestone (B) (C)
5.760%, 08/10/98 10,500 10,485 10,500 10,485
Mitsubishi Motors Credit (B) (C)
5.697%, 08/05/98 10,000 9,994 5,000 4,997 15,000 14,991
5.715%, 08/20/98 7,000 6,979 7,000 6,979
Orange & Rockland Utility (B) (C)
5.724%, 08/11/98 5,000 4,992 5,000 4,992
South Western Electric PLC (B) (C)
5.722%, 08/13/98 8,032 8,017 8,032 8,017
5.766%, 08/27/98 5,000 4,982 5,000 4,982
------- ------- ---------
TOTAL COMMERCIAL PAPER (COST $35,475) 35,475 14,971 50,446
------- ------- ---------
CORPORATE BONDS--5.0%
Bankers Trust (B) (C) 5,000 5,000 5,000 5,000.00
5.702%, 09/11/98
Household CCMT ABT 96 Series (B) (C) 10,000 10,000 5,000 5,000 15,000 15,000.00
5.656%, 01/15/99
Sigma Finance (B) (C) 5,000 5,000 2,500 2,500 7,500 7,500.00
5.750%, 11/10/98
Societe General, NY FYCD (B) (C)
5.760%, 08/25/98 5,000 5,000 5,000 5,000.00
------- ------- ---------
TOTAL CORPORATE BONDS (COST $24,995) 25,000 7,500 32,500
------- ------- ---------
</TABLE>
B12
<PAGE> 59
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Face Market Shares Value Face Market
Amount (000) Value (000) (000) (000) Amount (000) Value (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REPURCHASE AGREEMENTS--10.8%
BZW Securities, Inc.
5.59%, dated 07/31/98, matures 08/03/98,
repurchase price $1,962,513 (collateralized
by U.S. Treasury Note, par value $1,978,000,
5.50%, 11/15/98: market value $2,001,376) 1,962 1,962 1,962 1,962
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98, matures 08/03/98,
repurchase price $21,774,425 (collateralized
by various U.S. Treasury Bills, par value
23,190,000, 0.00%, 02/04/99 - 06/24/99:
$ market value $22,199,992 21,764 21,764 21,764 21,764
Lehman Brothers, Inc. (B) (C)
5.75% dated 07/31/98, matures 08/03/98,
repurchase price $29,494,190 (collateralized by
various corporate obligations 0.00%-5.75%,
08/03/98-01/15/99; total market value
$30,069,665) 29,480 29,480 29,480 29,480
Lehman Brothers, Inc. (B) (C)
5.75% dated 07/31/98, matures 08/03/98,
repurchase price $16,499,155 (collateralized by
various corporate obligations 0.00%-5.75%,
08/03/98-01/15/99; total market value
$16,499,155) 16,176 16,176 16,176 16,176
------- -------- -------
TOTAL REPURCHASE AGREEMENTS (COST $21,764) 51,244 18,138 69,382
------- -------- -------
TOTAL INVESTMENTS--121.3% (COST $469,933) 617,476 165,704 783,180
------- -------- -------
RECEIVABLE FOR SECURITIES SOLD--7.0% 45,597 45,597
PAYABLE FOR SECURITIES PURCHASED--(7.0%) (45,207) (45,207)
PAYABLE UPON RETURN OF SECURITIES LOANED - (19.9%) (89,955) (38,647) (128,602)
OTHER ASSETS AND LIABILITIES, NET--(1.5%) (9,340) (152) (9,492)
------- -------- -------
TOTAL NET ASSETS--100.0% 518,181 127,295 645,476
------- -------- -------
</TABLE>
- ----------
* Non-income producing security.
(A) This security or a partial position of this security is on loan at January
31, 1998. The total value of securities on loan at July 31, 1998 was
$87,400,900 and $21,817,470 for Growth and Blue Chip Growth, respectively.
(B) This security purchased with cash collateral held from securities lending.
(C) Floating Rate Security - The rate reflected on the Statement of Net Assets
is the rate in effect on July 31, 1998.
ADR - American Depository Reciept
Cl - Class
Ser - Series
B13
<PAGE> 60
HIGHMARK GROWTH FUND
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (000)
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
GROWTH BLUE CHIP PROFORMA COMBINED
FUND GROWTH FUND ADJUSTMENTS GROWTH FUND
---- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Investments at market value
(cost of $469,933, $145,628 and $615,561, respectively) $617,476 $165,704 $783,180
Interest Receivable 366 85 451
Receivable for investment securities sold 4,031 45,597 49,628
Receivable for capital shares sold 2,285 33 2,318
Other assets 33 2 35
Total Assets $624,191 $211,421 $835,612
======== ======== ========
Liabilities:
Payable for investment securities purchased 105,300 83,854 189,154
Payable for capital shares repurchased 222 104 326
Other Liabilities 488 168 656
-------- -------- --------
Total Liabilities $106,010 $ 84,126 $190,136
======== ======== ========
Net Assets:
Fiduciary Shares - HighMark Growth Fund
(based on 29,492,647 outstanding shares) 321,467 (321,467)(a) --
Fiduciary Shares - Pro Forma HighMark Growth Fund
(based on 37,015,993 outstanding shares) 415,189(a) 415,189
Fiduciary Shares - HighMark Blue Chip Growth Fund
(based on 7,936,141 outstanding shares) 93,722 (93,722)(a) --
Retail Class A - HighMark Growth Fund
(based on 1,014,423 outstanding shares) 14,852 14,852
Retail Class B - HighMark Growth Fund
(based on 115,600 outstanding shares) 1,916 1,916
Undistributed net investment income -- 11 11
Accumulated net realized gain on investments 32,403 13,486 45,889
Net unrealized appreciation on investments 147,543 20,076 167,619
-------- --------
TOTAL NET ASSETS $518,181 $127,295 $ -- $645,476
======== ======== ========= ========
Net Asset Value, Offering Price and Redemption
Price Per Share -- Fiduciary Class $ 16.92 $ 16.04 $ 16.92
Net Asset Value and Redemption
Price Per Share -- Retail Class A $ 16.93 $ 16.93
Maximum Offering Price Per Share -- Retail
Class A ($16.93 / 95.5%) $ 17.73 $ 17.73
Net Asset Value, Offering Price and Redemption
Price Per Share -- Retail Class B $ 16.85 $ 16.85
</TABLE>
B14
<PAGE> 61
HIGHMARK BOND FUND
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (000)
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
BOND GOVERNMENT PROFORMA COMBINED
FUND SECURITIES FUND ADJUSTMENTS BOND FUND
---- --------------- ----------- ---------
<S> <C> <C> <C>
Assets:
Investments at market value
(cost of $204,678, $140,431 and $345,109, respectively) $ 212,840 $ 143,058 $355,898
Interest Receivable 2,987 1,903 4,890
Receivable for investment securities sold -- -- 0
Receivable for capital shares sold 1,032 23 1,055
Other assets 25 -- 25
--------- --------- --------
Total Assets $ 216,884 $ 144,984 361,868
========= ========= ========
LIABILITIES:
Payable for investment securities purchased 8,618 30,755 39,373
Payable for capital shares repurchased 21 132 153
Other Liabilities 208 149 357
--------- --------- --------
Total Liabilities $ 8,847 $ 31,036 $ 39,883
========= ========= ========
NET ASSETS:
Fiduciary Shares - HighMark Bond Fund
(based on 19,061,377 outstanding shares) 200,926 (200,926) (a) --
Fiduciary Shares - Pro Forma HighMark Bond Fund
(based on 29,602,302 outstanding shares) 313,866 (a) 313,866
Fiduciary Shares - HighMark Government Securities Fund
(based on 11,659,153 outstanding shares) 112,940 (112,940)(a)
Retail Class A - HighMark Bond Fund
(based on 178,209 outstanding shares) 1,885 1,885
Undistributed net investment income 245 113 358
Accumulated net realized gain on investments (3,181) (1,732) (4,913)
Net unrealized appreciation on investments 8,162 2,627 10,789
--------- --------- --------
TOTAL NET ASSETS $ 208,037 $ 113,948 $ -- $321,985
========= ========= ========= ========
Net Asset Value, Offering Price and Redemption
Price Per Share -- Fiduciary Class $ 10.81 $ 9.77 $ 10.81
Net Asset Value and Redemption
Price Per Share -- Retail Class A $ 10.73 $ 10.73
Maximum Offering Price Per Share -- Retail
Class A ($10.73 / 97%) $ 11.06 $ 11.06
</TABLE>
B15
<PAGE> 62
HIGHMARK GROWTH FUND
PRO FORMA COMBINING STATEMENTS OF OPERATIONS (000)
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
GROWTH BLUE CHIP PROFORMA COMBINED
FUND GROWTH FUND ADJUSTMENTS GROWTH FUND
---- ----------- ----------- -----------
<S> <C> <C> <C>
Interest Income $ 600 $ 536 $ 1,136
Dividend Income 3,150 912 4,062
-------- -------- --------
Total Investment Income $ 3,750 $ 1,448 $ 5,198
======== ======== ========
Expenses:
Administrative Fee 755 227 982
Administrative Fees Waived (86) (23) (109)
Investment Advisor Fee 2,265 680 2,945
Investment Advisor Fee Waiver -- -- --
Shareholder Servicing Fees Fiduciary 917 283 1,200
Shareholder Servicing Fees Retail Class A 26 -- 26
Shareholder Servicing Fees Retail Class B 1 -- 1
Shareholder Servicing Fees Waived (566) (283) 113(b) (736)
Custodian Fees 38 12 50
Professional Fees 17 6 (4)(b) 19
Registration Fees 21 9 (6)(b) 24
Transfer Agent Fees 21 3 24
Distribution Fees Retail Class A 26 -- 26
Distribution Fees Retail Class B 3 -- 3
Distribution Fees Waiver -- -- --
Insurance Fees 3 1 4
Trustees Fees 6 2 8
Printing Fees 23 14 (5)(b) 32
Miscellaneous Fees 4 1 (1)(b) 4
-------- -------- -------- --------
Total Expenses 3,474 932 97 4,503
Reduction of Expenses (10) (3) (13)
-------- -------- -------- --------
Total Net Expenses 3,464 929 97 4,490
-------- -------- -------- --------
Net Investment Income 286 519 (97) 708
-------- -------- -------- --------
Net Realized Gain (Loss) on Investments 58,251 16,737 74,988
-------- -------- -------- --------
Net Realized Gain (Loss) on Option Contracts -- 17 17
-------- -------- -------- --------
Change in Unrealized Appreciation (Depreciation)
on Investments 16,670 (7,709) 8,961
-------- -------- -------- --------
Net Realized and Unrealized Gain on Investments 74,921 9,045 83,966
-------- -------- -------- --------
Increase in Net Assets Resulting from Operations $ 75,207 $ 9,564 $ (97) $ 84,674
======== ======== ======== ========
</TABLE>
B16
<PAGE> 63
HIGHMARK BOND FUND
PRO FORMA COMBINING STATEMENTS OF OPERATIONS (000)
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
BOND GOVERNMENT PROFORMA COMBINED
FUND SECURITIES FUND ADJUSTMENTS BOND FUND
---- --------------- ----------- ---------
<S> <C> <C> <C>
Interest Income $ 7,851 $ 4,944 $ 12,795
Dividend Income -- -- -- --
------- ------- -------- --------
Total Investment Income $ 7,851 $ 4,944 -- $ 12,795
======= ======= ======== ========
Expenses:
Administrative Fee 237 161 398
Administrative Fees Waived (24) (16) (40)
Investment Advisor Fee 593 403 996
Investment Advisor Fee Waiver -- -- 0
Shareholder Servicing Fees Fiduciary 294 201 495
Shareholder Servicing Fees Retail Class A 3 -- 3
Shareholder Servicing Fees Retail Class B -- -- 0
Shareholder Servicing Fees Waived (285) (201) 8 (478)
Custodian Fees 12 8 20
Professional Fees 11 8 (5)(b) 14
Registration Fees 15 18 (12)(b) 21
Transfer Agent Fees 20 2 22
Distribution Fees Retail Class A 2 -- 2
Distribution Fees Retail Class B -- -- 0
Distribution Fees Waiver (2) -- (2)
Insurance Fees -- 2 2
Trustees Fees 3 5 8
Printing Fees 13 8 (4)(b) 17
Miscellaneous Fees 4 7 (3)(b) 8
------- ------- -------- --------
Total Expenses 896 606 (16) 1,486
Reduction of Expenses (3) (2) (5)
------- ------- -------- --------
Total Net Expenses 893 604 (16) 1,481
------- ------- -------- --------
Net Investment Income 6,958 4,340 16 11,314
------- ------- -------- --------
Net Realized Gain (Loss) on Investments 122 348 470
------- ------- -------- --------
Change in Unrealized Appreciation (Depreciation)
on Investments 1,732 906 2,638
------- ------- -------- --------
Net Realized and Unrealized Gain on Investments 1,854 1,254 3,108
------- ------- -------- --------
Increase in Net Assets Resulting from Operations $ 8,812 $ 5,594 $ 16 $ 14,422
======= ======= ======== ========
</TABLE>
B17
<PAGE> 64
HIGHMARK GROWTH FUND
Notes to Pro Forma Financial Statements
1. BASIS OF COMBINATION
The unaudited Pro Forma Combining Statements of Assets and Liabilities,
Pro Forma Combining Statements of Operations and Pro Forma Combining Schedule of
Investments give effect to the proposed acquisition of the HighMark Blue Chip
Growth Fund by the HighMark Growth Fund. The proposed acquisition will be
accounted for by the method of accounting for tax free mergers of investment
companies (sometimes referred to as the pooling without restatement method). The
acquisition will be accomplished by an exchange of all outstanding shares of the
Fiduciary Class of the HighMark Blue Chip Growth Fund in exchange for shares of
the Fiduciary Class of the HighMark Growth Fund.
The Pro Forma combining statements should be read in conjunction with
the historical financial statements of the constituent funds and the notes
thereto incorporated by reference in the Statement of Additional Information.
The HighMark Growth Fund is a portfolio offered by HighMark Funds, an
open-end, management investment company registered under the Investment Company
Act of 1940, as amended. The HighMark Blue Chip Growth Fund is a portfolio
offered by HighMark Funds, an open-end, management investment company also
registered under the Investment Company Act of 1940, as amended.
PRO FORMA ADJUSTMENTS:
a) The Pro Forma combining statements of assets and liabilities
assumes the issuance of additional shares of the HighMark Growth
Fund as if the reorganization were to take place on July 31, 1998
and is based on the net asset value of the acquiring fund. In
addition, because the HighMark Growth Fund is the surviving fund
for accounting purposes, the Pro Forma adjustments also reflect a
reverse stock split of the HighMark Blue Chip Growth Fund shares
that will take place simultaneous to the merger so as to ensure
that the NAV per share that carries forward for historical
reporting purposes is the NAV per share of the HighMark Growth Fund
at the time of the merger.
b) The Pro Forma adjustments to professional, registration,
shareholder servicing, printing and miscellaneous fees reflect the
expected expense impacts due to the combination of the funds.
B18
<PAGE> 65
HIGHMARK BOND FUND
Notes to Pro Forma Financial Statements
1. BASIS OF COMBINATION
The unaudited Pro Forma Combining Statements of Assets and Liabilities,
Pro Forma Combining Statements of Operations and Pro Forma Combining Schedule of
Investments give effect to the proposed acquisition of the HighMark Government
Securities Fund by the HighMark Bond Fund. The proposed acquisition will be
accounted for by the method of accounting for tax free mergers of investment
companies (sometimes referred to as the pooling without restatement method). The
acquisition will be accomplished by an exchange of all outstanding shares of the
Fiduciary Class of the HighMark Government Securities Fund in exchange for
shares of the Fiduciary Class of the HighMark Bond Fund.
The Pro Forma combining statements should be read in conjunction with
the historical financial statements of the constituent funds and the notes
thereto incorporated by reference in the Statement of Additional Information.
The HighMark Bond Fund is a portfolio offered by HighMark Funds, an
open-end, management investment company registered under the Investment Company
Act of 1940, as amended. The HighMark Government Securities Fund is a portfolio
offered by HighMark Funds, an open-end, management investment company also
registered under the Investment Company Act of 1940, as amended.
PRO FORMA ADJUSTMENTS:
a) The Pro Forma combining statements of assets and liabilities
assumes the issuance of additional shares of the HighMark Bond Fund
as if the reorganization were to take place on July 31, 1998 and is
based on the net asset value of the acquiring fund. In addition,
because the HighMark Bond Fund is the surviving fund for accounting
purposes, the pro forma adjustments also reflect a reverse stock
split of the HighMark Government Securities Fund shares that will
take place simultaneous to the merger so as to ensure that the NAV
per share that carries forward for historical reporting purposes is
the NAV per share of the HighMark Bond Fund at the time of the
merger.
b) The Pro Forma adjustments to professional, registration, printing
and miscellaneous fees reflect the expected savings due to the
combination of the funds.
B19
<PAGE> 66
HIGHMARK BLUE CHIP GROWTH FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, DECEMBER 18, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF HIGHMARK FUNDS.
The undersigned hereby appoints Leslie Kondziela and Kevin P. Robins and
each of them with full power of substitution as proxies of the undersigned, to
vote, as designated below, at the Special Meeting of Shareholders of the Blue
Chip Growth Fund on December 18, 1998 at 3:00 p.m., Eastern time, and at any
adjournments thereof, all of the units of beneficial interest in the Blue Chip
Growth Fund which the undersigned would be entitled to vote upon the following
matters if personally present.
1. Approval of a Plan of Reorganization pursuant to which all of the assets and
liabilities of the Blue Chip Growth Fund will be transferred to the Growth Fund
in return for Fiduciary Class shares of the Growth Fund, followed by the
dissolution and liquidation of the Blue Chip Growth Fund, and the distribution
of shares of the Growth Fund to the shareholders of the Blue Chip Growth Fund.
FOR AGAINST ABSTAIN
( ) ( ) ( )
2. To transact any other business as properly comes before the Meeting.
FOR AGAINST ABSTAIN
( ) ( ) ( )
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) AND TO AUTHORIZE THE PROXIES, IN THEIR DISCRETION, TO
VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
THE TRUSTEES RECOMMEND A VOTE FOR ITEMS (1) AND (2).
NOTE: Please sign exactly as the name appears on this card. EACH Joint
owner must sign the proxy. When signing as executor, administrator, attorney,
trustee or guardian, or as custodian for a minor, please give the FULL title of
such. If a corporation, please give the FULL corporate name and indicate the
signer's office. If a partner, please sign in the partnership name.
------------------------------------------
Signature of Shareholder(s)
------------------------------------------
Signature of Shareholder(s)
Dated: , 1998.
-----------------------------
PLEASE EXECUTE, SIGN, DATE, AND RETURN THIS PROXY
PROMPTLY USING THE ENCLOSED ENVELOPE
<PAGE> 67
HIGHMARK GOVERNMENT SECURITIES FUND
PROXY FOR A SPECIAL MEETING OF
SHAREHOLDERS, DECEMBER 18, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF HIGHMARK FUNDS.
The undersigned hereby appoints Leslie Kondziela and Kevin P. Robins and
each of them with full power of substitution as proxies of the undersigned, to
vote, as designated below, at the Special Meeting of Shareholders of the
Government Securities Fund on December 18, 1998 at 3:00 p.m., Eastern time, and
at any adjournments thereof, all of the units of beneficial interest in the
Government Securities Fund which the undersigned would be entitled to vote upon
the following matter if personally present.
1. Approval of a Plan of Reorganization pursuant to which all of the assets and
liabilities of the Government Securities Fund will be transferred to the Bond
Fund in return for Fiduciary Class shares of the Bond Fund, followed by the
dissolution and liquidation of the Government Securities Fund, and the
distribution of shares of the Bond Fund to the shareholders of the Government
Securities Fund.
FOR AGAINST ABSTAIN
( ) ( ) ( )
2. To transact any other business as properly comes before the Meeting.
FOR AGAINST ABSTAIN
( ) ( ) ( )
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) AND TO AUTHORIZE THE PROXIES, IN THEIR DISCRETION, TO
VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
THE TRUSTEES RECOMMEND A VOTE FOR ITEMS (1) AND (2).
NOTE: Please sign exactly as the name appears on this card. EACH Joint
owner must sign the proxy. When signing as executor, administrator, attorney,
trustee or guardian, or as custodian for a minor, please give the FULL title of
such. If a corporation, please give the FULL corporate name and indicate the
signer's office. If a partner, please sign in the partnership name.
------------------------------------------
Signature of Shareholder(s)
------------------------------------------
Signature of Shareholder(s)
Dated: , 1998.
-----------------------------
PLEASE EXECUTE, SIGN, DATE, AND RETURN THIS PROXY
PROMPTLY USING THE ENCLOSED ENVELOPE
<PAGE> 68
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. 24 (filed June 8, 1998) 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).
<TABLE>
<CAPTION>
ITEM 16. EXHIBITS:
<S> <C> <C>
(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.
(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.
(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.
(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.
(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.
(f) Amendment to Declaration of Trust,
dated December 4, 1996, is
incorporated by reference to Exhibit
(1)(f) of Post-Effective Amendment
No. 19 (filed December 13, 1996) to
Registrant's Registration Statement
on Form N-1A.
</TABLE>
<PAGE> 69
<TABLE>
<S> <C> <C>
(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.
(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) None.
(4) Form of 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.
(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.
(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) Form of Investment Advisory Agreement
between Registrant and HighMark Capital
Management, Inc., dated as of September 1,
1998, is filed herewith.
</TABLE>
-2-
<PAGE> 70
<TABLE>
<S> <C> <C>
(7) (a) Distribution Agreement between
the Registrant and SEI Financial
Services Company is incorporated by
reference to Exhibit 6 of
Post-Effective Amendment No. 20
(filed February 25, 1997) to
Registrant's Registration Statement
on Form N-1A.
(b) Form of Distribution and Service
Agreement for Class B Shares between
Registrant and SEI Investments
Distribution Co. incorporated by
reference to Exhibit (6)(b) of
Post-Effective Amendment No. 22
(filed June 18, 1997) to
Registrant's Registration Statement
on Form N-1A.
(8) None.
(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) Amended and Restated Schedule A to
the Custodian Agreement is
incorporated by reference to Exhibit
(8)(b) of Post-Effective Amendment
No. 22 (filed June 18, 1997) to
Registrant's Registration Statement
on Form N-1A.
(c) Form of Amended and Restated
Schedule B to the Custodian
Agreement is incorporated by
reference to Exhibit (8)(c) of
Post-Effective Amendment No. 22
(filed June 18, 1997) to
Registrant's Registration Statement
on Form N-1A.
(d) Form of Securities Lending and
Reverse Repurchase Agreement
Services Client Addendum to
Custodian Agreement is incorporated
by reference to Exhibit (8)(d) of
Post-Effective Amendment No. 22
(filed June 18, 1997) to
Registrant's Registration Statement
on Form N-1A.
</TABLE>
-3-
<PAGE> 71
<TABLE>
<S> <C> <C>
(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.
(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 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.
(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.
(d) Registrant's Distribution and
Shareholder Services Plan relating
to the Class A Shares of the Income
Funds and the Equity 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.
(e) Amended and Restated Schedule A to
the Distribution and Shareholder
Services Plan relating to the Class
A Shares of the Income Funds and the
Equity Funds is incorporated by
reference to Exhibit (15)(e) of
Post-Effective Amendment No. 22
(filed June 18, 1997) to
Registrant's Registration Statement
on Form N-1A.
(f) Form of Distribution and Shareholder
Services Plan relating to the Class
B Shares of the Income Funds and the
Equity Funds is incorporated by
reference to Exhibit (15)(f) of
Post-Effective Amendment No. 22
(filed June 18, 1997) to
Registrant's Registration Statement
on Form N-1A.
</TABLE>
-4-
<PAGE> 72
<TABLE>
<S> <C> <C>
(g) Form of Amended Multiple Class Plan
for HighMark Funds adopted by the
Board of Trustees on June 18, 1997
is incorporated by reference to
Exhibit (18) of Post- Effective
Amendment No. 22 (filed June 18,
1997) to Registrant's Registration
Statement on Form N-1A.
(11) Form of Opinion of Ropes & Gray as
to legality of shares being
registered is filed herewith.
(12) Form of Opinion of Ropes & Gray,
including consent as to Tax Matters
is filed herewith.
(13) (a) Administration Agreement between
Registrant and SEI Fund Resources
incorporated by reference to Exhibit
9(a) of Post-Effective Amendment No.
20 (filed February 25, 1997) to
Registrant's Registration Statement
on Form N-1A.
(b) 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.
(c) Transfer Agency and Service
Agreement between the Registrant and
State Street Bank and Trust Company
is incorporated by reference to
Exhibit 9(c) of Post-Effective
Amendment No. 20 (filed February 25,
1997) to Registrant's Registration
Statement on Form N-1A.
(d) 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.
(e) 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.
</TABLE>
-5-
<PAGE> 73
<TABLE>
<S> <C> <C>
(f) Form of Shareholder Service Plan for
Class B for the Registrant is
incorporated by reference to Exhibit
(9)(f) of Post-Effective Amendment
No. 22 (filed June 18, 1997) to
Registrant's Registration Statement
on Form N-1A.
(14) (a) Consent of Deloitte & Touche LLP is filed herewith.
(b) Consent of Ropes & Gray, is filed herewith.
(15) None.
(16) Executed Powers of Attorney are filed herewith.
(17) (a) Prospectuses for HighMark Equity
Funds and Fixed Income Funds,
Fiduciary Shares, dated November 30,
1997, as supplemented.
(b) Statement of Additional Information for HighMark Funds
dated November 28, 1997.
(c) HighMark Annual Report to
Shareholders dated July 31, 1998.
</TABLE>
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.
-6-
<PAGE> 74
NOTICE
A copy of the Amended and Restated Agreement and Declaration of Trust
of HighMark Funds is on file with the Secretary of State of The Commonwealth of
Massachusetts and notice is hereby given that this instrument is executed on
behalf of the Registrant by an officer of the Registrant as an officer and not
individually and that the obligations of or arising out of this instrument are
not binding upon any of the trustees or shareholders individually but are
binding only upon the assets and property of the Registrant.
-7-
<PAGE> 75
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, D.C., on
the 13th day of October, 1998.
HighMark Funds
By: */s/ Mark E. Nagle
-----------------------
Mark E. Nagle
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
*/s/ Mark E. Nagle President and October 13, 1998
- ----------------- Chief Executive Officer
Mark E. Nagle
*/s/ Robert DellaCroce Controller and Chief October 13, 1998
- --------------------- Financial Officer
Robert DellaCroce
*/s/ Thomas L. Braje Trustee October 13, 1998
- -----------------------
Thomas L. Braje
*/s/ David A. Goldfarb Trustee October 13, 1998
- ----------------------
David A. Goldfarb
*/s/ Joseph C. Jaeger Trustee October 13, 1998
- ------------------------
Joseph C. Jaeger
*/s/ Frederick J. Long Trustee October 13, 1998
- -----------------------
Frederick J. Long
*/s/ William R. Howell Trustee October 13, 1998
- -----------------------
William R. Howell
*/s/ Paul L. Smith Trustee October 13, 1998
- --------------------------
Paul L. Smith
</TABLE>
*By: /s/ Martin E. Lybecker
-----------------------
Martin E. Lybecker
Attorney-In-Fact
-8-
<PAGE> 76
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
(4) Form of Agreement and Plan of Reorganization.
(6) (a) Form of Investment Advisory Agreement
(11) Form of Opinion of Ropes & Gray.
(12) Form of Opinion of Ropes & Gray, including consent as to Tax Matters.
(14) (a) Consent of Deloitte & Touche LLP.
(14) (b) Consent of Ropes & Gray.
(16) Executed Powers of Attorney.
(17) (a) Prospectus for HighMark Equity Funds and Fixed Income Funds,
Fiduciary Shares, dated November 30, 1997, as supplemented.
(17) (b) Statement of Additional Information for HighMark Funds dated November 28, 1997.
(17) (c) HighMark Annual Report to Shareholders dated July 31, 1998.
</TABLE>
<PAGE> 1
EXHIBIT (4)
Form of Plan of Reorganization
<PAGE> 2
EXHIBIT 4
HIGHMARK FUNDS
PLAN OF REORGANIZATION
This Plan of Reorganization having been approved by the Board of Trustees
of HighMark Funds is made as of October 13, 1998 by HighMark Funds (the "Plan").
The capitalized terms used herein shall have the meaning ascribed to them in
this Plan.
OVERVIEW OF PLAN OF REORGANIZATION
(1) The HighMark Blue Chip Growth Fund (the "Blue Chip Growth Fund") and
the HighMark Government Securities Fund ("Government Securities Fund"), each an
"Consolidating Fund" and, collectively, the "Consolidating Funds") will sell,
assign, convey, transfer and deliver to the HighMark Growth Fund (the "Growth
Fund") and the HighMark Bond Fund (the "Bond Fund" and the Growth Fund, each an
"Consolidated Fund" and, collectively, the "Consolidated Funds"), respectively,
on the Exchange Date all of the properties and assets existing at the Valuation
Time in the Consolidating Funds. In consideration therefor, each Consolidated
Fund shall, on the Exchange Date, assume all of the liabilities of the
corresponding Consolidating Fund for a number of full and fractional shares of
the Consolidating Fund having an aggregate net asset value equal to the value of
the assets of the Consolidating Fund transferred to the corresponding
Consolidated Fund on such date less the value of the liabilities of the
Consolidating Fund assumed by the corresponding Consolidated Fund on that date.
It is intended that the reorganization described in this Plan shall be a
tax-free reorganization under the Internal Revenue Code of 1986, as amended (the
"Code").
(2) Upon consummation of the transactions described in paragraph (1) of this
Plan, each Consolidating Fund shall distribute in complete liquidation to its
respective shareholders of record as of the Exchange Date the shares of the
corresponding Consolidated Fund received by it, each shareholder being entitled
to receive the number of such shares of the corresponding Consolidated Fund
equal to the proportion which the number of shares of beneficial interest of the
Consolidating Fund held by such shareholder bears to the number of such shares
of the Consolidating Fund outstanding on such date.
FACTUAL BASIS OF THE PLAN
1. (a) HighMark Funds 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 the transactions involved under this
Plan. Each of the Blue Chip Growth Fund, the Growth Fund, the Government
Securities Fund, and the Bond Fund (each a
1
<PAGE> 3
"HighMark Fund" and, collectively, the "HighMark Funds") has all necessary
federal, state and local authorizations to carry on its business as now being
conducted and to carry out this Plan.
(b) HighMark Funds 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 HighMark 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 each HighMark Fund qualifies and intends to
continue to qualify as a regulated investment company for the taxable year
ending upon its liquidation. Each HighMark Fund has been regulated as an
investment company under such Sections of the Code at all times since its
inception.
(c) The statement of assets and liabilities, statement of operations, and
statements of changes in net assets, financial highlights and schedule of
investments (indicating their market values) for each HighMark Fund for the year
ended July 31, 1998, such statements and schedules having been audited by
Deloitte & Touche LLP, independent accountants to HighMark Funds, fairly present
the financial position of each HighMark Fund as of such date and said statements
of operations and changes in net assets and financial highlights fairly reflect
the results of operations, changes in net assets and financial highlights for
the periods covered thereby in conformity with generally accepted accounting
principles.
(d) The prospectuses of each HighMark Fund dated November 30, 1997, as
amended February 9, 1998, as filed with the Securities and Exchange Commission
(the "Commission") (the Prospectuses") and the Statement of Additional
Information for HighMark Funds, dated November 28, 1997, as filed with the
Commission did not as of their such dates, and will not as of the Exchange Date
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 Funds, threatened against HighMark
Funds which assert liability on the part of HighMark Funds.
(f) The Consolidating Funds do not have any known liabilities of a material
nature, contingent or otherwise, other than those shown as belonging to it on
its respective statement of assets and liabilities as of July 31, 1998 referred
to in Section 1(c) hereof and those incurred in the ordinary course of HighMark
Funds' business as an investment company since that date.
(g) As used in this Plan, the term "Investments" shall mean the
Consolidating Funds' investments shown on their respective schedule of portfolio
investments as of July 31, 1998 referred to in Section 1(c) hereof as
supplemented with such changes as HighMark Funds or the Consolidating Funds
shall make after that date.
2
<PAGE> 4
(h) HighMark Funds and each HighMark Fund has filed or will file all
federal and state tax returns which, to the knowledge of HighMark Funds'
officers, are required to be filed by HighMark Funds and has paid or will pay
all federal and state taxes shown to be due on said returns or on any
assessments received by HighMark Funds or each HighMark Fund. All tax
liabilities of HighMark Funds and each HighMark Fund have been adequately
provided for on its books, and no tax deficiency or liability of HighMark Funds
or 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) At both the Valuation Time and the Exchange Date and except for
shareholder approval, HighMark Funds, on behalf of the Consolidating Funds, will
have full right, power and authority to sell, assign, transfer and deliver the
Investments and any other assets and liabilities transferred by it pursuant to
this Plan. At the Exchange Date, subject only to the delivery of the shares,
Investments and any such other assets and liabilities as contemplated by this
Plan, HighMark Funds, on behalf of the Consolidated Funds, will acquire the
Investments and any such other assets subject to no encumbrances, liens or
security interests whatsoever and without any restrictions upon the transfer
thereof.
(j) At both the Valuation Time and the Exchange Date, HighMark Funds and
each Consolidated Fund will have full right, power and authority to purchase the
Investments and any other assets and assume the liabilities of the corresponding
Consolidating Fund to be transferred to it pursuant to this Plan.
(k) Each HighMark Fund 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.
(l) At the Exchange Date, each Consolidating Fund will have sold such of
its assets, if any, as necessary to assure that, after giving effect to the
acquisition of its assets pursuant to this Plan, each Consolidated Fund 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 its Prospectus and Statement of Additional Information.
SPECIFICS OF PLAN
2. Reorganization. (a) Subject to the requisite approval of the respective
shareholders of each Consolidating Fund and to the other terms and conditions
contained herein (including each Consolidating Fund's distribution to its
respective shareholders of all of its investment company taxable income and net
capital gain (as described in Section 7(l)), each Consolidating Fund will sell,
assign, convey, transfer and deliver to the corresponding Consolidated Fund and
each Consolidated Fund will acquire from the corresponding Consolidating Fund,
on the Exchange Date all of the Investments and all of the cash and other assets
of the Consolidating Fund in exchange for that number of shares of beneficial
interest of the corresponding
3
<PAGE> 5
Consolidated Fund provided for in Section 3 and the assumption by the
corresponding Consolidated Fund of all of the liabilities of such Consolidating
Fund. Pursuant to this Plan, each Consolidating Fund will, as soon as
practicable after the Exchange Date, distribute in liquidation all of the
Consolidated Fund's shares received by it to its shareholders in exchange for
their shares of beneficial interest of each Consolidating Fund.
(b) HighMark Funds, on behalf of each Consolidating Fund, will pay or cause
to be paid to the corresponding Consolidated Fund any interest and cash
dividends received by it on or after the Exchange Date with respect to the
Investments transferred to such Consolidated Fund hereunder. HighMark Funds, on
behalf of each Consolidating Fund, will transfer to the corresponding
Consolidated Fund any rights, stock dividends or other securities received by it
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 the
corresponding Consolidated 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 each Consolidating Fund.
3. Exchange Date; Valuation Time. On the Exchange Date, each Consolidated Fund
will deliver to the corresponding Consolidating Fund a number of shares of the
respective Consolidated Fund having an aggregate net asset value equal to the
value of the assets of the corresponding Consolidating Fund, less the value of
the liabilities of the corresponding Consolidating Fund assumed, determined as
hereafter provided in this Section.
(a) The valuation time shall be 4:00 pm. (Eastern time) January 8, 1999 or
such earlier or later day as may be established by the proper officers of
HighMark Funds (the "Valuation Time").
(b) The net asset value of shares of each Consolidated Fund to be delivered
to the corresponding Consolidating Fund, the value of the assets of each
Consolidating Fund, and the value of the liabilities of each Consolidating Fund
to be assumed by the corresponding Consolidated Fund in each case shall be
computed as of the Valuation Time pursuant to the valuation procedures
customarily used by HighMark Funds.
(c) No formula will be used to adjust the net asset value of each HighMark
Fund to take into account differences in realized and unrealized gains and
losses.
(d) HighMark Funds, on behalf of each Consolidated Fund, shall issue shares
of each Consolidated Fund to the corresponding Consolidating Fund on one share
deposit receipt registered in the name of the corresponding Consolidating Fund.
Each Consolidating Fund shall distribute in liquidation shares of the
corresponding Consolidated Fund received by it hereunder pro rata to its
respective shareholders by redelivering such share deposit receipt to HighMark
Funds' transfer agent, which will as soon as practicable set up open accounts
for
4
<PAGE> 6
each shareholder of each Consolidating Fund in accordance with written
instructions furnished by HighMark Funds.
(e) Each Consolidated Fund shall assume all liabilities of the
corresponding Consolidating Fund, whether accrued or contingent, in connection
with the acquisition of assets and subsequent dissolution of the respective
Consolidating Fund or otherwise, except that recourse for assumed liabilities
relating to each Consolidating Fund will be limited to the respective
Consolidated Fund.
4. Expenses and Fees. 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 this Plan
will be borne by HighMark Capital Management, Inc. and/or its affiliates
including the costs of proxy materials, proxy solicitation, and legal expenses.
Fees and expenses not incurred directly in connection with the consummation of
the Plan will be borne by the party incurring such fees and expenses.
(b) Notwithstanding any other provisions of this Plan, if for any reason
the transaction contemplated by this Plan is not consummated, no entity shall be
liable to the other entity for any damages resulting therefrom, including,
without limitation, consequential damages.
5. Exchange Date. Delivery of the assets of each Consolidating Fund to be
transferred, assumption of the liabilities of each Consolidating Fund to be
assumed, and the delivery of the corresponding Consolidated Fund's shares to be
issued shall be made at the offices of HighMark Funds, One Freedom Valley Road,
Oaks, Pennsylvania 19456, at 9:00 a.m. Eastern time on the next full business
day following the Valuation Time, or at such other time and date established by
the proper officers of HighMark Funds, the date and time upon which such
delivery is to take place being referred to herein as the "Exchange Date."
6. Special Meeting of Shareholders: Dissolution. (a) Each Consolidating Fund
agrees to call a special meeting of its respective shareholders as soon as is
practicable after the effective date of the registration statement filed with
the Commission by HighMark Funds on Form N-14 relating to the shares of the
Growth Fund and the Government Securities Fund issuable hereunder (the
"Registration Statement"), and the proxy statement of each of the Blue Chip
Growth Fund and the Government Securities Fund included therein (the "Proxy
Statement") for the purpose of considering the sale of all of the assets of each
Consolidating Fund to and the assumption of all of the liabilities of each
Consolidating Fund by the corresponding Consolidated Fund as herein provided,
adopting this Plan, and authorizing the liquidation and dissolution of the
Consolidating Funds, and it shall be a condition to the obligations of each of
the parties hereto that the holders of the shares of beneficial interest of the
Consolidating Funds shall have approved this Plan and the transactions
contemplated herein in the manner required by law and HighMark Funds'
Declaration of Trust at such a meeting on or before the Valuation Time.
5
<PAGE> 7
(b) Each Consolidating Fund will liquidate and dissolve in the manner
provided in HighMark Funds' Declaration of Trust and in accordance with
applicable law, provided that each Consolidating Fund will not make any
distributions of shares of the corresponding Consolidated Funds to its
shareholders without first paying or adequately providing for the payment of all
of its debts, obligations and liabilities.
7. Conditions to Be Met Regarding the Transaction. The intention of HighMark
Funds to consummate each of the transactions described herein is subject to the
following conditions:
(a) This Plan shall have been adopted and the transactions contemplated
hereby, including the liquidation and dissolution of the Consolidating Funds,
shall have been approved by their respective shareholders in the manner required
by law.
(b) The officers of HighMark Funds shall cause the preparation of a
statement the assets of the Consolidating Funds and liabilities, with values
determined as provided in Section 3, together with a list of Investments with
their respective tax costs, all as of the Valuation Time, certified on HighMark
Funds' behalf by its President (or any Vice President) and Treasurer, and a
certificate of both such officers, dated the Exchange Date, that there has been
no material adverse change in the financial position of the Consolidating Funds
since July 31, 1998, 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 Consolidating Fund, dividends paid or losses from
operations.
(c) The officers of HighMark Funds shall cause the preparation of a
statement of the Consolidated Funds' net assets, together with a list of
portfolio holdings with values determined as provided in Section 3 hereof, all
as of the Valuation Time certified on HighMark Funds' behalf by its President
(or any Vice President) and Treasurer.
(d) The President (or any Vice President) and Treasurer of HighMark Funds
shall certify that as of the Valuation Time and as of the Exchange Date all the
elements in Section 1 of this Plan are true and correct in all material respects
as if made at and as of such dates and that each HighMark Fund has complied with
and satisfied all the conditions on its part under the Plan to be performed or
satisfied at or prior to such dates.
(e) HighMark Funds shall have received a letter from Deloitte & Touche LLP
dated the Exchange Date stating that such firm reviewed (i) the federal and
state income tax returns of the Consolidating Funds related to the year ended
July 31, 1998 and (ii) to the extent returns have not been prepared or filed,
all available information of the Consolidating Funds for the period from July
31, 1998 to the Exchange Date, and that, in the course of such review, nothing
came to their attention which caused them to believe that such returns and/or
available information did not properly reflect, in all material respects, the
federal and state income taxes of the Consolidating Funds for the periods
covered thereby, or that each Consolidating Fund would not qualify as a
regulated investment company for federal income tax purposes.
6
<PAGE> 8
(f) There shall not be any material litigation pending with respect to the
matters contemplated by this Plan.
(g) HighMark Funds shall have received an opinion of Ropes & Gray dated the
Exchange Date to the effect that: (i) HighMark Funds is a business trust duly
established and validly existing under the laws of the Commonwealth of
Massachusetts, and neither HighMark Funds nor any HighMark Fund is, to the
knowledge of such counsel, required to qualify to do business as a foreign
association in any jurisdiction; (ii) HighMark Funds, on behalf of each
Consolidating Fund, has the 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 Plan,
HighMark Funds, on behalf of each Consolidating Fund, will have duly sold,
assigned, conveyed, transferred and delivered such Investments and other assets
to the corresponding Consolidated Fund; (iii) the adoption of this Plan did not,
and the consummation of the transactions contemplated hereby will not, violate
HighMark Funds' Declaration of Trust or Code of Regulations, as amended, or any
provision of any agreement known to such counsel to which HighMark Funds is a
party or by which it is bound; (iv) no consent, approval, authorization or order
of any court or governmental authority is required for the consummation by
HighMark Funds of the transactions contemplated hereby, except such as have been
obtained under the Securities Act of 1933 (the "1933 Act"), the Securities
Exchange Act of 1934 ("the 1934 Act") and the 1940 Act; (v) this Plan has been
duly authorized, executed and delivered by HighMark Funds and is a valid and
binding obligation of HighMark Funds; and (vi) the shares of each Consolidated
Fund to be delivered to the corresponding Consolidating Fund as provided for by
this Plan are duly authorized and upon such delivery will be validly issued and
will be fully paid and nonassessable by HighMark Funds and no shareholder of
HighMark Funds has any preemptive right to subscription or purchase in respect
thereof.
(h) With respect to each transaction, HighMark Funds shall have received an
opinion of Ropes & Gray addressed to HighMark Funds and dated the Exchange Date
to the effect that for Federal income tax purposes: (i) no gain or loss will be
recognized by the Consolidating Fund upon the transfer of the assets and
Investments to the corresponding Consolidated Fund in exchange for shares of the
corresponding Consolidated Fund and the assumption by the corresponding
Consolidated Fund of the liabilities of such Consolidating Fund or upon the
distribution of shares of the corresponding Consolidating Fund by such
Consolidating Fund to its shareholders in liquidation; (ii) no gain or loss will
be recognized by the shareholders of the Consolidating Fund upon the exchange of
its shares for the shares of the corresponding Consolidated Fund; (iii) the
basis of the shares of the Consolidated Fund's shares a shareholder of the
corresponding Consolidating Fund receives in connection with the exchange will
be the same as the basis of his or her Consolidating Fund's shares exchanged
therefor; (iv) a Consolidating Fund's shareholder's holding period for his or
her corresponding Consolidated Fund's shares will be determined by including the
period for which he or she held the shares of the Consolidating Fund exchanged
therefor, provided that he or she held such shares of the Consolidating Fund as
capital assets; (v) no gain or loss will be recognized by the
7
<PAGE> 9
Consolidating Fund upon the receipt of the assets transferred to the
corresponding Consolidated Fund pursuant to this Plan in exchange for the shares
of the corresponding Consolidated Fund and the assumption by the corresponding
Consolidated Fund of the liabilities of such Consolidating Fund; (vi) the basis
in the hands of the Consolidated Fund of the assets of the corresponding
Consolidating Fund will be the same as the basis of the assets in the hands of
the corresponding Consolidating Fund immediately prior to the transfer; and
(vii) the Consolidated Fund's holding periods of the assets of the corresponding
Consolidating Fund will include the period for which such assets were held by
the corresponding Consolidating Fund.
(i) The assets of each Consolidating Fund to be Consolidating by the
corresponding Consolidated Fund will include no assets which the corresponding
Consolidated Fund, by reason of limitations contained in HighMark Funds'
Declaration of Trust or of investment restrictions disclosed in its Prospectus
in effect on the Exchange Date, may not properly acquire.
(j) The Registration Statement shall have become effective under the 1933
Act, and no stop order suspending such effectiveness shall have been instituted
or to the knowledge of HighMark Funds, contemplated by the Commission.
(k) HighMark Funds shall have received from the Commission such order or
orders as Ropes & Gray deems reasonably necessary or desirable under the 1933
Act, the 1934 Act, the 1940 Act in connection with the transactions contemplated
hereby, and that all such orders shall be in full force and effect.
(l) Prior to the Exchange Date, each Consolidating Fund shall have declared
a dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to its respective shareholders all of its
investment company taxable income for its taxable years ending on or after July
31, 1998 and on or prior to the Exchange Date (computed without regard to any
deduction for dividends paid), and all of its net capital gain realized in each
of its taxable years ending on or after July 31, 1998 and on or prior to the
Exchange Date (after reduction for any capital loss carryover).
(m) The custodian of HighMark Funds shall have delivered to HighMark Funds
a certificate identifying all of the assets of the Consolidating Funds held by
such custodian as of the Valuation Time.
(n) The transfer agent of HighMark Funds shall have provided to HighMark
Funds (i) a certificate setting forth the number of shares of each Consolidating
Fund outstanding as of the Valuation Time and (ii) the name and address of each
holder of record of any such shares of each Consolidating Fund and the number
and class of shares held of record by each such shareholder.
8
<PAGE> 10
(o) HighMark Funds, on behalf of each Consolidating Fund, shall have
executed and delivered an Assumption of Liabilities dated as of the Exchange
Date pursuant to which each Consolidating Fund will assume all of the
liabilities of the corresponding Consolidating Fund existing at the Valuation
Time in connection with the transactions contemplated by this Plan.
(p) HighMark Funds, on behalf of each Consolidating Fund, shall have
executed and delivered an instrument of transfer ("Transfer Document") and any
other certificates or documents HighMark Funds may deem necessary or desirable
to transfer each Consolidating Fund's entire right, title and interest in and to
the Investments and all other assets.
8. No Broker. There is no person who has dealt with HighMark Funds or any
HighMark Fund 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 Plan.
9. Termination. HighMark Funds may, by consent of its trustees, terminate this
Plan, and HighMark Funds, after consultation with counsel, may modify this Plan
in any manner deemed necessary or desirable.
10. Rule 145. Pursuant to Rule 145 under the 1933 Act, HighMark Funds will, in
connection with the issuance of any shares of the Consolidated Funds 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 Funds will issue stop transfer instructions to HighMark
Funds' transfer agent with respect to such shares.
11. Agreement and Declaration of Trust. Copies of the Agreement and Declaration
of Trust of HighMark Funds and any amendments thereto so filed is on file with
the Secretary of State of Massachusetts, and notice is hereby given that this
instrument is executed on behalf of the trustees of HighMark Funds, as trustees
and not individually, and that the obligations of this instrument are not
binding upon any of the trustees, officers or shareholders of HighMark Funds
individually but are binding only upon the assets and property of HighMark
Funds.
9
<PAGE> 11
The names "HighMark Funds" and "Trustees of HighMark Funds" refer respectively
to the Trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under a Declaration of Trust filed on March
10, 1987, as amended, 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 the Trust personally, but bind only
the assets of the Trust, and all persons dealing with any series of Shares of
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
HighMark Funds
By:
----------------------------
10
<PAGE> 1
EXHIBIT (6)(a)
Investment Advisory Agreement
<PAGE> 2
EXHIBIT (6)(a)
FORM OF INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of September 1, 1998 between HIGHMARK FUNDS
(formerly, THE HIGHMARK GROUP), a Massachusetts business trust (herein called
the "Trust"), and HighMark Capital Management, Inc., a California corporation
registered under the Investment Adviser's Act of 1940 with its principal offices
in San Francisco, California (herein called the "Investment Adviser").
WHEREAS, the Trust is registered as an open-end, diversified,
management investment company under the Investment Company Act of 1940, as
amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish
investment advisory and administrative services to certain investment portfolios
of the Trust (the "Funds") and the Investment Adviser represents that it is
willing and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints the Investment Adviser to act
as investment adviser to the Funds identified on Schedule A hereto for the
period and on the terms set forth in this Agreement. The Investment Adviser
accepts such appointment and agrees to furnish the services herein set forth for
the compensation herein provided.
2. Delivery of Documents. The Trust has furnished the Investment
Adviser with copies properly certified or authenticated of each of the
following:
(a) the Trust's 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' Code of Regulations and amendments thereto;
(c) resolutions of the Trust's' Board of Trustees authorizing
the appointment of the Investment Adviser and approving this Agreement;
(d) the Trust's' Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission
on March 12, 1987 and all amendments thereto;
<PAGE> 3
(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 Securities and Exchange
Commission and all amendments thereto; and
(f) the Trust's most recent prospectuses and Statement of
Additional Information (such prospectuses and Statement of Additional
Information, as presently in effect, and all amendments and supplements
thereto are herein collectively called the "Prospectus").
The Trust will furnish the Investment Adviser from time to time with
copies of all amendments of or supplements to the foregoing.
3. Management. Subject to the supervision of the Trust's Board of
Trustees, the Investment Adviser will provide a continuous investment program
for each Fund, including investment research and management with respect to all
securities and investments and cash equivalents in said Funds. The Investment
Adviser will determine from time to time what securities and other investments
will be purchased, retained or sold by the Trust with respect to the Funds. The
Investment Adviser will provide the services under this Agreement in accordance
with each Fund's investment objective, policies, and restrictions as stated in
the Prospectus and resolutions of the Trust's' Board of Trustees. The Investment
Adviser further 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 Securities and Exchange Commission and in addition will conduct its
activities under this Agreement in accordance with any applicable
regulations of any governmental authority pertaining to the investment
advisory activities of the Investment Adviser;
(c) will not make loans to any person to purchase or carry
units of beneficial interest in the Trust or make loans to the Trust;
(d) will place orders pursuant to its investment
determinations for the Trust either directly with the issuer or with
any broker or dealer. In placing orders with brokers and dealers, the
Investment Adviser will attempt to obtain prompt execution of orders in
an effective manner at the most favorable price. Consistent with this
obligation, when the execution and price offered by two or more brokers
or dealers are comparable, the Investment Adviser may, in its
discretion, purchase and sell portfolio securities to and from brokers
and dealers who provide the Investment Adviser with research advice and
other services. Unless and until appropriate procedures are adopted by
the Trustees of the Trust under Rule 17e-1 of the 1940 Act and unless
the provisions of such Rule are complied with, portfolio securities
will not be purchased
-2-
<PAGE> 4
from or sold through SEI Investments Distribution Co., HighMark Capital
Management, Inc., or any affiliated person of either the Trust, SEI
Investments Distribution Co., or HighMark Capital Management, Inc.;
(e) will maintain all books and records with respect to the
Trust's securities transactions and will furnish the Trust's Board of
Trustees such periodic and special reports as the Board may request;
(f) will treat confidentially and as proprietary information
of the Trust all records and other information relative to the Trust
and prior, present or potential interestholders; 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 the Investment
Adviser 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; and
(g) will maintain its policy and practice of conducting its
fiduciary functions independently. In making investment recommendations
for the Trust, the Investment Adviser's personnel will not inquire or
take into consideration whether the issuers of securities proposed for
purchase or sale for the Trust's account are customers of the
Investment Adviser or of its parent or its subsidiaries or affiliates.
In dealing with such customers, the Investment Adviser and its parent,
subsidiaries, and affiliates will not inquire or take into
consideration whether securities of those customers are held by the
Trust.
4. Services Not Exclusive. The investment management services furnished
by the Investment Adviser hereunder are not to be deemed exclusive, and the
Investment Adviser shall be free to furnish similar services to others so long
as its services under this Agreement are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Investment Adviser 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.
The Investment Adviser further agrees to preserve for the periods prescribed by
Rule 31a-3 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, the Investment Adviser
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.
-3-
<PAGE> 5
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, each of the Funds will pay the Investment Adviser
and the Investment Adviser will accept as full compensation therefor a fee
computed daily and paid monthly at the applicable annual rate set forth on
Schedule A hereto. Each Fund's obligation to pay the above-described fee to the
Investment Adviser will begin as of the date of the initial public sale of
shares in that Fund.
If in any fiscal year the aggregate expenses of any of the Funds (as
defined under the securities regulations of any state having jurisdiction over
the Trust) exceed the expense limitations of any such state, the Investment
Adviser will reimburse the Fund for a portion of such excess expenses equal to
such excess times the ratios of the fees otherwise payable by the Fund to the
Investment Adviser hereunder to the aggregate fees otherwise payable by the Fund
to the Investment Adviser hereunder and to SEI Investments Mutual Funds Services
under the Administration Agreement between SEI Investments Mutual Funds Services
and the Trust. The obligation of the Investment Adviser to reimburse the Funds
hereunder is limited in any fiscal year to the amount of its fee hereunder for
such fiscal year, provided, however, that notwithstanding the foregoing, the
Investment Adviser shall reimburse the Funds for such proportion of such excess
expenses regardless of the amount of fees paid to it during such fiscal year to
the extent that the securities regulations of any state having jurisdiction over
the Trust so require. Such expense reimbursement, if any, will be estimated
daily and reconciled and paid on a monthly basis.
8. Limitation of Liability. The Investment Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of this 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 of the Investment Adviser in the
performance of its duties or from reckless disregard by the Investment Adviser
of its obligations and duties under this Agreement.
9. Duration and Termination. This Agreement will become effective as to
a particular Fund as of the date first written above, provided that it shall
have been approved by vote of a majority of the outstanding voting securities of
such Fund, in accordance with the requirements under the 1940 Act, and, unless
sooner terminated as provided herein, shall continue in effect until October 31,
1999.
Thereafter, if not terminated, this Agreement shall continue in effect
as to a particular Fund for successive periods of twelve months each ending on
October 31st of each year, provided such continuance 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 parties to this Agreement or interested persons of
any party to this Agreement, 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 a majority of the outstanding voting
securities of
-4-
<PAGE> 6
such Fund. Notwithstanding the foregoing, this Agreement may be terminated as to
a particular Fund at any time on sixty days' written notice, without the payment
of any penalty, by the Trust (by vote of the Trust's' Board of Trustees or by
vote of a majority of the outstanding voting securities of such Fund) or by the
Investment Adviser. 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" shall have
the same meaning of such terms in the 1940 Act.)
10. 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.
11. 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 shall be held or made 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 and shall be
governed by the law of the Commonwealth of Massachusetts.
The names "HighMark Funds" and "Trustees of the HighMark Funds" refer
respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of March 10, 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 "The 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, interestholders or representatives of
the Trust personally, but bind only the assets of the Trust, and all persons
dealing with any Fund of the Trust must look solely to the assets of the Trust
belonging to such Fund for the enforcement of any claims against the Trust.
-5-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
HIGHMARK FUNDS
Seal By:______________________________
Title: President
HIGHMARK CAPITAL MANAGEMENT, INC.
Seal By:______________________________
Title: President
-6-
<PAGE> 8
Schedule A
to the
Investment Advisory Agreement
between the HighMark Funds and
HighMark Capital Management, Inc.
dated September 1, 1998
Name of Fund Compensation*
- ------------ -------------
The U.S. Government Money Market Fund Annual rate of thirty
one-hundredths of one percent
(.30%) of the U.S. Government
Obligations Money Market Fund's
average daily net assets.
The Diversified Money Market Fund Annual rate of thirty
one-hundredths of one percent
(.30%) of the Diversified
Money Market Fund's average
daily net assets.
The 100% U.S. Treasury Money Market Fund Annual rate of thirty one-
hundredths of one percent
(.30%) of the 100% U.S.
Treasury Money Market Fund's
average daily net assets.
The Income Equity Fund Annual rate of sixty
one-hundredths of one percent
(.60%) of the Income Equity
Fund's average daily net
assets.
The Bond Fund Annual rate of fifty
one-hundredths of one percent
(.50%) of the Bond Fund's
average daily net assets.
- ----------
* All fees are computed daily and paid monthly.
-7-
<PAGE> 9
Schedule A (Con't.)
to the
Investment Advisory Agreement
Between the HighMark Funds and
HighMark Capital Management, Inc.
dated September 1, 1998
Name of Fund Compensation*
- ------------ -------------
The California Tax-Free Money Market Fund Annual rate of thirty one-
hundredths of one percent
(.30%) of the California
Tax-Free Money Market Fund's
average daily net assets.
The Growth Fund Annual rate of sixty
one-hundredths of one percent
(.60%) of the Growth Fund's
average daily net assets.
The Balanced Fund Annual rate of sixty
one-hundredths of one percent
(.60%) of the Balanced Fund's
average daily net assets.
The Value Momentum Fund Annual rate of sixty
one-hundredths of one percent
(.60%) of the Value Momentum
Fund's average daily net
assets.
The Blue Chip Growth Fund Annual rate of sixty
one-hundredths of one percent
(.60%) of the Blue Chip Growth
Fund's average daily net
assets.
The Emerging Growth Fund Annual rate of eighty
one-hundredths of one percent
(.80%) of the Emerging Growth
Fund's average daily net
assets.
- ----------
* All fees are computed daily and paid monthly.
-8-
<PAGE> 10
Schedule A (Con't.)
to the
Investment Advisory Agreement
Between the HighMark Funds and
HighMark Capital Management, Inc.
dated September 1, 1998
Name of Fund Compensation*
- ------------ -------------
The International Equity Fund Annual rate of ninety-five
one-hundredths of one percent
(.95%) of the International
Equity Fund's average daily net
assets.
The Intermediate-Term Bond Fund Annual rate of fifty
one-hundredths of one percent
(.50%) of the Intermediate-Term
Bond Fund's average daily net
assets.
The Government Securities Fund Annual rate of fifty
one-hundredths of one percent
(.50%) of the Government
Securities Fund's average daily
net assets.
The Convertible Securities Fund Annual rate of sixty
one-hundredths of one percent
(.60%) of the Convertible
Securities Fund's average daily
net assets.
The California Intermediate Tax-Free Bond Fund Annual rate of fifty one-
hundredths of one percent
(.50%) of the California
Intermediate Tax- Free Bond
Fund's average daily net
assets.
The Small Cap Value Fund Annual rate of one hundred
one-hundredths of one percent
(1.00%) of the Small Cap Value
Fund's average daily net
assets.
- ----------
* All fees are computed daily and paid monthly.
-9-
<PAGE> 11
HIGHMARK FUNDS
By:______________________
Title:___________________
Date:____________________
HIGHMARK CAPITAL MANAGEMENT, INC.
By:______________________
Title:___________________
Date:____________________
-10-
<PAGE> 1
EXHIBIT (11)
Opinion of Ropes & Gray
<PAGE> 2
EXHIBIT 11
----------
ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K STREET, N.W.
SUITE 800 EAST
WASHINGTON, DC 20005-3333
(202) 626-3900
FAX: (202) 626-3961
November __, 1998
HighMark Funds
Oaks, Pennsylvania 19456
Ladies and Gentlemen:
We have represented the HighMark Funds, a Massachusetts business trust
("HighMark"), in connection with the preparation and execution of the Plan of
Reorganization (the "Plan") dated as of [_____________], 1998 regarding the
combination of the HighMark Blue Chip Growth Fund and the HighMark Government
Securities Fund (the "Consolidating Funds") into, respectively, the HighMark
Growth Fund and the HighMark Bond Fund (the "Consolidated Funds"). This opinion
is being given pursuant to Section 7(g) of the Plan. Capitalized terms defined
in the Plan and not otherwise defined herein are used herein with the meaning so
defined. This opinion is solely for the benefit of HighMark, its officers and
trustees, and the Consolidating and Consolidated Funds.
In connection with this opinion, we have examined and relied upon: (i)
an executed copy of the Plan; (ii) the Agreement and Declaration of Trust, as
amended, of HighMark on file in the offices of the Secretary of State of The
Commonwealth of Massachusetts and the Clerk of the City of Boston (the
"Declaration of Trust"); (iii) a copy of the Code of Regulations of HighMark;
(iv) signed copies of the Registration Statement of HighMark on Form N-14 (the
"Registration Statement"), filed with the Securities and Exchange Commission
(the "Commission") on October 13, 1998; (v) a copy of the Combined
Prospectus/Proxy Statement (the "Prospectus/Proxy Statement") dated November 16,
1998 relating to the Transaction, as filed with the Commission pursuant to Rule
497(b) under the 1933 Act; (vi) a copy of the Statement of Additional
Information dated November 16, 1998 relating to the Transaction, as filed with
the Commission pursuant to Rule 497(b) under the 1933 Act, which is incorporated
by reference into the Prospectus/Proxy Statement; (vii) copies of the
prospectuses of the HighMark Growth Fund, the HighMark Blue Chip Growth Fund,
the HighMark Government Securities Fund and the HighMark Bond Fund dated
November 30, 1997, as amended (the HighMark Prospectuses") and the Statement of
Additional Information
<PAGE> 3
HighMark Funds
November __, 1998
Page 2
dated November 28, 1997 (the "HighMark SAI"), as filed with the Commission, the
information about HighMark contained in the HighMark Prospectuses and HighMark
SAI being incorporated by reference into the Prospectus/Proxy Statement; (viii)
the originals (or copies) of minutes of meetings or actions by written consent
of the Board of Trustees of HighMark; and (ix) such other instruments,
certificates, and documents as we have deemed necessary as a basis for rendering
the opinions set forth below.
We have assumed the genuineness of the signatures on all documents
examined by us, the authenticity of all documents submitted to us as originals
and the conformity to the corresponding originals of all documents submitted to
us as copies.
We express no opinion as to the laws of any jurisdiction other than The
Commonwealth of Massachusetts and the United States of America.
Based on the foregoing, we are of the opinion that:
1. HighMark is a Massachusetts business trust duly established
and validly existing under the laws of the Commonwealth of
Massachusetts, and neither HighMark nor any HighMark Fund is,
to our knowledge, required to qualify to do business as a
foreign association in any jurisdiction;
2. HighMark Funds, on behalf of each Consolidating Fund, has the
power to sell, assign, convey, transfer and deliver the assets
contemplated to be transferred under the Plan and, upon
consummation of the transactions contemplated under the Plan,
HighMark Funds, on behalf of each Consolidating Fund, will
have duly sold, assigned, conveyed, transferred and delivered
such assets to the corresponding Consolidated Fund;
3. The execution and delivery of the Plan did not, and the
consummation of the transactions contemplated by the Plan will
not, violate HighMark's Declaration of Trust, as amended, or
Code of Regulations, or any material agreement known to us to
which HighMark or any Consolidating or Consolidated Fund is a
party or by which any of them is bound;
<PAGE> 4
HighMark Funds
November __, 1998
Page 3
4. No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by
HighMark or any Consolidating or Consolidated Fund of the
transactions contemplated by the Plan, except such as have
been obtained under the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations under those Acts;
5. The Plan has been duly authorized, executed and delivered by
HighMark and represents a valid binding contract, enforceable
in accordance with its terms; and
6. The Shares of the Consolidated Funds to be delivered to each
Consolidating Fund shareholder as provided for by the Plan are
duly authorized and upon delivery will be validly issued,
fully paid and nonassessable (except with respect to
liabilities to which shareholders of a Massachusetts business
trust, in certain circumstances, may be subject as set forth
in the HighMark Prospectuses and HighMark SAI), and no
shareholder of the Consolidated Funds has any preemptive right
to subscription or purchase in respect thereof.
We have participated in discussions with various representatives of
HighMark and its independent public accountants, in which the business and
affairs of HighMark and the contents of the Registration Statement and the
Prospectus/Proxy Statement and the documents incorporated by reference therein
were discussed. There is no assurance that all material facts as to HighMark and
its affairs were disclosed to us or that our familiarity with HighMark is such
that we have necessarily recognized the materiality of such facts as were
disclosed, and we have to a large extent relied upon statements of
representatives of HighMark as to the materiality of the facts disclosed to us.
Based upon our participation in the foregoing discussions, the
foregoing inquiries and our examination of the documents and information
referred to above and such other documents as came to our attention as a result
of such discussions and inquiries, we may state with respect to HighMark that no
matters came to our attention which led us to believe that either the
Registration Statement or the Prospectus/Proxy Statement, together with the
documents incorporated by reference therein, as of the date hereof, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. We express no opinion, however, as to the financial statements,
including the notes and schedules thereto, or as to any financial or statistical
data set forth in the Registration Statement or in the Prospectus/Proxy
Statement and the documents incorporated by reference therein.
<PAGE> 5
HighMark Funds
November __, 1998
Page 4
Our opinion set forth in paragraph 5 is subject to the qualification
that the validity and binding effect of the Plan may be limited (i) by laws
relating to bankruptcy, insolvency, reorganization, receivership, moratorium or
other laws of general application relating to or affecting the enforcement of
the rights and remedies of contractual parties, as from time to time in effect,
(ii) by application of general principles of equity (regardless of whether
considered in a proceeding in equity or at law), and (iii) with respect to
rights of indemnification, by public policy.
Very truly yours,
DRAFT
Ropes & Gray
<PAGE> 1
EXHIBIT (12)
Opinion of Ropes & Gray as to Tax Matters
<PAGE> 2
EXHIBIT 12A
-----------
ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K Street, N.W.
Suite 800 East
Washington, DC 20005-3333
(202) 626-3900
Fax: (202) 626-3961
November ___, 1998
HighMark Government Securities Fund
-- HighMark Funds
HighMark Bond Fund
-- HighMark Funds
One Freedom Valley Drive
Oaks, PA 19456
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of
Reorganization dated as of [_________] (the "Agreement"), between [among]
HighMark Funds (the "Trust"), a Massachusetts business trust, on behalf of two
of its series, HighMark Bond Fund ("Acquiring Fund") and HighMark Government
Securities Fund ("Target Fund") [and HighMark Capital Management, Inc. (the
"Advisor")]. The Agreement describes a proposed transaction (the "Transaction")
to occur on January 11, 1999, or such other date as may be decided by the Trust
(the "Exchange Date"), pursuant to which Acquiring Fund will acquire
substantially all of the assets of Target Fund in exchange for shares of
beneficial interest in Acquiring Fund (the "Acquiring Fund Shares") and the
assumption by Acquiring Fund of all of the liabilities of Target Fund following
which the Acquiring Fund Shares received by Target Fund will be distributed by
Target Fund to its shareholders in liquidation and termination of Target Fund.
This opinion as to certain federal income tax consequences of the Transaction is
furnished to you pursuant to Section 7(h) of the Agreement. Capitalized terms
not defined herein are defined in the Agreement.
Target Fund is a series of the Trust which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Shares of Target Fund are redeemable at net asset
value at each shareholder's option. Target Fund has elected to be a regulated
investment company for federal income tax purposes under Section 851 of the
Internal Revenue Code of 1986, as amended (the "Code").
<PAGE> 3
HighMark Government Securities Fund November __, 1998
HighMark Bond Fund
HighMark Funds -2-
Acquiring Fund is a series of the Trust which is registered under the
1940 Act as an open-end management investment company. Shares of Acquiring Fund
are redeemable at net asset value at each shareholder's option.
For purposes of this opinion, we have considered the Agreement, the
Proxy Statement, the Registration Statement (including the items incorporated by
reference therein), and such other items as we have deemed necessary to render
this opinion. In addition, you provided us with a letter dated as of the date
hereof, representing as to certain facts, occurrences and information upon which
you have indicated that we may rely in rendering this opinion (whether or not
contained or reflected in the documents and items referred to above).
Based on the foregoing representations and our review of the documents
and items referred to above, we are of the opinion that for federal income tax
purposes:
(i) No gain or loss will be recognized by Target Fund upon the transfer of
Target Fund's assets to Acquiring Fund in exchange for Acquiring Fund
Shares and the assumption by Acquiring Fund of the liabilities of
Target Fund, or upon the distribution of Acquiring Fund Shares by
Target Fund to its shareholders in liquidation;
(ii) No gain or loss will be recognized by the Target Fund shareholders
upon the exchange of their Target Fund Shares for Acquiring Fund
Shares;
(iii) The basis of Acquiring Fund Shares a Target Fund shareholder receives
in connection with the Transaction will be the same as the basis of
his or her Target Fund Shares exchanged therefor;
(iv) A Target Fund shareholder's holding period for his or her Acquiring
Fund Shares will be determined by including the period for which he or
she held the Target Fund Shares exchanged therefor, provided that he
or she held such Target Fund Shares as capital assets;
(v) No gain or loss will be recognized by Acquiring Fund upon the receipt
of the assets of Target Fund in exchange for Acquiring Fund Shares and
the assumption by Acquiring Fund of the liabilities of Target Fund;
(vi) The basis in the hands of Acquiring Fund of the assets of Target Fund
transferred to Acquiring Fund in the Transaction will be the same as
the basis of such assets in the hands of Target Fund immediately prior
to the transfer; and
<PAGE> 4
HighMark Government Securities Fund November __, 1998
HighMark Bond Fund
HighMark Funds -3-
(vii) The holding periods of the assets of Target Fund in the hands of
Acquiring Fund will include the periods during which such assets were
held by Target Fund.
Very truly yours,
DRAFT
Ropes & Gray
<PAGE> 5
EXHIBIT 12B
-----------
ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K Street, N.W.
Suite 800 East
Washington, DC 20005-3333
(202) 626-3900
Fax: (202) 626-3961
November ___, 1998
HighMark Blue Chip Growth Fund
-- HighMark Funds
HighMark Growth Fund
-- HighMark Funds
One Freedom Valley Drive
Oaks, PA 19456
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of
Reorganization dated as of [_________] (the "Agreement"), between [among]
HighMark Funds (the "Trust"), a Massachusetts business trust, on behalf of two
of its series, HighMark Growth Fund ("Acquiring Fund") and HighMark Blue Chip
Growth Fund ("Target Fund") [and HighMark Capital Management, Inc. (the
"Advisor")]. The Agreement describes a proposed transaction (the "Transaction")
to occur on January 11, 1999, or such other date as may be decided by the Trust
(the "Exchange Date"), pursuant to which Acquiring Fund will acquire
substantially all of the assets of Target Fund in exchange for shares of
beneficial interest in Acquiring Fund (the "Acquiring Fund Shares") and the
assumption by Acquiring Fund of all of the liabilities of Target Fund following
which the Acquiring Fund Shares received by Target Fund will be distributed by
Target Fund to its shareholders in liquidation and termination of Target Fund.
This opinion as to certain federal income tax consequences of the Transaction is
furnished to you pursuant to Section 7(h) of the Agreement. Capitalized terms
not defined herein are defined in the Agreement.
Target Fund is a series of the Trust which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Shares of Target Fund are redeemable at net asset
value at each shareholder's option. Target Fund has elected to be a regulated
investment company for federal income tax purposes under Section 851 of the
Internal Revenue Code of 1986, as amended (the "Code").
<PAGE> 6
HighMark Blue Chip Growth Fund November __, 1998
HighMark Growth Fund
HighMark Funds -2-
Acquiring Fund is a series of the Trust which is registered under the
1940 Act as an open-end management investment company. Shares of Acquiring Fund
are redeemable at net asset value at each shareholder's option.
For purposes of this opinion, we have considered the Agreement, the
Proxy Statement, the Registration Statement (including the items incorporated by
reference therein), and such other items as we have deemed necessary to render
this opinion. In addition, you provided us with a letter dated as of the date
hereof, representing as to certain facts, occurrences and information upon which
you have indicated that we may rely in rendering this opinion (whether or not
contained or reflected in the documents and items referred to above).
Based on the foregoing representations and our review of the documents
and items referred to above, we are of the opinion that for federal income tax
purposes:
(i) No gain or loss will be recognized by Target Fund upon the transfer of
Target Fund's assets to Acquiring Fund in exchange for Acquiring Fund
Shares and the assumption by Acquiring Fund of the liabilities of
Target Fund, or upon the distribution of Acquiring Fund Shares by
Target Fund to its shareholders in liquidation;
(ii) No gain or loss will be recognized by the Target Fund shareholders
upon the exchange of their Target Fund Shares for Acquiring Fund
Shares;
(iii) The basis of Acquiring Fund Shares a Target Fund shareholder receives
in connection with the Transaction will be the same as the basis of
his or her Target Fund Shares exchanged therefor;
(iv) A Target Fund shareholder's holding period for his or her Acquiring
Fund Shares will be determined by including the period for which he or
she held the Target Fund Shares exchanged therefor, provided that he
or she held such Target Fund Shares as capital assets;
(v) No gain or loss will be recognized by Acquiring Fund upon the receipt
of the assets of Target Fund in exchange for Acquiring Fund Shares and
the assumption by Acquiring Fund of the liabilities of Target Fund;
(vi) The basis in the hands of Acquiring Fund of the assets of Target Fund
transferred to Acquiring Fund in the Transaction will be the same as
the basis of such assets in the hands of Target Fund immediately prior
to the transfer; and
<PAGE> 7
HighMark Blue Chip Growth Fund November __, 1998
HighMark Growth Fund
HighMark Funds -3-
(vii) The holding periods of the assets of Target Fund in the hands of
Acquiring Fund will include the periods during which such assets were
held by Target Fund.
Very truly yours,
DRAFT
Ropes & Gray
<PAGE> 1
EXHIBIT (14)(a)
Consent of Deloitte & Touche LLP
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. 33-12608 under the
Securities Act of 1933, of our report dated September 14, 1998, relating to
HighMark Funds, including 100% U.S. Treasury Money Market Fund, U.S. Government
Money Market Fund, Diversified Money Market Fund, California Tax-Free Money
Market Fund, Intermediate-Term Bond Fund, Caliifornia Intermediate Tax-Free Bond
Fund, Bond Fund, Convertible Securities Fund, Government Securities Fund,
Balanced Fund, Growth Fund, Value Momentum Fund, Income Equity Fund, Blue Chip
Growth Fund, Emerging Growth Fund and International Equity Fund, included in the
Statement of Additional Information, which is part of such Registration
Statement, and to the references to us under the headings "Financial Statements"
and "Financial Highlights" in such Registration Statement.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
October 8, 1998
<PAGE> 1
EXHIBIT (14)(b)
Consent of Ropes & Gray
<PAGE> 2
CONSENT OF COUNSEL
We hereby consent to the use of our name and the reference 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.
October 13, 1998
<PAGE> 1
EXHIBIT (16)
Executed Powers of Attorney
<PAGE> 2
EXHIBIT 16
----------
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.
Signature Title Date
- --------- ----- ----
/s/ Stephen G. Mintos Chairman of the November 22, 1994
- -------------------------- Board, Trustee and
Stephen G. Mintos President
<PAGE> 3
/s/ Cynthia L. Lindsey Vice President and November 22, 1994
- ---------------------- and Treasurer
Cynthia L. Lindsey
/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
-2-
<PAGE> 4
POWER OF ATTORNEY
The undersigned, being a Trustee of the HighMark Funds, does hereby
constitute and appoint Martin E. Lybecker, Alan G. Priest and Alyssa Albertelli
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 HighMark Funds 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
HighMark Funds 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 of HighMark Funds 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/ William R. Howell
- --------------------- Trustee October 10, 1998
William R. Howell
</TABLE>
<PAGE> 5
POWER OF ATTORNEY
The undersigned, being a Trustee of the HighMark Funds, does hereby
constitute and appoint Martin E. Lybecker, Alan G. Priest and Alyssa Albertelli
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 HighMark Funds 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
HighMark Funds 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 of HighMark Funds 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/ Paul L. Smith
- --------------------- Trustee October 10, 1998
Paul L. Smith
</TABLE>
<PAGE> 6
POWER OF ATTORNEY
-----------------
The undersigned, being an officer of the HighMark Funds, does hereby
constitute and appoint Martin E. Lybecker, Alan G. Priest and Alyssa Albertelli
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 HighMark Funds 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
HighMark Funds 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 HighMark Funds 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.
Signature Title Date
- --------- ----- ----
/s/ MARK E. NAGLE President and October 10, 1998
- ----------------- Chief Executive Officer
Mark E. Nagle
<PAGE> 7
POWER OF ATTORNEY
-----------------
The undersigned, being an officer of the HighMark Funds, does hereby
constitute and appoint Martin E. Lybecker, Alan G. Priest and Alyssa Albertelli
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 HighMark Funds 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
HighMark Funds 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 HighMark Funds 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.
Signature Title Date
- --------- ----- ----
/s/ ROBERT J. DELLACROCE Treasurer and October 10, 1998
- ------------------------ Chief Financial Officer
Robert J. DellaCroce
<PAGE> 1
EXHIBIT (17)(a)
Prospectus for HighMark Funds
<PAGE> 2
HIGHMARK FUNDS
Equity Funds
Fixed Income Funds
Supplement dated December 31, 1997 to
Prospectus dated November 30, 1997
INVESTORS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE
CAPITALIZED TERMS USED HEREIN HAVE THE SAME MEANING AS IN THE PROSPECTUS
1. NEW SUB-ADVISOR. The Board of Trustees of the HighMark Funds has unanimously
approved the termination of the International Equity Fund's current sub-advisor,
TMAM, effective January 1, 1998. As of January 1, 1998, AXA Asset Management
Partenaires ("AXA") will serve as Sub-Advisor for the Fund on the same terms and
conditions and for the same consideration as TMAM. If shareholders approve a new
sub-advisory agreement with respect to AXA prior to April 30, 1998, AXA will
continue to operate as the Fund's Sub-Advisor. If shareholders do not approve a
new sub-advisory agreement with respect to AXA, then AXA will cease to operate
as the Fund's Sub-Advisor, and Pacific Alliance, the Fund's Advisor, will make
the day-to-day investment decisions for the Fund. The Prospectus is hereby
amended to incorporate the following information on page 43:
The Advisor and AXA Asset Management Partenaires ("AXA"), have entered into
an investment sub-advisory agreement relating to the International Equity
Fund (the "Investment Sub-Advisory Agreement"). Under the Investment
Sub-Advisory Agreement, AXA 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.
AXA, 46 Avenue de la Grande Armee, Paris, France 75017, operates as a
subsidiary of the AXA Group. Established in 1994, AXA provides active
global investment services for U.S. mutual funds and foreign mutual funds.
As of June 30, 1997, AXA managed assets of $494 billion and was the second
largest manager of mutual fund assets worldwide.
AXA 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.
Robert de Guigne serves as portfolio manager of the Fund. Mr. de Guigne has
been a portfolio manager with AXA and the AXA Group since 1996. From 1991
to 1996, Mr. de Guigne was an equity and fixed income manager with State
Street Bank.
2. CORRECTION. A typographical error occurred in the fee table on page 6. The
Management Fees (after voluntary reduction) for the Income Equity Fund should be
0.60% rather than the incorrect figure reported on page 6. The Total Fund
Operating Expenses (after voluntary reduction) of 0.91% is correctly reported in
the Prospectus.
<PAGE> 3
HIGHMARK FUNDS
EQUITY FUNDS
FIXED INCOME FUNDS
SUPPLEMENT DATED FEBRUARY 9, 1998 TO
FIDUCIARY SHARES PROSPECTUS DATED NOVEMBER 30, 1997
INVESTORS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE
CAPITALIZED TERMS USED HEREIN HAVE THE SAME MEANING AS IN THE PROSPECTUS
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 May 1, 1998, the information under "Fee Table" with respect to
the California Intermediate Tax-Free Bond Fund is amended as follows:
FEE TABLE
<TABLE>
<CAPTION>
VALUE CONVERTIBLE
INCOME MOMENTUM BLUE CHIP GROWTH EMERGING INTERNATIONAL SECURITIES
EQUITY FUND FUND GROWTH FUND FUND GROWTH FUND EQUITY FUND FUND
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- --------- ----------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES(a)
Maximum Sales Load
Imposed on
Purchases (as a
percentage of
offering price)... 0% 0% 0% 0% 0% 0% 0%
Maximum Sales Load
Imposed on
Reinvested
Dividends (as a
percentage of
offering price)... 0% 0% 0% 0% 0% 0% 0%
Deferred Sales Load
(as a percentage
of original
purchase price or
redemption
proceeds, as
applicable)....... 0% 0% 0% 0% 0% 0% 0%
Redemption Fees (as
a percentage of
amount redeemed,
if
applicable)(b).... 0% 0% 0% 0% 0% 0% 0%
Exchange Fee(a)..... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
<CAPTION>
CALIFORNIA
INTERMEDIATE- GOVERNMENT INTERMEDIATE
TERM BOND BOND SECURITIES BALANCED TAX-FREE
FUND FUND FUND FUND BOND 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
Purchases (as a
percentage of
offering price)... 0% 0% 0% 0% 0%
Maximum Sales Load
Imposed on
Reinvested
Dividends (as a
percentage of
offering price)... 0% 0% 0% 0% 0%
Deferred Sales Load
(as a percentage
of original
purchase price or
redemption
proceeds, as
applicable)....... 0% 0% 0% 0% 0%
Redemption Fees (as
a percentage of
amount redeemed,
if
applicable)(b).... 0% 0% 0% 0% 0%
Exchange Fee(a)..... $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
VALUE CONVERTIBLE
INCOME MOMENTUM BLUE CHIP GROWTH EMERGING INTERNATIONAL SECURITIES
EQUITY FUND FUND GROWTH FUND FUND GROWTH FUND EQUITY FUND FUND
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- --------- ----------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL OPERATING
EXPENSES (as a
percentage of net
assets)
Management Fees
(after voluntary
reduction)(c)..... 0.60% 0.60% 0.60% 0.60% 0.80% 0.95% 0.60%
12b-1 Fees.......... 0% 0% 0% 0% 0% 0% 0%
Other Expenses
(after voluntary
reduction)(d)..... 0.31% 0.21% 0.22% 0.30% 0.23% 0.41% 0.25%
---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses (after
voluntary
reduction)(e)..... 0.91% 0.81% 0.82% 0.90% 1.03% 1.36% 0.85%
==== ==== ==== ==== ==== ==== ====
<CAPTION>
CALIFORNIA
INTERMEDIATE- GOVERNMENT INTERMEDIATE
TERM BOND BOND SECURITIES BALANCED TAX-FREE
FUND FUND FUND FUND BOND FUND
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
SHARES SHARES SHARES SHARES SHARES
------------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
ANNUAL OPERATING
EXPENSES (as a
percentage of net
assets)
Management Fees
(after voluntary
reduction)(c)..... 0.50% 0.50% 0.50% 0.60% 0.20%
12b-1 Fees.......... 0% 0% 0% 0% 0%
Other Expenses
(after voluntary
reduction)(d)..... 0.25% 0.25% 0.25% 0.30% 0.27%
---- ---- ---- ---- ----
Total Fund Operating
Expenses (after
voluntary
reduction)(e)..... 0.75% 0.75% 0.75% 0.90% 0.47%
==== ==== ==== ==== ====
</TABLE>
2
<PAGE> 5
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>
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
International Equity Fund Fiduciary Shares.................. $14 $43 $74 $164
Convertible Securities Fund Fiduciary Shares................ $ 9 $27 $47 $105
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
Balanced Fund Fiduciary Shares.............................. $ 9 $29 $50 $111
California Intermediate Tax-Free Bond Fund Fiduciary
Shares.................................................... $ 5 $15 $26 $ 59
</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 of $15 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, 0.50% for the
Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.47% for the
Fiduciary Shares of the Growth and Balanced Funds, 0.48% for the Fiduciary
Shares of the Income Equity and Value Momentum Funds, 0.49% for the
Fiduciary Shares of the Blue Chip Growth and Intermediate-Term Bond Funds,
0.50% for the Fiduciary Shares of the Emerging Growth Fund, 0.68% for the
Fiduciary Shares of the International Equity Fund, 0.52% for the Fiduciary
Shares of the Convertible Securities Fund, 0.51% for the Fiduciary Shares of
the Bond Fund, 0.52% for the Fiduciary Shares of the Government Securities
Fund and 0.52% for the Fiduciary Shares of the California Intermediate
Tax-Free Bond Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 1.07%
for the Fiduciary Shares of the Growth and Balanced Funds, 1.08% for the
Fiduciary Shares of the Income Equity and Value Momentum Funds, 1.09% for
the Fiduciary Shares of the Blue Chip Growth Fund, 1.30% for the Fiduciary
Shares of the Emerging Growth Fund, 1.63% for the Fiduciary Shares of the
International Equity Fund, 1.12% for the Fiduciary Shares of the Convertible
Securities Fund, 0.99% for the Fiduciary Shares of the Intermediate-Term
Bond Fund, 1.01% for the Fiduciary Shares of the Bond Fund, 1.02% for the
Fiduciary Shares of the Government Securities Fund and 1.02% for the
Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
HMF 298-A
3
<PAGE> 6
HIGHMARK FUNDS
Equity Funds
Fixed Income Funds
Supplement dated February 19, 1998 to
Fiduciary Shares Prospectus dated November 30, 1997
INVESTORS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE
CAPITALIZED TERMS USED HEREIN HAVE THE SAME MEANING AS IN THE PROSPECTUS
This supplement provides new and additional information beyond that
contained in the Prospectus and should be retained and read in conjunction with
such Prospectus.
The information on the cover page under "Fiduciary Shares" is revised as
follows:
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; (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; and (v) Registered investment
advisors, regulated by a federal or state governmental authority, or financial
planners who are purchasing Fiduciary Shares for an account for which they are
authorized to make investment decisions (i.e., a discretionary account) and who
are compensated by their clients on the basis of an ad valorem fee.
The first paragraph under "PURCHASE AND REDEMPTION OF SHARES" on page 34 is
revised as follows:
The Income Equity, Value Momentum, Growth and Balanced Funds are divided
into three classes of Shares, Class A, Class B and Fiduciary. The Emerging
Growth, Intermediate-Term Bond, Bond and California Intermediate Tax-Free Bond
Funds are divided into two classes of Shares, Class A and Fiduciary, and the
Blue Chip Growth, International Equity, Convertible Securities and Government
Securities Funds are only offered in a single class of Shares, Fiduciary. Only
the following investors qualify to purchase a 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 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; (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; and (v) Registered investment advisors,
regulated by a federal or state governmental authority, or financial planners
who are purchasing Fiduciary Shares for an account for which they are authorized
to make investment decisions (i.e., a discretionary account) and who are
compensated by their clients on the basis of an ad valorem fee. For a
description of investors who qualify to purchase Retail Shares, see the Retail
Shares prospectus of the Funds.
HMF 298-B
<PAGE> 7
HIGHMARK FUNDS
Equity Funds
Fixed Income Funds
Supplement dated July 28, 1998 to
Fiduciary Shares Prospectus dated November 30, 1997
INVESTORS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE
Capitalized Terms Used Herein Have the Same Meaning as in the Prospectus
Effective July 28, 1998, BTMT will no longer provide sub-advisory services
to the Blue Chip Growth and Government Securities Funds. Pacific Alliance, a
division of Union Bank of California, N.A., which serves as the investment
advisor to HighMark, will provide investment advisory services to such Funds,
pursuant to an investment advisory agreement dated April 1, 1996.
The information under "SERVICE ARRANGEMENTS--The Advisor" on pages 41 and
42 of the Prospectus is hereby amended as follows:
Growth Fund and Blue Chip Growth Fund--Scott Chapman. Mr. Chapman, Vice
President of the Advisor, has served as team leader of the Growth Fund since
1993. He has been with Union Bank of California, N.A., and its predecessor, The
Bank of California, N.A., since 1991.
Bond Fund, Intermediate-Term Bond Fund and Government Securities Fund--E.
Jack Montgomery. Mr. Montgomery, Vice President of the Advisor, has served as
team leader for the Bond Fund since 1994. He has served as team leader for the
Intermediate-Term Bond Fund since 1996. He has been with Union Bank of
California, N.A. and The Bank of California, N.A. since 1994. From 1990 to
1994, Mr. Montgomery was employed by the San Francisco Employees' Retirement
System.
The information on page 43 of the Prospectus under "SERVICE
ARRANGEMENTS--The Sub-Advisors" is revised as follows:
Stephen M. Riccio serves as portfolio manager of the Emerging Growth
Fund. Mr. Riccio has been a portfolio manager with BTMT and its predecessor,
Bank of Tokyo Trust Company, since December 1994. From January 1994 to December
1994, Mr. Riccio served as a research analyst for Rochdale Investment
Management. From December 1989 to January 1994, Mr. Riccio served as a research
analyst for New York Life Insurance Company.
<PAGE> 8
HIGHMARK FUNDS
Money Market Funds
Equity Funds
Fixed Income Funds
Supplement dated September 1, 1998 to
Fiduciary and Retail Shares Prospectuses dated November 30, 1997
INVESTORS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE
CAPITALIZED TERMS USED HEREIN HAVE THE SAME MEANING AS IN THE PROSPECTUS
Effective September 1, 1998, the investment management unit at Union Bank
of California, N.A., investment advisor to HighMark, has been reorganized into a
subsidiary of UnionBanCal Corporation, the holding company of the advisor. The
new entity, which is called HighMark Capital Management, Inc., is a California
corporation registered under the Investment Adviser's Act of 1940.
The information under "SERVICE ARRANGEMENTS -- The Advisor" in each
Prospectus is hereby amended as follows:
Effective September 1, 1998, the investment management unit at Union Bank
of California, N.A., investment advisor to HighMark, has been reorganized into a
subsidiary of UnionBanCal Corporation, holding company of the advisor. The new
entity, which is called HighMark Capital Management, Inc., is a California
corporation registered under the Investment Adviser's Act of 1940.
HighMark Capital Management, Inc., now 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 Funds' records relating to such purchases and sales. All
references to Pacific Alliance in this prospectus shall be deemed to refer to
HighMark Capital Management, Inc.
HMFR-998
<PAGE> 9
- Equity Funds
- Fixed Income Funds
Fiduciary Shares
November 30, 1997
<PAGE> 10
HIGHMARK FUNDS
EQUITY 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:
<TABLE>
<S> <C> <C> <C>
- - Income Equity Fund - Convertible Securities Fund
- - Value Momentum Fund - Intermediate-Term Fund
- - Blue Chip Growth Fund - Bond Fund
- - Growth Fund - Government Securities Fund
- - Emerging Growth Fund - Balanced Fund
- - International Equity Fund - California Intermediate Tax-Free Bond Fund
</TABLE>
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 Investments Distribution Co., Oaks, Pennsylvania
19456, or by calling 1-800-433-6884. The SEC maintains a World Wide Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information. The Statement of
Additional Information is incorporated into this Prospectus by reference. This
Prospectus relates only to the Fiduciary Shares of the Funds. Interested persons
who wish to obtain a prospectus for other Funds and classes 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
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.
November 30, 1997
Fiduciary Shares
<PAGE> 11
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,
Emerging Growth, International Equity, Convertible Securities, Intermediate-Term
Bond, Bond, Government Securities, Balanced, and California Intermediate
Tax-Free Bond Funds (each a "Fund" and together 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 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 BALANCED FUND seeks capital appreciation and income, with a secondary
investment objective of conservation of capital. THE GROWTH FUND seeks long-term
capital appreciation through investments in equity securities; the production of
current income is an incidental 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 EMERGING
GROWTH FUND seeks long-term growth of capital by investing in a diversified
portfolio of equity securities of small capitalization, emerging growth
companies (collectively these seven Funds are sometimes referred to in this
Prospectus as the "Equity Funds"). THE CONVERTIBLE SECURITIES FUND seeks a high
level of current income and capital appreciation by investing in convertible
securities. 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 CALIFORNIA
INTERMEDIATE TAX-FREE BOND FUND seeks to provide high current income that is
exempt from federal and State of California income taxes. 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
(collectively, these five Funds are sometimes referred to in this Prospectus as
"Fixed Income Funds"). (See "INVESTMENT OBJECTIVES")
WHAT ARE THE FUNDS' PERMITTED INVESTMENTS? Each of the Equity Funds primarily
invests, consistent with its investment objective, in equity securities
including common stocks and securities convertible into common stocks. The
International Equity 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 Convertible Securities
Fund invests primarily in convertible securities, including bonds, debentures,
notes and preferred stocks convertible into common stock. The Intermediate-Term
Bond Fund primarily invests in bonds. The Bond Fund primarily invests in
long-term bonds. 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. 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
2
<PAGE> 12
instrumentalities; investments may also include zero-coupon obligations,
mortgage-related securities and asset-backed securities. The Balanced Fund
primarily invests, consistent with its investment objective, in equity
securities including common stocks and securities convertible into common stocks
and may also invest in fixed income securities. The California Intermediate
Tax-Free Bond 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").
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. Common stocks and other equity securities that the
Funds invest in are volatile and 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. 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. Values of fixed income
securities in which the California Intermediate Tax-Free Bond Fund invests may
be affected by other market and economic factors affecting the State of
California as well. The International Equity Fund will invest in securities of
foreign companies that involve special risks and considerations not typically
associated with investing in U.S. companies. 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. 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? 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, a division of Union Bank of California,
N.A., serves as the Advisor to HighMark. (See "The Advisor")
WHO ARE THE SUB-ADVISORS? Bank of Tokyo-Mitsubishi Trust Company serves as the
Sub-Advisor to the Emerging Growth, Blue Chip Growth, Convertible Securities and
Government Securities Funds. Tokyo-Mitsubishi Asset Management (U.K.), Ltd.
serves as the Sub-Advisor to the International Equity Fund. (See "The
Sub-Advisors")
WHO IS THE ADMINISTRATOR? SEI Investments 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")
3
<PAGE> 13
WHO IS THE DISTRIBUTOR? SEI Investments Distribution Co. 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 the New York Stock Exchange is open for
business ("Business Days"). The minimum initial investment is generally $1,000
per Fund. 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 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 (periodic dividends with respect to the International Equity Fund) 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")
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................................................................... 2
Fee Table............................................................................. 6
Financial Highlights.................................................................. 8
Fund Description...................................................................... 21
Investment Objectives................................................................. 21
Investment Policies................................................................... 22
Income Equity Fund.................................................................. 22
Value Momentum Fund................................................................. 22
Blue Chip Growth Fund............................................................... 23
Growth Fund......................................................................... 23
Emerging Growth Fund................................................................ 23
International Equity Fund........................................................... 24
Convertible Securities Fund......................................................... 25
Intermediate-Term Bond Fund......................................................... 25
Bond Fund........................................................................... 26
Government Securities Fund.......................................................... 26
Balanced Fund....................................................................... 27
California Intermediate Tax-Free Bond Fund.......................................... 27
</TABLE>
4
<PAGE> 14
<TABLE>
<CAPTION>
PAGE
--
<S> <C>
General............................................................................... 28
Money Market Instruments............................................................ 28
Illiquid and Restricted Securities.................................................. 28
California Municipal Securities..................................................... 29
Lending of Portfolio Securities..................................................... 29
Other Investments................................................................... 29
Risk Factors........................................................................ 30
Risks Associated with Convertible Securities........................................ 33
Portfolio Turnover.................................................................... 34
Purchase and Redemption of Shares..................................................... 34
Exchange Privileges................................................................... 35
Dividends............................................................................. 36
Taxes................................................................................. 36
Federal Taxation.................................................................... 36
California Taxes.................................................................... 39
Service Arrangements.................................................................. 40
The Advisor......................................................................... 40
The Sub-Advisors.................................................................... 42
Administrator....................................................................... 44
The Transfer Agent.................................................................. 44
Shareholder Service Plan............................................................ 44
Distributor......................................................................... 45
Banking Laws........................................................................ 45
Custodian........................................................................... 45
General Information................................................................... 45
Description of HighMark & Its Shares................................................ 45
Performance Information............................................................. 46
Miscellaneous....................................................................... 47
Description of Permitted Investments.................................................. 47
</TABLE>
5
<PAGE> 15
FEE TABLE
<TABLE>
<CAPTION>
VALUE CONVERTIBLE INTERMEDIATE-
INCOME MOMENTUM BLUE CHIP GROWTH EMERGING INTERNATIONAL SECURITIES TERM BOND
EQUITY FUND FUND GROWTH FUND FUND GROWTH FUND EQUITY FUND FUND FUND
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- -------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES(a)
Maximum Sales Load
Imposed on
Purchases (as a
percentage of
offering
price)........... 0% 0% 0% 0% 0% 0% 0% 0%
Maximum Sales Load
Imposed on
Reinvested
Dividends (as a
percentage of
offering
price)........... 0% 0% 0% 0% 0% 0% 0% 0%
Deferred Sales Load
(as a percentage
of original
purchase price or
redemption
proceeds, as
applicable)...... 0% 0% 0% 0% 0% 0% 0% 0%
Redemption Fees (as
a percentage of
amount redeemed,
if
applicable)(b)... 0% 0% 0% 0% 0% 0% 0% 0%
Exchange Fee(a).... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
ANNUAL OPERATING
EXPENSES (as a
percentage of net
assets)
Management Fees
(after voluntary
reduction)(c).... 0.50% 0.60% 0.60% 0.60% 0.80% 0.95% 0.60% 0.50%
12b-1 Fees......... 0% 0% 0% 0% 0% 0% 0% 0%
Other Expenses
(after voluntary
reduction)(d).... 0.31% 0.21% 0.22% 0.30% 0.23% 0.41% 0.25% 0.25%
---- ---- ---- ---- ---- ---- ---- ----
Total Fund
Operating
Expenses (after
voluntary
reduction)(e).... 0.91% 0.81% 0.82% 0.90% 1.03% 1.36% 0.85% 0.75%
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
CALIFORNIA
GOVERNMENT INTERMEDIATE
SECURITIES BALANCED TAX-FREE
BOND FUND FUND FUND BOND FUND
FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY
SHARES SHARES SHARES SHARES
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES(a)
Maximum Sales Load
Imposed on
Purchases (as a
percentage of
offering
price)........... 0% 0% 0% 0%
Maximum Sales Load
Imposed on
Reinvested
Dividends (as a
percentage of
offering
price)........... 0% 0% 0% 0%
Deferred Sales Load
(as a percentage
of original
purchase price or
redemption
proceeds, as
applicable)...... 0% 0% 0% 0%
Redemption Fees (as
a percentage of
amount redeemed,
if
applicable)(b)... 0% 0% 0% 0%
Exchange Fee(a).... $ 0 $ 0 $ 0 $ 0
ANNUAL OPERATING
EXPENSES (as a
percentage of net
assets)
Management Fees
(after voluntary
reduction)(c).... 0.50% 0.50% 0.60% 0%
12b-1 Fees......... 0% 0% 0% 0%
Other Expenses
(after voluntary
reduction)(d).... 0.25% 0.25% 0.30% 0.27%
---- ---- ---- ----
Total Fund
Operating
Expenses (after
voluntary
reduction)(e).... 0.75% 0.75% 0.90% 0.27%
==== ==== ==== ====
</TABLE>
6
<PAGE> 16
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>
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
International Equity Fund Fiduciary Shares..................... $ 14 $43 $74 $164
Convertible Securities Fund Fiduciary Shares................... $ 9 $27 $47 $105
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
Balanced Fund Fiduciary Shares................................. $ 9 $29 $50 $111
California Intermediate Tax-Free Bond Fund Fiduciary Shares.... $ 3 $ 9 $15 $ 34
</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 of $15 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, 0.50% for the
Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
(d) Absent voluntary fee waivers, OTHER EXPENSES would be 0.47% for the
Fiduciary Shares of the Growth and Balanced Funds, 0.48% for the Fiduciary
Shares of the Income Equity and Value Momentum Funds, 0.49% for the
Fiduciary Shares of the Blue Chip Growth and Intermediate-Term Bond Funds,
0.50% for the Fiduciary Shares of the Emerging Growth Fund, 0.68% for the
Fiduciary Shares of the International Equity Fund, 0.52% for the Fiduciary
Shares of the Convertible Securities Fund, 0.51% for the Fiduciary Shares of
the Bond Fund, 0.52% for the Fiduciary Shares of the Government Securities
Fund and 0.72% for the Fiduciary Shares of the California Intermediate
Tax-Free Bond Fund.
(e) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be: 1.07%
for the Fiduciary Shares of the Growth and Balanced Funds, 1.08% for the
Fiduciary Shares of the Income Equity and Value Momentum Funds, 1.09% for
the Fiduciary Shares of the Blue Chip Growth Fund, 1.30% for the Fiduciary
Shares of the Emerging Growth Fund, 1.63% for the Fiduciary Shares of the
International Equity Fund, 1.12% for the Fiduciary Shares of the Convertible
Securities Fund, 0.99% for the Fiduciary Shares of the Intermediate-Term
Bond Fund, 1.01% for the Fiduciary Shares of the Bond Fund, 1.02% for the
Fiduciary Shares of the Government Securities Fund and 1.22% for the
Fiduciary Shares of the California Intermediate Tax-Free Bond Fund.
7
<PAGE> 17
FINANCIAL HIGHLIGHTS
The tables below set forth certain financial information with respect to the
Fiduciary Shares of the Bond Fund, Growth Fund, and Income Equity Fund.
Financial highlights for the Funds for the period ended July 31, 1997 have been
derived from financial statements audited by Deloitte & Touche LLP, independent
auditors for HighMark, whose report thereon is included in the 1997 Annual
Report for the HighMark Funds, which is incorporated by reference into the
Statement of Additional Information. Financial highlights for the Funds prior to
the fiscal year ended July 31, 1996 have been derived from financial statements
examined by other auditors whose report thereon is on file with the Securities
and Exchange Commission.
The tables below set forth certain financial information with respect to the
Fiduciary Shares of the Intermediate-Term Bond Fund, the California Intermediate
Tax-Free Bond Fund, the Convertible Securities Fund, the Government Securities
Bond Fund, the Balanced Fund, the Value Momentum Fund, the Blue Chip Growth
Fund, the Emerging Growth Fund and the International Equity Fund. Upon
reorganizing as funds of HighMark Funds on April 28, 1997, Stepstone
Intermediate-Term Bond Fund became HighMark Intermediate-Term Bond Fund,
Stepstone California Intermediate Tax-Free Bond Fund became HighMark California
Intermediate Tax-Free Bond Fund, Stepstone Convertible Securities Fund became
HighMark Convertible Securities Fund, Stepstone Government Securities Fund
became HighMark Government Securities Fund, Stepstone Balanced Fund became
HighMark Balanced Fund, Stepstone Value Momentum Fund became HighMark Value
Momentum Fund, Stepstone Blue Chip Growth Fund became HighMark Blue Chip Growth
Fund, Stepstone Emerging Growth Fund became HighMark Emerging Growth Fund, and
Stepstone International Equity Fund became HighMark International Equity.
Financial highlights through January 31, 1997 represent the Institutional Class
Shares (now Fiduciary Shares) of Stepstone Intermediate-Term Bond, Stepstone
California Intermediate Tax-Free Bond, Stepstone Convertible Securities,
Stepstone Government Securities, Stepstone Balanced, Stepstone Value Momentum,
Stepstone Blue Chip Growth, Stepstone Emerging Growth, and Stepstone
International Equity Funds, and have been derived from financial statements
audited by Arthur Andersen LLP, independent auditors for the Stepstone Funds,
8
<PAGE> 18
INTERMEDIATE-TERM BOND FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, ------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value,
Beginning of
Period............... $ 10.16 $ 10.62 $ 9.67 $ 10.72 $ 10.57 $ 10.49
------------ -------- -------- -------- -------- --------
Investment Activities
Net investment
income............ 0.309 0.599 0.609 0.589 0.598 0.650
Net realized and
unrealized gain
(loss) on
investments....... 0.138 (0.460) 0.951 (1.034) 0.352 0.409
------------ -------- -------- -------- -------- --------
Distributions
Net investment
income............ (0.310) (0.595) (0.609) (0.590) (0.595) (0.636)
Capital gains........ -- -- -- (0.015) (0.205) (0.343)
------------ -------- -------- -------- -------- --------
Net Asset Value, End of
Period............... $ 10.30 $ 10.16 $ 10.62 $ 9.67 $ 10.72 $ 10.57
========== ======== ======== ======== ======== ========
Total Return........... 4.54% 1.43% 16.58% (4.11)% 9.22% 10.47%
Net assets, end of
period (000)...... $152,676 $150,411 $132,942 $109,848 $130,308 $112,806
Ratio of expenses to
average net
assets............ 0.69%* 0.67% 0.68% 0.71% 0.69% 0.67%
Ratio of expenses to
average net assets
excluding fee
waivers........... 0.82%* 0.68% 0.68% 0.71% 0.69% 0.67%
Ratio of net
investment income
to average net
assets............ 6.17%* 5.93% 5.97% 5.89% 5.56% 6.16%
Ratio of net
investment income
to average net
assets excluding
fee waivers....... 6.04%* 5.92% 5.97% 5.89% 5.56% 6.16%
Portfolio turnover
rate................. 58% 106% 147% 95% 72% 88%
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
* Annualized.
9
<PAGE> 19
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, -----------------------------------------
1997 1997 1996 1995 1994(2)
------------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period.... $ 9.76 $ 9.85 $ 8.95 $ 10.04 $ 10.00
------------ ------ ------ ------- -------
Investment Activities
Net investment income................. 0.206 0.430 0.518 0.460 0.117
Net realized and unrealized gain
(loss) on investments.............. 0.256 (0.078) 0.873 (1.098) 0.028
------------ ------ ------ ------- -------
Distributions
Net investment income................. (0.215) (0.442) (0.487) (0.452) (0.105)
Capital Gains......................... -- -- -- -- --
------------ ------ ------ ------- -------
Net Asset Value, End of Period.......... $ 10.01 $ 9.76 $ 9.85 $ 8.95 $ 10.04
========== ====== ====== ======= =======
Total Return............................ 4.84% 3.72% 15.83% (6.33)% 5.01%*
Net assets, end of period (000)....... $ 11,292 $7,435 $4,196 $12,793 $22,197
Ratio of expenses to average net
assets............................. 0.21%* 0.20% 0.24% 0.50% 0.50%*
Ratio of expenses to average net
assets excluding fee waivers....... 0.91%* 0.85% 0.71% 0.72% 0.73%*
Ratio of net investment income to
average net assets................. 4.56%* 4.69% 4.97% 4.84% 4.31%*
Ratio of net investment income to
average net assets excluding fee
waivers............................ 3.85%* 4.04% 4.50% 4.62% 4.08%
Portfolio turnover rate................. 5% 6% 30% 22% 19%
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
* Annualized
(2) Commenced operations on October 15, 1993.
10
<PAGE> 20
BOND FUND
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period..... $ 10.23 $ 10.38 $ 10.11 $ 11.13 $ 11.02
------- ------- ------- ------- -------
Investment Activities
Net investment income.................. 0.628 0.660 0.640 0.630 0.700
Net realized and unrealized gain
(loss) on investments............... 0.421 (0.160) 0.270 (0.970) 0.350
------- ------- ------- ------- -------
Distributions
Net investment income.................. (0.609) (0.650) (0.640) (0.630) (0.700)
Capital gains.......................... -- -- -- -- --
------- ------- ------- ------- -------
Net Asset Value, End of Period........... $ 10.67 $ 10.23 $ 10.38 $ 10.11 $ 11.13
======= ======= ======= ======= =======
Total Return............................. 10.59% 4.81% 9.43% (3.14)% 10.07%
Net assets, end of period (000)........ $71,571 $60,374 $59,758 $64,185 $33,279
Ratio of expenses to average net
assets.............................. 0.85% 0.89% 0.92% 0.86% 0.93%
Ratio of expenses to average net assets
excluding fee waivers............... 1.42% 1.61% 1.64% 1.37% 1.55%
Ratio of net investment income to
average net assets.................. 6.11% 6.10% 6.35% 6.11% 6.41%
Ratio of net investment income to
average net assets excluding fee
waivers............................. 5.54% 5.38% 5.62% 5.60% 5.79%
Portfolio turnover rate.................. 14% 21% 36% 44% 59%
Average commission rate(A)............... n/a n/a n/a n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
11
<PAGE> 21
CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, -------------------------------
1997 1997 1996 1995(3)
------------ ------- ------- -------
<S> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period............. $ 11.58 $ 10.43 $ 9.08 $ 10.00
------------ ------- ------- -------
Investment Activities
Net investment income.......................... 0.183 0.376 0.407 0.354
Net realized and unrealized gain (loss) on
investments................................. 0.833 1.423 1.350 (0.930)
------------ ------- ------- -------
Distributions
Net investment income.......................... (0.186) (0.378) (0.404) (0.343)
Capital gains.................................. -- (0.270) -- --
------------ ------- ------- -------
Net Asset Value, End of Period................... $ 12.41 $ 11.58 $ 10.43 $ 9.08
========== ======= ======= =======
Total Return..................................... 8.92% 17.72% 19.67% (5.83)%
Net assets, end of period (000)................ $ 25,338 $21,129 $16,668 $10,297
Ratio of expenses to average net assets........ 0.85%* 0.85% 0.85% 0.85%
Ratio of expenses to average net assets
excluding fee waivers....................... 1.00%* 0.85% 0.85% 0.85%
Ratio of net investment income to average net
assets...................................... 3.25%* 3.47% 4.14% 3.87%
Ratio of net investment income to average net
assets excluding fee waivers................ 3.10%* 3.47% 4.14% 3.87%
Portfolio turnover rate.......................... 33% 89% 46% 36%
Average commission rate(A)....................... 0.0647 0.0640 n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized.
(3) Commenced operations on February 1, 1994.
12
<PAGE> 22
GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, -------------------------------
1997 1997 1996 1995(3)
------------ ------- ------- -------
<S> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period............. $ 9.44 $ 9.94 $ 9.07 $ 10.00
------------ ------- ------- -------
Investment Activities
Net investment income.......................... 0.268 0.524 0.556 0.491
Net realized and unrealized gain (loss) on
investments................................. 0.203 (0.505) 0.870 (0.950)
------------ ------- ------- -------
Distributions
Net investment income.......................... (0.269) (0.520) (0.556) (0.475)
Capital gains.................................. -- -- -- --
------------ ------- ------- -------
Net Asset Value, End of Period................... $ 9.64 $ 9.44 $ 9.94 $ 9.07
========== ======= ======= =======
Total Return..................................... 5.08% 0.34% 16.16% (4.49)%
Net assets, end of period (000)................ $ 57,256 $51,382 $46,725 $32,178
Ratio of expenses to average net assets........ 0.73%* 0.74% 0.75% 0.75%
Ratio of expenses to average net assets
excluding fee waivers....................... 0.88%* 0.74% 0.75% 0.75%
Ratio of net investment income to average net
assets...................................... 5.79%* 5.59% 5.89% 5.46%
Ratio of net investment income to average net
assets excluding fee waivers................ 5.64%* 5.59% 5.89% 5.46%
Portfolio turnover rate.......................... 40% 186% 239% 184%
Average commission rate(A)....................... n/a n/a n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized
(3) Commenced operations on February 1, 1994.
13
<PAGE> 23
BALANCED FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, ------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of
Period....................... $ 15.04 $ 13.92 $ 11.45 $ 12.21 $ 11.50 $ 11.15
------------ -------- -------- -------- -------- --------
Investment Activities
Net investment income........ 0.228 0.422 0.415 0.390 0.394 0.413
Net realized and unrealized
gain (loss) on
investments............... 1.712 1.699 2.831 (0.756) 0.928 0.543
------------ -------- -------- -------- -------- --------
Distributions
Net investment income........ (0.228) (0.409) (0.417) (0.391) (0.391) (0.408)
Capital gains................ (0.290) (0.595) (0.362) (0.003) (0.221) (0.198)
------------ -------- -------- -------- -------- --------
Net Asset Value, End of
Period....................... $ 16.46 $ 15.04 $ 13.92 $ 11.45 $ 12.21 $ 11.50
========== ======== ======== ======== ======== ========
Total Return................... 13.35% 16.30% 28.93% (2.95)% 11.79% 8.86%
Net assets, end of period
(000)..................... $400,442 $307,531 $233,878 $167,434 $152,189 $100,474
Ratio of expenses to average
net assets................ 0.83%* 0.79% 0.80% 0.80% 0.69% 0.69%
Ratio of expenses to average
net assets excluding fee
waivers................... 0.98%* 0.79% 0.80% 0.80% 0.79% 0.79%
Ratio of net investment
income to average net
assets.................... 2.99%* 3.48% 3.20% 3.41% 3.35% 3.72%
Ratio of net investment
income to average net
assets excluding fee
waivers................... 2.85%* 3.48% 3.20% 3.41% 3.25% 3.62%
Portfolio turnover rate........ 10% 27% 26% 48% 49% 68%
Average commission rate(A)..... 0.0581 0.0604 n/a n/a n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized.
14
<PAGE> 24
GROWTH FUND
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
-------------------------------------------------
1997 1996 1995 1994
------------- ------- ------- -------
<S> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period............. $ 12.58 $ 11.87 $ 9.76 $ 10.00
------------- ------- ------- -------
Investment Activities
Net investment income.......................... 0.057 0.120 0.150 0.050
Net realized and unrealized gain (loss) on
investments................................. 5.773 1.350 2.260 (0.240)
------------- ------- ------- -------
Distributions
Net investment income.......................... (0.053) (0.120) (0.150) (0.050)
Capital gains.................................. (0.996) (0.640) (0.150) --
------------- ------- ------- -------
Net Asset Value, end of period................... $ 17.36 $ 12.58 $ 11.87 $ 9.76
========== ======= ======= =======
Total Return..................................... 48.54% 12.72% 25.23% (1.87)%
Net assets, end of period (000)................ $ 297,879 $41,495 $25,096 $15,254
Ratio of expenses to average net assets........ 0.92% 0.93% 0.79% 0.77%
Ratio of expenses to average net assets
excluding fee waivers....................... 1.24% 1.67% 1.92% 2.61%
Ratio of net investment income to average net
assets...................................... 0.39% 0.98% 1.40% 0.86%
Ratio of net investment income to average net
assets excluding fee waivers................ 0.07% 0.23% 0.26% (0.98)%
Portfolio turnover rate.......................... 118% 79% 68% 123%
Average commission rate(A)....................... 0.0598 n/a n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized.
15
<PAGE> 25
VALUE MOMENTUM FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, -------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of
Period..................... $ 21.57 $ 18.05 $ 13.40 $ 11.27 $ 12.76 $ 11.68
------------ -------- -------- -------- -------- -------
Investment Activities
Net investment income...... 0.132 0.436 0.331 0.318 0.292 0.310
Net realized and unrealized
gain (loss) on
investments............. 3.955 4.371 5.063 (0.817) 1.538 1.103
------------ -------- -------- -------- -------- -------
Distributions
Net investment income...... (0.176) (0.438) (0.337) (0.317) (0.290) (0.311)
Capital gains.............. -- (0.848) (0.408) (0.054) (0.030) (0.022)
------------ -------- -------- -------- -------- -------
Net Asset Value, End of
Period..................... $ 25.48 $ 21.57 $ 18.05 $ 13.40 $ 14.27 $ 12.76
========== ======== ======== ======== ======== =======
Total Return................. 19.06% 27.33% 40.88% (3.48)% 14.56% 12.33%
Net assets, end of period
(000)................... $463,433 $317,482 $222,065 $150,138 $140,609 $92,636
Ratio of expenses to
average net assets...... 0.78%* 0.79% 0.80% 0.81% 0.77% 0.68%
Ratio of expenses to
average net assets
excluding fee waivers... 0.94%* 0.79% 0.80% 0.81% 0.79% 0.78%
Ratio of net investment
income to average net
assets.................. 1.65%* 2.26% 2.07% 2.36% 2.19% 2.59%
Ratio of net investment
income to average net
assets excluding fee
waivers................. 1.49%* 2.26% 2.07% 2.36% 2.17% 2.49%
Portfolio turnover rate...... 1% 9% 20% 6% 5% 3%
Average commission rate(A)... 0.0600 0.0590 n/a n/a n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1993.
* Annualized.
16
<PAGE> 26
INCOME EQUITY FUND
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of
Period............................ $ 14.27 $ 13.00 $ 11.92 $ 12.13 $ 11.42
---------- -------- -------- -------- --------
Investment Activities
Net investment income............. 0.372 0.420 0.440 0.390 0.380
Net realized and unrealized gain
(loss) on investments.......... 5.019 1.930 1.500 0.120 0.710
---------- -------- -------- -------- --------
Distributions
Net investment income............. (0.368) (0.420) (0.440) (0.390) (0.380)
Capital gains..................... (1.083) (0.660) (0.420) (0.330) --
---------- -------- -------- -------- --------
Net Asset Value, End of Period...... $ 18.21 $ 14.27 $ 13.00 $ 11.92 $ 12.13
======== ======== ======== ======== ========
Total Return........................ 40.13% 18.25% 17.26% 4.23% 9.75%
Net assets, end of period (000)... $352,725 $262,660 $221,325 $213,328 $104,840
Ratio of expenses to average net
assets......................... 0.99% 1.03% 1.06% 1.06% 1.15%
Ratio of expenses to average net
assets excluding fee waivers... 1.21% 1.27% 1.30% 1.10% 1.21%
Ratio of net investment income to
average net assets............. 2.39% 2.95% 3.59% 3.29% 3.27%
Ratio of net investment income to
average net assets excluding
fee waivers.................... 2.17% 2.71% 3.34% 3.24% 3.22%
Portfolio turnover rate............. 46% 42% 37% 34% 30%
Average commission rate(A).......... 0.0583 n/a n/a n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized.
17
<PAGE> 27
BLUE CHIP GROWTH FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, -------------------------------
1997 1997 1996 1995(7)
------------ ------- ------- -------
<S> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period............. $ 14.50 $ 12.63 $ 9.53 $ 10.00
------------ ------- ------- -------
Investment Activities
Net investment income.......................... 0.081 0.160 0.174 0.167
Net realized and unrealized gain (loss) on
investments................................. 2.818 2.449 3.311 (0.479)
------------ ------- ------- -------
Distributions
Net investment income.......................... (0.078) (0.162) (0.180) (0.158)
Capital gains.................................. -- (0.574) (0.203) --
------------ ------- ------- -------
Net Asset Value, End of Period................... $ 17.32 $ 14.50 $ 12.63 $ 9.53
========== ======= ======= =======
Total Return..................................... 20.08% 21.11% 36.95% (3.10)%
Net assets, end of period (000)................ $ 96,883 $80,682 $63,410 $39,319
Ratio of expenses to average net assets........ 0.80%* 0.84% 0.83% 0.85%
Ratio of expenses to average net assets
excluding fee waivers....................... 0.95%* 0.84% 0.83% 0.85%
Ratio of net investment income to average net
assets...................................... 1.09%* 1.21% 1.54% 1.84%
Ratio of net investment income to average net
assets excluding fee waivers................ 0.94%* 1.21% 1.54% 1.84%
Portfolio turnover rate.......................... 54% 80% 69% 89%
Average commission rate(A)....................... 0.0520 0.0598 n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized.
(7) Commenced operations on February 1, 1994.
18
<PAGE> 28
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED JANUARY 31,
JULY 31, -------------------------------
1997 1997 1996 1995(7)
------------ ------- ------- -------
<S> <C> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period............. $ 13.50 $ 11.94 $ 9.42 $ 10.00
------------ ------- ------- -------
Investment Activities
Net investment income.......................... 0.014 0.008 0.026 0.086
Net realized and unrealized gain (loss) on
investments................................. 0.888 2.556 2.807 (0.535)
------------ ------- ------- -------
Distributions
Net investment income.......................... (0.012) (0.009) (0.033) (0.080)
Capital gains.................................. -- (0.991) (0.277) (0.051)
------------ ------- ------- -------
Net Asset Value, End of Period................... $ 14.39 $ 13.50 $ 11.94 $ 9.42
========== ======= ======= =======
Total Return..................................... 6.70% 21.79% 30.24% (4.48)%
Net assets, end of period (000)................ $ 66,336 $57,156 $41,770 $23,928
Ratio of expenses to average net assets........ 1.01%* 1.04% 1.05% 1.05%
Ratio of expenses to average net assets
excluding fee waivers....................... 1.16%* 1.04% 1.05% 1.05%
Ratio of net investment income to average net
assets...................................... 0.26%* 0.06% 0.22% 1.01%
Ratio of net investment income to average net
assets excluding fee waivers................ 0.10%* 0.06% 0.22% 1.01%
Portfolio turnover rate.......................... 116% 134% 131% 123%
Average commission rate(A)....................... 0.0583 0.0583 n/a n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized.
(7) Commenced operations on February 1, 1994.
19
<PAGE> 29
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FOR THE
SIX MONTH FOR THE YEARS ENDED
PERIOD ENDED JANUARY 31,
JULY 31, -------------------
1997 1997 1996(8)
------------ ------- -------
<S> <C> <C> <C>
FIDUCIARY SHARES
Net Asset Value, Beginning of Period....................... $ 34.52 $ 37.49 $ 33.51
------------ ------- -------
Investment Activities
Net investment income.................................... 0.212 0.220 0.447
Net realized and unrealized gain (loss) on investments... 3.958 (0.965) 4.084
------------ ------- -------
Distributions
Net investment income.................................... -- (0.812) (0.446)
Capital gains............................................ -- (1.416) (0.105)
------------ ------- -------
Net Asset Value, End of Period............................. $ 38.69 $ 34.52 $ 37.49
========== ======= =======
Total Return............................................... 12.08% (2.14)% 13.56%
Net Assets, end of period (000).......................... $ 52,467 $46,373 $44,188
Ratio of expenses to average net assets.................. 1.22%* 1.18% 1.16%
Ratio of expenses to average net assets excluding fee
waivers............................................... 1.41%* 1.28% 1.36%
Ratio of net investment income to average net assets..... 1.16%* 0.60% 1.31%
Ratio of net investment income to average net assets
excluding fee waivers................................. 0.97%* 0.50% 1.11%
Portfolio turnover rate.................................... 18% 29% 21%
Average commission rate(A)................................. 0.0250 0.0235 n/a
</TABLE>
- ---------------
Amounts designated as "--" are either $0 or have been rounded to $0.
(A) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Annualized.
(8) Commenced operations on February 1, 1995.
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<PAGE> 30
FUND DESCRIPTION
HighMark is an open-end, diversified, registered investment company that
currently offers units of beneficial interest ("Shares") in sixteen separate
investment portfolios ("Funds"). All of the Funds are advised by Pacific
Alliance, a division of Union Bank of California, N.A. (the "Adviser").
Shareholders may purchase Shares of selected Funds through three separate
classes (Class A and Class B Shares (collectively, the "Retail Shares") and
Fiduciary Shares). 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 Investments Distribution Co., Oaks,
Pennsylvania 19456, or by calling 1-800-433-6884.
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 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 CONVERTIBLE SECURITIES FUND seeks a high level of current income and
capital appreciation by investing in convertible securities.
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.
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<PAGE> 31
The BALANCED FUND seeks capital appreciation and income. Conservation of
capital is a secondary consideration.
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 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.
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
22
<PAGE> 32
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, 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
23
<PAGE> 33
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.
International Equity Fund
Under normal market conditions, at least 65% of the International Equity
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 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 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
- ---------------
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.
24
<PAGE> 34
securities of issuers in a single country or region and shares of U.S.
registered or foreign registered open-end management investment companies.
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 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 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").
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
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<PAGE> 35
recognized statistical rating organization ("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. 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 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.
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
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<PAGE> 36
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.
Balanced Fund
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,
ADRs, preferred stocks, securities (including debt securities) convertible into
or exercisable for common stocks and 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 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 or, if unrated, which the Advisor deems to be
attractive opportunities and of comparable quality.
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.
California Intermediate Tax-Free Bond Fund
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
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<PAGE> 37
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 investment grade by a nationally recognized
rating agency or deemed by the Advisor to be of comparable quality at the time
of purchase and which pay interest that is not treated as a preference item for
purposes of the federal alternative minimum tax. 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. Under normal market conditions, the dollar-weighted average
portfolio maturity of the Fund is expected to 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.
GENERAL
Money Market Instruments
Under normal market conditions, money market instruments may comprise up to
35% of the total assets of each Equity Fund, and the International Equity,
Convertible Securities, Intermediate-Term Bond and Bond Funds, up to 25% of the
Balanced Fund's total assets and up to 20% of the Government Securities Fund's
total assets. When market conditions indicate a temporary "defensive" investment
strategy as determined by the Advisor, a Fund may invest more than the above
stated amount of its total assets in money market instruments, and the
California Intermediate Tax-Free Bond Fund may invest more than 20% of its total
assets in municipal obligations of other states or taxable money market
instruments including repurchase agreements. 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 (or taxable money market instruments for
the California Intermediate Tax-Free Bond Fund).
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
28
<PAGE> 38
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.
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.
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.
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 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 under normal market conditions. The 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.
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<PAGE> 39
The Funds, other than the California Intermediate Tax-Free Bond Fund, may also
invest in money market instruments, money market funds, and cash.
Each Fund 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 Securities and
Exchange Commission, 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 Equity Fund may write covered calls on its equity securities and enter
into closing transactions with respect to covered call options. The Balanced
Fund may also buy and sell options, futures contracts and options on futures. An
Equity Fund's assets 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 an Equity Fund's net
assets at the time such options are purchased by the Fund. An Equity 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 of these Funds 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 these 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.
The International Equity Fund and the Fixed Income Funds may invest in futures
and options on futures for the purpose of achieving the Fund's objectives and
for adjusting portfolio duration. These 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 the Fund. The
International Equity Fund may enter into index contracts and contracts for
foreign currencies. These Funds 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
To the extent a Fund invests in equity securities, that 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.
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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 fixed income investments in the 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. 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.
As described above, the Funds 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 a 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 a Fund be required to liquidate any such portfolio security where the Fund
would suffer a loss on the sale of such security.
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 a 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, a 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.
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Each of the International Equity Fund, the Fixed Income Funds and 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. 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. 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 Convertible Securities Fund, the Fixed Income Funds and
the Balanced Fund will not hold foreign currency for investment purposes.
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.
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.
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
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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
municipal issuers during the recession resulted in the credit ratings of certain
of their obligations being downgraded significantly by the major rating
agencies.
Risks Associated with Convertible Securities
Convertible securities 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 Funds, other than the Convertible Securities 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.
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.
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.
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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 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 Funds and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the relevant Fund. See FEDERAL TAXATION.
PURCHASE AND REDEMPTION OF SHARES
The Income Equity, Value Momentum, Growth and Balanced Funds are divided into
three classes of Shares, Class A, Class B and Fiduciary. The Emerging Growth,
Intermediate-Term Bond, Bond and California Intermediate Tax-Free Bond Funds are
divided into two classes of Shares, Class A and Fiduciary, and the Blue Chip
Growth, International Equity, Convertible Securities and Government Securities
Funds are only offered in a single class of Shares, Fiduciary. Only the
following investors qualify to purchase a 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. For a description of investors who qualify to
purchase Retail Shares, see the Retail Shares prospectus of the Funds.
Purchases and redemptions of Shares of the Funds may be made on days on which
the New York Stock Exchange is open for business ("Business Days"). The minimum
initial investment is generally $1,000 per Fund and the minimum subsequent
investment is generally only $100 per Fund. For present and retired directors,
officers, and employees (and their spouses and children under the age of 21) of
Union Bank of California, SEI Investments Distribution Co. and their affiliates,
the minimum initial investment is $250 per Fund and the minimum subsequent
investment is $50 per Fund. 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
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HighMark calculated to three decimal places. HighMark reserves the right to
reject a purchase order when the Distributor or 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 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 three classes of Shares (Class A and Class B
Shares (collectively, "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
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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 1-800-433-6884. 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 investment income of each of the Funds is declared and paid monthly,
with the exception of the International Equity Fund which is declared and paid
periodically, 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 in writing 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
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 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.
For each Fund, other than the California Intermediate Tax-Free Bond Fund,
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. With respect to the Equity Funds and the
Balanced Fund, 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. A corporate Shareholder will only be
eligible to claim a dividends received deduction with respect
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to a dividend from a Fund if the corporate Shareholder held its Shares on the
ex-dividend date and for at least 45 other days during the 90-day period
surrounding the ex-dividend date. Distributions by the Fund of net gains on
capital assets held for more than one year but not more than 18 months and of
net gains on capital assets held for more than 18 months are taxable to
Shareholders as such, 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 distributions on the Shares.
Because all of the California Intermediate Tax-Free Bond 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 California Intermediate Tax-Free Bond 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" of a facility financed through certain
private activity bonds or a "related person" to such a user under the Code.
Under the Code, interest on indebtedness incurred or continued by a
Shareholder to purchase or carry Shares of the California Intermediate Tax-Free
Bond 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 Intermediate
Tax-Free Bond 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 of the California
Intermediate Tax-Free Bond Fund 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 Intermediate Tax-Free Bond 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 Intermediate Tax-Free Bond 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.
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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 Intermediate Tax-Free Bond 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 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. If at the end of a 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 in respect of foreign
securities the Fund has held for at least the minimum period specified in the
Code 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 such taxes,
but may then generally be entitled to deduct their share of such taxes.
Alternatively, such Shareholders who hold Shares (without protection from risk
of loss) on the ex-dividend date and for at least 15 other days during the
30-day period surrounding the ex-dividend date will be entitled to claim a
foreign tax credit for their share of these taxes. The Funds, other than the
International Equity Fund, do 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 foreign 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
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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.
California Taxes
The California Intermediate Tax-Free Bond Fund intends to qualify to pay
dividends to Shareholders that are exempt from California personal income tax
("California exempt-interest dividends"). The California Intermediate Tax-Free
Bond 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 California Intermediate Tax-Free Bond 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 California
Intermediate Tax-Free Bond 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
California Intermediate Tax-Free Bond Fund's earnings and profits.
Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of Shares of the California Intermediate Tax-Free Bond Fund
will not be deductible for California personal income tax purposes if the Fund
distributes California exempt-interest dividends.
Additional information regarding California taxes is contained in the
Statement of Additional Information. However, the foregoing and the California
tax information in the Statement of Additional Information 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
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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, 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 Fixed
Income Funds and 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, from the Growth Fund, Value
Momentum Fund, Income Equity Fund, Convertible Securities Fund and 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,
from the Emerging Growth Fund, computed daily and paid monthly, at the annual
rate of eighty one-hundredths of one percent (.80%) of the Fund's average daily
net assets, and 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. 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. Prior to April 28, 1997, the Value Momentum Fund, the
Blue Chip Growth Fund, the Emerging Growth Fund, the International Equity Fund,
the Convertible Securities Fund, the Intermediate-Term Bond Fund, the Government
Securities Fund, the Balanced Fund, and the California Intermediate Tax-Free
Bond Fund did not yet operate as HighMark Funds. Fee and other information
presented regarding these Funds after that time only represents their operation
as HighMark Funds. Prior to operating as HighMark Funds, these Funds had a
fiscal year end of January 31.
During HighMark's fiscal year ended July 31, 1997, Union Bank of California
received investment advisory fees from the Income Equity Fund aggregating 0.60%
of the Fund's average daily net assets, from the Value Momentum Fund (February
1, 1997 through July 31, 1997) aggregating 0.60% of the Fund's average daily net
assets, from the Blue Chip Growth Fund (February 1, 1997 through July 31, 1997)
aggregating 0.60% of the Fund's average daily net assets, from the Growth Fund
aggregating 0.60% of the Fund's average daily net assets, from the Emerging
Growth Fund (February 1, 1997 through July 31, 1997) aggregating 0.80% of the
Fund's average daily net assets, from the Income Equity Fund aggregating 0.60%
of the Fund's average daily net assets, from the International Equity Fund
(February 1, 1997 through July 31, 1997) aggregating 0.91% of
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the Fund's average daily net assets, from the Convertible Securities Fund
(February 1, 1997 through July 31, 1997) aggregating 0.60% of the Fund's average
daily net assets, from the Intermediate-Term Bond Fund (February 1, 1997 through
July 31, 1997) aggregating 0.50% of the Fund's average daily net assets, from
the Bond Fund aggregating 0.50% of the Fund's average daily net assets, from the
Government Securities Fund (February 1, 1997 through July 31, 1997) aggregating
0.50% of the Fund's average daily net assets, from the Balanced Fund (February
1, 1997 through July 31, 1997) aggregating 0.60% of the Fund's average daily net
assets, and from the California Intermediate Tax-Free Bond Fund (February 1,
1997 through July 31, 1997) aggregating 0.00% of the Fund's average daily net
assets. For the period February 1, 1996 through January 31, 1997, Union Bank of
California received investment advisory fees from the Value Momentum Fund
aggregating 0.60% of the Fund's average daily net assets, from the Blue Chip
Growth Fund aggregating 0.60% of the Fund's average daily net assets, from the
Emerging Growth Fund aggregating 0.80% of the Fund's average daily net assets,
from the International Equity Fund aggregating 0.95% of the Fund's average daily
net assets, from the Convertible Securities Fund aggregating 0.60% of the Fund's
average daily net assets, from the Intermediate-Term Bond Fund aggregating 0.50%
of the Fund's average daily net assets, from the Government Securities Fund
aggregating 0.50% of the Fund's average daily net assets, from the Balanced Fund
aggregating 0.60% of the Fund's average daily net assets, and from the
California Intermediate Tax-Free Bond Fund aggregating 0.00% 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, 1997,
Union BanCal Corporation and its subsidiaries had approximately $31 billion in
consolidated assets. Pacific Alliance, a division of Union Bank of California's
Trust and Investment Management Group, as of September 30, 1997, had
approximately $14.6 billion of assets under management. The Advisor, with a team
of approximately 43 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 Funds are made by a team of investment
professionals, all of whom take an active part in the decision making process.
Team leaders for each Fund are as follows:
Growth Fund--Scott Chapman. Mr. Chapman, Vice President of the Advisor, has
served as team leader since 1993. He has been with Union Bank of California,
N.A., and its predecessor, The Bank of California, N.A., since 1991.
Value Momentum Fund--Richard Earnest. Mr. Earnest, Senior Vice President of
the Advisor, has served as team leader of the Fund since its inception on
February 1, 1991. He has been with Union Bank of California, N.A., and its
predecessor, Union Bank, since 1964.
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Income Equity Fund--Thomas Arrington. Mr. Arrington, Vice President of the
Advisor, has served as team leader since 1994. He has been with Union Bank of
California, N.A., and its predecessor, The Bank of California, N.A., since 1990.
Bond Fund and Intermediate-Term Bond Fund--E. Jack Montgomery. Mr. Montgomery,
Vice President of the Advisor, has served as team leader for the Bond Fund since
1994. He has served as the team leader for the Intermediate-Term Bond Fund since
1996. He has been with Union Bank of California, N.A. and The Bank of
California, N.A. since 1994. From 1990 to 1994, Mr. Montgomery was employed by
the San Francisco Employees' Retirement System.
Balanced Fund--Carl J. Colombo. Mr. Colombo, Vice President of the Advisor,
has served as team leader of the Fund since its inception on February 1, 1991.
He has been with Union Bank of California, N.A., and its predecessor, Union
Bank, since 1985.
California Intermediate Tax-Free Bond Fund--Robert Bigelow. Mr. Bigelow, Vice
President of the Advisor, has served as team leader since 1994. He has been with
Union Bank of California, N.A. and its predecessor, Union Bank since 1994. From
1986 to 1994, Mr. Bigelow served as a portfolio manager at City National Bank.
The Sub-Advisors
The Advisor and Bank of Tokyo-Mitsubishi Trust Company ("BTMT") have entered
into an investment subadvisory agreement relating to the Emerging Growth, Blue
Chip Growth, Convertible Securities and Government Securities Funds (the
"Investment Sub-Advisory Agreement"). Under the Investment Sub-Advisory
Agreement, BTMT 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. BTMT 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.
BTMT 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 September 30, 1997, BTMT managed $750 million in
individual portfolios and collective funds.
BTMT 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, .30% of the average daily net assets of the Blue Chip
Growth and Convertible Securities Fund and .20% of the average daily net assets
of the Government Securities Fund. For the fiscal year ended July 31, 1997
(beginning February 1, 1997), BTMT received sub-investment advisory fees from
the Advisor for the Emerging Growth Fund aggregating 0.50% of the Fund's average
daily net assets, for the Blue Chip Growth Fund aggregating 0.30% of the Fund's
average
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daily net assets, for the Convertible Securities Fund aggregating 0.30% of the
Fund's average daily net assets, and for the Government Securities Fund
aggregating 0.20% of the Fund's average daily net assets. For the period
February 1, 1996 through January 31, 1997, BTMT received sub-investment advisory
fees for the Emerging Growth Fund aggregating 0.50% of the Fund's average daily
net assets, for the Blue Chip Growth Fund aggregating 0.30% of the Fund's
average daily net assets, for the Convertible Growth Fund aggregating 0.30% of
the Fund's average daily net assets, and for the Government Securities Fund
aggregating 0.20% of the Fund's average daily net assets.
Seth E. Shalov serves as portfolio manager of the Emerging Growth Fund. Mr.
Shalov has been a Senior Portfolio Manager with BTMT and its predecessor, Bank
of Tokyo Trust Company, since 1987.
Robert Freund serves as portfolio manager for the Convertible Securities Fund.
Mr. Freund has been an analyst and portfolio manager with BTMT and its
predecessor, Bank of Tokyo Trust Company, since 1992.
Edmond Y. Chin serves as portfolio manager of the Blue Chip Growth Fund. Mr.
Chin has been a portfolio manager with the Sub-Advisor and its predecessor, Bank
of Tokyo Trust Company, since 1997. From 1985 to 1997, Mr. Chin served as an
equity analyst and portfolio manager at Continental Asset Management.
Stephen W. Blocklin serves as portfolio manager of the Government Securities
Fund. Mr. Blocklin has been with BTMT and its predecessor, Bank of Tokyo Trust
Company, since 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 Advisor and Tokyo-Mitsubishi Asset Management (U.K.), Ltd. ("TMAM"), have
entered into an investment sub-advisory agreement relating to the International
Equity Fund (the "Investment Sub-Advisory Agreement"). Under the Investment
SubAdvisory Agreement, TMAM 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, TMAM provides active global investment services for
segregated funds and specialist fund management.
TMAM 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 International Equity Fund. For the fiscal year ended July 31, 1997
(beginning February 1, 1997), TMAM received sub-investment advisory fees from
the Advisor for the International Equity Fund aggregating 0.30% of the Fund's
average daily net assets. For the period February 1, 1996 through January 31,
1997, TMAM received sub-investment advisory fees for the Fund aggregating 0.30%
of the Fund's average daily net assets.
In March 1997, Andrew Jenner assumed the responsibilities of portfolio manager
for the International Equity Fund. Mr. Jenner has been with TMAM since September
1996. From 1987 to 1996, Mr. Jenner was employed by NatWest Investment
Management, most recently as Director of International Equities.
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Administrator
SEI Investment 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. A description of the
services performed by Union Bank of California, N.A., 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 each class 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 0.01% of the average
daily net assets for the Bond Fund, 0.03% of the average daily net assets of the
Intermediate-Term Bond Fund, 0.10% of the average daily net assets of the
Balanced Fund, Income Equity Fund, and Growth Fund, and 0.00% of the average
daily net assets of each of the other Funds.
Distributor
SEI Investments Distribution Co. (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
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 and sub-accounting services
on behalf of each Fund, for which it receives compensation from SEI Investment
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.
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 open for investment 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. 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 three classes of
Shares in selected Funds, Shares of such Funds have been divided into three
classes, designated Class A and Class B Shares (collectively, "Retail Shares")
and Fiduciary Shares. For information regarding the Retail Shares of the Funds,
interested persons may contact the Distributor for a prospectus at
1-800-433-6884.
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As of November 17, 1997, HighMark believes that Union Bank of California, N.A.
was the Shareholder of record of 94.45% of the Fiduciary Shares of the Growth
Fund, 75.17% of the Fiduciary Shares of the Income Equity Fund, 81.50% of the
Fiduciary Shares of the Balanced Fund, 92.15% of the Fiduciary Shares of the
Bond Fund, 76.42% of the Fiduciary Shares of the Intermediate-Term Bond Fund,
substantially all of the Fiduciary Shares of the California Intermediate
Tax-Free Bond Fund, 78.51% of the Fiduciary Shares of the Value Momentum Fund,
34.66% of the Fiduciary Shares of the Blue Chip Growth Fund, 50.63% of the
Fiduciary Shares of the Emerging Growth Fund, 99.36% of the Fiduciary Shares of
the International Equity Fund. As of November 17, 1997, HighMark believes that
Bank of Tokyo Trust Company was the shareholder of record of 81.34% of the
Fiduciary Shares of the Government Securities Fund, 64.85% of the Fiduciary
Shares of the Blue Chip Growth Fund, and 48.57% of the Fiduciary Shares of the
Emerging Growth 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 each 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 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.
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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 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 Investments Distribution Co.,
Oaks, Pennsylvania 19456, or by calling toll free 1-800-433-6884.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark
Funds.
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.
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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 Equity 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
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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 International Equity 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.
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
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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.
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
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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).
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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 refunding outstanding obligations,
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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 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 International Equity 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.
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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
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
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<PAGE> 64
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.
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
fixed income security at a fixed price prior to maturity. The underlying fixed
income 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 fixed income 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 fixed income
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> 65
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.
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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> 67
HIGHMARK FUNDS
For further information
call 1-800-433-6884
or visit our Web site at
www.highmark-funds.com
INVESTMENT ADVISOR
Pacific Alliance,
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
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 Investments Fund Resources and
SEI Investments Distribution Co.
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105
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
<PAGE> 68
HighMark Funds Prospectus
INVESTMENT ADVISOR
Pacific Alliance
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, NY 10116
SUB-ADVISOR
Tokyo-Mitsubishi Asset Management (U.K.) Ltd.
12-15 Finsbury Circus
London EC2M7BT
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Investments Fund Resources and
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, PA 19456
LEGAL COUNSEL
Ropes & Gray
For further information call One Franklin Square
1-800-433-6884 1301 K Street, N.W., Suite 800 East
or visit our web site at Washington, D.C. 20005
www.highmark-funds.com
AUDITORS
Deloitte & Touche LLP
[HIGHMARK FUNDS logo] 50 Fremont Street
San Francisco, CA 94105-2230
84823-A (11/97)
<PAGE> 1
EXHIBIT (17)(b)
Statement of Additional Information for HighMark Funds
<PAGE> 2
HIGHMARK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 28, 1997
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Prospectuses of the HighMark Funds and the
HighMark Money Market Funds, each of which is dated November 28, 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 Investments Distribution Co., at 1 Freedom Valley Drive, Oaks,
Pennsylvania, 19456, or by telephoning toll free 1-800-433-6884. Capitalized
terms used but not defined herein have the same meanings as set forth in the
Prospectuses.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Voting Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Valuation of the Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Valuation of the Equity Funds and the Fixed Income Funds . . . . . . . . . . . . . . . . . . . . . . . . 40
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Additional Federal Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Additional Tax Information Concerning The California Tax-Free Money
Market Fund and The California Intermediate Tax-Free Bond Fund . . . . . . . . . . . . . . . . . 44
Federal Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
California Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
-i-
<PAGE> 4
<TABLE>
<S> <C>
Foreign Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
MANAGEMENT OF HIGHMARK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Investment Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
The Sub-Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Glass-Steagall Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Administrator and Sub-Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Shareholder Services Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
The Distribution Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Transfer Agent and Custodian Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Description of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Shareholder and Trustee Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
The Reorganization of the IRA Fund and HighMark . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Calculation of Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
</TABLE>
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<PAGE> 5
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. 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 Government Securities Fund, and the
HighMark California Intermediate Tax-Free Bond Fund commenced operations in
HighMark on April 28, 1997, and the HighMark Convertible Securities Fund
commenced operations in HighMark on May 1, 1997. 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 HighMark 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 three classes of Shares (designated Class A and Class B Shares
(collectively "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 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
<PAGE> 6
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 certificates of deposit and time
deposits will be limited to those (a) of domestic and foreign banks and savings
and loan associations which, at the time of investment, have total assets of
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<PAGE> 7
$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 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 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
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<PAGE> 8
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 33 1/3% 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.
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.
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<PAGE> 9
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 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.
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<PAGE> 10
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 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
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<PAGE> 11
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.
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
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<PAGE> 12
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 rating
organization ("NRSRO") or are determined by the Advisor to be of comparable
quality. The California Tax-Free Money Market Fund 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
-8-
<PAGE> 13
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 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
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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 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
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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, 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.
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<PAGE> 16
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, as of the date
of this Statement of Additional Information, rating agencies, underwriters and
investors appear to have lingering concerns about California's creditworthiness.
Major credit rating agencies have cited, among other things, concerns about
California's ability to withstand another economic downturn, fiscal problems at
the county level, and concern about California's ability to pass a true balanced
budget in light of federal funding cuts, political influences and structural
impediments under the California constitution (such as strict property tax
limits and mandated school funding levels).
The recession severely affected State revenues while the State's
health, welfare and education costs were increasing. As a result, throughout
the first half of the decade, California had a period of budget imbalance and
multibillion dollar year-end deficits. However, in recent years, California
appears to have ended its fiscal years with a surplus in the general fund. 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 well 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 did not need to use such "cross-year" borrowing during the
1996-97 fiscal year and does not anticipate that it will need to use such
borrowing during the 1997-98 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.
Article XIII B of the California Constitution, originally adopted in
1979, 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,"
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<PAGE> 17
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. In June 1996, the
investors in such overdue notes were paid and the Orange County bankruptcy
ended. However, the Orange County bankruptcy and such default have had a serious
effect upon the market for California municipal obligations.
Numerous factors may adversely affect the State and municipal
economies. For example, limits on federal funding (such as those contemplated by
welfare reform enacted in 1996) could result in the loss of billions of dollars
in federal assistance otherwise available to the State.
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 four-county area. The possibility
exists that another natural disaster such as an 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,
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<PAGE> 18
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, 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.
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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. 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 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
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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.
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.
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<PAGE> 21
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 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
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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
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
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<PAGE> 23
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.
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 Options. 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
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<PAGE> 24
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 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
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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.
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
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<PAGE> 26
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.
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
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<PAGE> 27
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 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
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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, 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
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<PAGE> 29
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.
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
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<PAGE> 30
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.
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.
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<PAGE> 31
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.
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
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<PAGE> 32
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.
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
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<PAGE> 33
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.
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,
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<PAGE> 34
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 (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
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<PAGE> 35
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. 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.
5. 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);
6. 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).
7. 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 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 5. 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.
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 company's outstanding
voting securities, (ii) securities issued by the acquired company
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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
EACH OF THE EQUITY AND FIXED INCOME FUNDS, OTHER THAN THE CONVERTIBLE SECURITIES
FUND AND THE CALIFORNIA INTERMEDIATE TAX-FREE BOND 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, with respect to the International Equity
Fund only, repurchase agreements involving such securities) 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). With respect to the International Equity
Fund, 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
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 in accordance with its investment objective and policies.
THE CALIFORNIA INTERMEDIATE TAX-FREE BOND 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; and
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 CONVERTIBLE SECURITIES 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 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 Fund's total assets at the
time of its borrowing. The Fund will not invest in additional
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<PAGE> 39
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.
13. 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;
14. 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.
15. 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.
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<PAGE> 40
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.
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
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<PAGE> 41
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 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
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<PAGE> 42
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.
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.
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<PAGE> 43
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 for each of the last two fiscal
years, and is expected to remain zero percent. For HighMark's fiscal years
ended July 31, 1997 and July 31, 1996, each Funds' portfolio turnover rate was:
118% and 79% for the HighMark Growth Fund; 46% and 42% for the HighMark Income
Equity Fund; and 14% and 21% for the HighMark Bond Fund. For each of the
following Funds, the portfolio turnover rate for the six-month period ended
July 31, 1997 and the prior two years ended January 31, 1997 and January 31,
1996 was: __%, __% and __% for the HighMark Balanced Fund (fixed income
portion); __%, __% and __% for the HighMark Balanced Fund (equity portion); 1%,
9% and 20% for the HighMark Value Momentum Fund; 54%, 80% and 69% for the
HighMark Blue Chip Growth Fund; 116%, 134% and 131% for the HighMark Emerging
Growth Fund; 18%, 29% and 21% for the HighMark International Equity Fund; 58%,
106% and 147% for the HighMark Intermediate-Term Bond Fund; 40%, 186% and 239%
for the HighMark Government Securities Fund; 33%, 89% and 46% for the HighMark
Convertible Securities Fund; and 5%, 6% and 30% for the HighMark California
Intermediate Tax-Free Bond Fund. 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.
VALUATION
As disclosed in the Prospectuses, each Money Market 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) on days on
which both the New York Stock Exchange and the Federal Reserve wire system are
open for business ("Business Days"). As disclosed in the Prospectuses, each
Equity Fund's and Fixed Income Fund's net asset value per share for
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<PAGE> 44
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) on days
on which the New York Stock Exchange is open for business (also "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
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
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<PAGE> 45
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 Money Market Funds may be
made on days on which both the New York Stock Exchange and the Federal Reserve
wire systems are open for business. Purchases and redemptions of shares of the
Equity Funds and Fixed Income Funds may be made on days on which the New York
Stock Exchange is 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 limited to gains from options, futures, or forward
contracts) derived with respect to its business of investing in such stock,
securities, or currencies; (b)
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<PAGE> 46
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 (c)
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.
In addition, until the start of a Fund's first tax year beginning after
August 5, 1997, each Fund must 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. This 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 constructive
sales, 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.
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
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<PAGE> 47
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 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
-43-
<PAGE> 48
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. Neither 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 (at the close of each
quarter of the Fund's taxable year) 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.
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. However, each
such Shareholder is advised to consult his or her tax advisor with respect to
whether exempt-interest
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<PAGE> 49
dividends would remain excludable if such Shareholder were treated as a
"substantial user" or a "related person" to such user 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.
In addition, exempt-interest dividends may be taxable for federal alternative
minimum tax purposes and for state and local purposes.
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.
Distributions designated by the California Tax-Free Money Market Fund
and the California Intermediate Tax-Free Bond Fund as deriving from net gains on
securities held for more than one year but not more than 18 months and from net
gains on securities held for more than 18 months will be taxable to a Fund
Shareholder as such, regardless of how long a time the Shareholder held the
Fund's Shares. 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
disallowed to the extent of any exempt-interest dividends paid thereon, and any
remaining 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 a 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 as ordinary income 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 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.
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<PAGE> 50
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 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
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<PAGE> 51
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 at the end of a Fund's fiscal year more
than 50% of the value of its total assets represents securities of foreign
corporations, the Fund will be eligible to make an election permitted by the
Code to treat any foreign taxes paid by it on securities it has held for at
least the minimum period specified in the Code as having been paid directly by
the Fund's Shareholders in connection with the Fund's dividends received by
them. In this case, Shareholders generally will be required to include in U.S.
taxable income their pro rata share of such taxes, and those Shareholders who
are U.S. citizens, U.S. corporations and, in some cases, U.S. residents will be
entitled to deduct their share of such taxes. Alternatively, such Shareholders
who hold Fund Shares (without protection from risk of loss) on the ex-dividend
date and for at least 15 other days during the 30-day period surrounding the
ex-dividend date will be entitled to claim a foreign tax credit for their share
of these taxes.
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<PAGE> 52
If a Fund makes this 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 six Trustees, all 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>
Thomas L. Braje Trustee Retired October, 1996. Prior to October
1323 Encina Drive 1996, Vice President and Chief Financial
Milbrae, CA 94030 Officer of Bio Rad Laboratories, Inc.
David A. Goldfarb Trustee Partner, Goldfarb & Simens, Certified
111 Pine Street Public Accountants.
18th Floor
San Francisco, CA 94111
Joseph C. Jaeger Trustee Senior Vice President and Chief
100 First Street Financial Officer, Delta Dental Plan of
San Francisco, CA 94105 California.
Frederick J. Long Trustee President and Chief Executive Officer,
520 Pike Street Pettit-Morry Co. and Acordia Northwest
20th Floor Inc. (each an insurance brokerage firm).
Seattle, WA 98101
</TABLE>
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<PAGE> 53
<TABLE>
<S> <C> <C>
Paul L. Smith Trustee Member of the Board of Trustees
422 Gordon Terrace of Stepstone Funds 2/1991 - 4/1997;
Pasadena, CA 91105 Retired. Prior to retirement Director of Union
Bank; Vice Chairman and member of the Office
of the Chief Executive of Security
Pacific Corporation; and Former Director
and officer of numerous subsidiaries of
Security Pacific Corporation and
Security Pacific National Bank.
William R. Howell Trustee Chairman of the Board of Trustees
73-350 Calliandra Avenue of Stepstone Funds 1991 - 4/1997;
Palm Desert, CA 92260 Director, Current Income Shares, Inc.
</TABLE>
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<PAGE> 54
<TABLE>
<S> <C> <C>
Michael L. Noel Member Advisory Board Member of the Board of Trustees
1107 Pine Country Court of Stepstone Funds 1990-4/1997.
Prescott, AZ 86303-6405
</TABLE>
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<PAGE> 55
<TABLE>
<S> <C> <C>
Robert M. Whitler Member Advisory Board Retired. Prior to retirement Executive Vice
336 Running Spring Drive President and head of Union Bank's Financial
Palm Desert, CA 92211-3240 Management and Trust Services Group.
David G. Lee President and Chief Executive Senior Vice President of the
530 East Swedesford Road Officer Administrator and Distributor, employee
Wayne, PA 19087 since 1993. Prior to 1993, President
for GW Sierra Trust Funds before 1991.
Robert DellaCroce Controller and Chief CPA, Director of Fund Resources,
530 East Swedesford Road Financial Officer employee since 1994. Prior to 1994,
Wayne, PA 19087 senior manager for Arthur Andersen.
Kevin P. Robins Vice President and Secretary Employee since 1992. Prior to 1992,
1 Freedom Valley Drive of the Administrator and associate with Morgan Lewis & Bockius
Oaks, PA 19456 Distributor since 1988.
Kathryn L. Stanton Vice President and Assistant Employee since 1994. Prior to 1992,
1 Freedom Valley Drive Secretary; Secretary associate with Morgan Lewis & Bockius
Oaks, PA 19456 since 1988.
</TABLE>
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<PAGE> 56
<TABLE>
<S> <C> <C>
Sandra K. Orlow Vice President and Assistant Employee since 1983.
1 Freedom Valley Drive Secretary
Oaks, PA 19456
Todd Cipperman Vice President and Assistant Employee since 1995. From 1994 to May
1 Freedom Valley Drive Secretary. 1995, associate with Dewey Ballantine.
Oaks, PA 19456 Prior to 1994, associate with Winston &
Strawn.
Barbara A. Nugent Vice President and Assistant Employee since 1996. Prior to April
1 Freedom Valley Drive Secretary. 1996, associate with Drinker, Biddle &
Oaks, PA 19456 Reath from 1994 to 1996. Prior to 1996,
Assistant Vice President/Administration
for Delaware Service Company, Inc. from
1992 to 1993 and Assistant
Vice-Operations of Delaware Service
Company, Inc. from 1988 to 1992.
</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 SEI Fund Resources and/or SEI Investments
Distribution Co. receives any compensation directly from HighMark for serving
as a Trustee and/or officer. SEI Fund Resources and/or SEI Investments
Distribution Co. receive administration, fund accounting servicing and
distribution fees from each of HighMark's Funds. See "Manager and
Administrator" and "Distributor" below. Messrs. Robins, Cipperman, Cahn,
DellaCroce, and Lee, and Ms. Stanton, Ms. Orlow, and Ms. Nugent are employees
and officers of SEI Investments Company. While SEI Fund Resources is a
distinct legal entity from SEI Investments Distribution Co., SEI Fund Resources
is considered to be an affiliated person of SEI Investments Distribution Co.
under the 1940 Act due to, among other things, the fact that SEI Investments
Distribution Co. and SEI Fund Resources are both controlled by the same
ultimate parent company, SEI Investments Company.
During the fiscal year ended July 31, 1997, fees paid to the
disinterested Trustees for their services as Trustees aggregated $___________.
For the disinterested Trustees, the
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<PAGE> 57
following table sets forth information concerning fees paid and retirement
benefits accrued during the fiscal year ended July 31, 1997:
<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>
Thomas L. Braje None None
David A. Goldfarb None None
William R. Howell None None
Joseph C. Jaeger None None
Frederick J. Long None None
Paul L. Smith None None
Michael L. Noel* None None
Robert M. Whitler* None None
</TABLE>
*Members of Advisory Board.
The Advisory Board to the Board of Trustees is responsible for
providing monitoring services and evaluating issues affecting the HighMark
Funds pursuant to the direction of the Board of Trustees, and consulting and
providing advice to the Board of Trustees regarding those issues.
INVESTMENT ADVISOR
Investment the advisory and management services are provided to each of
HighMark's Funds by Pacific Alliance division, 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
-53-
<PAGE> 58
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 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, 1997, Union Bank of California received the
following investment advisory fees: $666,964 from the Growth Fund (an
additional $121,712 in fees were voluntarily reduced); $1,986,575 from the
Income Equity Fund (an additional $658 in fees were voluntarily reduced);
$1,025,689 from the Balanced Fund; $1,158,537 from the Value Momentum Fund;
$254,574 from the Blue Chip Growth Fund; $229,671 from the Emerging Growth
Fund; $218,664 from the International Equity Fund (an additional $9,751 in fees
were voluntarily reduced); $294,637 from the Bond Fund (an additional $188,247
in fees were voluntarily reduced); $388,609 from the Intermediate-Term Bond
Fund; $137,014 from the Government Securities Fund; $67,657 from the
Convertible Securities Fund; $506 from the California Intermediate Tax-Free
Bond Fund (an additional $41,978 in fees were voluntarily reduced); $2,181,976
from the Diversified Money Market Fund; $838,857 from the U.S. Government Money
Market Fund; $1,377,080 from the 100% U.S. Treasury Money Market Fund (an
additional $129,101 in fees were voluntarily reduced); and $124,611 from the
California Tax-Free Money Market Fund (an additional $266,840 in fees were
voluntarily reduced).
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For the fiscal year ended January 31, 1997,(1) Union Bank of
California, N.A. received the following investment advisory fees: $1,630,000
from the Balanced Fund; $1,599,000 from the Value Momentum Fund; $437,000 from
the Blue Chip Growth Fund; $428,000 from the Emerging Growth Fund; $413,000
from the International Equity Fund (an additional $49,000 in fees were
voluntarily waived); $711,000 from the Intermediate-Term Bond Fund; $243,000
from the Government Securities Fund; $116,000 from the Convertible Securities
Fund; $1,000 from the California Intermediate Tax-Free Bond Fund (an additional
$49,000 in fees were voluntarily waived); $2,773,000 from the HighMark
Diversified Money Market Fund; and $126,000 from the California Tax-Free Money
Market Fund (an additional $265,000 in fees were voluntarily waived).(2)
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);
$277,708 from the Bond Fund (an additional $256,561 in fees were voluntarily
reduced); $944,226 from the U.S. Government Money Market Fund; and $1,203,300
from the 100% U.S. Treasury Money Market Obligations Fund.
For the fiscal year ended January 31, 1996, the Adviser's predecessor
received the following investment advisory fees: $1,238,970 from the Balanced
Fund; $1,169,765 from the Value Momentum Fund; $288,983 from the Blue Chip
Growth Fund; $255,357 from the Emerging Growth Fund; $300,582 from the
International Equity Fund (an additional $76,243 in fees were voluntarily
waived); $648,012 from the Intermediate-Term Bond Fund; $185,894 from the
Government Securities Fund; $77,050 from the Convertible Securities Fund;
$3,065 from the California Intermediate Tax-Free Bond Fund (an additional
$61,451 in fees were voluntarily waived); $2,002,595 from the HighMark
Diversified Money Market Fund; and $113,705 from the California Tax-Free Money
Market Fund (an additional $237,331 in fees were voluntarily waived).
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);
$271,150 from the Bond Fund (an additional $250,310 in fees were voluntarily
reduced); $729,094 from the U.S. Government Money Market Fund; and $920,611
from the 100% U.S. Treasury Money Market Fund.
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(1) See "ADDITIONAL INFORMATION - Miscellaneous" for an explanation of the
different fiscal year ends for each Fund.
(2) Each of these Funds is the accounting survivor of a reorganization of
two mutual funds. All fees paid by these Funds (or sub-advisory fees paid with
respect to these Funds) for a fiscal year end of January 31 represent the fees
paid by the accounting survivor prior to the reorganization.
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For the fiscal year ended January 31, 1995, the Adviser's predecessor
received the following investment advisory fees: $1,015,559 from the Balanced
Fund; $923,288 from the Value Momentum Fund; $183,178 from the Blue Chip Growth
Fund; $130,134 from the Emerging Growth Fund; $617,704 from the
Intermediate-Term Bond Fund; $145,821 from the Government Securities Fund;
$44,430 from the Convertible Securities Fund; $60,306 from the California
Intermediate Tax-Free Bond Fund (an additional $48,888 in fees were voluntarily
waived); $1,820,479 from the HighMark Diversified Money Market Fund; and
$99,901 from the California Tax-Free Money Market Fund (an additional $264,000
in fees were voluntarily waived).
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. For the
fiscal year ended July 31, 1997, Bank of Tokyo-Mitsubishi Trust Company
received sub-advisory fees of $127,287 with respect to the Blue Chip Growth
Fund; $143,545 with respect to the Emerging Growth Fund; $54,805 with respect
to the Government Securities Fund; and $33,828 with respect to the Convertible
Securities Fund. For the fiscal years ended January 31, 1997 and 1996, Bank of
Tokyo-Mitsubishi Trust Company, or its predecesor, Bank of Tokyo Trust Company
received sub-advisory fees of: $ and $144,472, respectively, with respect
to the Blue Chip Growth Fund; $ and $159,198, respectively, with respect to
the Emerging Growth Fund; $ and $74,358, respectively, with respect to the
Government Securities Fund; and $ and $37,745, respectively, with respect to
the Convertible Securities 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.
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
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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. For the fiscal year ended
July 31, 1997 and the fiscal year ended January 31, 1997, Tokyo-Mitsubishi
Asset Management (UK) Ltd. received sub-advisory fees of $72,131 and
$_________, respectively, with respect to 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.
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,
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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 Investments Distribution Co., 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 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 3, 1997: $___________________________________________________________ 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.
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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 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 Governors of 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.
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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 Investment Company ("SEI"), was organized as a
Delaware corporation in 1969 and has its principal business offices at 1
Freedom Valley Drive, Oaks, Pennsylvania 19456. 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, Boston 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., TIP 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.
For the fiscal year ended July 31, 1997, for its services as
administrator and expenses assumed pursuant to the Administration Agreement,
the Administrator received the following fees: $204,315 from the Growth Fund
(an additional $22,032 in fees were voluntarily reduced); $605,282 from the
Income Equity Fund (an additional $17,907 in fees were voluntarily reduced);
$255,346 from the Balanced Fund (an additional $29,410 in fees were voluntarily
reduced); $298,886 from the Value Momentum Fund (an additional $22,063 in fees
were voluntarily reduced); $65,190 from the Blue Chip Growth Fund (an
additional $4,683 in fees were voluntarily reduced); $44,080 from the Emerging
Growth Fund (an additional $3,159 in fees were voluntarily reduced); $36,978
from the International Equity Fund (an additional $3,072 in fees were
voluntarily reduced); $101,712 from the Bond Fund (an additional $25,352 in
fees were voluntarily reduced); $118,137 from the Intermediate-Term Bond Fund
(an additional $8,143 in fees were voluntarily reduced); $41,994 from the
Government Securities Fund (an
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additional $2,987 in fees were voluntarily reduced); $17,347 from the
Convertible Securities Fund (an additional $1,252 in fees were voluntarily
reduced); $11,833 from the California Intermediate Tax-Free Bond Fund (an
additional $2,604 in fees were voluntarily reduced); $1,141,740 from the
Diversified Money Market Fund (an additional $88,254 in fees were voluntarily
reduced); $439,141 from the U.S. Government Money Market Fund (an additional
$14,294 in fees were voluntarily reduced); $815,457 from the 100% U.S. Treasury
Money Market Fund (an additional $45,215 in fees were voluntarily reduced); and
$207,633 from the California Tax-Free Money Market Fund (an additional $15,291
in fees were voluntarily reduced).
For the fiscal year ended January 31, 1997, the Administrator received
the following fees: $342,000 from the Balanced Fund; $336,000 from the Value
Momentum Fund; $92,000 from the Blue Chip Growth Fund; $67,000 from the
Emerging Growth Fund; $60,000 from the International Equity Fund; $179,000 from
the Intermediate-Term Bond Fund; $61,000 from the Government Securities Fund;
$24,000 from the Convertible Securities Fund; $13,000 from the California
Intermediate Tax-Free Bond Fund; $1,163,000 from the HighMark Diversified Money
Market Fund; and $164,00 from the California Tax-Free Money Market Fund.
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; $80,226 from the Bond Fund (an
additional $43,205 in fees were voluntarily reduced); $472,171 from the U.S.
Government Money Market Fund; and $601,680 from the 100% U.S. Treasury Money
Market Fund.
For the fiscal year ended January 31, 1996, the Administrator received
the following fees: $276,935 from the Balanced Fund; $261,423 from the Value
Momentum Fund; $288,983 from the Blue Chip Growth Fund; $42,746 from the
Emerging Growth Fund; $54,149 from the International Equity Fund; $173,915 from
the Intermediate-Term Bond Fund; $49,832 from the Government Securities Fund;
$17,197 from the Convertible Securities Fund; $17,405 from the California
Intermediate Tax-Free Bond Fund; $895,102 from the HighMark Diversified Money
Market Fund; and $157,204 from the California Tax-Free Money Market Fund.
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; $78,332 from the Bond Fund (an additional $42,155 in fees were
voluntarily reduced); $364,547 from the U.S. Government Money Market Fund; and
$460,306 from the 100% U.S. Treasury Money Market Fund.
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For the fiscal year ended January 31, 1995, the Administrator received
the following fees: $233,783 from the Balanced Fund; $212,556 from the Value
Momentum Fund; $42,147 from the Blue Chip Growth Fund; $22,454 from the
Emerging Growth Fund; $170,689 from the Intermediate-Term Bond Fund; $40,273
from the Government Securities Fund; $10,223 from the Convertible Securities
Fund; $30,713 from the California Intermediate Tax-Free Bond Fund; $838,165
from the HighMark Diversified Money Market Fund; and $170,054 from the
California Tax-Free Money Market Fund.
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.
SHAREHOLDER SERVICES PLANS
HighMark has adopted two Shareholder Services Plans, one for Fiduciary
Class and Class A Shares, and one for Class B Shares (collectively, the
"Services Plans") 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
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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, pursuant to each plan.
The servicing agreements adopted under the Services Plans (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 Plans, 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 Investments Distribution Co., Securities
and Exchange Commission fees and state fees and expenses, certain insurance
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
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SEI Investments Distribution Co. (the "Distributor"), a wholly-owned
subsidiary of SEI, serves as distributor to HighMark's Funds pursuant to a
distribution agreement dated February 15, 1997 between HighMark and the
Distributor for the Fiduciary Class and Class A Shares, and pursuant to a
distribution agreement dated June 18, 1997 between HighMark and the Distributor
for Class B Shares (collectively, the "Distribution Agreements").
Unless terminated, the Distribution Agreements 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 Agreements or
interested persons (as defined in the 1940 Act) of any party to the
Distribution Agreements, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreements are 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 Agreements terminate in the event of their
assignment, as defined in the 1940 Act.
The Distribution Plans. The operation of the Distribution Plans, the
0.25% fee payable under HighMark's Distribution Plans to which the Class A
Shares of HighMark's Funds are presently subject and the 0.75% fee to which the
Class B Shares are presently subject are described in each such Fund's
Prospectus under "SERVICE ARRANGEMENTS -The Distribution Plans." For the
fiscal year ended July 31, 1997, the Distributor received in respect of the
sale of Retail Shares distribution fees of: $4,737 from the Growth Fund; $8,102
from the Income Equity Fund; $10,350 from the Balanced Fund; $21,773 from the
Value Momentum Fund; $803,701 from the Diversified Money Market Fund; $29,990
from the U.S. Government Money Market Fund; $358,799 from the 100% U.S.
Treasury Money Market Fund; and $229,497 from the California Tax-Free Money
Market Fund.
For the fiscal year ended January 31, 1997, the Distributor received
in respect of the sale of Retail Shares distribution fees of: $21,000 from the
Balanced Fund; $34,000 from the Value Momentum Fund; $962,000 from the
Diversified Money Market Fund; and $300,000 from the California Tax-Free Money
Market Fund.
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 Class A or
Class B 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
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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 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
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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,
1997, incorporated by reference into this Statement of Additional Information
have been audited by Deloitte & Touche LLP, independent accountants, as set
forth in their report also incorporated by reference into this Statement of
Additional Information, 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.
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
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have been divided into three classes of Shares, designated Class A and Class B
Shares (collectively, "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 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
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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 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
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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 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
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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, 1997 (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 4.67% and 4.67%, respectively, and the effective yield of
the Fund's Retail Shares and Fiduciary Shares was 4.78% and 4.78%, respectively;
the yield of the U.S. Government Money Market Fund's Retail Shares and Fiduciary
Shares was 4.54% and 4.56%, respectively, and the effective yield of the Fund's
Retail Shares and Fiduciary Shares was 4.66% and 4.64%, respectively; the yield
of the 100% U.S. Treasury Money Market Fund's Retail Shares and Fiduciary Shares
was 4.45% and 4.45% respectively, and the effective yield of the Fund's Retail
Shares and Fiduciary Shares was 4.55% and 4.55% respectively; and the yield of
the California Tax-Free Money Market Fund's Retail Shares and Fiduciary Shares
was 2.83% and 2.83% respectively, and the effective yield of the Fund's Retail
Shares and Fiduciary Shares was 2.87% and 2.87%, 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, 1997, the yield of the
Diversified Money Market Fund's Retail Shares and Fiduciary Shares was 4.65% and
4.65% respectively, and the effective yield of the Fund's Retail Shares and
Fiduciary Shares was 4.75% and 4.75%, respectively; the yield of the U.S.
Government Money Market Fund's Retail Shares and Fiduciary Shares was 4.52% and
4.54%, respectively, and the effective yield of the Fund's Retail Shares and
Fiduciary Shares was 4.61% and 4.63%, respectively; the yield of the 100% U.S.
Treasury Money Market Fund's Retail Shares and Fiduciary Shares was 4.43% and
4.43%, respectively, and the effective yield of the Fund's Retail Shares and
Fiduciary Shares was 4.52% and 4.52%, respectively; and the yield of the
California Tax- Free Money Market Fund's Retail Shares and Fiduciary Shares was
2.70% and 2.70%, respectively, and the effective yield of the Fund's Retail
Shares and Fiduciary Shares was 2.73% and 2.73%, respectively. The yield of
each Fund's Retail Shares and Fiduciary Shares, respectively, was computed by
determining the percentage
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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, 1997, the tax-equivalent
yield of the California Tax-Free Money Market Fund's Retail Shares and Fiduciary
Shares was 4.69% and 4.69% respectively (using a federal income tax rate of
39.6%), and 5.73% and 5.73% 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 4.75% and
4.75%, respectively (using a federal income tax rate of 39.6%), and 5.81% and
5.81%, 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, 1997, the tax-equivalent
yield of the California Tax-Free Money Market Fund's Retail Shares and Fiduciary
Shares was 4.47% and 4.47%, respectively (using a federal income tax rate of
39.6%), and 5.47% and 5.47%, 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 4.52% and
4.52%, respectively (using a federal income tax rate of 39.6%), and 5.53% and
5.53%, 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, 1997, the one-year average annual total
return of the Diversified Money Market Fund Retail and Fiduciary shares was
4.80%, of the U.S. Government Money Market Fund Retail and Fiduciary shares was
4.65% and 4.67%, respectively, of the 100% U.S. Treasury Money Market Fund
Retail and Fiduciary shares was 4.55%, and of the California Tax-Free Money
Market Fund Retail and Fiduciary shares was 2.76%.
For the period ended July 31, 1997, the five-year average annual total
return of the Diversified Money Market Fund's Retail and
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Fiduciary shares was 3.98%; of the U.S. Government Money Market Fund's Retail
and Fiduciary shares was 3.86%; of the 100% U.S. Treasury Money Market Fund's
Retail and Fiduciary shares was 3.75%; and of the California Tax-Free Money
Market Fund's Retail and Fiduciary shares was 2.58%.
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, 1997, 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 4.35%, 4.17% and 4.08%, respectively. For the period from August 11, 1987
(the date on which the California Tax-Free Money Market Fund commenced
operations) through July 31, 1997, the average annual total return of the
California Tax-Free Money Market Fund Retail and Fiduciary shares was 3.65%.
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 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.
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For the one year period ended July 31, 1997, the average annual total
return of the Retail and Fiduciary Shares of the Income Equity Fund was 11.77%
(12.01% without a load) and 17.04%, respectively, and of the Bond Fund was 1.00%
(2.05% without a load) and 2.03%, respectively. For the five-year period ended
July 31, 1997, the average annual total return of the Retail and Fiduciary
Shares of the Income Equity Fund was 14.07% (15.12% without a load) and 15.08%,
respectively, and of the Bond Fund was 5.69% (6.34% without a load) and 6.49%,
respectively. For the ten year period ended January 31, 1997, the average annual
total return of the Retail and Fiduciary Shares of the Income Equity Fund was
12.16% (12.67% without a load) and 12.66%, respectively. For the ten year period
ended July 31, 1997, the average annual total return of the Retail and Fiduciary
Shares of the Bond Fund was 6.58% (6.91% without a load) and 6.99%,
respectively.
For the one year period ended July 31, 1997, the average annual total
return of the Retail and Fiduciary Shares of the Growth Fund was 19.02% (24.62%
without a load) and 24.84%, respectively and of the Retail and Fiduciary Shares
of the Balanced Fund was 8.86% (14.00% without a load) and 13.89% respectively.
For the period beginning November 18, 1993 (commencement of operations)
and ending July 31, 1997, the average annual total return of the Retail Shares
and Fiduciary Shares of the Growth Fund was 16.58% (18.26% without a load) and
18.24%, respectively.
For the period beginning November 14, 1993 (commencement of operations)
and ending July 31, 1997, the aggregate total return of the Retail Shares and
Fiduciary Shares of the Balanced Fund was 10.55% (12.14% without a load) and
12.36%, 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, 1997, the yield for the Retail
and Fiduciary Shares of the Growth Fund was 0.34% (0.77%
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without a load) and 0.36%, respectively; for the Retail and Fiduciary Shares of
the Income Equity Fund was 2.24% (2.99% without a load) and 2.36%,
respectively; for the Retail and Fiduciary Shares of the Balanced Fund was
3.17% (3.57% without a load) and 3.32%, respectively; and for the Retail and
Fiduciary Shares of the Bond Fund was 5.75% (6.08% without a load) and 5.93%,
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:
(6)
Standardized Yield = 2 [( a-b + 1) - 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 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 period ended July 31, 1997, the annualized distribution rate
(including capital gains and excluding a sales charge) of the Income Equity Fund
was 16.30% for Retail Shares and 16.33% for Fiduciary Shares and of the Bond
Fund was 5.78% for Retail Shares and 5.73% for Fiduciary Shares. For the period
ended July 31, 1997, the distribution rate (excluding capital gains and a sales
charge) of the Income Equity Fund was 2.38% for the Retail and Fiduciary Shares,
and of the Bond Fund was 5.78 for the Retail Shares and 5.73% for the Fiduciary
Shares. For the period ended July 31, 1997, the distribution rate (including
capital gains and a sales charge) of the Income Equity Fund was 15.57% and of
the Bond Fund was 5.61%. For the period ended July 31, 1997 [all figures will
be updated in final SAI] the distribution rate (excluding capital gains and
including a sales charge) of the Income Equity Fund was 2.27% and of the Bond
Fund was 5.61%. The distribution rate for each Fund is determined by dividing
the income distributions and, where the distribution rate includes capital gains
distributions, capital gains
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distributions on a Share of the Fund over a six-month period by the per Share
net asset value of the Fund on the last day of the period and annualized.
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. Because
the Class B Shares had not commenced operations as of January 31, 1997, "Retail
Shares" in the preceding examples refer only to Class A Shares.
MISCELLANEOUS
Prior to April 28, 1997, the California Tax-Free Money Market Fund,
the HighMark 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, and the California Intermediate Tax-Free Bond
Fund and, prior to May 1, 1997, the Convertible Securities Fund did not yet
operate as HighMark Funds. Prior to operating as HighMark Funds, each Fund had
a fiscal year end of January 31 (rather than July 31). Most of the financial
and investment information (e.g., fees paid to service providers and portfolio
turnover) presented in this Statement of Additional Information and in the
Prospectuses is based on a Fund's fiscal year end. Each of these Funds is the
accounting survivor of a reorganization of two mutual funds. All fees paid by
these Funds (or sub-advisory fees paid with respect to these Funds) for a
fiscal year end of January 31 represent the fees paid by the accounting
survivor prior to the reorganization. As a result, for each of these Funds,
and for the Diversified Money Market Fund and the Balanced Fund, for the fiscal
year ended July 31, 1997, the financial and investment information is provided
for the period February 1, 1997 through July 31, 1997. Therefore, for these
Funds for each prior fiscal year, the financial and investment information is
provided for the period February 1 through January 31.
For all of the other Funds information for a fiscal year is provided
for the period August 1 through July 31 (or such other shorter period if the
Fund began operations after August 1).
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
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<PAGE> 80
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 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 1997 Annual Report to Shareholders of HighMark is incorporated
herein by reference. This Report includes audited financial statements for the
fiscal year ended July 31, 1997. 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 17, 1997, 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 17, 1997, HighMark believes that Union Bank
of California was the shareholder of record of 94.45% of the Fiduciary Shares of
the Growth Fund, 75.17% of the Fiduciary Shares of the Income Equity Fund,
81.50% of the Fiduciary Shares of the Balanced Fund, 92.15% of the Fiduciary
Shares of the Bond Fund, 76.42% of the Fiduciary Shares of the Intermediate-Term
Bond Fund, substantially all of the Fiduciary Shares of the California
Intermediate Tax-Free Bond Fund, 17.96% of the Fiduciary Shares of the
Government Securities Fund, 18.68% of the Fiduciary Shares of the Convertible
Securities Fund, 78.51% of the Fiduciary Shares of the Value Momentum Fund,
34.66% of the Fiduciary Shares of the Blue Chip Growth Fund, 50.63% of the
Fiduciary Shares of the
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<PAGE> 81
Emerging Growth Fund, 99.36% of the Fiduciary Shares of the International
Equity Fund, 96.79% of the Fiduciary Shares of the U.S. Government Money
Market Fund, 97.20% of the Fiduciary Shares of the Diversified Money Market
Fund, 94.83% of the Fiduciary Shares of the 100% U.S. Treasury Money Market
Fund and 99.72% of the Fiduciary Shares of the California Tax-Free Money Market
Fund. As of November 17, 1997, HighMark believes that Bank of Tokyo Trust
Company was the shareholder of record of 81.34% of the Fiduciary Shares of the
Government Securities Fund, 81.13% of the Fiduciary Shares of the Convertible
Securities Fund, 64.85% of the Fiduciary Shares of the Blue Chip Growth Fund,
and 48.57% of the Fiduciary Shares of the Emerging Growth Fund.
As of November 17, 1997, HighMark believes that Union Bank of
California had voting power with respect to 43.89% of the Growth Fund Fiduciary
Shares, 23.96% of the Income Equity Fund Fiduciary Shares, 37.63% of the
Balanced Fund Fiduciary Shares, 54.48% of the Bond Fund Fiduciary Shares,
46.88% of the Value Momentum Fund Fiduciary Shares, 86.77% of the
Intermediate-Term Bond Fund Fiduciary Shares, 98.91% of the California
Intermediate Tax-Free Bond Fund Fiduciary Shares, 91.77% of the International
Equity Fund Fiduciary Shares, 13.98% of the Diversified Money Market Fund
Fiduciary Shares, 7.98% of the 100% U.S. Treasury Money Market Fund Fiduciary
Shares, 3.52% of the U.S. Government Money Market Fund Fiduciary Shares and
34.20% of the California Tax-Free Money Market Fund Fiduciary Shares.
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 17, 1997. Because Class B Shares had not commenced operations as
of November 28, 1997, "Retail Shares" in this context refers to Class A Shares
only.
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<PAGE> 82
<TABLE>
<CAPTION>
5% OR MORE BENEFICIAL OWNERS
----------------------------
PERCENT OF
BENEFICIAL
NAME AND ADDRESS OWNERSHIP
- ---------------- ---------
GROWTH FUND
-----------
RETAIL SHARES
-------------
<S> <C> <C>
Post & Co. 9.68%
c/o The Bank of New York
Attn: Bill Sauer - Mutual Funds
Reorganization Department
P.O. Box 1066
Wall Street Station
New York, New York 10268-1066
INCOME EQUITY FUND
------------------
RETAIL SHARES
-------------
NFSC FEBO #0C3-114383 12.19%
Richard W. Killion
c/o Killion Industries
2811 La Mirada Drive
Vista, CA 92083-8407
NFSC FEBO #PC1-039918
The Kendall Jackson FNDTN, Inc.
Wendy Petersen
421 Aviation Blvd.
Santa Rosa, CA 95403-1069
BALANCED FUND
-------------
RETAIL SHARES
-------------
NFSC FEBO #0BP-237345 8.07%
Ty Yeh
Yeh Family Trust
U/A 3/11/91
2048 Studebaker Rd
Long Beach, CA 90815-3539
</TABLE>
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<PAGE> 83
<TABLE>
<S> <C> <C>
FIDUCIARY SHARES
----------------
American Express Trust Company 10.27%
as Agent for NEC Savings and Retirement Plan
Attn: Nancy Jendro Trust Operations
P.O. Box 534
Minneapolis, MN 55440-0534
PFTC: Trustee Nissan Employee Savings Plan 5.61%
Putnam Investments DCPA
Nissan Motor Corporation
Location 31
P.O. Box 9740
Providence, Rhode Island 02940-9740
BOND FUND
---------
RETAIL SHARES
-------------
NFSC FEBO 0C3-032050 11.25%
Frederick V. Betts
800 Financial Center
1215 Fourth Avenue
Seattle, WA 98161
NFSC FEBO 0L5-328391 8.66%
Union Bank of Calif Cust
IRA of James Harris
1212 Christian Valley Road
Auburn, CA 95602
NFSC FEBO #PC1-038210 8.12%
Marla J. Arata
7108 Oakmont Drive
Modesto, CA 95356-9646
</TABLE>
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<PAGE> 84
<TABLE>
<S> <C> <C>
NFSC FEBO 0C3-090565 8.10%
Wallace Allred
Norma Allred
2250 N. Broadway No. 48
Escondido, CA 92026
NFSC FEBO #0C3-159069 6.46%
NFSC/FMTC IRA
FBO Domnic N. Lemos
666 4th Avenue
San Francisco, CA 94118-3911
NFSC FEBO #0L5-911925
Union Bank of Calif Cust
IRA of Bernard White
Rollover
10303 Fig Grove Rd.
Madera, CA 93638-8896
DIVERSIFIED MONEY MARKET FUND
-----------------------------
RETAIL SHARES
-------------
National Financial Services 99.45%
Corporation for the Benefit of Our Customers
Church Street Station
P.O. Box 3908
New York, NY 10008-3908
U.S. GOVERNMENT MONEY MARKET FUND
---------------------------------
RETAIL SHARES
-------------
National Financial Services 93.71%
Corporation for the
Benefit of Our Customers
Church Street Station
P.O. Box 3752
New York, NY 10008-3752
</TABLE>
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<PAGE> 85
<TABLE>
<S> <C> <C>
100% U.S. TREASURY MONEY MARKET FUND
------------------------------------
RETAIL SHARES
-------------
National Financial Services 99.82%
Corporation for the
Benefit of Our Customers
Church Street Station
P.O. Box 3908
New York, NY 10008-3908
CALIFORNIA TAX-FREE MONEY MARKET FUND
-------------------------------------
RETAIL SHARES
-------------
National Financial Services 99.41%
Corporation for the
Benefit of Our Customers
Church Street Station
P.O. Box 3752
New York, NY 10008-3752
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
------------------------------------------
RETAIL SHARES
-------------
NFSC FEBO #0BP-354317 42.26%
Tri Cities Broadcasting Inc.
6551 Corte Cisco
Carlsbad, CA 92009-4527
NFSC FEBO #PC1-046655 11.55%
Henry & Marcy Tenenblatt Trust
Henry Tenenblatt
U/A 08/03/87
16323 Shadow Mountain
Pacific Palisades, CA 90272-2353
</TABLE>
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<PAGE> 86
<TABLE>
<S> <C> <C>
NFSC FEBO #0BP-253499 8.42%
Aaron Belokamen
Lilian Belokamen
11610 Bellagio Road
Los Angeles, CA 90049-2113
VALUE MOMENTUM FUND
-------------------
FIDUCIARY CLASS
---------------
Mellon Bank NA 13.52%
Trustee for Department of
Personnel Admin. of State of CA
Attn: Wally Adebayo
One Cabot Road Mail Zone 028-0031
Medford, MA 02155-5141
INTERMEDIATE-TERM BOND FUND
---------------------------
RETAIL CLASS
------------
National Financial Services Corp. 100.00%
for Exclusive Benefits of our Customers
P.O. Box 3908
Church Street Station
New York, New York 10008-3908
</TABLE>
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.
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<PAGE> 87
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.
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<PAGE> 88
- -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> 89
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> 90
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> 91
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> 92
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> 93
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.
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<PAGE> 94
FINANCIAL STATEMENTS
The Independent Auditors' Report for HighMark Funds for the year ended July 31,
1996, Financial Statements for HighMark Funds for the period ended July 31,
1996, Financial Statements for HighMark Funds for the period ended January 31,
1997, and Financial Statements for Stepstone Funds for the period ended January
31, 1997 are all incorporated by reference to the Annual and Semi-Annual
Reports of HighMark and Stepstone, dated as of such dates, which have been
previously sent to shareholders of each Fund pursuant to the 1940 Act and
previously filed with the Securities and Exchange Commission. A copy of each
such report may be obtained without charge by contacting the Distributor, SEI
Investments Distribution Co. at 1 Freedom Valley Drive, Oaks, Pennsylvania,
19456 or by telephoning toll-free at 1-800-734-2922.
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<PAGE> 1
EXHIBIT (17)(c)
Annual Report for HighMark Funds
<PAGE> 2
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
[PHOTO OF FAMILY AT PLAY OMITTED]
HIGHMARK Annual Report
JULY 31, 1998
<PAGE> 3
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
Table of Contents
Letter to Shareholders & Message from the Investment Advisor .............. 1
Management's Discussion & Analysis ........................................ 4
Statements of Net Assets .................................................. 28
Statements of Operations .................................................. 92
Statements of Changes in Net Assets ....................................... 96
Financial Highlights ...................................................... 100
Notes to Financial Statements ............................................. 108
Independent Auditors' Report .............................................. 117
Notice to Shareholders .................................................... 118
- --------------------------------------------------------------------------------
This report and the financial statements contained herein are submitted for the
general information of HighMarkSM Funds' shareholders. This report is not
authorized for distribution to prospective investors unless preceded or
accompanied by an effective prospectus.
Shares of HighMark Funds are not deposits or obligations of, or guaranteed by
Union Bank of California, N.A., or any of its subsidiaries or affiliates. Such
shares are also not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency. Investments in
shares of mutual funds involve risk, including the possible loss of principal.
SEI Investments Distribution Co., serves as Distributor for HighMark Funds and
is not affiliated with the advisor, HighMark Capital Management, Inc. or with
Union Bank of California, N.A.
- --------------------------------------------------------------------------------
<PAGE> 4
LETTER TO SHAREHOLDERS
[PHOTO OF GREG KNOPF OMITTED]
GREG KNOPF
DEAR SHAREHOLDER:
We are pleased to report another period of fine performance for many of the
HighMark Funds for the fiscal year ended July 31, 1998. Your HighMark Funds
generally did very well against their peer groups and compared to their standard
benchmarks of investment performance.
HIGHMARK CAPITAL MANAGEMENT, INC.
Effective September 1, 1998, the investment management unit at Union Bank of
California, N.A., investment advisor to HighMark, has been reorganized into a
subsidiary of UnionBanCal Corporation, the holding company of the advisor. The
new entity, called HighMark Capital Management, Inc., will allow us to build on
the successful HighMark name and should give us a greater presence in the
marketplace. We do not expect any changes in the personnel managing your
HighMark Funds as a result of this reorganization.
SMALL CAP VALUE FUND
A new fund, the HighMark Small Cap Value Fund, opened on September 17, 1998.
This fund is managed by our successful Value Momentum team, and is available in
Fiduciary, Retail "A" (front-end load), and Retail "B" (back-end load) classes
of shares. We are excited about the potential of this new fund and the
opportunity it presents to broaden our lineup of funds. We invite you to ask
your investment representative for more information about the Small Cap Value
Fund, or call HighMark at 1-800-433-6884 for a prospectus.
ENHANCED WEB SITE
The HighMark Web site has been significantly enhanced recently, and we encourage
you to visit us on the Web at www.highmark-funds.com. The Web site includes
information about the HighMark fund family and portfolio managers, and also
allows you to view fund performance and download prospectuses. In addition, we
have added a section for investment professionals, as part of our ongoing
commitment to serving this market.
The recent volatility of the financial markets shows the importance of a
well-diversified portfolio and of taking a long-term approach to investing. This
may be a good time to review your portfolio with your investment representative.
We thank you for your continued confidence and investment in HighMark Funds.
Sincerely,
/S/Signature
Greg Knopf
Managing Director, Mutual Funds
HighMark Capital Management, Inc.
September 1998
1
<PAGE> 5
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
MESSAGE FROM THE INVESTMENT ADVISOR
[PHOTO OF LUKE MAZUR OMITTED]
LUKE MAZUR
DEAR SHAREHOLDER:
After three years of double-digit gains, the stock market began to show signs of
weariness as the HighMark fiscal year came to a close on July 31, 1998. The
Asian economic crisis appeared to be worsening, exerting downward pressure on
the U.S. economy. At the same time, U.S. corporate earnings began to show little
or no growth. Meanwhile, global demand for the safety and liquidity of U.S.
Treasury bonds pushed yields to record lows, as bond investment performance
began to approach that of equities.
THE ECONOMY: SLOWING BUT NO RECESSION
Although the U.S. economy slowed in the second quarter of 1998, it is still
among the strongest in the world, having grown at an annual rate of nearly 4%
for the past few years. Indeed, the second quarter growth of just 1.6% may have
been an anomaly caused by two temporary conditions, a buildup of inventories
from the first quarter and the General Motors strike, since settled. However, a
third factor, the widening trade deficit, may be more difficult to resolve,
since it results from Asia's devalued currencies. Nevertheless, unemployment
remains under 5%, inflation remains under 2%, the federal budget is generating a
surplus for the first time in 30 years, the housing market remains robust and
consumer confidence is extremely high. Consumer spending, which accounts for
about two-thirds of GDP, has been strong in 1998.
While we don't believe that the impact of the Asian crisis on U.S. economic
growth will be significant, we do believe Asia could be in a recession for the
next year or two if Japan's leaders are unable to stimulate its economy.
Meanwhile, as Europe gets ready for a single currency on January 1, 1999,
European economic activity is looking more positive.
We expect the U.S. economy to grow between 2.5% to 3.0% for 1998. Productivity
gains should continue to offset rising wages. Because of dormant inflation,
long-term interest rates should trade in a range of 5.00% to 6.00%. With a
slowing economy, there is a reasonable possibility that the Federal Reserve
Board will lower short-term interest rates to 5.25% or 5.00% by the end of 1998.
Thus, we remain optimistic on the U.S. economy for the balance of the year.
STOCKS: MARKET SENTIMENT SHIFTS QUICKLY
Despite the recent volatility in the stock market, we believe that there are
many positives underlying the investment landscape. In addition to the generally
positive economic scenario described above, the U.S. continues to be the world
leader in innovation and technology and an increased investment in technology is
leading to greater productivity. Meanwhile, corporate restructuring and merger
and acquisition activity continue to cut corporate overhead. A demographic shift
continues to favor investment in stocks throughout the U.S., Europe and Asia.
The graying of the population is creating greater retirement savings, and more
of that money is flowing into the financial markets.
2
<PAGE> 6
Still, market sentiment shifts quickly. In mid-July, the Dow Jones Industrial
Average closed above 9300, setting an all-time record. By the end of August, the
Dow had lost more than 1,000 points, as investors became justifiably nervous
about the Russian economy. However, for the long-term investor, these sudden
changes in market sentiment can present great opportunity.
BONDS: THEY'VE COME A LONG WAY
Between August 1, 1997 and July 31, 1998, the benchmark 30-year Treasury bond
yield fell from 6.45% to 5.71%. As a result, bond prices rose about 13.8% during
the period. The Treasury bond is currently yielding very close to its all-time
low. Since bond prices move inversely to yields, interest rates would have to
move further into record territory for bonds to generate capital appreciation.
However, it is also true that inflation is at its lowest level in decades. As a
result, we continue to be bullish on bonds and believe that further capital
appreciation is possible. Meanwhile, bond yields continue to produce income well
in excess of inflation.
Although the Asian crisis is having a negative impact on the world economy, we
believe that the U.S. economy is demonstrating that it is strong enough to
withstand it. As a result, we remain optimistic regarding the U.S. stock and
bond markets.
Sincerely,
/S/Signature
Luke Mazur
Chief Investment Officer
HighMark Capital Management, Inc.
September 1998
3
<PAGE> 7
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK GROWTH FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Growth Fund returned 22.59%
(Fiduciary Shares).* In comparison, the Lipper Growth Funds Average rose 13.15%
during the period and the Standard & Poor's 500 Composite Index was up 19.28%.
In recognition of the Fund's performance, Morningstar, Inc. recently awarded the
Fund a five-star rating out of a possible five stars for the three-year period
ending 7/31/98.** The Fund was rated among 2,545 funds in the equity category.
FACTORS AFFECTING PERFORMANCE
There are three key reasons why the Fund produced superior performance:
TIMELY SECTOR WEIGHTINGS. In October 1997, our valuation discipline led us to
underweight technology companies after the sector had significantly outperformed
the S&P 500 Index. Meanwhile, the consumer staple sector became more
attractively priced after a sell-off on concerns that the rising U.S. dollar
might result in lower translated foreign earnings, and that consumer demand from
the Far East might slow due to currency devaluations. Indeed, during the period,
the technology sector underperformed and investors returned to consumer staple
companies.
UNDERWEIGHTING ENERGY. The price of oil dropped 41% during the year, which
caused the energy sector to sharply underperform the market. The commodity-based
energy sector generally does not meet our criteria for consistent, sustainable
superior earnings growth, but the Fund did benefit when one energy holding,
Dresser Industries, agreed to be acquired by Halliburton, another oil service
company.
GOOD STOCK SELECTION. Two additions to the portfolio performed particularly well
during the period. IMS Health provides pharmaceutical companies with
prescription market share data used for measuring sales and marketing
effectiveness. The company has a 90% market share and multiyear contracts with
the world's leading pharmaceutical companies. Berkshire Hathaway, a diversified
holding company controlled by the legendary Warren Buffett, derives two-thirds
of its earnings from 100% ownership in businesses that have grown at a 24%
annual rate for the past 30 years. The other third of Berkshire's earnings come
from its well-publicized minority positions in companies such as Coca-Cola,
Gillette, American Express and Walt Disney.
CURRENT STRATEGY & OUTLOOK
The growth style of investing typically outperforms when the economy slows, as
investors yearn for consistent and reliable earnings growth. In managing the
Fund,we will continue to seek a projected composite earnings growth rate
superior to that of the S&P 500 Index, yet the price-earnings multiple of the
composite portfolio is only slightly higher than the S&P 500 Index. We continue
to seek companies with excellent growth potential at reasonable prices and our
long-term outlook is positive.
- ------------
* The HighMark Growth Fund (Retail Class A Shares) produced a total return of
22.26% for the period. Including the maximum sales charge of 4.50%, the total
return for the Fund's Retail Class A Shares was 16.76%. The Fund's Retail
Class B Shares, launched on 2/2/98, produced a total synthetic return of
22.06% for the period. Including the maximum contingent deferred sales charge
of 5.00%, the total synthetic return for the Fund's Retail Class B Shares
was 17.21%.
** The ratings are subject to change every month. Past performance is no
guarantee of future results. Morningstar ratings are calculated from a fund's
three-, five- and ten-year average annual returns (if available) in excess of
90-day Treasury bill returns. The Fund received five stars for the three-year
period ending 7/31/98. The top 10% of funds within a rating category receive
five stars.
4
<PAGE> 8
HIGHMARK GROWTH FUND
TEAM LEADER:
SCOTT CHAPMAN
HIGHMARK CAPITAL
MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
NOVEMBER 18, 1993 (FIDUCIARY SHARES)
JUNE 20, 1994 (RETAIL CLASS A SHARES)
FEBRUARY 2, 1998 (RETAIL CLASS B SHARES)
NET ASSETS (000):
$449,060 (FIDUCIARY SHARES)
$ 17,173 (RETAIL CLASS A SHARES)
$ 1,948 (RETAIL CLASS B SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK GROWTH FUND SEEKS
LONG-TERM CAPITAL APPRECIATION
THROUGH INVESTMENTS IN EQUITY
SECURITIES. THE PRODUCTION OF CURRENT
INCOME IS AN INCIDENTAL OBJECTIVE.
Comparison of Change in the Value of a $10,000
Investment in the HighMark Growth Fund (Fiduciary,
Synthetic Retail Class A or Synthetic Retail Class B
Shares) versus the S&P 500 Composite Index
and the Lipper Growth Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark HighMark HighMark
Growth Fund, Growth Fund, Growth Fund, S&P 500 Lipper
Fiduciary Synthetic Retail Synthetic Retail Composite Growth Funds
Shares Class A Shares Class B Shares Index Average
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/93 $10,000 $ 9,550 $10,000 $10,000 $10,000
7/94 9,650 9,225 9,650 10,100 9,962
7/95 12,085 11,541 12,085 12,733 12,517
7/96 13,622 13,028 13,622 14,841 13,745
7/97 20,234 19,345 20,234 22,574 19,740
7/98 24,805 23,651 24,498 26,926 22,335
</TABLE>
- --------------------------------------------------------------------------------
Annualized Annualized
One Year 3 Year Inception
Return Return to Date
- --------------------------------------------------------------------------------
Fiduciary Shares 22.59% 27.08% 21.76%
- --------------------------------------------------------------------------------
Retail Class A Shares 22.26% 27.02% 25.87%
- --------------------------------------------------------------------------------
Retail Class A Shares
with load* 16.76% 25.08% 24.46%
- --------------------------------------------------------------------------------
Retail Class B Shares 22.06%+ 26.90%+ 28.71%
- --------------------------------------------------------------------------------
Retail Class B Shares
with load** 17.21%+ 26.28%+ 23.71%
- --------------------------------------------------------------------------------
* REFLECTS 4.50% SALES CHARGE.
** REFLECTS MAXIMUM CDSC OF 5.00%.
+ SYNTHETIC, NOT ACTUAL.
Past performance is not predictive of future results.
5
<PAGE> 9
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK VALUE MOMENTUM FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Value Momentum Fund returned
9.22% (Fiduciary Shares).* In comparison, the Lipper Growth & Income Funds
Average rose 11.37% during the period and the Standard & Poor's 500 Composite
Index was up 19.28%.
FACTORS AFFECTING PERFORMANCE
Three factors adversely impacted performance in relation to the S&P 500 Index.
First, the value style of investing significantly underperformed growth during
the period. Typically, value does well when earnings are accelerating and the
stock market is weak. Instead, earnings were weakening, and the S&P 500 Index
reached several new highs. Second, small and midcap stocks seriously
underperformed. For example, during the twelve-months ended July 31, 1998, the
Russell 2000 Index, a broad measure of smaller stocks, rose just 2.31%. By and
large, the Fund was not invested in the large liquid growth stocks that
performed so well during the fiscal year. Third, several companies in the
portfolio announced surprisingly poor results. One, Cendant Corporation,
announced accounting irregularities and was forced to restate earnings. Others,
such as Parker Hannifin, Manpower and Wallace Computer, reported very
disappointing profits.
CURRENT STRATEGY & OUTLOOK
Because of market conditions, value investing was at a disadvantage during the
fiscal year. Nevertheless, we continue to have confidence in our stock selection
process. Our system requires us to project earnings and price-earnings multiples
for each company to determine a company's valuation on a normalized basis. In
addition, we have a downside risk process that requires us to determine the
lowest price at which we think a stock might sell given a worst case scenario.
We place a value on each company based on its cash flows, and we have a private
market value for each company based on what we think it is worth to a
knowledgeable buyer. Each stock passes through each one of those systems on a
constantly updated basis, and we think they form a solid core of disciplines
with which to assess a company's value. This system has proven to be very
effective for us.
We believe that a number of stocks in the portfolio offer excellent value. For
example, Fleetwood Enterprises manufactures factory-built housing and travel
vehicles. Factory-built housing continues to gain market share in a solid
housing market, and the travel-trailer business continues to benefit from good
consumer income and low fuel prices. McGraw-Hill, which owns Standard & Poor's
Corporation, Business Week magazine and other media products, has also done
well. This is a broad-based company that has been quite stable and has improved
its rate of profitability. Federated Department Stores is benefiting from
devalued currencies in Asia, where it purchases much of its inventory.
For value stocks to outperform, certain factors beyond our control would have to
take place. First, there would have to be a broad-based recovery in corporate
profits. Second, the stock market would have to fall to a level in which
valuations were considered inexpensive or at least more reasonable.
- -----------
* The HighMark Value Momentum Fund (Retail Class A Shares) produced a total
return of 8.96% for the period. Including the maximum sales charge of 4.50%,
the total return for the Fund's Retail Class A Shares was 4.06%. The Fund's
Retail Class B Shares, launched on 2/2/98, produced a total synthetic return
of 8.73% for the period. Including the maximum contingent deferred sales
charge of 5.00%, the total synthetic return for the Fund's Retail Class B
Shares was 3.73%.
6
<PAGE> 10
HIGHMARK VALUE MOMENTUM FUND
TEAM LEADER:
RICHARD EARNEST
HIGHMARK CAPITAL
MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1991 (FIDUCIARY SHARES)
APRIL 2, 1992 (RETAIL CLASS A SHARES)
FEBRUARY 2, 1998 (RETAIL CLASS B SHARES)
NET ASSETS (000):
$863,627 (FIDUCIARY SHARES)
$ 35,325 (RETAIL CLASS A SHARES)
$ 5,202 (RETAIL CLASS B SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK VALUE MOMENTUM FUND
SEEKS LONG-TERM CAPITAL GROWTH
WITH A SECONDARY OBJECTIVE OF
INCOME. THE FUND WILL BE INVESTED
PRIMARILY IN STOCKS THAT APPEAR
UNDERVALUED RELATIVE TO THE MARKET
AND/OR THEIR HISTORIC PRICE
VALUATIONS. IN ADDITION, STOCKS
ARE SCREENED FOR POSITIVE PRICE
OR EARNINGS MOMENTUM. MOST OF THE
SECURITIES PAY A DIVIDEND.
Comparison of Change in the Value of a $10,000
Investment in the HighMark Value Momentum Fund
(Fiduciary, Synthetic Retail Class A or
Synthetic Retail Class B Shares) versus the the S&P
500 Composite Index and the Lipper Growth
and Income Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark Value HighMark Value HighMark Value
Momentum Fund, Momentum Fund, Momentum Fund, S&P 500 Lipper Growth &
Fiduciary Synthetic Retail Synthetic Retail Composite Income Funds
Shares Class A Shares Class B Shares Index Average
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2/91 $10,000 $ 9,550 $10,000 $10,000 $10,000
7/91 10,637 10,158 10,637 10,694 10,647
7/92 11,865 11,335 11,869 12,065 11,978
7/93 13,339 12,745 13,344 13,116 13,344
7/94 13,909 13,289 13,914 13,788 14,060
7/95 17,443 16,666 17,450 17,383 16,949
7/96 20,376 19,429 20,383 20,260 19,288
7/97 30,054 28,588 30,065 30,817 27,796
7/98 32,825 31,149 32,689 36,759 30,956
</TABLE>
- --------------------------------------------------------------------------------
Annualized Annualized Annualized
One Year 3 Year 5 Year Inception
Return Return Return to Date
- --------------------------------------------------------------------------------
Fiduciary Shares 9.22% 23.46% 19.73% 18.12%
- --------------------------------------------------------------------------------
Retail Class A Shares 8.96% 23.18% 19.57% 18.34%
- --------------------------------------------------------------------------------
Retail Class A Shares
with load* 4.06% 21.31% 18.48% 17.49%
- --------------------------------------------------------------------------------
Retail Class B Shares 8.73%+ 23.27%+ 19.62%+ 3.94%
- --------------------------------------------------------------------------------
Retail Class B Shares
with load** 3.73%+ 22.61%+ 19.43%+ (1.06)%
- --------------------------------------------------------------------------------
* REFLECTS 4.50% SALES CHARGE.
** REFLECTS MAXIMUM CDSC OF 5.00%.
+ SYNTHETIC, NOT ACTUAL.
Past performance is not predictive of future results. Performance presented from
February 1, 1991, (commencement of operations of Fiduciary Shares) and April 2,
1992, (commencement of operations Retail Shares) to April 25, 1997 reflects the
performance of the Stepstone Value Momentum Fund.
7
<PAGE> 11
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK INCOME EQUITY FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Income Equity Fund returned
10.79% (Fiduciary Shares).* In comparison, the Lipper Equity Income Funds
Average rose 10.48% during the period and the Standard & Poor's 500 Index was up
19.28%.
FACTORS AFFECTING PERFORMANCE
The Fund's star performers were the regional telephone companies, which have
produced unexpectedly strong earnings. These companies have yet to be seriously
affected by deregulation and increased competition. Other positive contributors
to the Fund were in the automotive, health care, insurance and publishing
sectors. For example, Ford rose 66% in price from the beginning of 1998 to the
end of the Fund's fiscal year, and was still trading at a significant discount
to the market. The healthcare and publishing stocks outperformed because of
their steady and reliable earnings. The insurance stocks benefited from falling
interest rates, which boosted stocks and bonds in their investment portfolios.
The Fund's biggest disappointments were petroleum stocks, which suffered from
declining oil prices and expectations that weak economic growth in Asia would
keep oil demand and prices depressed.
CURRENT STRATEGY & OUTLOOK
Three stocks in our portfolio stand out as excellent values. The merger of
NationsBank and Bank of America creates the first truly national banking
franchise in the United States, and is projected to generate $2 billion in
savings by the year 2000. We expect strong earnings growth for McGraw-Hill, a
New York-based publisher with interests in education publishing and financial
services, with such attractive holdings as Business Week magazine and Standard &
Poor's Corporation. Baxter International, a global medical products company, is
generating solid earnings growth and an attractive dividend yield.
Although energy prices are currently depressed, we believe that our petroleum
holdings provide a hedge against an unexpected pickup in inflation. In addition,
oil companies generally have strong balance sheets and their stocks offer
attractive yields.
During the period, we made a slight modification to the Income Equity strategy.
While we continue to require an above-average dividend yield for most
industries, we no longer require it for technology companies. The most
successful technology companies typically reinvest their profits because of the
strong investment opportunities available to them. We don't want to exclude
ourselves from such a vibrant part of the U.S. economy.
- ------------
* The HighMark Income Equity Fund (Retail Class A Shares) produced a total
return of 10.50% for the period. Including the maximum sales charge of 4.50%,
the total return for the Fund's Retail Class A Shares was 5.53%. The Fund's
Retail Class B Shares, launched on 2/2/98, produced a total synthetic return
of 10.31% for the period. Including the maximum contingent deferred sales
charge of 5.00%, the total synthetic return for the Fund's Retail Class B
Shares was 5.31%.
8
<PAGE> 12
HIGHMARK INCOME EQUITY FUND
TEAM LEADER:
THOMAS ARRINGTON
HIGHMARK CAPITAL
MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
FEBRUARY 9, 1984 (FIDUCIARY SHARES)
JUNE 20, 1994 (RETAIL CLASS A SHARES)
FEBRUARY 2, 1998 (RETAIL CLASS B SHARES)
NET ASSETS (000):
$670,298 (FIDUCIARY SHARES)
$ 23,024 (RETAIL CLASS A SHARES)
$ 1,816 (RETAIL CLASS B SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK 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. THE OPPORTUNITY FOR
LONG-TERM GROWTH OF ASSET VALUE IS
A SECONDARY CONSIDERATION.
Comparison of Change in the Value of a $10,000
Investment in the HighMark Income Equity Fund
(Fiduciary, Synthetic Retail Class A or
Synthetic Retail Class B Shares) versus the the
S&P 500 Composite Index and the Lipper
Equity Income Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark Income HighMark Income HighMark Income
Equity Fund, Equity Fund, Equity Fund, S&P 500 Lipper Equity
Fiduciary Synthetic Retail Synthetic Retail Composite Income
Shares Class A Shares Class B Shares Index Funds Average
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2/84 $10,000 $ 9,550 $10,000 $10,000 $10,000
7/84 9,656 9,221 9,656 9,788 9,836
7/85 13,213 12,618 13,213 12,965 12,603
7/86 16,865 16,106 16,865 16,649 15,379
7/87 21,400 20,437 21,400 23,192 19,191
7/88 21,089 20,140 21,089 20,465 18,161
7/89 27,028 25,812 27,028 26,989 22,806
7/90 26,785 25,580 26,785 28,738 22,681
7/91 30,163 28,805 30,163 32,396 24,987
7/92 34,998 33,423 34,998 36,550 28,610
7/93 38,410 36,681 38,410 39,733 32,218
7/94 40,035 38,233 40,035 41,771 33,697
7/95 46,945 44,931 46,945 52,661 39,351
7/96 55,517 53,113 55,517 61,376 45,164
7/97 77,795 74,343 77,795 93,360 63,279
7/98 86,190 82,149 85,816 111,359 69,910
</TABLE>
- --------------------------------------------------------------------------------
Annualized Annualized Annualized Annualized
One Year 3 Year 5 Year 10 Year Inception
Return Return Return Return to Date
- --------------------------------------------------------------------------------
Fiduciary Shares 10.79% 22.45% 17.54% 15.12% 15.88%
- --------------------------------------------------------------------------------
Retail Class A Shares 10.50% 22.28% 17.50%+ 15.09%+ 20.73%
- --------------------------------------------------------------------------------
Retail Class A Shares
with load* 5.53% 20.43% 16.42%+ 14.57%+ 19.38%
- --------------------------------------------------------------------------------
Retail Class B Shares 10.31%+ 22.27%+ 17.44%+ 15.07%+ 13.10%
- --------------------------------------------------------------------------------
Retail Class B Shares
with load** 5.31%+ 21.60%+ 17.23%+ 15.07%+ 8.10%
- --------------------------------------------------------------------------------
* REFLECTS 4.50% SALES CHARGE.
** REFLECTS MAXIMUM CDSC OF 5.00%.
+ SYNTHETIC, NOT ACTUAL.
Past performance is not predictive of future results.
9
<PAGE> 13
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK BALANCED FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Balanced Fund returned 7.31%
(Fiduciary Shares).* In comparison, the Lipper Balanced Funds Average rose
9.75%. Meanwhile, the Standard & Poor's 500 Composite Index was up 19.28% and
the Lehman Brothers Aggregate Bond Index reflected a return of 7.86%.
FACTORS AFFECTING PERFORMANCE
The portfolio's asset allocation strategy shifted slightly towards fixed-income
securities and away from cash equivalents during the fiscal year. As of July 31,
1997, the portfolio included 61.3% equities, 32.5% bonds and 6.2% in cash. By
July 31, 1998, the mix had shifted to 59.2% equities, 38.3% bonds and 2.5% in
cash. Because we believed that inflation would remain benign and that the
Federal Reserve Board would not raise short-term rates, our decision to favor
bonds over cash positively impacted performance.
Another positive factor affecting performance was our decision to lengthen
duration (sensitivity to interest rates) from 101% to 109% of the benchmark. In
a period of falling interest rates, a portfolio with a longer duration tends to
outperform one with a shorter duration. However, our overweighted position in
corporate bonds and mortgage-backed securities was a drag on performance, as
global demand for U.S. Treasury bonds soared as a result of the Asian economic
crisis. The impact of the duration and sector decisions essentially offset each
other. As a result, our fixed income performance virtually matched the
benchmark.
However, the equity component of the portfolio significantly underperformed the
S&P 500 Index, rising only 8%. There were three reasons for this
underperformance. First, the S&P 500 Index performance was concentrated in the
largest 10% to 20% of the companies making up the index, areas where we had
little exposure. Second, the Fund's portfolio included significant exposure to
capital goods, energy and basic materials companies that performed poorly in a
slowing economic environment. Third, the portfolio included a few companies that
reported sudden problems, causing the stock prices to fall sharply.
CURRENT STRATEGY & OUTLOOK
In the fixed-income component, after months of underperformance, we believe that
corporate bonds and mortgage-backed securities now offer compelling value. As a
result, we intend to remain overweighted in these sectors.
In equities, we have retained in our portfolio a number of companies that we
believe are undervalued. Unlike early 1998 when investors seemed unconcerned
about valuations, we believe investors over the long run will be more concerned
about buying good companies at a reasonable price, a trend we hope to take
advantage of in the months ahead.
- ----------
* The HighMark Balanced Fund (Retail Class A Shares) produced a total return of
7.12% for the period. Including the maximum sales charge of 4.50%, the total
return for the Fund's Retail Class A Shares was 2.27%. The Fund's Retail Class
B Shares, launched on 2/2/98, produced a total synthetic return of 6.99% for
the period. Including the maximum contingent deferred sales charge of 5.00%,
the total synthetic return for the Fund's Retail Class B Shares was 1.99%.
10
<PAGE> 14
HIGHMARK BALANCED FUND
TEAM LEADER:
CARL COLOMBO
HIGHMARK CAPITAL
MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1991 (FIDUCIARY SHARES)
NOVEMBER 13, 1992 (RETAIL CLASS A SHARES)
FEBRUARY 2, 1998 (RETAIL CLASS B SHARES)
NET ASSETS (000):
$448,783 (FIDUCIARY SHARES)
$ 10,629 (RETAIL CLASS A SHARES)
$ 967 (RETAIL CLASS B SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK BALANCED FUND SEEKS
CAPITAL APPRECIATION AND INCOME
WITH A SECONDARY INVESTMENT
OBJECTIVE OF CONSERVATION OF
CAPITAL. UNDER NORMAL MARKET
CONDITIONS, THE FUND INVESTS
BETWEEN 50% TO 70% OF ITS TOTAL
ASSETS IN EQUITY SECURITIES, AT
LEAST 25% IN BONDS AND THE REST IN
CASH EQUIVALENTS.
Comparison of Change in the Value of a $10,000 Investment in the HighMark
Balanced Fund (Fiduciary, Synthetic Retail Class A or Synthetic
Retail Class B Shares) versus the Lehman Brothers Aggregate Bond Index,
the S&P 500 Composite Index and the Lipper Balanced Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark HighMark HighMark
Balanced Fund, Balanced Fund, Balanced Fund, Lehman Brothers S&P 500 Lipper
Fiduciary Synthetic Retail Synthetic Retail Aggregate Composite Balanced
Shares Class A Shares Class B Shares Bond Index Index Funds Average
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2/91 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000
7/91 10,437 10,437 10,437 10,374 10,694 10,564
7/92 11,600 11,603 11,603 11,907 12,065 11,937
7/93 12,809 12,812 12,812 13,119 13,116 13,208
7/94 13,183 13,188 13,186 13,131 13,788 13,557
7/95 15,701 15,707 15,705 14,459 17,383 15,805
7/96 17,419 17,390 17,423 15,258 20,260 17,363
7/97 22,726 22,621 22,732 16,903 30,817 22,551
7/98 24,387 24,232 24,321 18,232 36,759 24,750
</TABLE>
- --------------------------------------------------------------------------------
Annualized Annualized Annualized
One Year 3 Year 5 Year Inception
Return Return Return to Date
- --------------------------------------------------------------------------------
Fiduciary Shares 7.31% 15.81% 13.75% 13.21%
- --------------------------------------------------------------------------------
Retail Class A Shares 7.12% 15.55% 13.59% 13.42%
- --------------------------------------------------------------------------------
Retail Class A Shares
with load* 2.27% 13.80% 12.56% 12.51%
- --------------------------------------------------------------------------------
Retail Class B Shares 6.99%+ 15.70%+ 13.68%+ 4.32%
- --------------------------------------------------------------------------------
Retail Class B Shares
with load** 1.99%+ 14.94%+ 13.44%+ (0.68)%
- --------------------------------------------------------------------------------
* REFLECTS 4.50% SALES CHARGE.
** REFLECTS MAXIMUM CDSC OF 5.00%.
+ SYNTHETIC, NOT ACTUAL.
Past performance is not predictive of future results. Performance presented from
February 1, 1991 (commencement of operations of Fiduciary Shares) and November
13, 1992 (commencement of operations of Retail Shares) to April 25, 1997
reflects the performance of the Stepstone Balanced Fund.
11
<PAGE> 15
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK BLUE CHIP GROWTH FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Blue Chip Growth Fund returned
8.67% (Fiduciary Shares). In comparison, the Lipper Growth Funds Average rose
13.15% during the period while the Standard & Poor's 500 Index was up 19.28%.
FACTORS AFFECTING PERFORMANCE
The Fund underperformed its benchmark for several reasons, including being
overweighted in technology companies. In many cases, the Asian economic crisis
caused orders to be deferred or cancelled. We believed that this situation would
correct itself over time and that the stocks' underperformance represented good
value. Our patience, however, was not rewarded during this twelve-month period.
Moreover, the Fund was overweighted in the health care services industry, which
also underperformed. Managed care companies faced rising medical costs and lower
rates of growth in Medicare reimbursement rates. As the market corrected in late
July, we took the opportunity to add several large blue-chip companies such as
Coca-Cola, General Electric, Gillette, Johnson & Johnson and McDonalds.
CURRENT STRATEGY & OUTLOOK
We believe that the rate of growth in the economy is slowing and that investors
will favor strong, multinational blue-chip growth companies for their reliable
and consistent earnings growth. Low interest rates, low inflation, strong fund
inflows and continued strong earnings growth should sustain valuation levels and
position blue-chip growth stocks well for future performance.
12
<PAGE> 16
HIGHMARK BLUE CHIP GROWTH FUND
PORTFOLIO MANAGER:
THE FUND IS MANAGED BY
A TEAM OF INVESTMENT
PROFESSIONALS AT HIGHMARK
CAPITAL MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1994 (FIDUCIARY SHARES)
NET ASSETS (000):
$127,295 (FIDUCIARY SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK 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.
Comparison of Change in the Value of a $10,000 Investment
in the HighMark Blue Chip Growth Fund (Fiduciary Shares)
versus the S&P 500 Composite Index and the
Lipper Growth Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark Blue S&P 500 Lipper
Chip Growth Fund, Composite Growth Funds
Fiduciary Shares Index Average
- ---------------------------------------------------------------------
<S> <C> <C> <C>
2/94 $10,000 $10,000 $10,000
7/94 9,651 9,920 9,538
7/95 12,114 12,506 11,985
7/96 13,548 14,576 13,161
7/97 19,699 22,172 18,900
7/98 21,407 26,446 21,385
</TABLE>
- ---------------------------------------------------------------------
Annualized Annualized
One Year 3 Year Inception
Return Return to Date
- ---------------------------------------------------------------------
Fiduciary Shares 8.67% 20.90% 17.92%
- ---------------------------------------------------------------------
Past performance is not predictive of future results. Performance presented from
February 1, 1994 (commencement of operations of Fiduciary Shares) to April 25,
1997 reflects the performance of the Stepstone Blue Chip Fund.
13
<PAGE> 17
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK EMERGING GROWTH FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Emerging Growth Fund returned
3.37% (Fiduciary Shares). In comparison, the Lipper Small Cap Funds Average rose
2.64% during the period while the Russell 2000 Index was up 2.31%.
FACTORS AFFECTING PERFORMANCE
The largest factor affecting overall small cap stock performance during the past
fiscal year was the continuing preference by investors for large cap stocks.
During the period, investment dollars continued to flow into large cap index
funds such as the S&P 500 Index which helped drive up returns. Small cap index
funds did not enjoy the same investor interest, which caused relative
performance to suffer. In addition, within the small cap universe, the "value"
style was more in favor than the "growth" style that the Fund employs. The
Lipper average and the Russell 2000 Index include a mixture of growth and value,
making the comparison with the Emerging Growth Fund difficult. Considering these
negative factors, the Fund performed relatively well due to strong returns and
overweightings in the finance and technology sectors.
CURRENT STRATEGY & OUTLOOK
We believe that the outlook for small cap growth stocks is promising for three
reasons. First, because the economy is slowing, investors may favor companies
that can still post strong earnings. Many of the most rapidly growing companies
are in the small cap area. Second, small cap valuations are very attractive
compared to large cap stocks. At July 31, 1998, the S&P 600 Index, a measure of
small cap stocks, was trading at 16 times 1999 estimated earnings. In contrast,
the S&P 500 Index was trading at 22 times earnings. Third, the weakening Asian
economies are expected to hurt large company earnings more than small cap
profits. According to Merrill Lynch Small Cap Research, large companies have 27%
exposure to foreign sales versus 14% for smaller companies.
Our strategy is to remain overweighted in technology. We believe that this
sector will outperform the general market due to strong expected earnings growth
that can be purchased at reasonable prices. Because many small technology
companies have the ability to dominate their niche, they are able to increase
prices, revenues and earnings, all of which makes them very attractive to
investors as well as potential acquirers.
14
<PAGE> 18
HIGHMARK EMERGING GROWTH FUND
PORTFOLIO MANAGER:
STEVE RICCIO
BANK OF TOKYO-
MITSUBISHI TRUST CO.
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1994 (FIDUCIARY SHARES)
NET ASSETS (000):
$68,579 (FIDUCIARY SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK EMERGING GROWTH FUND
SEEKS LONG-TERM GROWTH OF CAPITAL
BY INVESTING IN A DIVERSIFIED
PORTFOLIO OF EQUITY SECURITIES OF
SMALL CAPITALIZATION, EMERGING
GROWTH COMPANIES.
Comparison of Change in the Value of a $10,000
Investment in the HighMark Emerging Growth Fund
(Fiduciary Shares) versus the Frank Russell 2000 Growth Index
and the Lipper Small-Cap Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark
Emerging Growth Fund, Frank Russell Lipper Small-Cap
Fiduciary Shares 2000 Growth Index Funds Average
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2/94 $10,000 $10,000 $10,000
7/94 9,282 8,923 9,126
7/95 11,888 11,932 12,039
7/96 13,258 12,291 13,352
7/97 16,455 15,396 17,671
7/98 17,010 15,194 18,138
</TABLE>
- ---------------------------------------------------------------------
Annualized Annualized
One Year 3 Year Inception
Return Return to Date
- ---------------------------------------------------------------------
Fiduciary Shares 3.37% 12.68% 12.11%
- ---------------------------------------------------------------------
Past performance is not predictive of future results. Performance presented from
February 1, 1994 (commencement of operations of Fiduciary Shares) to April 25,
1997 reflects the performance of the Stepstone Emerging Growth Fund.
15
<PAGE> 19
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK INTERNATIONAL EQUITY FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark International Equity Fund
returned -0.82% (Fiduciary Shares). In comparison, the Lipper International
Funds Average returned 6.77%. The unmanaged Morgan Stanley Capital International
EAFE Index, a benchmark made up of companies in 20 nations, returned 5.47% for
the period.
On January 1, 1998, AXA Asset Management Partenaires assumed responsibility as
sub-advisor for the Fund. AXA Asset Management Partenaires is part of the AXA
Group, one of the world's largest money management firms with over $495 billion
under management.
FACTORS AFFECTING PERFORMANCE
Since assuming responsibility as sub-advisor, AXA has been in the process of
realigning the portfolio. Despite this realignment, the Fund continues to
underperform its benchmarks. We believe, however, that these changes will
ultimately have a positive effect on performance. The Fund maintained an
overweighted position in European markets, notably in France, Spain, Portugal,
Italy and Germany. Conversely, the Fund was underweighted in Japan and Southeast
Asia.
The strong performance of the European market has been driven by a pickup in the
economy coupled with the ongoing corporate restructuring process, which has
driven earnings revisions upward. The upcoming euro conversion has been a very
strong deflationary factor because goods and services are increasingly competing
throughout the Continent, not just in the local markets, as consumers anticipate
the arrival of the new single currency on January 1, 1999. In addition,
sustained low interest rates are encouraging individual investors to move into
the equity markets. In Japan, a light weighting in financial stocks and a strong
emphasis on defensive domestic sectors such as pharmaceuticals and utilities
were beneficial.
CURRENT STRATEGY & OUTLOOK
The Fund continues to maintain a very strong weighting in Europe, with about 77%
of the portfolio invested there as of July 31, 1998. As of that date, the
weighting in Japan was about 19%, while the rest of Asia was about 4%.
We're still confident that corporate profits will be sufficiently strong in
Europe to allow the bull market to continue. Corporate managements have done a
good job improving profitability, although returns still lag their U.S.
counterparts. However, the European markets can't go much higher until the Asian
economic crisis stabilizes. In Japan, exporters are benefiting from a weaker
yen, but they must pass on the lower prices to their customers, so the currency
advantage isn't that significant. Despite large corrections in the Southeast
Asian markets, we believe that it is still too early to search for value, and
that there is still substantial negative news yet to be factored into
valuations, especially in the financial sector.
16
<PAGE> 20
HIGHMARK INTERNATIONAL EQUITY FUND
PORTFOLIO MANAGER:
ROBERT DE GUIGNE
AXA ASSET MANAGEMENT
PARTENAIRES
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1995 (FIDUCIARY SHARES)
NET ASSETS (000):
$91,970 (FIDUCIARY SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK 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.
Comparison of Change in the Value of a $10,000 Investment
in the HighMark International Equity Fund (Fiduciary Shares)
versus the Morgan Stanley MSCI EAFE Index and the
Lipper International Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark International
Equity Fund, Morgan Stanley MSCI Lipper International
Fiduciary Shares EAFE Index Funds Average
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2/95 $10,000 $10,000 $10,000
7/95 11,143 11,368 11,332
7/96 11,650 11,770 11,990
7/97 12,585 13,902 14,921
7/98 12,482 14,663 15,931
</TABLE>
- ---------------------------------------------------------------------
Annualized Annualized
One Year 3 Year Inception
Return Return to Date
- ---------------------------------------------------------------------
Fiduciary Shares (0.82)% 3.86% 6.24%
- ---------------------------------------------------------------------
Past performance is not predictive of future results. Performance presented from
February 1, 1995 (commencement of operations of Fiduciary Shares) to April 25,
1997 reflects the performance of the Stepstone International Equity Fund.
17
<PAGE> 21
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark California Intermediate Tax-Free
Bond Fund produced a total return of 4.75% (Fiduciary Shares).* In comparison,
the Lipper California Intermediate Municipal Debt Funds Average returned 4.35%.
The Fund's performance was ranked 7th out of 31 funds by Lipper, placing it in
the top quartile for this twelve month period. The unmanaged Lehman Brothers
7-year Municipal Bond Index reflected a return of 5.26%.
FACTORS AFFECTING PERFORMANCE
On average, the Fund's duration (sensitivity to interest rates) was generally
longer than the benchmark. During a period of falling interest rates, a
longer-than-average duration is favorable to performance. Although we have no
plans to change its quality focus, the Fund's high credit quality was a slight
negative to performance during the period, as lower-rated bonds produced higher
total returns in California's improving economy. About 75% of the portfolio's
bonds are insured. As a general category, municipal bonds underperformed U.S.
Treasury securities, which benefited from the global flight to quality after
Asia's economic crisis became apparent last fall.
CURRENT STRATEGY & OUTLOOK
We continue to try to improve the portfolio's call protection, a strategy that
is important in a period of generally falling interest rates. A bond with poor
call protection is likely to be redeemed by the issuer when interest rates fall,
forcing the bondholder to reinvest at lower yields.
California's economy, largest among the 50 states and the 7th largest in the
world, has replaced declining aerospace jobs with employment in entertainment,
financial services and high technology. Since California is a major trading
partner with the Far East, the worsening Asian economic crisis is causing
concern. However, the state's robust business climate appears to be withstanding
the Asian crisis, which bodes well for the credit quality of the state's
municipal securities.
Unlike the U.S. Treasury market, the municipal market still offers additional
value for investors willing to buy longer maturities. For example, on July 31,
1998, the ten-year U.S. Treasury note yielded 5.49%, while the two-year note
yielded 5.48%. In contrast, the ten-year municipal bond offered 4.42%, while the
two-year bond yielded 3.82%. Currently, we believe that longer-term municipal
bonds offer very attractive yields on a tax-adjusted basis, particularly for
investors in high tax brackets.
- -----------
* The HighMark California Intermediate Tax-Free Bond (Retail Class A Shares)
produced a total return of 4.66% for the period. Including the maximum sales
charge of 3.00%, the total return for the Fund's Retail Class A Shares was
1.51% for the period.
18
<PAGE> 22
HIGHMARK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
TEAM LEADER:
ROBERT BIGELOW
HIGHMARK CAPITAL
MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
OCTOBER 15, 1993 (FIDUCIARY SHARES)
OCTOBER 15, 1993 (RETAIL CLASS A SHARES)
NET ASSETS (000):
$157,062 (FIDUCIARY SHARES)
$ 12,925 (RETAIL CLASS A SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK CALIFORNIA
INTERMEDIATE TAX-FREE BOND FUND
SEEKS TO PROVIDE HIGH CURRENT
INCOME THAT IS EXEMPT FROM FEDERAL
AND STATE OF CALIFORNIA INCOME
TAXES. THE FUND INVESTS PRIMARILY
IN BONDS AND NOTES ISSUED BY THE
STATE OF CALIFORNIA, ITS AGENCIES,
INSTRUMENTALITIES, AND POLITICAL
SUBDIVISIONS.
Comparison of Change in the Value of a $10,000
Investment in the HighMark California Intermediate
Tax-Free Bond Fund (Fiduciary or
Retail Class A Shares) versus the Lehman Brothers 7-Year
Municipal Bond Index and the Lipper California
Intermediate Municipal Debt Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark California HighMark California Lipper California
Intermediate Tax-Free Intermediate Tax-Free Lehman Brothers Intermediate
Bond Fund, Bond Fund, 7-Year Municipal Municipal Debt
Fiduciary Shares Retail Class A Shares Bond Index Funds Average
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/93 $10,000 $ 9,700 $10,000 $10,000
7/94 9,702 9,401 9,953 9,914
7/95 10,407 10,086 10,760 10,538
7/96 11,102 10,748 11,307 11,144
7/97 12,079 11,696 12,248 12,063
7/98 12,652 12,241 12,930 12,588
</TABLE>
- ----------------------------------------------------------------------
Annualized Annualized
One Year 3 Year Inception
Return Return to Date
- ----------------------------------------------------------------------
Fiduciary Shares 4.75% 6.73% 4.84%
- ----------------------------------------------------------------------
Retail Class A Shares 4.66% 6.67% 4.78%
- ----------------------------------------------------------------------
Retail Class A Shares
with load* 1.51% 5.60% 4.12%
- ----------------------------------------------------------------------
* REFLECTS 3.00% SALES CHARGE.
Past performance is not predictive of future results. Performance presented from
October 15, 1993 (commencement of operations of Fiduciary and Retail Shares) to
April 25, 1997 reflects the performance of the Stepstone California Intermediate
Tax-Free Bond Fund.
19
<PAGE> 23
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK CONVERTIBLE SECURITIES FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Convertible Securities Fund
returned 3.02% (Fiduciary Shares). In comparison, the Lipper Convertible
Securities Average produced a return of 6.96%. The unmanaged Merrill Lynch All
Convertible All Securities Excluding Mandatory Quality Index, formerly the
Merrill Lynch Investment Grade Convertible Securities Index, reflected a return
of 9.46%.
FACTORS AFFECTING PERFORMANCE
The Fund was adversely affected by its small company and technology holdings,
whose convertible bonds performed relatively poorly during late 1997. The
convertible bond market has recently been inundated with speculative companies
that are looking for a cheaper form of financing to execute their business
plans. Currently, the market has a bias for large-capitalization companies, of
which relatively few have issued convertible securities.
Convertibles offer a less volatile way to participate in the equity market
because their prices rise in some proportion to the underlying equity, while
being cushioned somewhat on the downside because of their relatively high fixed
interest payments. However, since convertibles are mostly dependent on the
performance of underlying equities, it is important to be very selective of the
companies issuing the securities. The Fund improved its performance during the
period ended July 31, 1998 because of its focus on sound companies that have
strong and visible financial execution.
CURRENT STRATEGY & OUTLOOK
The Fund has recently done well because it has steered clear of most of the
problems in the small capitalization area. However, our current strategy is not
dependent on the capitalization of the underlying equity but rather on the
company's position in its industry, management strength and demonstrated
performance. As opportunities present themselves due to temporary price
weakness, we will make investments where we have confidence that strong
performance is likely to follow. Convertibles should continue to return a
portion of the appreciation of general equity performance while limiting the
downside, especially if interest rates remain stable or decline.
20
<PAGE> 24
HIGHMARK CONVERTIBLE SECURITIES FUND
PORTFOLIO MANAGER:
ROBERT FREUND
BANK OF TOKYO-
MITSUBISHI TRUST CO.
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1994 (FIDUCIARY SHARES)
NET ASSETS (000):
$33,008 (FIDUCIARY SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK CONVERTIBLE
SECURITIES FUND SEEKS A
HIGH LEVEL OF CURRENT INCOME
AND CAPITAL APPRECIATION BY
INVESTING IN CONVERTIBLE
SECURITIES.
Comparison of Change in the Value of a $10,000
Investment in the HighMark Convertible Securities
Fund (Fiduciary Shares) versus
the Merrill Lynch All Convertible All Securities Excluding Mandatory
Quality Index and the Lipper Convertible Securities Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
Highmark Convertible Merrill Lynch All Convertible Lipper Convertible
Securities Fund, All Securities Excluding Securities
Fiduciary Shares Mandatory Quality Index Average
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2/94 $10,000 $10,000 $10,000
7/94 9,648 9,615 9,518
7/95 10,883 11,034 10,847
7/96 11,487 12,360 11,825
7/97 14,601 15,451 15,172
7/98 15,042 16,913 16,228
</TABLE>
- ---------------------------------------------------------------------
Annualized Annualized
One Year 3 Year Inception
Return Return to Date
- ---------------------------------------------------------------------
Fiduciary Shares 3.02% 11.39% 9.26%
- ---------------------------------------------------------------------
Past performance is not predictive of future results. Performance presented from
February 1, 1994 (commencement of operations of Fiduciary Shares) to April 25,
1997 reflects the performance of the Stepstone Convertible Securities Fund.
21
<PAGE> 25
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK GOVERNMENT SECURITIES FUND
PERFORMANCE
For the year ended July 31, 1998, the HighMark Government Securities Fund
returned 7.08% (Fiduciary Shares). In comparison, the Lipper General U.S.
Government Funds Average rose 7.32% during the period while the Lehman Brothers
Intermediate Government Bond Index was up 6.82%.
FACTORS AFFECTING PERFORMANCE
The Fund benefited from being heavily weighted in U.S. Treasury and government
agency securities. Treasury bonds have rallied very strongly as investors around
the world sought liquidity and credit safety. In addition to this flight to
quality, U.S. government securities have benefited from a long period of low
inflation. The Fund benefited from the drop in interest rates by maintaining a
longer duration than the index, especially during calendar 1998. Recently,
corporate bond exposure has been detrimental to the Fund's performance. Despite
the extra yield provided by corporates, they have not been able to keep pace
with the total return provided by comparable Treasury bonds.
CURRENT STRATEGY & OUTLOOK
The Fund continues to be positioned for a further decline in interest rates.
Inflation is likely to remain subdued as increased competition, deregulation,
globalization, and weak overseas economies limit pricing flexibility for
corporations. The Fund remains overweighted in U.S. government agency securities
that provide similar liquidity and credit characteristics compared to
Treasuries, but a higher yield to maturity. Some high-quality corporate bonds
could be added to the portfolio if their yield advantages continue to widen.
22
<PAGE> 26
HIGHMARK GOVERNMENT SECURITIES FUND
PORTFOLIO MANAGER:
THE FUND IS MANAGED
BY A TEAM OF INVESTMENT
PROFESSIONALS AT HIGHMARK
CAPITAL MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1994 (FIDUCIARY SHARES)
NET ASSETS (000):
$113,948 (FIDUCIARY SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK 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, ITS
AGENCIES OR INSTRUMENTALITIES.
Comparison of Change in the Value of a $10,000
Investment in the HighMark Government Securities
Fund (Fiduciary Shares) versus
the Lehman Brothers Intermediate Government Bond Index and the
Lipper General U.S. Government Funds Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark Government Lehman Brothers Lipper General U.S.
Securities Fund, Intermediate Government
Fiduciary Shares Government Bond Index Funds Average
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
2/94 $10,000 $10,000 $10,000
7/94 9,740 9,841 9,747
7/95 10,613 10,789 10,593
7/96 11,016 11,345 11,046
7/97 12,019 12,499 12,130
7/98 12,870 13,542 13,018
</TABLE>
- ---------------------------------------------------------------------
Annualized Annualized
One Year 3 Year Inception
Return Return to Date
- ---------------------------------------------------------------------
Fiduciary Shares 7.08% 6.64% 5.14%
- ---------------------------------------------------------------------
Past performance is not predictive of future results. Performance presented from
February 1, 1994 (commencement of operations of Fiduciary Shares) to April 25,
1997 reflects the performance of the Stepstone Government Securities Fund.
23
<PAGE> 27
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK BOND & INTERMEDIATE-TERM BOND FUNDS
PERFORMANCE
For the year ended July 31, 1998, the HighMark Bond Fund produced a total return
of 7.41% (Fiduciary Shares).* In comparison, the Lipper Corporate A-Rated Debt
Funds Average produced a 7.04% return and the unmanaged Lehman Brothers
Aggregate Bond Index reflected a return of 7.86%.
For the same period, the HighMark Intermediate-Term Bond Fund produced a return
of 6.37% (Fiduciary Shares).** In comparison, the Lipper Intermediate
Investment-Grade Debt Average produced a 6.81% return and the unmanaged Lehman
Brothers Intermediate Government/Corporate Bond Index returned 6.74%.
FACTORS AFFECTING PERFORMANCE
Interest rates generally declined during the period, boosting bond prices. The
benchmark 30-year U.S. Treasury bond yield fell from 6.45% on August 1, 1997 to
5.71% on July 31, 1998. Similarly, the 10-year U.S. Treasury note fell from
6.18% on August 1, 1997 to 5.49% on July 31, 1998. Both portfolios were
favorably affected by longer-than-average durations (sensitivity to interest
rates) in a falling interest rate environment.
Although a falling interest rate environment is good for most bonds, it
generally causes mortgage-backed securities to underperform Treasury bonds. In a
period of falling interest rates, homeowners tend to refinance their mortgages,
causing bondholders to reinvest at lower rates.
The Asian economic crisis has caused investors to become concerned about U.S.
economic growth, which in turn impacts the creditworthiness of corporations. As
a result, corporate bonds underperformed U.S. government bonds, which benefited
from the global flight to quality.
CURRENT STRATEGY & OUTLOOK
Because of the relative underperformance of corporate bonds, yields are
relatively high compared to Treasury bonds. In some cases, we are able to earn
as much as 90 basis points more for a high-quality corporate bond. That is why
we have recently increased our proportion of corporate bonds in both portfolios,
adding issues by Merrill Lynch, Cable & Wireless, Fannie Mae, Phillips
Petroleum, Raytheon and Travelers. We continue to focus on higher quality
issues. The HighMark Bond Fund and the HighMark Intermediate-Term Bond Fund
carry average credit ratings of AA1 and AA3, respectively.***
- ------------
* The HighMark Bond Fund (Retail Class A Shares) produced a total return of
7.47% for the period. Including the maximum sales charge of 3.00%, the total
return for the Fund's Retail Class A Shares was 4.22%.
** The HighMark Intermediate-Term Bond Fund (Retail Class A Shares) produced a
total return of 6.38% for the period. Including the maximum sales charge of
3.00%, the total return for the Fund's Retail Class A Shares was 3.17%.
*** Moody's ratings as of 7/31/98.
24
<PAGE> 28
HIGHMARK BOND FUND
TEAM LEADER:
JACK MONTGOMERY
HIGHMARK CAPITAL
MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
FEBRUARY 15, 1984 (FIDUCIARY SHARES)
JUNE 20, 1994 (RETAIL CLASS A SHARES)
NET ASSETS (000):
$206,125 (FIDUCIARY SHARES)
$ 1,912 (RETAIL CLASS A SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK BOND FUND SEEKS
CURRENT INCOME THROUGH INVESTMENTS
IN LONG-TERM, FIXED INCOME
SECURITIES. THE DOLLAR-WEIGHTED
AVERAGE PORTFOLIO MATURITY OF THE
FUND WILL BE FROM FIVE TO TWENTY
YEARS.
Comparison of Change in the Value of a $10,000
Investment in the HighMark Bond Fund (Fiduciary or
Synthetic Retail Class A Shares)
versus the Lehman Brothers Aggregate Bond Index and the
Lipper Corporate A-Rated Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark HighMark Bond Lehman Brothers Lipper Corporate
Bond Fund, Fund, Synthetic Aggregate Debt A-Rated
Fiduciary Shares Retail A Shares Bond Index Average
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2/84 $10,000 $ 9,700 $10,000 $10,000
7/84 9,896 9,599 10,119 10,014
7/85 12,322 11,952 12,541 12,350
7/86 15,603 15,135 15,236 14,710
7/87 15,853 15,378 15,923 15,457
7/88 16,779 16,276 17,129 16,576
7/89 19,259 18,681 19,734 18,928
7/90 20,322 19,712 21,127 19,933
7/91 22,149 21,484 23,388 21,865
7/92 25,345 24,585 26,844 25,416
7/93 27,895 27,058 29,577 28,237
7/94 27,019 26,027 29,604 27,946
7/95 29,567 28,445 32,597 30,623
7/96 30,989 29,853 34,399 32,075
7/97 34,271 33,041 38,108 35,568
7/98 36,810 35,509 41,103 38,072
</TABLE>
- --------------------------------------------------------------------------------
Annualized Annualized Annualized Annualized
One Year 3 Year 5 Year 10 Year Inception
Return Return Return Return to Date
- --------------------------------------------------------------------------------
Fiduciary Shares 7.41% 7.58% 5.70% 8.17% 9.34%
- --------------------------------------------------------------------------------
Retail Class A Shares 7.47% 7.68% 5.59%+ 8.11%+ 7.91%
- --------------------------------------------------------------------------------
Retail Class A Shares
with load* 4.22% 6.58% 4.95%+ 7.79%+ 7.12%
- --------------------------------------------------------------------------------
* REFLECTS 3.00% SALES CHARGE.
+ SYNTHETIC, NOT ACTUAL.
Past performance is not predictive of future results.
25
<PAGE> 29
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK INTERMEDIATE-TERM BOND FUND
TEAM LEADER:
JACK MONTGOMERY
HIGHMARK CAPITAL
MANAGEMENT, INC.
FUND'S DATE OF INCEPTION:
FEBRUARY 1, 1991 (FIDUCIARY SHARES)
FEBRUARY 3, 1992 (RETAIL CLASS A SHARES)
NET ASSETS (000):
$249,520 (FIDUCIARY SHARES)
$ 5,120 (RETAIL CLASS A SHARES)
INVESTMENT OBJECTIVE:
THE HIGHMARK INTERMEDIATE-TERM
BOND FUND SEEKS TOTAL RETURN
THROUGH INVESTMENTS IN
FIXED-INCOME SECURITIES. THE
DOLLAR-WEIGHTED AVERAGE PORTFOLIO
MATURITY OF THE FUND WILL BE THREE
TO TEN YEARS.
Comparison of Change in the Value of a $10,000 Investment in the
HighMark Intermediate-Term Bond Fund (Fiduciary or Synthetic Retail Class A
Shares) versus the Lehman Brothers Intermediate Government/Corporate Index
and the Lipper Intermediate Investment-Grade Debt Average.
[Line graph omitted--plot points as follows:]
<TABLE>
<CAPTION>
HighMark HighMark Lehman Brothers Lipper
Intermediate-Term Intermediate-Term Intermediate Intermediate
Bond Fund, Bond Fund, Synthetic Government/ Investment-Grade
Fiduciary Shares Retail A Shares Corporate Index Debt Average
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2/01 $10,000 $ 9,700 $10,000 $10,000
7/91 10,427 10,114 10,362 10,388
7/92 12,026 11,670 11,826 11,947
7/93 13,127 12,737 12,843 13,131
7/94 13,066 12,666 12,964 13,050
7/95 14,164 13,731 14,106 14,246
7/96 14,749 14,344 14,853 14,943
7/97 16,140 15,650 16,201 16,474
7/98 17,169 16,649 17,292 17,596
</TABLE>
Annualized Annualized Annualized
One Year 3 Year 5 Year Inception
Return Return Return to Date
- -------------------------------------------------------------------------
Fiduciary Shares 6.37% 6.62% 5.52% 7.63%
- -------------------------------------------------------------------------
Retail Class A Shares 6.38% 6.63% 5.50% 6.67%
- -------------------------------------------------------------------------
Retail Class A Shares
with load* 3.17% 5.57% 4.87% 6.18%
- -------------------------------------------------------------------------
* REFLECTS 3.00% SALES CHARGE.
Past performance is not predictive of future results. Performance presented from
February 28, 1991 (commencement of operations of Fiduciary Shares) and February
29, 1992 (commencement of operation of the Retail Shares) to April 25, 1997
reflects the performance of the Stepstone Intermediate-Term Bond Fund.
26
<PAGE> 30
HIGHMARK TAXABLE MONEY MARKET FUNDS*
OBJECTIVES AND PERFORMANCE
The HighMark Taxable Money Market Funds seek current income with liquidity and
stability of principal. The 100% U.S. Treasury Money Market Fund invests
exclusively in direct U.S. Treasury obligations with maturities of less than 13
months. The U.S. Government Money Market Fund invests in U.S. Treasury and
government agency securities, and in repurchase agreements collateralized by
like instruments. The Diversified Money Market Fund invests in U.S. Treasury and
government agency securities, as well as high-quality short-term obligations
issued by banks and corporations.
The HighMark Taxable Money Market Funds (Fiduciary Shares)** produced the
following one-month effective yields as of July 31, 1998: 100% U.S. Treasury
Money Market Fund: 4.92%; U.S. Government Money Market Fund: 5.13%; Diversified
Money Market Fund: 5.26%.
FACTORS AFFECTING PERFORMANCE
Believing the pace of economic growth would slow as the year progressed, we
extended the average maturities of the Funds in March, which benefited
performance. The 100% U.S. Treasury Money Market Fund gradually shifted assets
away from the Treasury Bill sector, reflecting better availability and higher
yields on coupon-bearing securities. It ended the fiscal year with a weighted
average maturity of 82 days. The U.S. Government Money Market Fund was managed
with a shorter maturity structure due to the higher liquidity needs of the
shareholder base. It ended the year with an average weighted maturity of 45
days. Net inflows to the Diversified Money Market Fund were invested primarily
in six-month securities, with commercial paper and Yankee Dollar certificates of
deposit providing the best value. It ended the period with a 69-day average
weighted maturity.
HIGHMARK CALIFORNIA TAX-FREE MONEY MARKET FUND***
OBJECTIVE AND PERFORMANCE
The HighMark California Tax-Free Money Market Fund seeks as high a level of
current interest income free from federal income tax and California personal
income taxes as is consistent with the preservation of capital and the relative
stability of principal. The Fund's one-month effective yield as of July 31, 1998
(Fiduciary Shares) was 2.77%.**** Using a combined federal and California state
income tax rate of 41.95%, the one-month effective yield is equivalent to a
4.77% taxable yield.
FACTORS AFFECTING PERFORMANCE
The worsening Asian economic crisis is causing a concern, since California is a
major trading partner. However, the state's robust business climate appears to
be withstanding the Asian crisis, which bodes well for the credit quality of the
state's municipal securities.
- ------------
* An investment in the HighMark Taxable Money Market Funds is neither insured
nor guaranteed by the U.S. government. Although these funds seek 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.
** For Retail Class A Shares of the HighMark 100% U.S. Treasury, U.S.
Government and Diversified Money Market Funds, the one-month effective
yield as of July 31, 1998 was 4.65%, 4.87% and 5.00%, respectively. The
one-month effective yield for U.S. Government Money Market Fund's Retail
Class B Shares, launched on 2/2/98, was 4.42% for the same period.
*** An investment in the HighMark California Tax-Free Money Market Fund is
neither insured nor guaranteed by the U.S. government. Although this fund
seeks to maintain a stable net asset value of $1.00 per share, there can be
no assurance that it will be able to do so. Some or all of the income may
be subject to certain state and local taxes, and, in some cases, to the
federal alternative minimum tax.
**** The one-month effective yield as of July 31, 1998 for the Retail Class A
Shares of the California Tax-Free Money Market Fund was 2.51%.
27
<PAGE> 31
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
100% U.S. Treasury Money Market Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Treasury Bill* -- 5.2%
================================================================================
5.193%, 10/15/98 $50,000 $ 49,469
--------
TOTAL U.S. TREASURY BILL
(Cost $49,469) 49,469
--------
================================================================================
U.S. Treasury Notes -- 93.8%
================================================================================
5.875%, 08/15/98 149,837 149,869
6.125%, 08/31/98 138,925 139,001
4.750%, 09/30/98 68,360 68,294
6.000%, 09/30/98 72,940 73,018
4.750%, 10/31/98 115,398 115,185
5.875%, 10/31/98 134,168 134,308
5.500%, 11/15/98 50,000 50,010
5.875%, 01/31/99 165,405 165,775
--------
TOTAL U.S. TREASURY NOTES
(Cost $895,460) 895,460
--------
TOTAL INVESTMENTS -- 99.0%
(Cost $944,929) 944,929
--------
OTHER ASSETS AND LIABILITIES, NET -- 1.0% 9,891
--------
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class (unlimited
authorization -- no par value) based on
227,684,081 outstanding shares of
beneficial interest $227,684
Fund Shares of Retail Class A (unlimited
authorization -- no par value) based on
727,086,980 outstanding shares of
beneficial interest 727,086
Undistributed net investment income 62
Accumulated net realized loss on investments (12)
--------
TOTAL NET ASSETS -- 100.0% $954,820
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $1.00
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- RETAIL CLASS A $1.00
========
- --------------------------------------------------------------------------------
* REPRESENTS THE YIELD TO MATURITY AT DATE OF PURCHASE.
The accompanying notes are an integral part of the financial statements.
28
<PAGE> 32
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
U.S. Government Money Market Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Government Agency
Obligations - Discounted* -- 39.3%
================================================================================
FHLB
5.460%, 09/02/98 $10,000 $ 9,953
FHLMC
5.480%, 08/04/98 15,000 14,993
5.481%, 08/21/98 10,000 9,970
5.479%, 08/26/98 20,000 19,925
5.475%, 09/23/98 10,000 9,920
5.483%, 10/09/98 20,000 19,793
5.491%, 10/09/98 10,000 9,896
5.485%, 12/07/98 10,000 9,809
FNMA
5.506%, 09/25/98 11,000 10,909
5.508%, 10/22/98 10,000 9,876
5.513%, 10/23/98 10,000 9,875
5.522%, 10/23/98 17,900 17,675
SLMA
NEBHELP Inc. (B)
Dir-Pay LOC SLMA
5.519%, 08/12/98 6,509 6,498
--------
TOTAL U.S.GOVERNMENT AGENCY
OBLIGATIONS - DISCOUNTED
(Cost $159,092) 159,092
---------
================================================================================
U.S. Government Agency Obligations -- 33.9%
================================================================================
FFCB
5.375%, 03/02/99 15,000 14,977
FHLB
5.426%, 08/04/98 (A) 10,000 10,000
5.523%, 10/20/98 (A) 10,000 10,000
5.735%, 12/23/98 13,000 13,009
5.579%, 01/27/99 10,000 9,998
FNMA
5.370%, 08/12/98 10,000 9,999
5.300%, 12/10/98 4,365 4,362
5.560%, 12/15/98 10,000 10,000
5.553%, 04/28/99 (A) 10,000 9,996
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Government Agency Obligations (continued)
================================================================================
SLMA
5.243%, 08/20/98 (A) $20,000 $ 19,998
5.403%, 09/17/98 (A) 10,000 10,000
5.303%, 11/06/98 (A) 15,000 14,991
--------
TOTAL U.S.GOVERNMENT AGENCY OBLIGATIONS
(Cost $137,330) 137,330
--------
================================================================================
Repurchase Agreements -- 26.8%
================================================================================
Deutsche Bank Securities, Inc.
5.590%, dated 07/31/98, matures
08/03/98, repurchase price
$74,410,361 (collateralized
by U.S. Treasury Bond, par value
$283,790,000, 0.00% - 5.50%,
04/15/00 - 11/15/21: market
value $75,863,318) 74,376 74,376
J.P. Morgan Securities, Inc.
5.580%, dated 07/31/98,
matures 08/03/98, repurchase
price $34,260,522
(collateralized by various
U.S. Government Obligations,
total par value $22,225,000,
10.625%, 08/15/15: market
value $34,930,841) 34,245 34,245
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $108,621) 108,621
--------
TOTAL INVESTMENTS -- 100.0%
(Cost $405,043) 405,043
--------
OTHER ASSETS AND LIABILITIES, NET -- 0.0% 127
--------
The accompanying notes are an integral part of the financial statements.
29
<PAGE> 33
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
U.S. Government Money Market Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par value)
based on 283,253,052 outstanding shares
of beneficial interest $283,253
Fund Shares of Retail Class A
(unlimited authorization -- no par value)
based on 122,067,630 outstanding shares
of beneficial interest 122,068
Fund Shares of Retail Class B
(unlimited authorization -- no par value)
based on 253 outstanding shares of
beneficial interest --
Accumulated net realized loss on investments (151)
--------
TOTAL NET ASSETS -- 100.0% $405,170
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $1.00
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- RETAIL CLASS A $1.00
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- RETAIL CLASS B $1.00
========
- --------------------------------------------------------------------------------
* REPRESENTS THE YIELD TO MATURITY AT THE DATE OF PURCHASE.
(A) ADJUSTABLE RATE SECURITY -- THE RATE REFLECTED ON THE STATEMENT OF NET
ASSETS IS THE RATE IN EFFECT ON JULY 31, 1998.
(B) SECURITIES SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, EXEMPT
FROM REGISTRATION UNDER SECTION 3A-4, 4[2] OR 144A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER
"ACCREDITED INVESTORS."
FFCB--FEDERAL FARM CREDIT BANK
FHLB--FEDERAL HOME LOAN BANK
FHLMC--FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
LOC--LETTER OF CREDIT
SLMA--STUDENT LOAN MARKETING ASSOCIATION
The accompanying notes are an integral part of the financial statements.
30
<PAGE> 34
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Diversified Money Market Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Certificates of Deposit - Yankee -- 18.4%
================================================================================
ABN AMRO Bank, N.V. Chicago
5.750%, 03/31/99 $50,000 $ 49,984
Bank of Nova Scotia, Portland
5.800%, 10/06/98 15,000 15,005
Banque Nationale de Paris
5.630%, 10/27/98 50,000 50,000
Barclays Bank PLC, New York
5.530%, 02/23/99 50,000 49,986
Barclays Bank PLC, New York (A)
5.528%, 06/01/99 50,000 49,969
Canadian Imperial Bank of
Commerce, New York
5.580%, 08/25/98 50,000 50,000
5.580%, 09/04/98 35,000 35,000
5.665%, 11/16/98 25,000 25,001
Societe Generale, New York
5.780%, 03/31/99 50,000 49,984
Toronto Dominion Bank, New York
5.600%, 12/22/98 50,000 50,002
--------
TOTAL CERTIFICATES OF DEPOSIT - YANKEE
(Cost $424,931) 424,931
--------
================================================================================
Eurodollar Certificates of Deposit -- 4.3%
================================================================================
Abbey National Treasury Service, London
5.580%, 08/26/98 50,000 50,000
Commerzbank A.G., London
5.600%, 12/04/98 48,000 47,996
--------
TOTAL EURODOLLAR CERTIFICATES OF DEPOSIT
(Cost $97,996) 97,996
--------
================================================================================
Eurodollar Time Deposit -- 2.2%
================================================================================
Westdeutsche Landesbank
Girozentrale, London
5.688%, 08/03/98 50,000 50,000
--------
TOTAL EURODOLLAR TIME DEPOSIT
(Cost $50,000) 50,000
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Certificates of Deposit -- 2.6%
================================================================================
Bankers Trust Co, New York
5.960%, 08/11/98 $15,000 $ 15,001
Wilmington Trust Co.
5.580%, 08/07/98 45,000 45,000
--------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $60,001) 60,001
--------
================================================================================
Bank Notes -- 2.6%
================================================================================
American Express Centurion Bank (A)
5.596%, 07/14/99 50,000 50,000
Southtrust Bank, N.A. (A)
5.656%, 09/17/98 10,000 10,001
--------
TOTAL BANK NOTES
(Cost $60,001) 60,001
--------
================================================================================
Commercial Paper* -- 54.4%
================================================================================
ABS - TRADE RECEIVABLES -- 14.3%
Asset Securitization Cooperative,
Corp. (B)
5.589%, 08/28/98 50,000 49,793
5.593%, 09/24/98 48,000 47,603
Concord Minutemen Capital
Company LLC (B)
5.608%, 10/07/98 37,844 37,455
Corporate Receivables Corp. (B)
5.594%, 09/21/98 35,000 34,726
5.588%, 10/21/98 24,000 23,703
International Securitization Corp. (B)
5.613%, 09/15/98 10,500 10,427
5.627%, 12/29/98 23,675 23,134
Lexington Parker Capital
Company, LLC (B)
5.726%, 08/06/98 50,000 49,960
5.585%, 09/11/98 50,000 49,685
--------
326,486
--------
The accompanying notes are an integral part of the financial statements.
31
<PAGE> 35
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Diversified Money Market Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Commercial Paper (continued)
================================================================================
ABS - DIVERSIFIED FINANCIAL ASSETS -- 8.0%
Beta Finance, Inc. (B)
5.590%, 09/21/98 $25,000 $ 24,805
5.594%, 09/25/98 43,000 42,639
CC (USA) Inc. (B)
5.592%, 08/18/98 29,500 29,423
5.604%, 08/20/98 11,000 10,968
5.597%, 09/02/98 25,000 24,877
Greenwich Funding Corp. (B)
5.606%, 09/15/98 52,014 51,654
--------
184,366
--------
AUTOMOTIVE -- 4.3%
Daimler-Benz North America, Corp.
5.578%, 08/28/98 50,000 49,794
5.600%, 11/20/98 50,000 49,152
--------
98,946
--------
BANKING -- 11.7%
Bankers Trust Corp.
5.610%, 12/18/98 25,000 24,472
J.P. Morgan & Co, Inc.
5.603%, 10/05/98 50,000 49,502
5.598%, 12/04/98 25,000 24,525
5.589%, 12/21/98 34,750 34,002
National Australia
Funding (Del) Inc.
5.584%, 11/10/98 50,000 49,231
NationsBank Corporation
5.609%, 11/13/98 40,000 39,364
UBS Finance (Del) Inc.
5.593%, 12/21/98 50,000 48,923
--------
270,019
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Commercial Paper (continued)
================================================================================
BROKERAGE -- 8.3%
Bear Stearns Companies, Inc.
5.589%, 12/21/98 $50,000 $ 48,923
5.601%, 12/21/98 50,000 48,921
Credit Suisse First Boston Inc. (B)
5.587%, 08/25/98 25,000 24,908
Merrill Lynch & Co. Inc.,
5.618%, 09/18/98 50,000 49,634
5.602%, 11/04/98 20,000 19,710
---------
192,096
---------
DIVERSIFIED OPERATIONS -- 5.3%
CIT Group
5.631%, 11/06/98 75,000 73,884
General Electric Capital, Corp.
5.602%, 11/19/98 50,000 49,160
---------
123,044
---------
ELECTRONIC AND ELECTRICAL -- 1.0%
Panasonic Finance (America) (B)
5.586%, 10/09/98 22,500 22,262
---------
OIL & GAS EXPLORATION PRODUCTS
& SERVICES -- 0.4% BP America, Inc.
5.673%, 08/03/98 10,000 9,997
---------
TECHNOLOGY -- 0.5%
International Business Machines Corp.
5.673%, 08/03/98 10,500 10,497
---------
UTILITY -- 0.6%
Electricity Corp. of New Zealand
5.652%, 08/11/98 13,877 13,856
---------
TOTAL COMMERCIAL PAPER
(Cost $1,251,569) 1,251,569
---------
The accompanying notes are an integral part of the financial statements.
32
<PAGE> 36
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Diversified Money Market Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations -- 6.9%
================================================================================
Bankers Trust Corp Ser A Medium
Term Note (A) (B)
5.680%, 08/06/99 $ 30,000 $ 30,000
Goldman Sachs Group LP
Master Demand Note (A)
5.798%, 03/25/99 100,000 100,000
Merrill Lynch & Co. Inc.
Medium Term Note (A)
5.820%, 03/24/99 30,000 30,017
----------
TOTAL CORPORATE OBLIGATIONS
(Cost $160,017) 160,017
----------
================================================================================
U.S. Government Agency Obligations -- 5.0%
================================================================================
FHLB (A)
5.523%, 10/20/98 65,000 64,997
FNMA (A)
5.453%, 03/16/99 50,000 49,984
----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $114,981) 114,981
----------
================================================================================
Repurchase Agreements -- 2.6%
================================================================================
Deutsche Bank Securities, Inc.
5.59%, dated 07/31/98,
matures 08/03/98,
repurchase price $41,434,975
(collateralized by various
U.S. Treasury Bill,
par value $41,474,000,
5.50%-6.875%,
03/31/00-05/31/03;
total market
value $42,244,150) 41,416 41,416
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Repurchase Agreements (continued)
================================================================================
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98, matures
08/03/98, repurchase price
$19,644,098 (collateralized
by various U.S. Treasury Bills,
total par value $20,917,000, 0.00%,
05/27/99; total market value
$20,028,028) $19,635 $ 19,635
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $61,051) 61,051
----------
TOTAL INVESTMENTS -- 99.0%
(Cost $2,280,547) 2,280,547
----------
OTHER ASSETS AND LIABILITIES, NET -- 1.0% 23,874
----------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization --
no par value) based on 1,181,354,171
outstanding shares of beneficial
interest 1,181,353
Fund Shares of Retail Class A
(unlimited authorization --
no par value) based on 1,124,487,597
outstanding shares of beneficial
interest 1,124,488
Accumulated net realized loss
on investments (1,420)
----------
TOTAL NET ASSETS -- 100.0% $2,304,421
==========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $1.00
==========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- RETAIL CLASS A $1.00
==========
- --------------------------------------------------------------------------------
* REPRESENTS THE YIELD TO MATURITY AT DATE OF PURCHASE.
(A) ADJUSTABLE RATE SECURITY -- THE RATE REFLECTED ON THE STATEMENT OF NET
ASSETS IS THE RATE IN EFFECT ON JULY 31, 1998.
(B) SECURITIES SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, EXEMPT
FROM REGISTRATION UNDER SECTION 3A-4, 4[2] OR 144A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER
"ACCREDITED INVESTORS."
FHLB -- FEDERAL HOME LOAN BANK
FNMA --FEDERAL NATIONAL MORTGAGE ASSOCIATION
SER -- SERIES
The accompanying notes are an integral part of the financial statements.
33
<PAGE> 37
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds -- 97.1%
================================================================================
ABAG, California Financial Authority
For Nonprofit Corps. American
Baptist Homes West Project,
Ser C (A)
3.400%, 10/01/27 $9,975 $ 9,975
Alternative Energy Source
Finance Authority, GE Capital
Corporation-Arroyo Energy
Project, VRDN (A) (B) (C)
3.050%, 12/01/20 1,100 1,100
Anaheim Public Improvement
Corporation, 1995 Police
Facilities Refinancing Project,
COP, VRDN, AMBAC Insured
(A) (B) (C)
2.900%, 08/01/08 3,400 3,400
Anaheim, Housing Authority,
Bel Page Project, VRDN
(A) (B) (C)
3.000%, 08/01/20 6,000 6,000
Camarillo, Multi-Family Housing
Revenue, Heritage Park
Apartments, VRDN, (A) (B) (C)
3.000%, 07/15/19 1,900 1,900
Contra Costa, Water District,
TECP
3.400%, 10/15/98 5,000 5,000
3.400%, 10/22/98 5,000 5,000
Dublin, Housing Finance Authority,
Multi-Family, RB, VRDN (A)
3.350%, 06/15/28 2,500 2,500
East Bay, Municipal Utility
District, TECP
3.100%, 08/05/98 8,600 8,600
3.500%, 09/11/98 1,000 1,000
Education Facilities Authority,
Carnegie Institute, TECP
3.550%, 09/11/98 1,000 1,000
3.450%, 10/09/98 5,000 5,000
Education Facilities Authority,
Stanford University, Ser L,
VRDN, RB (A)
2.900%, 10/01/14 1,000 1,000
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Glendale, Unified School
District, GO, FGIC Insured
5.500%, 09/01/98 $3,420 $ 3,425
Health Facilities Finance
Authority, Catholic
Healthcare, MBIA Insured,
VRDN, RB (A)
3.000%, 07/01/12 1,300 1,300
Health Facilities Finance
Authority, Hospital Revenue
Bond, VRDN, RB, Rabo Bank
Insured (A)
3.450%, 07/01/22 7,600 7,600
Health Facilities Finance
Authority, Pooled Loan
Program, VRDN, RB, Rabo
Bank Insured (A)
2.950%, 06/01/07 5,105 5,105
Health Facilities Finance
Authority, RB
7.625%, 10/01/15 6,150 6,314
Health Facilities Finance
Authority, St. Joseph's
Hospital, VRDN, RB (A) (B)
3.400%, 08/01/98 6,280 6,280
Health Facilities Finance
Authority, Sutter Health,
Ser A, VRDN, RB, (A) (B)
3.500%, 01/10/00 6,900 6,900
Health Facilities Finance
Authority, Adventist Health
Systems, VRDN, RB,
(A) (B) (C)
3.050%, 08/01/21 1,500 1,500
Health Facilities Finance
Authority, Memorial Health
Services, VRDN, RB, (A)
3.050%, 10/01/24 20,240 20,240
Health Facilities Finance
Authority, Pooled Loan
Program, Ser A, VRDN, RB
(A) (B) (C)
2.950%, 09/01/20 2,410 2,410
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 38
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Health Facilities Finance
Authority, Pooled Loan
Program, Ser B, VRDN,
RB (A) (B)
2.950%, 10/01/10 $4,100 $ 4,100
Health Facilities Finance
Authority, Santa Barbara
Cottage, Ser B,
VRDN, RB (A) (B) (C)
3.050%, 09/01/05 3,920 3,920
Health Facilities Finance
Authority, Santa Barbara
Cottage, Ser C, VRDN, RB
(A) (B) (C)
3.050%, 09/01/15 6,000 6,000
Health Facilities Finance
Authority, St. Francis Medical,
Ser F, RB, VRDN, MBIA
Insured (A)
3.000%, 07/01/10 3,000 3,000
Irvine Ranch Water District,
VRDN, RB (A)
3.500%, 09/02/20 2,500 2,500
Irvine Ranch Water District,
Consolidated Refunding Ser
1995 B, VRDN, RB (A) (B) (C)
3.500%, 10/01/10 2,000 2,000
Irvine Ranch Water District,
Improvement District, Ser A,
VRDN, RB (A) (B) (C)
3.350%, 11/15/13 1,500 1,500
Irvine Ranch Water District,
Improvement District,VRDN, RB (A)
3.500%, 09/02/23 1,000 1,000
Irvine Ranch Water District,
Improvement District, Ser A,
VRDN RB (A) (B) (C)
3.350%, 11/15/13 1,000 1,000
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Livermore, Portola Meadows
Apartments Project, VRDN,
RB, (A) (B) (C)
3.150%, 05/01/19 $ 5,100 $ 5,100
Los Angeles, Wastewater System,
Ser A, RB, MBIA Insured
8.500%, 06/01/99 1,775 1,846
Los Angeles, Capital Asset
Lease Corp, TECP
3.200%, 08/13/98 5,800 5,800
3.500%, 09/09/98 3,000 3,000
Los Angeles County,
Metropolitan Transportation
Authority, Ser A,
VRDN, RB MBIA Insured (A)
3.000%, 07/01/20 14,900 14,900
Los Angeles County, Pension
Obligation, Ser B, RB, VRDN
(A) (B) (C)
2.900%, 06/30/07 2,000 2,000
Los Angeles County,
Pension Obligation,
Ser C, RB, VRDN,
AMBAC Insured (A) (B)
2.900%, 06/30/07 10,400 10,400
Los Angeles County,
Public Works
financing Authority,
Regional Park
& Open Space District,
Ser A, RB
5.000%, 10/01/98 12,000 12,024
Los Angeles County, Ser A,
VRDN, RB, FGIC Insured
(A) (B)
2.900%, 07/01/12 5,700 5,700
Los Angeles,
Department of Water & Power,
TECP
3.150%, 10/07/98 4,600 4,600
Los Angeles, Multi-Family
Housing, Ser K, VRDN, RB
(A) (B)
3.350%, 07/01/10 14,200 14,200
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 39
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Los Angeles, Transportation
Authority, TECP
3.400%, 09/29/98 $ 2,400 $ 2,400
Los Angeles, California
Community College, District
TRAN
4.250%, 07/29/99 1,200 1,207
Los Angeles, California
Unified School District, GO,
FSA Insured
4.000%, 11/01/98 1,455 1,456
Los Angeles, Unified School
District Authority, Belmont
Learning Complex Project,
Ser A, VRDN (A) (B)
3.200%, 12/01/17 14,900 14,900
Los Angeles Wastewater System,
TECP
3.400%, 11/18/98 5,000 5,000
Metro Water District of
Southern California, TECP
3.400%, 08/07/98 1,800 1,800
3.550%, 09/11/98 1,000 1,000
3.400%, 11/18/98 2,000 2,000
Modesto Multi-Family Housing,
Live Oak Project, VRDN, RB (A) (B)
3.000%, 09/01/24 2,400 2,400
Ontario Industrial Development
Authority, Winsford Partners Project,
Ser A, VRDN, RB (A) (B) (C)
3.200%, 09/01/08 2,000 2,000
Orange County, Apartment
Development Authority, Wood
Canyon Villas, AMT (A) (B)
3.150%, 08/07/98 2,000 2,000
Orange County, Transportation
Authority, TECP
3.600%, 09/09/98 3,000 3,000
Orange County, Water District,
TECP
3.350%, 09/04/98 8,200 8,200
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Oxnard Housing Authority, Seawind
Apartment Projects, Ser A,
VRDN, RB (A) (B) (C)
3.400%, 12/01/20 $ 2,750 $ 2,750
Pasadena, Rose Bowl
Improvement Project, (A)
3.200%, 12/01/11 1,300 1,300
Pasadena, Rose Bowl Improvement
Project, VRDN, COP
(A) (B) (C)
3.200%, 12/01/16 2,000 2,000
Pollution Control Finance
Authority, Chevron USA
Project, Ser B, VRDN, RB (A)
3.900%, 06/15/05 3,100 3,101
Pollution Control Finance
Authority, Shell Oil, Ser A,
VRDN, RB (A) (B)
3.400%, 10/01/08 4,800 4,800
Pollution Control Finance
Authority, Shell Oil, Ser A,
VRDN, RB, MBIA Insured
(A) (B)
3.400%, 10/01/10 600 600
Pollution Control Finance
Authority, Shell Oil, VRDN,
RB (A) (B)
3.400%, 10/01/06 3,200 3,200
3.400%, 10/01/09 2,500 2,500
Pollution Control Finance
Authority, Shell Oil, Ser A,
VRDN, RB (A) (B)
3.400%, 11/01/00 3,000 3,000
3.400%, 10/01/11 1,100 1,100
Pollution Control Finance
Authority, Southern California
Edison, Ser B,
VRDN, RB, (A) (B)
3.900%, 02/28/08 1,600 1,600
Pollution Control Finance
Authority, Burney Forest,
VRDN, RB (A) (B) (C)
3.500%, 09/01/20 9,200 9,200
The accompanying notes are an integral part of the financial statements.
36
<PAGE> 40
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Pollution Control Finance
Authority, Chevron Project,
VRDN, RB (A) (B)
4.000%, 05/15/02 $ 2,585 $ 2,585
Pollution Control Finance
Authority, Delano Project
1989, VRDN, RB (A) (B) (C)
3.500%, 08/01/19 5,500 5,500
Pollution Control Finance
Authority, Delano Project
1990, VRDN, RB (A) (B) (C)
3.500%, 08/01/19 3,200 3,200
Pollution Control Finance
Authority, Delano Project
1991, VRDN, RB (A) (B) (C)
3.500%, 08/01/19 700 700
Pollution Control Finance
Authority, Exxon Project,
VRDN, RB (A) (B) (C)
3.300%, 12/01/12 5,000 5,000
Pollution Control Finance
Authority, Honey Lake Power
Project, VRDN, RB
(A) (B) (C)
3.500%, 09/01/18 3,400 3,400
Pollution Control Finance
Authority, Southern California
Edison, Ser A, VRDN,
RB (A) (B)
3.900%, 02/28/08 23,700 23,700
Pollution Control Finance
Authority, Southern
California Edison, Ser D,
VRDN, RB (A) (B)
3.900%, 02/28/08 12,005 12,005
Rancho Mirage, Eisenhower
Medical Center, VRDN (A) (B)
3.200%, 07/01/22 6,800 6,800
Riverside County, COP,
MBIA Insured
4.000%, 12/01/98 1,505 1,508
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Riverside County,
Riverside County
Public Facilities,
COP, Ser 1985 A,
VRDN (A) (B) (C)
3.050%, 12/01/15 $14,400 $ 14,400
Sacramento, Municipal Utility
District, RB, VRDN (A) (B)
7.875%, 08/15/16 5,315 5,429
Sacramento, Regional County
Sanitation District
4.000%, 08/01/98 1,875 1,875
San Bernadino County, Housing
Authority, Victoria Terrace,
Project A, VRDN,
RB (A) (B) (C)
3.100%, 06/01/15 2,450 2,450
San Diego, County Teeter
Projects, TECP
3.450%, 10/16/98 7,200 7,200
San Diego, Sales Tax
Revenue Project, TECP
3.600%, 09/09/98 4,000 4,000
San Diego, Transportation
Authority
Sales Tax Revenue, TECP
3.450%, 09/24/98 7,400 7,400
San Francisco, City and
County Referendum, Ser 1,
FGIC Insured
4.500%, 06/15/99 1,015 1,023
San Joaquin County,
California Transportation
Authority, TECP
3.550%, 10/08/98 7,000 7,000
Santa Clara, California
Unified
School District, GO
7.000%, 08/01/98 2,500 2,500
Santa Magarita, Dana Point
Authority, RB, AMBAC Insured
4.250%, 08/01/98 1,905 1,905
School Facility Financing,
Capital Improvement Projects
VRDN, RB (A)
3.050%, 07/01/22 9,600 9,600
The accompanying notes are an integral part of the financial statements.
37
<PAGE> 41
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
South Coast, Education Agency
TRAN, RB Ser A, MBIA Insured
4.500%, 06/30/99 $ 5,000 $ 5,042
Southern California,
Metro Water District,
Water Revenue Authorization,
Ser B, VRDN, RB (A)
3.100%, 07/01/28 3,200 3,200
Southern California, Metro
Water District, Water Revenue
Authorization,
Ser C, VRDN, RB (A)
2.900%, 07/01/28 1,000 1,000
State Housing Finance Agency,
Multi-Family Housing, Ser B,
VRDN, RB (A) (B) (C)
3.100%, 08/01/38 3,200 3,200
State of California, TECP
3.350%, 10/06/98 3,300 3,300
Statewide Communities
Development Authority, TRAN,
Ser B, FSA Insured
4.750%, 09/30/98 10,000 10,019
Statewide Communities
Development Authority,
North California
Retirement, VRDN, RB
(A) (B) (C)
3.350%, 06/01/26 40,000 40,000
Statewide Communities
Development Authority,
St. Joseph Health System,
COP, VRDN, RB (A) (B)
3.050%, 07/01/08 1,600 1,600
Transportation Finance
Authority, VRDN, RB, (A)
3.300%, 10/01/27 17,500 17,500
Turlock Irrigation District,
Transmission Projects, COP,
Ser A, VRDN (A) (C)
2.950%, 01/01/26 4,050 4,050
Turlock Irrigation District,
Revenue Credit Support,
MBIA Insured
4.500%, 01/01/99 1,030 1,035
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
University of California
Regents,TECP
3.400%, 08/07/98 $ 3,000 $ 3,000
Vista Multi-Family
Housing Rate,
VRDN (A) (B)
3.000%, 05/01/05 2,640 2,640
West Basin Municipal Water
District, Phase II Recycled
Water Project,
Ser B, COP, VRDN (A) (B) (C)
2.850%, 08/01/27 2,200 2,200
West Basin Municipal Water
District, Phase II Recycled
Water Project,
Ser C, COP, VRDN (A) (B) (C)
3.000%, 08/01/27 2,000 2,000
West Covina Redevelopment
Agency, Lakes Public Parking
Project, VRDN, RB (A) (B) (C)
2.900%, 08/01/18 2,505 2,505
--------
TOTAL CALIFORNIA MUNICIPAL BONDS
(Cost $531,124) 531,124
--------
================================================================================
Cash Equivalents -- 2.7%
================================================================================
Provident California Tax
Free Money Market 14,388 14,388
SEI California Tax Free
Money Market 209 209
--------
TOTAL CASH EQUIVALENTS
(Cost $14,597) 14,597
--------
TOTAL INVESTMENTS -- 99.8%
(Cost $545,721) 545,721
--------
OTHER ASSETS AND LIABILITIES, NET -- 0.2% 1,026
--------
The accompanying notes are an integral part of the financial statements.
38
<PAGE> 42
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par value)
based on 241,534,163 outstanding shares
of beneficial interest $241,534
Fund Shares of Retail Class A (unlimited
authorization -- no par value)
based on 305,279,757 outstanding shares
of beneficial interest 305,279
Accumulated net realized loss on investments (66)
--------
TOTAL NET ASSETS -- 100.0% $546,747
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $1.00
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- RETAIL CLASS A $1.00
========
- --------------------------------------------------------------------------------
(A) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS IS
THE RATE IN EFFECT ON JULY 31, 1998.
(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
COP--CERTIFICATE OF PARTICIPATION
FGIC--FINANCIAL GUARANTY INSURANCE COMPANY
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
The accompanying notes are an integral part of the financial statements.
39
<PAGE> 43
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Intermediate-Term Bond Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations -- 62.9%
================================================================================
AEROSPACE & DEFENSE -- 5.1%
Lockheed Martin
7.450%, 06/15/04 $5,500 $ 5,809
McDonnell Douglas
6.875%, 11/01/06 1,000 1,050
Raytheon
6.750%, 08/15/07 6,000 6,150
--------
13,009
--------
AUTOMOTIVE -- 7.9%
Ford Motor Credit
6.850%, 08/15/00 2,500 2,544
8.200%, 02/15/02 6,000 6,397
6.500%, 02/28/02 2,000 2,028
General Motors Acceptance (C)
8.000%, 10/01/99 4,000 4,095
General Motors
8.950%, 07/02/09 4,455 4,990
--------
20,054
--------
BANKS -- 9.9%
Bankers Trust
7.250%, 01/15/03 3,500 3,627
Bank of Boston
8.375%, 12/15/02 2,500 2,700
Banponce
6.750%, 12/15/05 2,000 2,040
Citicorp
6.750%, 08/15/05 4,075 4,202
First Bank System
6.875%, 09/15/07 3,000 3,120
Fleet Financial
7.125%, 04/15/06 5,000 5,212
Mellon Bank NA
7.000%, 03/15/06 1,500 1,568
Mercantile Bancorp
7.050%, 06/15/04 2,500 2,594
--------
25,063
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations (continued)
================================================================================
ENTERTAINMENT -- 0.8%
Walt Disney
6.375%, 03/30/01 $2,000 $ 2,028
--------
FINANCIAL SERVICES -- 11.3%
Associates Corporation of N.A.
6.000%, 04/15/03 2,000 1,988
Avco Financial Services
7.375%, 08/15/01 3,500 3,636
Bear Stearns
6.500%, 06/15/00 4,000 4,040
Commercial Credit
6.200%, 11/15/01 2,000 2,015
General Electric
Capital Services
6.500%, 11/01/06 2,000 2,058
Golden West Financial
6.700%, 07/01/02 1,000 1,018
Grand Metro Investment
8.625%, 08/15/01 1,000 1,071
Lehman Brothers Holdings
8.750%, 05/15/02 4,000 4,325
Merrill Lynch & Co.
Medium Term Note
6.330%, 08/25/00 1,500 1,511
Morgan Stanley
6.125%, 10/01/03 3,000 2,985
Salomon
7.300%, 05/15/02 4,000 4,150
--------
28,797
--------
FOREIGN GOVERNMENTS -- 3.8%
Province of British Columbia
7.000%, 01/15/03 1,500 1,556
Province of Manitoba
6.125%, 01/19/04 4,000 4,005
Province of Ontario
7.375%, 01/27/03 4,000 4,210
--------
9,771
--------
The accompanying notes are an integral part of the financial statements.
40
<PAGE> 44
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Intermediate-Term Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations (continued)
================================================================================
INDUSTRIAL -- 3.5%
Du Pont (E.I.) de Nemours
6.500%, 09/01/02 $7,000 $ 7,140
Tyco International Limited
6.500%, 11/01/01 1,800 1,816
--------
8,956
--------
INSURANCE -- 3.0%
American General
7.700%, 10/15/99 2,490 2,540
Travelers Property Casualty
6.750%, 04/15/01 5,000 5,094
--------
7,634
--------
MACHINERY -- 0.4%
Caterpillar Tractor
6.000%, 05/01/07 1,000 976
--------
RETAIL -- 4.8%
Bass America
6.750%, 08/01/99 4,000 4,030
Sears Roebuck Acceptance
7.000%, 06/15/07 5,000 5,206
Wal-Mart Stores
6.375%, 03/01/03 3,000 3,056
--------
12,292
--------
TELEPHONES & TELECOMMUNICATION -- 5.5%
Cable and Wireless
Communications
6.625%, 03/06/05 7,000 7,026
New England Telephone &
Telegraph
6.250%, 03/15/03 2,000 2,018
WorldCom
9.375%, 01/15/04 2,091 2,201
7.750%, 04/01/07 2,500 2,691
--------
13,936
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations (continued)
================================================================================
UTILITIES -- 6.9%
Arkansas Electric Cooperative
7.330%, 06/30/08 $2,219 $ 2,355
Oklahoma Gas & Electric
6.650%, 07/15/27 2,500 2,622
Old Dominion Electric
7.480%, 12/01/13 5,550 5,973
Pacific Gas & Electric
8.750%, 01/01/01 3,280 3,489
Panhandle Eastern
7.875%, 08/15/04 3,000 3,240
--------
17,679
--------
TOTAL CORPORATE OBLIGATIONS
(Cost $155,803) 160,195
--------
================================================================================
U.S. Treasury Obligations -- 6.0%
================================================================================
6.250%, 05/31/00 (A) 5,000 5,064
6.125%, 09/30/00 (A) 2,000 2,024
5.875%, 02/15/04 (A) 4,000 4,064
7.250%, 05/15/04 (A) 2,000 2,164
5.875%, 11/15/05 (A) 2,000 2,033
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $15,135) 15,349
--------
================================================================================
U.S. Government Agency Mortgage-
Backed Obligations -- 13.5%
================================================================================
FNMA
6.500%, 12/01/07 1,514 1,523
5.750%, 02/15/08 (A) 2,000 1,981
6.000%, 05/01/09 730 722
6.000%, 09/01/10 1,544 1,526
6.000%, 05/01/11 2,483 2,454
6.000%, 01/01/12 1,792 1,771
6.000%, 03/01/13 2,903 2,869
FHLMC
8.000%, 05/15/00 469 477
7.000%, 09/01/01 6,397 6,494
The accompanying notes are an integral part of the financial statements.
41
<PAGE> 45
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Intermediate-Term Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Government Agency Mortgage-
Backed Obligations (continued)
================================================================================
FNMA
6.200%, 09/25/02 $1,000 $ 998
5.450%, 10/10/03 650 640
6.770%, 09/01/05 6,750 7,109
6.850%, 09/12/05 2,000 2,032
6.700%, 11/10/05 3,750 3,796
--------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS
(Cost $33,855) 34,392
--------
================================================================================
Asset-Backed Securities -- 15.0%
================================================================================
American Express Master Trust,
Ser 1994-1A
7.150%, 08/15/99 6,500 6,510
Chase Manhattan Auto Grantor Trust,
Ser 1996B
6.610%, 09/15/02 3,960 3,990
Citibank Credit Card Master
Trust 1997-3 Cl A
6.839%, 02/10/04 3,000 3,061
Citibank Credit Card Master
Trust 1998-3 Cl A
5.800%, 02/07/05 3,400 3,348
Contimortgage Home Equity
Loan Trust, Ser 1995-3
Cl A4,
7.440%, 09/15/12 3,110 3,245
Country Wide Mortgage 1993-2
Cl 4
6.750%, 04/25/08 936 940
EQCC Home Equity Loan Trust,
1996-3 Cl A6
7.400%, 12/15/19 2,500 2,605
Green Tree Financial
6.750%, 06/15/25 2,000 2,042
J.C. Penney Master Credit
Card Trust Series B, Cl A
8.950%, 10/15/01 1,000 1,061
J.C. Penney Master Credit
Card Trust
9.625%, 06/15/00 6,000 6,461
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Asset-Backed Securities (continued)
================================================================================
Residential Funding Mortgage
1992-S36 Cl A4
6.750%, 11/25/07 $ 2,280 $ 2,280
Sears Credit Account
Master Trust,
Ser 1994-1 Cl A
7.000%, 01/15/04 2,500 2,530
--------
TOTAL ASSET-BACKED SECURITIES
(Cost $37,097) 38,073
--------
================================================================================
Commercial Paper -- 5.5%
================================================================================
Engelhard Corporation (B)
5.803%, 08/03/98 10,000 9,997
South Western Electric PLC (B)
5.725%, 08/20/98 3,959 3,947
--------
TOTAL COMMERCIAL PAPER
(Cost $13,944) 13,944
--------
================================================================================
Repurchase Agreements -- 2.8%
================================================================================
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98,
matures 08/03/98,
repurchase price $4,749,362
(collateralized by
U.S. Treasury Bill, par value
$5,089,000, 0.000%,
07/22/99: market value
$4,842,597) 4,747 4,747
Lehman Brothers, Inc. (B)
5.75%, dated 07/31/98, matures
08/03/98, repurchase price
$2,316,995 (collateralized
by various corporate obligations,
0.00%-5.75%, 08/03/98-08/20/98:
total market value
$2,362,203) 2,316 2,316
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $7,063) 7,063
--------
TOTAL INVESTMENTS -- 105.7%
(Cost $262,897) 269,016
--------
The accompanying notes are an integral part of the financial statements.
42
<PAGE> 46
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Intermediate-Term Bond Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (6.4%) $(16,260)
--------
OTHER ASSETS AND LIABILITIES, NET -- 0.7% 1,884
--------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par value)
based on 24,188,661 outstanding
shares of beneficial interest $245,806
Fund Shares of Retail Class A (unlimited
authorization -- no par value)
based on 496,361 outstanding shares
of beneficial interest 5,692
Undistributed net investment income 184
Accumulated net realized loss on
investments (3,161)
Net unrealized appreciation on
investments 6,119
--------
TOTAL NET ASSETS -- 100.0% $254,640
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $10.32
======
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS A $10.31
======
MAXIMUM OFFERING PRICE PER SHARE --
RETAIL CLASS A ($10.31 / 97%) $10.63
======
- --------------------------------------------------------------------------------
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT
JULY 31, 1998 (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN AT
JULY 31, 1998 WAS $15,939,433.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
(C) VARIABLE RATE SECURITY
CL--CLASS
FHLMC--FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
The accompanying notes are an integral part of the financial statements.
43
<PAGE> 47
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds -- 98.3%
================================================================================
Alameda County,
Santa Rita Jail Project,
COP, MBIA Insured
5.250%, 12/01/04 $ 500 $ 527
Anaheim, Water Revenue Bond,
Callable 04/01/00 @ 102
5.750%, 04/01/04 250 251
Anaheim Public Financing
Authority, Electric Utility
Projects, RB, MBIA Insured
5.500%, 10/01/10 1,750 1,837
Antioch Public Finance
Authority, Police
Facilities Project, Lease RB,
MBIA Insured,
Callable 04/01/03 @ 102
4.550%, 01/01/03 500 506
Atascadero, School District
Participation
Note, MBIA Insured,
Callable 02/01/07 @ 101
5.200%, 08/01/08 1,000 1,055
Bakersfield, Convention Center
Expansion Project, COP,
MBIA Insured
5.000%, 04/01/03 335 348
5.300%, 04/01/06 500 531
Berkeley, Unified School
District, GO,
Ser D, FGIC Insured
8.250%, 08/01/05 345 427
Berkeley, City Pension Insurer,
GO, AMBAC Insured,
4.200%, 06/01/02 820 823
Berkeley, School District,
Ser D,
GO, FGIC Insured
8.250%, 08/01/04 295 357
California Industry, GO, FGIC
Insured, Callable
07/01/05 @100.625
5.500%, 07/01/10 670 708
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
California State Department of
Water, Ser J-2, RB
6.000%, 12/01/06 $ 1,400 $ 1,559
California State, GO
5.400%, 02/01/01 500 500
7.000%, 08/01/02 1,500 1,656
6.000%, 10/01/05 1,300 1,438
6.500%, 09/01/06 1,000 1,149
6.250%, 04/01/08 1,000 1,135
California State Public
Works Board, various
University of California
Projects, Ser A, RB,
Pre-Refunded 12/01/02 @ 102
6.600%, 12/01/22 800 895
California State Public Works,
Dept Corrections-Del Norte,
Ser C, RB,
4.750%, 12/01/05 500 512
California State Public Works,
Various University Calif
Project, Ser A,
AMBAC Insured,
Callable 12/01/07 @ 102
5.100%, 12/01/10 1,000 1,039
Calleguas, Las Virgines
Municipal Water District,
RB, FSA Insured
4.000%, 11/01/02 500 499
Calleguas, Municipal
Water District,
RB, AMBAC Insured,
Pre-Refunded 07/01/01 @ 102
6.250%, 07/01/05 1,000 1,080
Central Coast, Water Authority,
RB, AMBAC Insured,
Callable 10/01/06 @ 102
5.000%, 10/01/07 2,000 2,087
Coachella Valley, Flood
Control Project,
RB, AMBAC Insured
4.500%, 10/01/06 1,045 1,055
The accompanying notes are an integral part of the financial statements.
44
<PAGE> 48
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Coast Community College, Coastline
Community College Center Project,
MBIA Insured, Callable
02/01/06 @ 102
5.200%, 02/01/08 $ 500 $ 522
5.500%, 02/01/11 640 674
Contra Costa, Transportation
Authority Sales Tax Revenue,
Ser A, Callable 03/01/02
@ 102 6.875%, 03/01/07 500 542
Contra Costa, Merrithew
Memorial Hospital Project,
COP, MBIA Insured,
Callable 11/01/07 @ 102
5.200%, 11/01/09 2,000 2,095
5.500%, 11/01/12 2,160 2,273
Contra Costa, Transportation
Authority, Ser A, RB,
FGIC Insured, Callable
08/01/05 @ 100
5.300%, 03/01/06 600 631
Contra Costa Water
Distribution, Ser G,
RB, MBIA Insured, Callable
10/01/04 @ 102
5.700%, 10/01/06 2,500 2,725
Cupertino, COP, Callable
01/01/03 @ 102
5.500%, 01/01/05 500 531
Desert Sands, Union School
District, RB, FSA Insured,
Callable
03/01/05 @102
5.400%, 03/01/08 660 699
5.500%, 03/01/09 565 600
Downey, Civic Center Project,
PN, MBIA Insured
5.300%, 02/01/06 600 634
East Bay, Regal Park District,
Ser C, GO, FGIC Insured
6.500%, 09/01/01 685 734
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
East Bay, Wastewater
Treatment System,
RB, FGIC Insured
6.000%, 06/01/06 $ 750 $ 831
Eastern Municipal
Water District,
PN, FGIC Insured
5.000%, 07/01/03 1,395 1,449
Eastern Municipal
Water District, PN,
Pre-Refunded 07/01/01 @102,
6.600%, 07/01/05 1,120 1,221
Eastern Municipal Water
District, COP, FGIC Insured
5.000%, 07/01/04 1,000 1,041
Eastern Municipal Water
District, PN, Pre-Refunded
11/01/98 @102
6.900%, 11/01/03 1,755 1,950
Education Facilities Authority,
Santa Clara University,
MBIA Insured,
Callable 09/01/06 @ 102
5.100%, 09/01/08 510 534
Educational Facilities
Authority, Pooled
College & Universities Project,
Ser C, RB, MBIA Insured
5.000%, 03/01/05 560 584
Educational Facilities
Authority, Santa
Clara University, RB, MBIA
Insured
5.000%, 09/01/07 400 417
Educational Facilities
Authority, Pooled
College & University Projects C,
RB, MBIA Insured
5.000%, 03/01/06 655 682
Escondido, High School
District, GO,
MBIA Insured,
5.200%, 11/01/06 1,000 1,057
Escondido, Union High School,
GO, Callable 11/06/06 @102
5.600%, 11/01/09 1,000 1,089
The accompanying notes are an integral part of the financial statements.
45
<PAGE> 49
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Gilroy, Unified School
District, COP,
FSA Insured, Callable
09/01/04 @ 102
5.750%, 09/01/05 $1,235 $ 1,338
Glendale, Union School
District, GO, FGIC Insured
5.500%, 09/01/05 600 645
Hawthorne, School District,
Ser A, GO, FGIC Insured,
4.650%, 11/01/06 1,000 1,020
Health Facilities Finance
Authority, Catholic Health
Facility, AMBAC Insured,
Callable 07/01/05 @ 102
5.750%, 07/01/07 925 1,009
Health Facilities Finance
Authority, Catholic Health
Facility, Ser A,
MBIA Insured, Callable
07/01/04 @ 102
5.000%, 09/01/07 1,500 1,549
Health Facilities Finance
Authority, Catholic
Healthcare West, Ser A,
MBIA Insured
4.400%, 07/01/05 1,000 1,005
Health Facilities Finance
Authority, Cedars Sinai
Medical Center, Ser B,
MBIA Insured, Callable
08/01/07 @ 102
4.750%, 08/01/09 500 504
Hollister, Community Development
Project, GO, AMBAC Insured,
Callable 10/01/07 @102
5.000%, 10/01/08 740 767
Irvine Ranch, Water District
Issue, RB, Callable
08/15/98 @100
7.900%, 08/15/02 500 502
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Joshua Basin,
Desert Financing Authority,
RB, AMBAC Insured
4.800%, 05/01/08 $ 445 $ 455
4.900%, 05/01/09 465 478
Kern County, Water Agency
District, GO, Callable
11/01/1998 @ 102
5.900%, 05/01/06 300 307
Las Virgenes,
Unified School District,
GO, Ser A, MBIA Insured
5.000%, 11/01/05 1,000 1,046
Los Angeles, Airport RB,
FGIC Insured
6.000%, 05/15/05 1,000 1,101
Los Angeles, GO,
FGIC Insured, Callable
09/01/03 @101
5.800%, 09/01/09 1,000 1,070
Los Angeles,
Airport Revenue Bond,
Ser A, FGIC Insured, Callable
05/15/05 @101
5.500%, 05/15/08 1,000 1,065
Los Angeles,
Wastewater Systems, RB,
FGIC Insured
5.250%, 06/01/07 1,000 1,061
Los Angeles,
County Public Works
Financing Authority,
Regal Park & Open Space
District, RB
5.250%, 10/01/05 1,700 1,802
Los Angeles, Regal Park & Open
Space District, GO
6.000%, 10/01/03 900 978
Los Angeles, Regal Park & Open
Space Dist, GO, Callable
10/01/2007 @ 101
5.500%, 10/01/08 1,870 2,013
Los Angeles, Department of
Airports, RB, Ser B, FGIC
Insured 6.500%, 05/15/04 1,840 2,054
The accompanying notes are an integral part of the financial statements.
46
<PAGE> 50
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Los Angeles, Unified School District,
GO, Ser A, FGIC Insured,
Callable 09/01/03 @ 101
4.600%, 07/01/06 $1,050 $ 1,067
Los Angeles, Department of
Water & Power
6.750%, 04/01/06 1,460 1,568
Los Angeles, Department of
Water & Power, RB, FGIC Insured,
Callable 09/01/04 @ 101
6.800%, 09/01/99 1,000 1,034
Los Angeles, GO, Ser A,
MBIA Insured 5.500%,
09/01/04 700 748
Los Angeles, GO, FGIC Insured,
Callable 09/01/03 @ 101
5.400%, 09/01/06 300 317
Los Angeles, Unified School
District, GO, Ser A, FSA
Insured
4.200%, 11/01/03 930 931
Los Angeles, Unified School
District, GO, FGIC Insured
6.000%, 07/01/07 1,000 1,116
Los Angeles, Wastewater System,
Ser B, RB, MBIA Insured,
Callable 06/01/03 @ 102
5.400%, 06/01/08 300 315
M-S-R Public Power Agency,
San Juan Project, RB, Ser F,
AMBAC Insured,
Callable 07/01/03 @ 102,
6.000%, 07/01/08 230 250
Merced County, Csac Lease,
COP, FSA Insured
6.000%, 10/01/05 640 694
Merced County, COP, FSA Insured
6.000%, 10/01/05 610 656
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Metropolitan Southern California,
Waterworks Revenue, Ser C,
6.000%, 07/01/07 $1,900 $ 2,121
Metropolitan Water District
of Southern California,
Ser B, RB, MBIA Insured,
Callable 07/01/06 @ 102
5.250%, 07/01/07 1,820 1,931
Metropolitan Water District
of Southern California,
Water District, MBIA
Insured, Callable
07/01/02 @ 102
5.400%, 07/01/04 1,000 1,059
Milpitas Redevelopment Agency,
Tax Allocation,
Redevelopment Project
Area # 1, RB, MBIA Insured
4.600%, 01/15/06 1,040 1,056
Modesto, Community Center, COP,
AMBAC Insured, Callable
11/01/01 @ 102
6.500%, 11/01/07 1,000 1,094
Modesto, District Finance
Authority, Water Project,
RB, AMBAC Insured
5.500%, 09/01/03 400 425
Mojave Water Agency,
Supplemental Water Entitlement,
COP, MBIA Insured
4.950%, 09/01/06 500 518
Mojave Water Agency, Water
Entitlement, GO, MBIA Insured
5.100%, 09/01/08 500 522
Monrovia, Redevelopment Agency
Tax Allocation Project, GO,
AMBAC Insured
4.200%, 05/01/02 500 502
4.300%, 05/01/03 500 504
Mountain View, Los Altos Unified
School District, Ser B, GO,
Callable 05/01/07 @ 102
5.250%, 05/01/08 500 531
5.350%, 05/01/09 755 807
The accompanying notes are an integral part of the financial statements.
47
<PAGE> 51
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Mountain View, Los Altos
Unified School District,
Ser B, GO, Callable
05/01/2007 @ 102
5.650%, 05/01/12 $ 585 $ 629
Mountain View, Tax Allocation
Project, Ser A, MBIA Insured
5.400%, 08/01/08 700 750
Mountain View, Tax Allocation,
Ser A, MBIA Insured
5.600%, 08/01/10 500 537
Newport Beach, Water Services
Capital Improvement Project,
RB, AMBAC Insured
4.100%, 08/01/03 600 599
Northern California Power Agency,
Ser A, MBIA Insured
6.400%, 08/02/02 1,080 1,192
6.400%, 08/01/07 1,420 1,553
Oak Park, Unified School
District, GO, MBIA Insured
5.250%, 05/01/08 1,015 1,073
Orange County, Allen-McColloch
Pipeline, COP, MBIA Insured
5.500%, 07/01/05 2,000 2,140
Orange County, Civic Center
Authority, RB
5.000%, 12/01/98 200 201
Orange County, Transportation
Authority, Measure M, RB,
FGIC Insured
5.500%, 02/15/01 1,000 1,035
5.800%, 02/15/05 1,000 1,084
6.000%, 02/15/07 2,310 2,561
Orange County, Water District
Revenue, Ser A, RB, MBIA Insured,
Callable 08/15/08 @ 102
4.875%, 08/15/10 2,655 2,682
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Port of Oakland, Ser D, RB,
MBIA Insured
6.500%, 11/01/03 $ 500 $ 556
Redding, Electric System,
Ser A, COP, MBIA Insured
6.150%, 07/01/02 1,000 1,071
Redwood City, Elementary School
District, GO, FGIC Insured
5.500%, 08/01/10 1,140 1,234
Riverside, Water Revenue, RB,
Callable 10/01/98 @ 101.25
5.750%, 04/01/03 250 254
Sacramento, County Sanitation
District, GO, FGIC Insured
5.000%, 08/01/03 1,000 1,040
Sacramento, County Sanitation
District Financing Authority,
RB
5.500%, 12/01/03 1,000 1,065
5.000%, 08/01/04 870 906
Sacramento Municipal Utility
District, Ser C, RB,
FGIC Insured,
Escrowed To Maturity,
Callable 11/15/02 @ 102
5.750%, 11/15/08 570 623
Sacramento Municipal Utility
District, Ser C, RB,
FGIC Insured,
Unrefunded Balance,
Callable 11/15/02 @ 102
5.750%, 11/15/08 380 406
San Bernardino, County
Transportation Authority,
RB, FGIC Insured
6.000%, 03/01/02 360 382
San Bernardino, County
Transportation Authority,
Sales Tax Revenue,
RB, MBIA Insured, Callable
03/01/03 @ 102
6.000%, 03/01/06 1,735 1,917
The accompanying notes are an integral part of the financial statements.
48
<PAGE> 52
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
San Bernardino, Municipal Water
Department, RB, FGIC Insured
4.500%, 02/01/00 $ 875 $ 871
4.050%, 02/01/03 425 424
San Bernardino, County
Transportation Authority,
Sales Tax Revenue, RB,
FGIC Insured
6.000%, 03/01/06 1,000 1,074
San Bernardino, County
Transportation Authority,
Sales Tax Revenue, RB,
Ser A, FSA Insured
5.250%, 03/01/07 2,000 2,120
San Diego County, Refunded
Balance, Ser A,
7.000%, 04/01/06 355 395
San Diego County Regional
Transportation Commission,
Sales Tax RB, Ser A,
FGIC Insured
5.250%, 04/01/06 2,100 2,221
San Diego County, Second Sr,
Ser A, ABMAC Insured
6.000%, 04/01/06 3,000 3,319
5.000%, 04/01/08 1,995 2,072
San Diego County Water
Authority Revenue, COP,
Ser A
5.000%, 05/01/04 2,445 2,537
San Diego County, Water
Authority Revenue, RB,
Prerefunded
05/01/01 @ 102
6.400%, 05/01/08 2,000 2,162
San Diego County,
Water Authority Revenue,
Ser A, RB,
4.250%, 05/01/04 1,000 999
San Diego Lease Revenue, RB,
Callable 09/01/04 @ 102
5.500%, 09/01/07 450 481
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
San Diego, Public Facility
Financing Authority,
Sewer Revenue, RB,
FGIC Insured
6.000%, 05/15/06 $2,800 $ 3,101
San Francisco, Bay Area Rapid
Transportation District, RB,
FGIC Insured
5.500%, 07/01/05 2,200 2,362
6.500%, 07/01/07 2,000 2,175
San Francisco Building Authority,
Department General Services,
Lease RB, Ser A
4.500%, 10/01/00 300 303
San Francisco City & County,
GO, Utility Public Safety
Improvement Project, Ser F,
FGIC Insured,
Callable 06/15/01 @ 100
6.500%, 06/15/08 1,000 1,070
San Francisco City & County,
Public Safety Improvements
Project, Ser F,
FGIC Insured, Prerefunded
06/15/01 @ 100
6.500%, 06/15/07 1,000 1,069
San Francisco, New Public
Housing Authority, RB
5.000%, 08/01/03 350 359
San Joaquin County, COP,
MBIA Insured
4.625%, 11/15/05 1,035 1,056
4.800%, 11/15/07 1,000 1,026
San Jose, Redevelopment
Agency, RB,
AMBAC Insured,
5.000%, 08/01/09 1,500 1,558
San Jose, Redevelopment Agency,
Tax Allocation Merged Area
Redevelopment Project,
MBIA Insured
6.000%, 08/01/07 1,100 1,229
The accompanying notes are an integral part of the financial statements.
49
<PAGE> 53
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
San Jose,
Redevelopment Agency,
Merged Area Redevelopment
Project, RB, MBIA Insured
6.000%, 08/01/08 $2,000 $ 2,237
San Jose, Tax Allocation -
Merged Area Redevelopment
Project, MBIA Insured
6.000%, 08/01/06 1,000 1,110
Santa Ana, Community
Redevelopment
Agency Tax Allocation,
6.400%, 12/15/10 815 858
Santa Barbara County,
Transportation
Authority, RB, FGIC Insured,
Callable 4/01/04 @ 101,
04/01/06 @ 100
5.000%, 04/01/07 1,000 1,036
Santa Clara County, Financing
Authority Lease, Ser A, RB,
AMBAC Insured
4.600%, 11/15/06 1,350 1,372
Santa Clara, Electric Revenue,
Ser A, MBIA Insured
6.000%, 07/01/05 1,595 1,713
Santa Clara, COP, AMBAC
Insured, Callable
05/15/02 @ 102
Sinking Fund 05/15/06 @ 100
6.000%, 05/15/12 400 428
Santa Cruz County, Public
Facilities Financing Authority,
Tax Allocation,
Callable 09/01/03 @ 102,
MBIA Insured
5.100%, 09/01/05 500 526
Saratoga Unified School District,
Ser A, GO, FGIC Insured,
Callable 09/01/07 @ 102
4.800%, 09/01/08 825 845
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
South Coast, County Water
District, RB,
Callable 11/01/98 @ 100.25
5.900%, 05/01/99 $ 245 $ 247
South Orange County, Public
Financing Authority,
Foothill Area,
Ser C, GO, FGIC Insured
7.500%, 08/15/07 1,000 1,224
Southern California,
Public Power
Authority Crossover,
Ser B, AMBAC Insured
5.900%, 07/01/04 1,000 1,076
Tulare County, Capital
Improvement
Project, Ser A, COP,
MBIA Insured
5.250%, 02/15/05 1,000 1,052
5.375%, 02/15/06 500 531
Turlock, District Revenue,
Ser A, MBIA Insured
6.000%, 01/01/07 1,000 1,111
University of California,
Multiple Purpose Projects,
Ser B, RB, MBIA Insured
4.800%, 09/01/07 1,500 1,536
University of California,
UCLA, RB,
Callable 11/01/03 @ 102
5.000%, 11/01/04 1,000 1,040
Walnut Valley, Badillo/Grand
Transmission Project, COP,
FGIC Insured,
Callable 02/01/02 @ 102
6.125%, 02/01/07 730 774
West Basin Municipal
Water District,
Ser A, COP, AMBAC Insured,
Callable 08/01/07 @ 101
5.000%, 08/01/08 425 440
West Hollywood, COP, FGIC Insured
4.550%, 02/01/09 665 662
The accompanying notes are an integral part of the financial statements.
50
<PAGE> 54
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
California Municipal Bonds (continued)
================================================================================
Yorba Linda, Tax Allocation Revenue
Redevelopment Project,
Ser A, MBIA Insured,
4.250%, 09/01/04 $800 $ 802
--------
TOTAL CALIFORNIA MUNICIPAL BONDS
(Cost $160,507) 167,117
--------
================================================================================
Cash Equivalents -- 0.4%
================================================================================
Provident California Tax
Free Money Market 640 640
SEI California Tax Free Money Market 5 5
--------
TOTAL CASH EQUIVALENTS
(Cost $645) 645
--------
TOTAL INVESTMENTS -- 98.7%
(Cost $161,152) $167,762
--------
OTHER ASSETS AND LIABILITIES, NET -- 1.3% 2,225
--------
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par value)
based on 15,636,489 outstanding shares
of beneficial interest $151,603
Fund Shares of Retail Class A
(unlimited authorization -- no par value)
based on 1,290,529 outstanding shares
of beneficial interest 12,629
Undistributed net investment income 146
Accumulated net realized loss
on investments (1,001)
Net unrealized appreciation
on investments 6,610
--------
TOTAL NET ASSETS-- 100.0% $169,987
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $10.04
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS A $10.01
========
MAXIMUM OFFERING PRICE PER SHARE --
RETAIL CLASS A ($10.01 / 97%) $10.32
========
- --------------------------------------------------------------------------------
AMBAC -- AMERICAN MUNICIPAL BOND ASSURANCE COMPANY
COP -- CERTIFICATES OF PARTICIPATION
FGIC -- FINANCIAL GUARANTY INSURANCE CORPORATION
FSA -- FINANCIAL SECURITY ASSURANCE
GO -- GENERAL OBLIGATION
MBIA -- MUNICIPAL BOND INVESTORS ASSURANCE
RB -- REVENUE BOND
SER -- SERIES
SR. -- SENIOR
The accompanying notes are an integral part of the financial statements.
51
<PAGE> 55
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Bond Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Bonds -- 42.6%
================================================================================
AEROSPACE & DEFENSE -- 0.8%
Lockheed Martin
7.700%, 06/15/08 $1,500 $ 1,644
--------
AUTOMOTIVE -- 6.0%
Ford Motor Credit
6.850%, 08/15/00 1,000 1,017
7.000%, 09/25/01 1,500 1,541
6.500%, 02/28/02 4,000 4,055
7.750%, 11/15/02 1,000 1,059
General Motors Acceptance
8.000%, 10/01/99 4,790 4,904
--------
12,576
--------
BANKS -- 6.2%
Bank of Boston
8.375%, 12/15/02 1,250 1,350
Citicorp
6.750%, 08/15/05 4,100 4,228
First Bank System
6.875%, 09/15/07 4,500 4,680
Lehman Brothers
8.375%, 02/15/99 1,000 1,012
Mercantile Bancorp
7.050%, 06/15/04 1,500 1,556
--------
12,826
--------
BEAUTY PRODUCTS -- 0.3%
Procter and Gamble
8.500%, 08/10/09 500 594
--------
COMPUTERS & SERVICES -- 2.4%
IBM
6.500%, 01/15/28 5,000 4,931
--------
ENTERTAINMENT -- 0.7%
Walt Disney
6.375%, 03/30/01 1,500 1,521
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Bonds (continued)
================================================================================
FINANCIAL SERVICES -- 7.4%
Associates Corporation of N.A.
6.000%, 04/15/03 $2,000 $ 1,987
General Electric Capital
Services
6.500%, 11/01/06 3,500 3,601
Golden West Financial
6.700%, 07/01/02 2,800 2,849
Merrill Lynch & Co.
Medium Term Note
6.330%, 08/25/00 3,000 3,023
Morgan Stanley
6.125%, 10/01/03 1,300 1,294
Salomon Brothers
7.300%, 05/15/02 1,000 1,038
Sears Finance
7.000%, 06/15/07 1,500 1,562
--------
15,354
--------
FOOD, BEVERAGE & TOBACCO -- 0.5%
Philip Morris
7.750%, 01/15/27 1,000 1,069
--------
FOREIGN GOVERNMENTS -- 2.1%
Hydro Quebec
8.050%, 07/07/24 1,125 1,320
Province of British Columbia
7.000%, 01/15/03 1,500 1,556
Province of Ontario
7.375%, 01/27/03 1,500 1,579
--------
4,455
--------
INDUSTRIAL -- 1.6%
Caterpillar Tractor
6.000%, 05/01/07 3,360 3,280
--------
INSURANCE -- 3.7%
American General
7.700%, 10/15/99 1,500 1,530
Travelers Property Casualty
6.750%, 04/15/01 6,000 6,113
--------
7,643
--------
The accompanying notes are an integral part of the financial statements.
52
<PAGE> 56
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Bonds (continued)
================================================================================
METALS & MINING -- 0.7%
Potash
7.125%, 06/15/07 $1,500 $ 1,541
--------
PETROLEUM REFINING -- 1.0%
Phillips Petroleum
Callable 03/15/08 @ 102.7
7.125%, 03/15/28 2,000 2,018
--------
PRINTING & PUBLISHING -- 1.9%
E.W. Scripps
6.375%, 10/15/02 4,000 4,030
--------
RETAIL -- 2.1%
Bass America
6.750%, 08/01/99 200 202
JC Penney
6.000%, 05/01/06 1,230 1,192
Wal-Mart Stores
6.375%, 03/01/03 2,850 2,903
--------
4,297
--------
TELEPHONES & TELECOMMUNICATION -- 5.2%
Bell Atlantic
8.000%, 10/15/29 2,980 3,546
Cable and Wireless Communications
6.625%, 03/06/05 4,500 4,517
New England Telephone & Telegraph
6.250%, 03/15/03 1,500 1,513
7.875%, 11/15/29 1,000 1,180
--------
10,756
--------
TOTAL CORPORATE BONDS
(Cost $86,327) 88,535
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Government Agency Obligations -- 27.6%
================================================================================
FHLB
8.375%, 10/25/99 $ 300 $ 309
FHLMC
7.000%, 02/20/18 3,105 3,125
6.250%, 01/15/24 2,000 1,969
FNMA
9.050%, 04/10/00 3,000 3,161
6.200%, 09/25/02 2,000 1,995
5.450%, 10/10/03 3,800 3,744
6.850%, 09/12/05 2,000 2,032
6.700%, 11/10/05 1,000 1,012
5.750%, 02/15/08 (A) 2,000 1,981
6.500%, 03/25/13 1,500 1,496
6.500%, 03/01/24 1,323 1,317
8.000%, 08/01/24 257 266
8.000%, 09/01/24 38 40
8.000%, 10/01/24 140 146
8.500%, 05/01/25 899 938
6.500%, 01/01/26 780 776
6.500%, 05/01/26 884 880
8.000%, 07/01/26 1,309 1,357
6.000%, 12/01/27 1,978 1,924
6.500%, 01/01/28 1,006 1,001
6.500%, 02/01/28 1,975 1,966
6.500%, 03/01/28 1,996 1,988
6.500%, 04/01/28 4,939 4,915
6.000%, 07/22/28 1,000 971
GNMA
8.000%, 04/15/17 378 393
8.000%, 05/15/17 186 193
6.500%, 06/15/23 2,359 2,353
6.500%, 12/15/23 1,301 1,298
6.500%, 01/15/24 513 512
7.000%, 01/15/24 620 630
7.500%, 01/15/24 1,029 1,062
6.500%, 02/15/24 850 848
The accompanying notes are an integral part of the financial statements.
53
<PAGE> 57
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Bond Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Government Agency Obligations (continued)
================================================================================
GNMA (continued)
7.500%, 02/15/24 $1,221 $ 1,259
7.000%, 04/15/24 1,540 1,564
7.500%, 09/15/25 771 795
6.500%, 10/15/25 781 780
6.500%, 04/15/26 1,831 1,827
7.500%, 02/15/27 968 998
7.500%, 06/15/27 530 546
7.500%, 07/15/27 1,859 1,914
7.500%, 08/15/27 1,037 1,071
--------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $55,384) 57,352
--------
================================================================================
U.S. Treasury Obligations -- 13.4%
================================================================================
U.S. Treasury Bond
10.375%, 11/15/12 (A) 3,000 3,993
7.250%, 05/15/16 9,850 11,426
8.750%, 08/15/20 4,860 6,612
7.250%, 08/15/22 (A) 1,500 1,775
7.125%, 02/15/23 2,800 3,272
U.S. Treasury Notes
8.500%, 11/15/00 420 447
6.625%, 06/30/01 300 309
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $24,766) 27,834
--------
================================================================================
Asset-Backed Securities -- 7.9%
================================================================================
Chase Manhattan
Auto Grantor Trust
6.610%, 09/15/02 660 665
Citibank Credit Card Master
Trust 1997-3 Cl A
6.839%, 02/10/04 2,700 2,755
Citibank Credit Card Master
Trust 1998-3 Cl A
5.800%, 02/07/05 2,000 1,969
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Asset-Backed Securities (continued)
================================================================================
EQCC Home Equity Loan Trust
1995-2 Cl A4
7.800%, 12/15/10 $2,200 $ 2,302
EQCC Home Equity Loan Trust
1996-3 Cl A6
7.400%, 12/15/19 2,500 2,605
Green Tree Financial 1995-9
Cl A
6.800%, 01/15/27 2,500 2,577
J.C. Penney Master Credit
Card Trust
9.625%, 06/15/00 1,500 1,615
Standard Credit Card Master
Trust 1993-3
5.500%, 02/07/00 2,000 1,998
--------
TOTAL ASSET-BACKED SECURITIES
(Cost $16,072) 16,486
--------
================================================================================
Collateralized Mortgage Obligations -- 5.9%
================================================================================
American Express Master
Trust 1998-1
5.900%, 04/15/04 4,000 4,040
Contimortgage Home Equity
Loan Trust 1994-4 Cl A3
8.090%, 09/15/09 1,675 1,752
Contimortgage Home Equity
Loan Trust 1995-2 Cl A4
8.050%, 07/15/12 1,000 1,050
Contimortgage Home Equity
Loan Trust, 1995-3 Cl A4
7.440%, 09/15/12 1,000 1,043
Country Wide Mortgage 1993-2 Cl 4
6.750%, 04/25/08 393 395
GE Capital Mortgage Service
1994-1 Cl A6
6.500%, 01/25/24 2,650 2,638
Residential Funding Mortgage
1992-S36 Cl A4
6.750%, 11/25/07 1,413 1,414
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $11,828) 12,332
--------
The accompanying notes are an integral part of the financial statements.
54
<PAGE> 58
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Bond Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Repurchase Agreements -- 4.9%
================================================================================
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98,
matures 08/03/98, repurchase
price $3,657,906
(collateralized by
U.S. Treasury Bill,
par value $3,827,000, 0.00%,
07/22/98: market value
$3,729,531) $3,656 $ 3,656
Lehman Brothers, Inc. (B)
5.75%, dated 07/31/98,
matures 08/03/98,
repurchase price $6,648,184
(collateralized by various
corporate obligations,
0.00%-5.75%, 08/03/98:
total market value
$6,777,900) 6,645 6,645
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $10,301) 10,301
--------
TOTAL INVESTMENTS -- 102.3%
(Cost $204,678) 212,840
--------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (3.2%) (6,645)
--------
OTHER ASSETS AND LIABILITIES, NET -- 0.9% 1,842
--------
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization --
no par value) based on 19,061,377
outstanding shares of
beneficial interest $200,926
Fund Shares of Retail Class A
(unlimited authorization --
no par value) based on 178,209
outstanding shares of beneficial
interest 1,885
Undistributed net investment income 245
Accumulated net realized loss
on investments (3,181)
Net unrealized appreciation
on investments 8,162
--------
TOTAL NET ASSETS -- 100.0% $208,037
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $10.81
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS A $10.73
========
MAXIMUM OFFERING PRICE PER SHARE --
RETAIL CLASS A ($10.73 / 97%) $11.06
========
- --------------------------------------------------------------------------------
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT JULY 31,
1998 (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN AT JULY 31,
1988 WAS $6,505,604.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
CL--CLASS
FHLB--FEDERAL HOME LOAN BANK
FHLMC--FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
GNMA--GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
The accompanying notes are an integral part of the financial statements.
55
<PAGE> 59
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Convertible Securities Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Convertible Bonds -- 53.7%
================================================================================
AUTOMOTIVE -- 1.6%
Magna International
5.000%, 10/15/02 $ 400 $ 515
--------
BROADCASTING, NEWSPAPERS & ADVERTISING -- 7.7%
Clear Channel Communications
2.625%, 04/01/03 1,250 1,392
Getty Images (A)
4.750%, 06/01/03 1,200 1,148
--------
2,540
--------
COMMUNICATIONS -- 2.8%
Brightpoint (A)
0.000%, 03/11/18 2,250 908
--------
ENVIRONMENTAL SERVICES -- 6.4%
U.S. Filter
4.500%, 12/15/01 825 838
Waste Management
4.000%, 02/01/02 700 952
WMX Technologies
2.000%, 01/24/05 300 332
--------
2,122
--------
HOTELS & LODGING -- 1.4%
Hilton Hotels
5.000%, 05/15/06 450 450
--------
INSURANCE -- 1.8%
Penn Treaty American
6.250%, 12/01/03 500 593
--------
MACHINERY -- 6.1%
Solectron (A)
6.000%, 03/01/06 1,100 1,679
Thermo Electron
4.250%, 01/01/03 375 352
--------
2,031
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Convertible Bonds (continued)
================================================================================
MEDICAL PRODUCTS & SERVICES -- 3.5%
Alza
5.000%, 05/01/06 $ 500 $ 604
Assisted Living Concepts
6.000%, 11/01/02 250 236
Integrated Health Services
5.750%, 01/01/01 300 318
--------
1,158
--------
PETROLEUM & FUEL PRODUCTS -- 7.7%
Diamond Offshore Drilling (Loews)
3.125%, 09/15/07 1,275 1,106
Halter Marine Group
4.500%, 09/15/04 1,050 889
Parker Drilling
5.500%, 08/01/04 700 562
--------
2,557
--------
RETAIL -- 13.1%
Federated Department Stores
5.000%, 10/01/03 400 636
Home Depot
3.250%, 10/01/01 625 1,171
Nine West Group (A)
5.500%, 07/15/03 750 599
Rite Aid (A)
5.250%, 09/15/02 750 966
Staples (A)
4.500%, 10/01/00 425 967
--------
4,339
--------
SEMI-CONDUCTORS/INSTRUMENTS -- 1.6%
Adaptec (A)
4.750%, 02/01/04 675 512
--------
TOTAL CONVERTIBLE BONDS
(Cost $16,190) 17,725
--------
The accompanying notes are an integral part of the financial statements.
56
<PAGE> 60
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Convertible Securities Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks -- 8.6%
================================================================================
AIR TRANSPORTATION -- 1.6%
AMR* 7,594 $ 542
--------
BANKS -- 2.5%
Citicorp 3,000 510
First Union 5,266 317
--------
827
--------
MISCELLANEOUS BUSINESS SERVICES -- 1.4%
First Data 16,088 466
--------
TELEPHONES & TELECOMMUNICATION-- 3.1%
Intermedia Communications 233 9
WorldCom* 19,187 1,015
--------
1,024
--------
TOTAL COMMON STOCKS
(Cost $1,532) 2,859
--------
================================================================================
Preferred Stocks -- 18.5%
================================================================================
COMPUTERS & SERVICES -- 2.1%
Microsoft, Ser A 7,325 698
--------
ENERGY & POWER -- 1.9%
MCN Financing 13,750 620
--------
ENTERTAINMENT -- 1.9%
Metromedia International* 13,500 618
--------
INSURANCE -- 1.9%
SunAmerica 13,000 631
--------
MISCELLANEOUS BUSINESS SERVICES -- 3.6%
Cendant 38,000 1,182
--------
MISCELLANEOUS TRANSPORTATION -- 1.5%
Fleetwood Capital Trust* (A) 10,000 501
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES/PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Preferred Stocks (continued)
================================================================================
PAPER & PAPER PRODUCTS -- 0.9%
International Paper 6,500 $ 318
--------
PRINTING & PUBLISHING -- 1.8%
Hollinger International 40,000 583
--------
TELEPHONES & TELECOMMUNICATION -- 2.9%
Intermedia Communications* (A) 20,000 955
--------
TOTAL PREFERRED STOCKS
(Cost $5,942) 6,106
--------
================================================================================
Regulated Investment Companies -- 9.8%
================================================================================
Dollar General, STRYPES*
05/15/01 25,000 1,006
FirstPlus Financial Group,
TIMES 08/15/00 33,000 1,320
S&P 500 Depositary Receipt,
SPYDRS 8,000 894
--------
TOTAL REGULATED INVESTMENT COMPANIES
(Cost $3,377) 3,220
--------
================================================================================
Repurchase Agreement -- 8.7%
================================================================================
BZW Securities, Inc.
5.59%, dated 07/31/98,
matures 08/03/98,
repurchase price $2,873,599
(collateralized by
U.S. Treasury Note,
par value $2,896,000, 5.50%,
11/15/98: market value
$2,930,225) $2,872 2,872
--------
TOTAL REPURCHASE AGREEMENT
(Cost $2,872) 2,872
--------
TOTAL INVESTMENTS -- 99.3%
(Cost $29,913) 32,782
--------
OTHER ASSETS AND LIABILITIES, NET -- 0.7% 226
--------
The accompanying notes are an integral part of the financial statements.
57
<PAGE> 61
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Convertible Securities Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par value)
based on 2,860,557 outstanding shares
of beneficial interest $ 29,955
Undistributed net investment income 62
Accumulated net realized gain on investments 122
Net unrealized appreciation on investments 2,869
--------
TOTAL NET ASSETS -- 100.0% $33,008
=======
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $11.54
========
- --------------------------------------------------------------------------------
*NON-INCOME PRODUCING SECURITY
(A) SECURITIES SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, EXEMPT
FROM REGISTRATION UNDER SECTION 4(2) OR 144A OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER
"ACCREDITED INVESTORS."
SPYDRS -- STANDARD AND POOR DEPOSITORY RECEIPTS
STRYPES -- STRUCTURED YIELD PRODUCT EXCHANGE SECURITIES
TIMES -- TRUST ISSUED MANDATORY EXCHANGE SECURITIES
SER -- SERIES
The accompanying notes are an integral part of the financial statements.
58
<PAGE> 62
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Government Securities Fund
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Treasury Obligations -- 41.6%
================================================================================
U.S. Treasury Bonds
5.875%, 02/28/99 $ 200 $ 201
6.250%, 03/31/99 1,000 1,005
6.500%, 04/30/99 5,250 5,290
5.875%, 07/31/99 (A) 1,500 1,505
7.750%, 01/31/00 (A) 1,500 1,548
6.750%, 04/30/00 1,000 1,020
5.750%, 11/15/00 (A) 4,800 4,824
7.750%, 02/15/01 2,000 2,104
6.375%, 09/30/01 1,500 1,535
7.500%, 11/15/01 2,000 2,115
5.500%, 01/31/03 (A) 1,500 1,495
7.250%, 05/15/04 1,580 1,709
8.125%, 08/15/19 (A) 1,000 1,277
6.625%, 02/15/27 (A) 11,700 13,066
6.125%, 11/15/27 (A) 8,250 8,716
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $44,938) 47,410
--------
================================================================================
U.S. Government Agency Obligations -- 46.2%
================================================================================
Aid-Israel
7.125%, 08/15/99 2,000 2,027
FNMA
5.625%, 03/15/01 (A) 18,500 18,483
5.250%, 01/15/03 13,500 13,238
5.750%, 06/15/05 6,000 5,963
5.750%, 02/15/08 (A) 11,750 11,639
6.000%, 05/15/08 1,250 1,261
--------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $52,448) 52,611
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations -- 9.7%
================================================================================
SUPRA-NATIONAL -- 4.4%
Asian Development Bank
5.750%, 05/19/03 $5,000 $ 4,981
---------
FINANCIAL SERVICES -- 5.3%
Associates Corp. of N.A.
6.500%, 07/15/02 1,000 1,013
Donaldson, Lufkin & Jenrette
6.500%, 06/01/08 5,000 5,019
--------
6,032
--------
TOTAL CORPORATE OBLIGATIONS
(Cost $11,021) 11,013
--------
================================================================================
Commercial Paper -- 13.1%
================================================================================
Engelhard Corporation (B)
5.803%, 08/03/98 5,000 4,998
Mitsubishi Motors Credit (B)
5.697%, 08/05/98 5,000 4,997
South Western Electric PLC (B)
5.725%, 08/20/98 5,000 4,985
--------
TOTAL COMMERCIAL PAPER
(Cost $14,980) 14,980
--------
================================================================================
Corporate Obligation -- 4.4%
================================================================================
Household CCMT ABT 96, Ser A (B)
5.656%, 01/15/99 5,000 5,000
--------
TOTAL CORPORATE OBLIGATION
(Cost $5,000) 5,000
--------
The accompanying notes are an integral part of the financial statements.
59
<PAGE> 63
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Government Securities Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Repurchase Agreements -- 10.6%
================================================================================
BZW Securities, Inc.
5.59%, dated 07/31/98,
matures 08/03/98, repurchase
price $1,269,684
(collateralized by U.S. Treasury Note,
par value $1,307,000, 5.50%, 11/15/98:
market value $1,322,446) $ 1,269 $ 1,269
Lehman Brothers, Inc. (B)
5.75%, dated 07/31/98,
matures 08/03/98, repurchase
price $10,780,777
(collateralized by various
corporate obligations
0.00%-5.75%, 08/03/98-
01/15/99; total market
value $10,991,126) 10,775 10,775
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $12,044) 12,044
--------
TOTAL INVESTMENTS -- 125.6%
(Cost $140,431) 143,058
--------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (27.0%) (30,755)
--------
OTHER ASSETS AND LIABILITIES, NET -- 1.4% 1,645
--------
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no
par value) based on 11,659,153
outstanding shares of beneficial
interest $112,940
Undistributed net investment income 113
Accumulated net realized loss
on investments (1,732)
Net unrealized appreciation
on investments 2,627
--------
TOTAL NET ASSETS -- 100.0% $113,948
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $9.77
========
- --------------------------------------------------------------------------------
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT JULY 31,
1998 (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN AT JULY 31,
1998 WAS $29,701,858.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
(C) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS IS
THE RATE IN EFFECT ON JULY 31, 1998.
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
The accompanying notes are an integral part of the financial statements.
60
<PAGE> 64
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks -- 59.2%
================================================================================
AEROSPACE & DEFENSE -- 0.9%
B.F. Goodrich 42,400 $ 1,720
Lockheed Martin 25,650 2,557
--------
4,277
--------
AGRICULTURE -- 0.3%
Dole Food (A) 30,000 1,414
--------
AIR TRANSPORTATION -- 0.7%
FDX * (A) 11,000 668
KLM Royal Dutch Air* 58,844 2,442
--------
3,110
--------
AIRCRAFT -- 1.1%
Allied Signal (A) 46,500 2,023
Textron 40,000 2,955
--------
4,978
--------
APPAREL/TEXTILES -- 0.3%
Donna Karan
International* (A) 105,000 1,437
--------
AUTO RENTAL AND LEASING-- 0.4%
Rollins Truck Leasing 139,200 1,618
--------
AUTOMOTIVE -- 1.2%
Chrysler (A) 63,110 3,735
TRW 31,000 1,680
--------
5,415
--------
BANKS -- 2.8%
Bank of New York 48,000 3,072
Bank United, Cl A* 30,000 1,339
BankBoston 50,000 2,419
Chase Manhattan Bank 8,400 635
First Union 20,000 1,205
J.P. Morgan 14,700 1,852
Norwest 35,600 1,279
Wilmington Trust 14,000 830
--------
12,631
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
BEAUTY PRODUCTS -- 0.2%
Avon Products 11,000 $ 952
--------
CHEMICALS -- 3.2%
Agrium 113,000 1,349
Cabot (A) 76,000 2,066
Du Pont (E. I.) de Nemours 38,600 2,393
Engelhard 91,700 1,914
Georgia Gulf 60,600 1,333
Monsanto 61,000 3,454
Morton International 83,800 2,027
--------
14,536
--------
COMMUNICATIONS EQUIPMENT -- 0.6%
Motorola (A) 49,100 2,565
--------
COMPUTERS & SOFTWARE SERVICES -- 2.5%
Compaq Computer 82,500 2,712
Computer Associates
International 44,437 1,475
Hewlett Packard 36,000 1,998
IBM 35,200 4,664
Microsoft* 7,200 792
--------
11,641
--------
CONSTRUCTION MATERIALS -- 0.9%
Armstrong World Industries 28,463 1,754
Lafarge (A) 61,000 2,379
--------
4,133
--------
DIVERSIFIED OPERATIONS -- 1.6%
Corning 41,600 1,277
General Electric 52,600 4,698
Minnesota Mining &
Manufacturing (A) 15,750 1,179
--------
7,154
--------
The accompanying notes are an integral part of the financial statements.
61
<PAGE> 65
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
DRUGS -- 4.2%
American Home Products 60,000 $ 3,090
Amgen* 46,000 3,378
Astra, Cl A, ADR* 34,800 666
Bristol-Myers Squibb 21,400 2,438
Johnson & Johnson 6,400 494
Merck 24,800 3,058
SmithKline Beecham ADR (A) 56,000 3,206
Warner Lambert 42,500 3,211
--------
19,541
--------
ELECTRICAL UTILITIES -- 0.6%
Duke Energy 10,000 571
FirstEnergy* 50,700 1,397
PacifiCorp 43,000 922
--------
2,890
--------
ELECTRONICS -- 0.2%
AMP 29,500 867
--------
ENTERTAINMENT -- 1.6%
Circus Circus Enterprises* (A) 52,200 714
Mirage Resorts* (A) 68,000 1,462
Viacom, Cl B* (A) 32,500 2,226
Walt Disney 90,000 3,099
--------
7,501
--------
FINANCIAL SERVICES -- 2.7%
American Express 30,000 3,311
Fannie Mae 69,700 4,321
Travelers Group (A) 74,197 4,971
--------
12,603
--------
FOOD, BEVERAGE & TOBACCO -- 2.7%
Anheuser Busch 31,200 1,613
Archer-Daniels-Midland 115,692 1,981
Coca-Cola Company 11,400 920
Hershey Foods 10,000 631
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
FOOD, BEVERAGE & TOBACCO (CONTINUED)
PepsiCo 50,700 $ 1,968
Philip Morris Companies 69,900 3,062
Universal Foods 103,400 2,365
--------
12,540
--------
FORESTRY -- 0.2%
Rayonier 25,000 1,055
--------
GAS/NATURAL GAS -- 1.9%
Coastal 70,000 2,293
Eastern Enterprises (A) 35,900 1,434
Sempra Energy* (A) 53,008 1,335
Williams Companies 116,400 3,732
--------
8,794
--------
HOTELS & LODGING -- 0.3%
Hilton Hotels 50,000 1,259
--------
HOUSEHOLD FURNITURE & FIXTURES -- 0.3%
Leggett & Platt 52,400 1,405
--------
INSURANCE -- 3.2%
AFLAC (A) 75,000 2,578
Allstate 56,522 2,399
Equitable Companies 40,000 3,003
Hartford Financial
Services Group 55,200 2,874
HSB Group (A) 49,350 2,563
Jefferson Pilot 11,925 672
Marsh & McLennan 13,350 815
--------
14,904
--------
LEASING & RENTING -- 0.6%
Comdisco 126,750 1,957
Xtra 15,000 928
--------
2,885
--------
LEISURE PRODUCTS -- 0.1%
Mattel 5,600 215
--------
The accompanying notes are an integral part of the financial statements.
62
<PAGE> 66
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
MACHINERY -- 3.3%
Baker Hughes (A) 84,200 $ 2,058
Deere (A) 41,200 1,656
Dresser Industries 71,500 2,525
Global Industries
Technologies* 104,900 1,410
Ingersoll Rand (A) 45,250 1,999
Parker-Hannifin 52,500 1,801
Tenneco 67,600 2,451
Toro 40,000 1,085
--------
14,985
--------
MEASURING DEVICES -- 0.6%
Mallinckrodt 45,000 1,246
Tektronix 57,250 1,567
--------
2,813
--------
MEDICAL PRODUCTS & SERVICES -- 1.0%
Baxter International 46,500 2,778
Tenet Healthcare* 63,000 1,886
--------
4,664
--------
MISCELLANEOUS BUSINESS SERVICES -- 2.0%
Electronic Data Systems 63,100 2,220
Equifax (A) 40,000 1,635
First Data (A) 63,000 1,823
Reuters Group PLC ADR (A) 33,866 1,981
Wallace Computer Services 80,400 1,568
--------
9,227
--------
MISCELLANEOUS TRANSPORTATION -- 0.1%
Fleetwood Enterprises 10,000 357
--------
OFFICE SUPPLIES -- 0.5%
Avery Dennison (A) 40,000 2,303
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
PAPER & PAPER PRODUCTS-- 1.1%
Kimberly-Clark 33,800 $ 1,519
Mead (A) 38,000 1,142
Weyerhaeuser 25,600 1,075
Willamette Industries 50,300 1,424
--------
5,160
--------
PETROLEUM & FUEL PRODUCTS -- 1.1%
Occidental Petroleum 81,700 1,818
Phillips Petroleum 31,300 1,383
Union Pacific Resources Group 143,504 2,009
--------
5,210
--------
PETROLEUM REFINING -- 3.3%
Amoco 62,200 2,597
Chevron (A) 35,300 2,917
Mobil 35,200 2,455
Royal Dutch Petroleum 39,200 1,999
Ultramar Diamond Shamrock* 79,200 2,074
Unocal 30,000 983
USX-Marathon Group 62,000 2,116
--------
15,141
--------
PRECIOUS METALS -- 0.4%
Barrick Gold (A) 114,636 1,877
--------
PRINTING & PUBLISHING -- 0.8%
Houghton Mifflin 50,000 1,575
Media General 45,000 2,095
--------
3,670
--------
RAILROADS -- 0.5%
Burlington Northern Santa Fe 23,700 2,440
--------
The accompanying notes are an integral part of the financial statements.
63
<PAGE> 67
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
REAL ESTATE -- 2.0%
BRE Properties, Cl A 53,600 $ 1,353
CBL & Associates Properties 69,100 1,680
First Industrial Realty Trust 80,000 2,210
Kimco Realty Depository Share 11,520 296
Kimco Realty Corp. 32,000 1,184
JP Realty 75,700 1,675
Post Properties 22,200 881
--------
9,279
--------
RETAIL -- 2.9%
American Stores (A) 84,000 1,948
Costco* (A) 45,000 2,554
Federated Department
Stores* (A) 32,000 1,694
J.C. Penney 30,000 1,761
McDonald's 41,500 2,773
Sears Roebuck and Company 48,600 2,466
--------
13,196
--------
RUBBER & PLASTIC -- 0.3%
Mark IV Industries 65,100 1,253
--------
SEMI-CONDUCTORS/INSTRUMENTS -- 1.1%
Applied Materials* (A) 62,000 2,077
Intel 37,500 3,166
--------
5,243
--------
TELEPHONES & TELECOMMUNICATION -- 2.6%
AirTouch Communications* (A) 45,300 2,664
Bell Atlantic 84,800 3,848
Century Telephone Enterprises 30,000 1,493
Frontier 43,400 1,457
SBC Communications 64,000 2,616
--------
12,078
--------
WHOLESALE -- 0.3%
Arrow Electronics* 68,000 1,364
--------
TOTAL COMMON STOCKS
(Cost $171,701) 272,580
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Treasury Obligations -- 8.9%
================================================================================
U.S. Treasury Notes
7.125%, 02/29/00 $1,500 $ 1,536
6.125%, 09/30/00 1,500 1,518
5.750%, 10/31/00 700 703
5.625%, 02/28/01 3,000 3,008
6.250%, 04/30/01 1,000 1,018
6.500%, 05/31/01 2,000 2,049
6.625%, 06/30/01 1,000 1,028
6.500%, 08/31/01 3,000 3,079
7.500%, 11/15/01 6,000 6,344
5.875%, 11/30/01 2,000 2,019
6.250%, 06/30/02 3,400 3,480
6.250%, 02/15/03 1,000 1,027
5.875%, 02/15/04 500 508
6.500%, 05/15/05 4,500 4,733
6.500%, 08/15/05 4,500 4,741
6.875%, 05/15/06 1,000 1,079
7.000%, 07/15/06 2,500 2,720
6.625%, 05/15/07 400 428
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $39,624) 41,018
--------
================================================================================
U.S. Government Agency Mortgage-Backed Bonds -- 11.2%
================================================================================
FHLMC
6.000%, 02/01/28 2,945 2,864
FNMA
7.500%, 08/01/01 1,785 1,817
5.450%, 10/10/03 1,950 1,921
6.850%, 09/12/05 1,400 1,423
6.000%, 05/15/08 2,000 2,017
6.500%, 03/01/24 367 366
8.000%, 08/01/24 596 618
8.000%, 05/01/25 2,652 2,749
7.000%, 09/01/25 1,668 1,692
8.000%, 07/01/26 654 678
The accompanying notes are an integral part of the financial statements.
64
<PAGE> 68
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
U.S. Government Agency Mortgage-Backed Bonds (continued)
================================================================================
FNMA (continued)
7.000%, 09/01/26 $1,246 $ 1,264
7.500%, 09/01/26 1,083 1,113
7.000%, 12/01/26 1,704 1,729
7.500%, 03/01/27 1,303 1,339
6.500%, 10/01/27 1,360 1,354
6.500%, 12/01/27 2,480 2,468
7.000%, 12/01/27 2,616 2,654
6.000%, 03/01/28 3,941 3,829
6.000%, 05/01/28 1,008 979
GNMA
6.500%, 09/15/08 2,826 2,852
6.000%, 11/15/08 1,914 1,900
6.500%, 06/15/23 252 252
6.500%, 02/15/24 84 85
7.500%, 05/15/24 336 346
7.500%, 09/15/25 837 861
7.000%, 02/15/26 880 894
6.500%, 04/15/26 889 887
7.000%, 08/15/26 2,310 2,347
7.500%, 09/15/26 3,023 3,115
7.500%, 01/15/27 2,324 2,392
7.000%, 10/15/27 1,956 1,987
6.500%, 05/15/28 997 995
--------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED BONDS
(Cost $50,657) 51,787
--------
================================================================================
Corporate Obligations -- 16.9%
================================================================================
AirTouch Communications
6.650%, 05/01/08 2,000 2,013
Allied-Signal
6.200%, 02/01/08 4,000 3,975
American General
6.250%, 12/18/02 2,000 2,005
6.750%, 06/15/05 2,000 2,048
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations (continued)
================================================================================
American Telephone & Telegraph
7.500%, 06/01/06 $2,000 $2,160
Associates of North America
7.875%, 09/30/01 2,000 2,105
Avco Financial Services
7.375%, 08/15/01 2,000 2,078
Bankers Trust NY
7.500%, 11/15/15 2,000 2,133
Bass America
6.750%, 08/01/99 595 599
Bell Atlantic
8.000%, 10/15/29 175 208
Bell Atlantic New York Telephone
6.500%, 04/15/28 3,000 2,966
Caterpillar Tractor
6.000%, 05/01/07 605 591
Chemical Bank
6.700%, 08/15/08 1,500 1,536
Chesapeake & Potomac Telephone
of Maryland
6.000%, 05/01/03 1,500 1,498
Citicorp
6.750%, 08/15/05 450 464
Dow Chemical Non-Redeemable
Prior To Maturity
6.850%, 08/15/13 2,000 2,063
Du Pont (E.I.) de Nemours
6.750%, 09/01/07 3,000 3,116
Fannie Mae Medium Term
Note (Unsecured)
6.375%, 06/29/05 2,000 1,987
First Bank System
6.875%, 09/15/07 500 520
First Chicago NBD
6.125%, 02/15/06 1,000 985
First National Bank of Boston
8.000%, 09/15/04 2,000 2,170
The accompanying notes are an integral part of the financial statements.
65
<PAGE> 69
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations (continued)
================================================================================
Ford Motor
6.500%, 08/01/18 $2,000 $ 1,973
Ford Motor Credit
6.850%, 08/15/00 250 254
6.500%, 02/28/02 500 507
6.125%, 01/09/06 3,250 3,205
General Motors Acceptance
Step-Up Note
8.000%, 10/01/99 555 568
GMAC
6.125%, 01/22/08 3,000 2,936
Golden West Financial
6.700%, 07/01/02 150 153
GTE
6.840%, 04/15/18 3,000 3,019
Hydro Quebec
8.050%, 07/07/24 150 176
IBM
8.375%, 11/01/19 200 243
JC Penney
6.000%, 05/01/06 100 97
Johnson Controls
6.300%, 02/01/08 2,000 1,990
Joseph E. Seagram & Sons
7.000%, 04/15/08 1,500 1,560
Lehman Brothers Holding
8.500%, 05/01/07 2,000 2,273
Litton Industries Call
@ Make Whole
+18.75. Long 1st Cpn
6.750%, 04/15/18 2,500 2,500
Lockheed Martin
7.700%, 06/15/08 2,000 2,193
New England Telephone & Telegraph
7.875%, 11/15/29 250 295
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Obligations (continued)
================================================================================
Panhandle Eastern
7.875%, 08/15/04 $1,000 $ 1,080
Phillips Petroleum
6.650%, 07/15/18 1,000 984
Province of British Columbia
7.000%, 01/15/03 1,500 1,556
Ralston Purina
7.750%, 10/01/15 2,000 2,215
Raytheon
6.550%, 03/15/10 2,000 1,998
Royal Bank of Scotland
6.375%, 02/01/11 2,500 2,444
Sears Roebuck Acceptance Medium
Term Note
6.900%, 08/01/03 2,000 2,050
U.S. West Capital Funding
6.375%, 07/15/08 2,000 1,980
Wal-Mart
6.375%, 03/01/03 450 458
5.875%, 10/15/05 2,000 1,985
--------
TOTAL CORPORATE OBLIGATIONS
(Cost $75,752) 77,912
--------
================================================================================
Asset Backed Securities -- 1.1%
================================================================================
American Express Master Trust,
Ser 1994-1, Cl A
7.150%, 08/15/99 1,500 1,502
Citibank Credit Card Master
Trust 1997-3 Cl A
6.839%, 02/10/04 100 102
Contimortgage Home Equity
Loan Trust, Ser 1994-4, Cl A3
8.090%, 09/15/09 300 314
The accompanying notes are an integral part of the financial statements.
66
<PAGE> 70
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Asset Backed Securities (continued)
================================================================================
Contimortgage Home Equity
Loan Trust, Ser 1995-3, Cl A4
7.440%, 09/15/12 $ 200 $ 209
Equity Capital Home Equity Loan
Trust, Ser 1996-3, Cl A6
7.400%, 12/15/19 450 469
Green Tree Financial, Ser 1995-9,
Cl A5
6.800%, 01/15/27 350 361
J.C. Penney Master Credit Card
Trust, Ser C, Cl A
9.625%, 06/15/00 1,000 1,077
Standard Credit Card Master
Trust, Ser 1993-3
5.500%, 02/07/00 650 649
--------
TOTAL ASSET BACKED SECURITIES
(Cost $4,550) 4,683
--------
================================================================================
Commercial Paper -- 2.8%
================================================================================
Orange & Rockland Utility (B)
5.724%, 08/11/98 5,000 4,992
South Western Electric PLC (B)
5.722%, 08/13/98 8,000 7,985
---------
TOTAL COMMERCIAL PAPER
(Cost $12,977) 12,977
--------
================================================================================
Corporate Obligations -- 2.2%
================================================================================
Sigma Finance, Inc. (B)
5.750%, 11/10/98 5,000 5,000
Societe General, NY FYCD (B)
5.760%, 08/25/98 5,000 5,000
---------
TOTAL CORPORATE OBLIGATIONS
(Cost $10,000) 10,000
---------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Repurchase Agreements -- 7.9%
================================================================================
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98, matures
08/03/98, repurchase price
$8,515,037 (collateralized
by U.S. Treasury Bill,
par value $9,141,000,
0.00%, 07/22/99: market
value $8,681,345) $ 8,511 $ 8,511
Lehman Brothers, Inc. (B)
5.75%, dated 07/31/98, matures
08/03/98, repurchase price
$27,957,998 (collateralized
by various corporate
obligations, 0.00%-5.75%,
08/03/98-11/10/98: total market
value $28,503,501) 27,945 27,945
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $36,456) 36,456
--------
TOTAL INVESTMENTS -- 110.2%
(Cost $401,717) 507,413
--------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (11.1%) (50,922)
--------
OTHER ASSETS AND LIABILITIES, NET -- 0.9% 3,888
----------
The accompanying notes are an integral part of the financial statements.
67
<PAGE> 71
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Balanced Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization --
no par value) based on
26,817,522 outstanding shares
of beneficial interest $329,791
Fund Shares of Retail Class A
(unlimited authorization --
no par value) based on
635,462 outstanding shares
of beneficial interest 7,691
Fund Shares of Retail Class B
(unlimited authorization --
no par value) based on
57,833 outstanding shares
of beneficial interest 996
Undistributed net investment income 302
Accumulated net realized gain
on investments 15,903
Net unrealized appreciation
on investments 105,696
--------
TOTAL NET ASSETS -- 100.0% $460,379
========
- --------------------------------------------------------------------------------
DESCRIPTION VALUE
- --------------------------------------------------------------------------------
================================================================================
Net Assets (continued)
================================================================================
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $16.73
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS A $16.73
========
MAXIMUM OFFERING PRICE PER SHARE --
RETAIL CLASS A ($16.73 / 95.5%) $17.52
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS B $16.73
========
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT JULY 31,
1998. (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN AT JULY 31,
1998 WAS $49,307,453.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
GNMA -- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
SER -- SERIES
The accompanying notes are an integral part of the financial statements.
68
<PAGE> 72
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Growth Fund
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks -- 97.6%
================================================================================
AEROSPACE & DEFENSE -- 0.5%
B.F. Goodrich 63,265 $ 2,566
--------
AIR TRANSPORTATION -- 0.9%
FDX* (A) 30,730 1,865
Southwest Airlines 78,610 2,589
--------
4,454
--------
APPAREL/TEXTILES -- 1.0%
Cintas 102,800 5,224
--------
BANKS -- 4.3%
Banc One (A) 22,102 1,142
BankAmerica 55,510 4,982
Chase Manhattan Bank 7,210 545
Fleet Financial Group 14,880 1,279
Northern Trust Corp. 33,610 2,475
State Street Bank (A) 36,980 2,563
U.S. Bancorp 125,481 5,772
Washington Mutual (A) 74,970 2,994
Wells Fargo 1,385 493
--------
22,245
--------
BEAUTY PRODUCTS -- 2.9%
Avon Products 103,670 8,967
Colgate-Palmolive (A) 57,190 5,287
Proctor & Gamble 8,730 693
--------
14,947
--------
BROADCASTING, NEWSPAPERS & ADVERTISING -- 3.3%
Comcast, Cl A (A) 186,270 8,458
Gannett 72,320 4,624
Interpublic Group (A) 43,840 2,641
Univision Communications* 34,660 1,265
--------
16,988
--------
CHEMICALS -- 0.9%
Du Pont (E. I.) de Nemours 75,740 4,696
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
COMMUNICATIONS EQUIPMENT -- 0.7%
Nokia ADR 43,800 $ 3,816
--------
COMPUTERS & SERVICES -- 2.2%
Cisco Systems* 53,157 5,090
Computer Sciences* 39,710 2,541
EMC* 80,240 3,932
--------
11,563
--------
COMPUTERS & SOFTWARE SERVICES -- 5.2%
America Online* (A) 53,670 6,279
Compaq Computer 80,290 2,640
Dell Computer* 5,696 619
Fiserv* (A) 93,712 4,135
Hewlett Packard 15,855 880
Microsoft* 112,660 12,386
Parametric Technology* (A) 18,800 256
--------
27,195
--------
DIVERSIFIED OPERATIONS -- 6.4%
Berkshire Hathaway, Cl B* (A) 8,572 20,076
General Electric 143,950 12,857
--------
32,933
--------
DRUGS -- 11.9%
Abbott Labs 74,524 3,097
Alza* (A) 129,555 5,036
Amgen* 19,246 1,413
Bristol-Myers Squibb 89,900 10,243
Eli Lilly 68,662 4,618
Johnson & Johnson 73,500 5,678
Merck 19,395 2,392
Pfizer 106,700 11,737
Schering Plough 76,210 7,373
Warner Lambert 136,140 10,287
--------
61,874
--------
The accompanying notes are an integral part of the financial statements.
69
<PAGE> 73
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Growth Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
ENTERTAINMENT -- 2.7%
Mirage Resorts* (A) 210,990 $ 4,536
Walt Disney 269,244 9,272
--------
13,808
--------
FINANCIAL SERVICES -- 7.3%
American Express 79,965 8,826
Fannie Mae 161,075 9,987
Franklin Resources (A) 102,460 4,463
MBNA 77,367 2,592
Travelers Group (A) 175,845 11,782
--------
37,650
--------
FOOD, BEVERAGE & TOBACCO -- 5.0%
Coca Cola Company 222,196 17,928
Hershey Foods 68,340 4,314
PepsiCo 32,090 1,245
Wrigley, Wm. Jr. 25,770 2,311
--------
25,798
--------
HOUSEHOLD PRODUCTS -- 2.9%
Gillette 289,594 15,168
--------
INSURANCE -- 4.4%
Allstate 100,886 4,281
American International Group 47,816 7,211
First Health Group 17,380 428
Hartford Financial
Services Group 48,220 2,510
Marsh & McLennan 82,755 5,053
Mutual Risk Management (A) 80,242 3,059
--------
22,542
--------
LEISURE -- 3.4%
Carnival, Cl A 173,150 6,396
Mattel 283,632 10,902
Nike, Cl B 10,952 487
--------
17,785
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
MACHINERY -- 3.2%
Danaher 91,780 $ 3,746
Dresser Industries 175,055 6,182
Emerson Electric 7,340 436
Illinois Tool Works (A) 77,400 4,339
Ingersoll Rand (A) 46,957 2,075
--------
16,778
--------
MEDICAL PRODUCTS & SERVICES -- 8.1%
Covance* 24,380 584
IMS HEALTH Inc. 364,360 22,886
Medtronic 91,150 5,646
Safeskin* 280,640 10,542
Stryker (A) 53,900 2,341
--------
41,999
--------
MISCELLANEOUS BUSINESS SERVICES -- 1.7%
Automatic Data Processing 34,315 2,323
Electronic Data Systems 10,965 386
First Data (A) 15,801 457
Robert Half International* 107,844 5,743
--------
8,909
--------
MISCELLANEOUS CONSUMER SERVICES -- 0.4%
Service International 51,305 1,943
--------
PETROLEUM SERVICES -- 1.3%
Schlumberger (A) 111,440 6,749
--------
PRINTING & PUBLISHING -- 1.9%
McGraw-Hill 30,450 2,495
R.R. Donnelley & Sons 55,380 2,354
Washington Post, Cl B 8,987 4,893
--------
9,742
--------
PROFESSIONAL SERVICES -- 1.3%
Devry* 333,500 6,795
--------
The accompanying notes are an integral part of the financial statements.
70
<PAGE> 74
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Growth Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES/PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
RETAIL -- 8.5%
Costco* (A) 176,125 $ 9,995
Harley-Davidson (A) 83,700 3,317
Home Depot 218,304 9,141
Kohls* 187,090 9,167
McDonald's 98,428 6,576
Safeway* (A) 137,180 6,079
--------
44,275
--------
SEMI-CONDUCTORS/INSTRUMENTS -- 2.8%
Applied Materials* (A) 64,740 2,169
Intel 100,538 8,489
Texas Instruments 44,790 2,657
Xilinx* (A) 32,630 1,224
--------
14,539
--------
SPECIALTY MACHINERY -- 0.5%
Solectron* 55,850 2,681
--------
TELEPHONES & TELECOMMUNICATION -- 2.0%
AirTouch Communications* 110,550 6,502
Lucent Technologies 38,866 3,593
--------
10,095
--------
TOTAL COMMON STOCKS
(Cost $358,219) 505,757
--------
================================================================================
Commercial Paper -- 6.8%
================================================================================
Bridgestone/Firestone (B) (C)
5.760%, 08/10/98 $10,500 10,485
Mitsubishi Motors Credit (B)
5.697%, 08/05/98 10,000 9,994
5.715%, 08/20/98 7,000 6,979
South Western Electric PLC
(B) (C)
5.722%, 08/13/98 8,032 8,017
--------
TOTAL COMMERICIAL PAPER
(Cost $35,475) 35,475
--------
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Corporate Bonds -- 4.8%
================================================================================
Bankers Trust (B) (C)
5.702%, 09/11/98 $ 5,000 $ 5,000
Household CCMT ABT 96 Series
(B) (C)
5.656%, 01/15/99 10,000 10,000
Sigma Finance (B) (C)
5.750%, 11/10/98 5,000 5,000
Societe General, NY FYCD
(B) (C)
5.760%, 08/25/98 5,000 5,000
--------
TOTAL CORPORATE BONDS
(Cost $24,995) 25,000
--------
================================================================================
Repurchase Agreements -- 9.9%
================================================================================
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98, matures
08/03/98, repurchase price
$21,774,425 (collateralized by
various U.S. Treasury Bills, par
value $23,190,000, 0.00%,
02/04/99-06/24/99: market
value $22,199,992) 21,764 21,764
Lehman Brothers, Inc. (B) (C)
5.75%, dated 07/31/98,
matures 08/03/98, repurchase
price $29,494,190
(collateralized by various
corporate obligations,
0.00%-5.75%, : total market
value $30,069,665) 29,480 29,480
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $51,244) 51,244
--------
TOTAL INVESTMENTS -- 119.1%
(Cost $469,933) 617,476
--------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (17.3%) (89,955)
--------
OTHER ASSETS AND LIABILITIES, NET -- (1.8%) (9,340)
--------
The accompanying notes are an integral part of the financial statements.
71
<PAGE> 75
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Growth Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization --
no par value) based on
29,492,647 outstanding shares
of beneficial interest $321,467
Fund Shares of Retail Class A
(unlimited authorization --
no par value) based on 1,014,423
outstanding shares of
beneficial interest 14,852
Fund Shares of Retail Class B
(unlimited authorization --
no par value) based on 115,600
outstanding shares of beneficial
interest 1,916
Accumulated net realized gain
on investments 32,403
Net unrealized appreciation
on investments 147,543
--------
TOTAL NET ASSETS -- 100.0% $518,181
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $16.92
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS A $16.93
========
MAXIMUM OFFERING PRICE PER SHARE --
RETAIL CLASS A ($16.93 / 95.5%) $17.73
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS B $16.85
========
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT JULY 31,
1998. (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN AT JULY 31,
1998 WAS $87,400,990.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
(C) FLOATING RATE SECURITIES
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
The accompanying notes are an integral part of the financial statements.
72
<PAGE> 76
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Value Momentum Fund
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks -- 95.4%
================================================================================
AEROSPACE & DEFENSE -- 0.2%
Raytheon Company, Cl B 31,800 $ 1,759
--------
AIR TRANSPORTATION -- 0.1%
Southwest Airlines (A) 19,500 642
--------
APPAREL/TEXTILES -- 0.1%
V.F. Corporation 20,000 941
--------
AUTOMOTIVE -- 2.0%
Arvin Industries 150,000 5,831
Ford Motor 101,000 5,751
TRW (A) 115,300 6,248
--------
17,830
--------
BANKS -- 6.0%
Banc One (A) 91,447 4,727
Bank United, Cl A* 140,000 6,247
BankAmerica 122,700 11,012
Bankers Trust 55,000 6,163
Chase Manhattan Bank 48,800 3,690
First Union 110,000 6,627
Fleet Financial Group 25,100 2,157
J.P. Morgan 35,400 4,460
Providian Financial 85,000 6,678
Wilmington Trust 50,000 2,966
--------
54,727
--------
BUILDING -- 1.8%
Fleetwood Enterprises (A) 147,800 5,275
Lafarge (A) 175,000 6,825
Masco 52,000 1,485
Southdown 37,775 2,363
--------
15,948
--------
CHEMICALS -- 3.7%
Avery Dennison (A) 189,000 10,879
Cabot (A) 146,000 3,969
Dow Chemical (A) 20,350 1,847
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
CHEMICALS (CONTINUED)
Du Pont (E.I.) de Nemours 114,600 $ 7,105
Engelhard 226,000 4,718
Wellman (A) 160,000 3,170
W.R. Grace & Co.* 104,000 1,736
--------
33,424
--------
COMMUNICATIONS EQUIPMENT -- 1.2%
CTS 225,000 6,595
Harris (Del) 120,000 4,755
--------
11,350
--------
COMPUTERS & SERVICES -- 4.1%
Cisco Systems* 90,000 8,617
Electronic Data Systems 48,200 1,696
Equifax (A) 165,000 6,744
Hewlett Packard 154,000 8,547
IBM 85,000 11,262
--------
36,866
--------
DIVERSIFIED OPERATIONS -- 2.3%
General Electric 182,800 16,326
Textron (A) 60,000 4,433
--------
20,759
--------
DRUGS -- 6.8%
American Home Products 167,000 8,600
Amgen* 107,700 7,909
Bristol Myers Squibb 64,000 7,292
Merck 95,000 11,715
Monsanto 118,000 6,682
Novo-Nordisk ADR 25,000 1,650
SmithKline Beecham, ADR (A) 174,000 9,961
Watson Pharmaceuticals* (A) 171,500 7,739
--------
61,548
--------
The accompanying notes are an integral part of the financial statements.
73
<PAGE> 77
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Value Momentum Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
ELECTRICAL UTILITIES -- 0.1%
General Public Utilities 36,000 $ 1,287
--------
FINANCIAL SERVICES -- 5.4%
Aames Financial (A) 300,000 3,375
Associates First Capital 26,470 2,056
Bear Stearns (A) 116,504 6,553
Fannie Mae 200,300 12,419
Morgan Stanley, Dean Witter,
Discover (A) 140,000 12,189
Travelers Group (A) 179,501 12,027
--------
48,619
--------
FOOD, BEVERAGE & TOBACCO -- 4.5%
Dole Food (A) 145,000 6,833
IBP (A) 130,000 2,559
PepsiCo 28,400 1,102
Philip Morris Companies 225,000 9,858
Ralston-Ralston Purina Group 110,700 3,563
Sara Lee 121,000 6,065
Universal 155,000 5,396
Universal Foods 255,000 5,833
--------
41,209
--------
GAS/NATURAL GAS -- 4.5%
Coastal 280,000 9,170
Eastern Enterprises 168,100 6,713
MCN (A) 150,000 3,722
Oneok* (A) 150,000 5,119
Questar (A) 473,000 8,810
Sonat 50,000 1,462
Williams Companies 180,000 5,771
--------
40,767
--------
GLASS PRODUCTS -- 0.6%
Corning 34,000 1,043
PPG Industries (A) 63,500 4,024
--------
5,067
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
HOTELS & LODGING -- 0.3%
Hilton Hotels 95,000 $ 2,393
--------
HOUSEHOLD FURNITURE & FIXTURES -- 1.1%
Leggett & Platt (A) 376,000 10,081
--------
INSURANCE -- 4.2%
Aegon N.V., ADR* 73,848 6,776
Allstate 146,952 6,236
Chubb 68,000 4,990
Lincoln National 20,000 1,915
Marsh & McLennan 144,750 8,839
Mutual Risk Management (A) 28,000 1,067
Torchmark (A) 183,000 8,018
--------
37,841
--------
LEASING & RENTING -- 3.3%
Comdisco 574,503 8,869
GATX 176,000 6,754
Rollins Truck Leasing 802,500 9,329
Ryder System 14,900 432
Xtra 70,000 4,331
--------
29,715
--------
LEISURE PRODUCTS -- 1.6%
Hasbro 245,000 8,866
Mattel 138,350 5,318
--------
14,184
--------
MACHINERY -- 3.8%
Caterpillar 116,000 5,626
Deere (A) 91,000 3,657
Dresser Industries 215,700 7,617
Emerson Electric 21,600 1,284
Kennametal 181,500 5,865
Parker-Hannifin (A) 178,000 6,108
Rockwell International* 45,000 1,831
Toro 92,500 2,509
--------
34,497
--------
The accompanying notes are an integral part of the financial statements.
74
<PAGE> 78
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Value Momentum Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
MEASURING DEVICES -- 1.0%
Perkin Elmer 43,000 $ 2,521
Tektronix (A) 232,500 6,365
--------
8,886
--------
MEDICAL PRODUCTS & SERVICES -- 4.2%
Baxter International (A) 156,000 9,321
Becton, Dickinson (A) 100,000 8,263
Fresenius National Medical
Care, ADR* 98,613 2,028
Mallinckrodt 110,000 3,046
Manor Care (A) 135,000 5,037
Novacare* 400,000 4,000
Tenet Healthcare* 210,000 6,287
--------
37,982
--------
MISCELLANEOUS BUSINESS SERVICES -- 1.6%
Cendant* 372,479 6,449
First Data (A) 15,000 434
Manpower 128,100 3,443
Wallace Computer Services (A) 240,000 4,680
--------
15,006
--------
OFFICE FURNITURE & FIXTURES -- 0.6%
Hon Industries (A) 200,000 5,738
--------
PAPER & PAPER PRODUCTS -- 2.0%
Kimberly-Clark 199,920 8,984
Weyerhaeuser (A) 106,800 4,486
Willamette Industries 152,500 4,318
--------
17,788
--------
PETROLEUM & FUEL PRODUCTS -- 4.0%
Amoco 37,000 1,545
British Petroleum PLC, ADR (A) 16,142 1,295
Chevron (A) 78,500 6,486
Exxon 19,000 1,332
Halliburton (A) 31,000 1,126
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
PETROLEUM & FUEL PRODUCTS (CONTINUED)
Mobil 142,000 $ 9,905
Occidental Petroleum 246,700 5,489
Phillips Petroleum 22,000 972
Royal Dutch Petroleum 106,000 5,406
Union Pacific Resources (A) 165,408 2,316
--------
35,872
--------
PETROLEUM REFINING -- 1.2%
Ashland 30,000 1,556
Sempra Energy* (A) 312,544 7,872
Valero Energy 50,000 1,197
--------
10,625
--------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES -- 1.4%
Xerox 118,700 12,530
--------
PRINTING & PUBLISHING -- 2.1%
Banta 250,000 7,594
Houghton Mifflin (A) 150,000 4,725
McGraw-Hill 85,000 6,965
--------
19,284
--------
PROFESSIONAL SERVICES -- 0.5%
ServiceMaster 140,000 4,760
--------
RAILROADS -- 1.3%
Burlington Northern Santa Fe 71,100 7,319
Florida East Coast
Railway (A) 160,000 4,320
--------
11,639
--------
REAL ESTATE -- 4.0%
BRE Properties, Cl A 248,262 6,269
CBL Associates Properties 260,000 6,321
First Industrial Realty Trust 200,000 5,525
Kimco Realty Depository Share* 32,400 832
Kimco Realty 90,000 3,330
JP Realty 208,000 4,602
The accompanying notes are an integral part of the financial statements.
75
<PAGE> 79
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Value Momentum Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
REAL ESTATE (CONTINUED)
Meditrust 30,700 $ 691
Post Properties 185,000 7,342
Reckson Associates 60,000 1,361
Reckson Service Industries* 24,000 51
--------
36,324
--------
RETAIL -- 3.9%
Dayton-Hudson (A) 258,000 12,336
Federated Department
Stores* (A) 216,700 11,472
J.C. Penney 18,200 1,068
Kroger* 60,000 2,839
Sears Roebuck 153,700 7,800
--------
35,515
--------
RUBBER & PLASTIC -- 1.5%
Hanna 180,000 2,666
Sealed Air Corp.* (A) 55,744 2,230
Sealed Air Convertible, Ser A 49,400 2,204
Sonoco Products 220,000 6,435
--------
13,535
--------
SEMI-CONDUCTORS/INSTRUMENTS -- 2.1%
Applied Materials* (A) 125,000 4,188
Avnet (A) 60,000 3,293
Intel 139,000 11,737
--------
19,218
--------
STEEL & STEEL WORKS -- 0.8%
Aluminum Company of
America (A) 39,000 2,703
Harsco (A) 96,000 4,146
--------
6,849
--------
TELEPHONES & TELECOMMUNICATIONS -- 5.5%
AT&T 102,000 6,184
Bell Atlantic 173,000 7,850
Century Telephone Enterprises 202,500 10,074
Frontier 130,000 4,363
- --------------------------------------------------------------------------------
DESCRIPTION SHARES/PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
TELEPHONES & TELECOMMUNICATIONS (CONTINUED)
GTE 118,000 $ 6,416
Lucent Technologies 59,058 5,459
SBC Communications (A) 228,034 9,321
--------
49,667
--------
TOTAL COMMON STOCKS
(Cost $523,288) 862,672
--------
================================================================================
Commercial Paper -- 8.9%
================================================================================
Bridgestone/Firestone (B)
5.661%, 08/05/98 $ 9,000 8,994
5.760%, 08/10/98 10,500 10,485
Boston Gas Company (B)
5.642%, 09/10/98 11,745 11,672
McKesson Corporation (B)
5.746%, 08/03/98 12,500 12,496
Mitsubishi Motors Credit (B)
5.697%, 08/05/98 10,000 9,994
5.715%, 08/20/98 10,000 9,970
National Power PLC (B)
5.657%, 08/20/98 8,637 8,611
South Western Electric PLC (B)
5.705%, 08/06/98 8,414 8,407
--------
TOTAL COMMERCIAL PAPER
(Cost $80,629) 80,629
--------
================================================================================
Corporate Bonds -- 3.9%
================================================================================
Bankers Trust, NY (B) (C)
5.702%, 09/11/98 5,000 5,000
Household CCMT ABT 96 (B) (C)
5.656%, 01/15/99 20,000 20,000
Sigma Finance (B) (C)
5.750%, 11/10/98 5,000 5,000
Societe General, NY FYCD (B) (C)
5.760%, 08/25/98 5,000 5,000
--------
TOTAL CORPORATE BONDS
(Cost $35,000) 35,000
--------
The accompanying notes are an integral part of the financial statements.
76
<PAGE> 80
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Value Momentum Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Repurchase Agreements -- 9.9%
================================================================================
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98, matures
08/03/98, repurchase price $44,458,296
(collateralized by various U.S.
Government Obligations, total par
value $27,873,000, 13.25%, 05/15/14:
total market value $45,327,105) $44,437 $ 44,438
HSBC Securities, Inc. (B) ----------
5.83%, dated 07/31/98, matures
08/03/98, repurchase price $25,012,145
(collateralized by various corporate
obligations, 0.00%-5.830%, 08/03/98-
11/10/98: total market value
$25,500,000) 25,000 25,000
Lehman Brothers, Inc. (B) ----------
5.750%, dated 07/31/98, matures
08/03/98, repurchase price $20,367,754
(collateralized by various corporate
obligations, 0.00%-5.83%, 08/03/98-
11/10/98: total market value
$20,765,160) 20,358 20,358
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $89,796) 89,796
----------
TOTAL INVESTMENTS -- 118.1%
(Cost $728,713) 1,068,097
----------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (17.8%) (160,987)
----------
OTHER ASSETS AND LIABILITIES,
NET -- (0.3%) (2,956)
----------
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par
value) based on 31,620,042
outstanding shares of beneficial interest $ 517,893
Fund Shares of Retail Class A
(unlimited authorization -- no par
value) based on 1,294,257 outstanding
shares of beneficial interest 24,766
Fund Shares of Retail Class B
(unlimited authorization -- no par value)
based on 189,975 outstanding shares
of beneficial interest 5,439
Undistributed net investment income 433
Accumulated net realized gain on investments 16,239
Net unrealized appreciation on investments 339,384
----------
TOTAL NET ASSETS -- 100.0% $ 904,154
==========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $27.31
==========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS A $27.31
==========
MAXIMUM OFFERING PRICE PER SHARE -
RETAIL CLASS A ($27.31 / 95.5%) $28.60
==========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS B $27.28
==========
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY.
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT
JULY 31, 1998 (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN AT
JULY 31, 1998 WAS $155,747,978.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
(C) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS
IS THE RATE IN EFFECT ON JULY 31, 1998.
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
The accompanying notes are an integral part of the financial statements.
77
<PAGE> 81
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Income Equity Fund
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks -- 98.0%
================================================================================
AEROSPACE & DEFENSE -- 0.9%
B.F. Goodrich 157,710 $ 6,397
--------
AUTOMOTIVE -- 3.0%
Ford Motor 363,100 20,674
--------
BANKS -- 17.4%
Banc One (A) 186,773 9,654
Chase Manhattan Bank 223,225 16,881
First Union (A) 484,875 29,214
Fleet Financial Group 252,700 21,716
National City 215,175 14,390
NationsBank (A) 363,425 28,983
--------
120,838
--------
BEAUTY PRODUCTS -- 2.8%
Avon Products 187,000 16,175
International Flavors &
Fragrances (A) 83,040 3,488
--------
19,663
--------
BUSINESS SERVICES -- 1.0%
Pitney Bowes 134,750 6,805
--------
CHEMICALS -- 1.3%
Du Pont (E. I.) de Nemours 151,675 9,404
--------
COMPUTERS & SERVICES -- 5.1%
Hewlett Packard 233,050 12,934
IBM 170,350 22,571
--------
35,505
--------
DIVERSIFIED OPERATIONS -- 3.3%
General Electric 211,775 18,914
Thomas & Betts (A) 99,525 4,080
--------
22,994
--------
DRUGS -- 8.6%
Abbott Labs 202,900 8,433
Bristol-Myers Squibb 238,875 27,217
Merck (A) 85,325 10,522
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
DRUGS (CONTINUED)
Pharmacia & Upjohn 152,375 $ 7,219
SmithKline Beecham, ADR 113,150 6,478
--------
59,869
--------
ELECTRICAL UTILITIES -- 1.0%
Duke Energy 62,650 3,579
FPL Group 57,950 3,524
--------
7,103
--------
ENVIRONMENTAL SERVICES -- 0.8%
Browning-Ferris
Industries (A) 155,800 5,482
--------
FINANCIAL SERVICES -- 2.9%
Associates First Capital 80,368 6,244
Fannie Mae 224,225 13,902
--------
20,146
--------
FOOD, BEVERAGE & TOBACCO -- 1.0%
General Mills 31,800 1,970
H.J. Heinz 57,475 3,168
Philip Morris 37,975 1,664
--------
6,802
--------
GAS/NATURAL GAS -- 3.0%
Enron Corporation 134,850 7,139
Williams Companies 430,050 13,788
--------
20,927
--------
GLASS PRODUCTS -- 0.4%
PPG Industries 47,950 3,039
--------
INSURANCE -- 9.2%
American General 193,050 13,188
Jefferson Pilot (A) 157,262 8,866
Lincoln National (A) 61,350 5,874
Marsh & McLennan 436,537 26,656
St. Paul Companies 260,750 9,436
--------
64,020
--------
The accompanying notes are an integral part of the financial statements.
78
<PAGE> 82
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Income Equity Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
MACHINERY -- 3.1%
Dresser Industries 178,290 $ 6,296
Emerson Electric 115,700 6,877
National Service
Industries (A) 159,875 8,303
--------
21,476
--------
MEDICAL PRODUCTS & SERVICES -- 3.7%
Baxter International (A) 429,200 25,645
--------
PAPER & PAPER PRODUCTS -- 0.6%
Kimberly-Clark 91,850 4,127
--------
PETROLEUM & FUEL PRODUCTS -- 11.7%
Amoco 160,850 6,715
Atlantic Richfield 118,325 8,017
Chevron (A) 98,475 8,136
Exxon 417,100 29,249
Mobil 148,375 10,349
Phillips Petroleum 177,900 7,861
Texaco 183,525 11,161
--------
81,488
--------
PRINTING & PUBLISHING -- 6.3%
McGraw-Hill 292,775 23,989
R.R. Donnelley & Sons (A) 467,100 19,852
--------
43,841
--------
RETAIL -- 3.6%
J.C. Penney 137,473 8,068
May Department Stores 121,300 7,786
Sears Roebuck & Company 178,450 9,056
--------
24,910
--------
SPECIALTY MACHINERY -- 1.2%
Cooper Industries 156,700 8,217
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES/PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
TELEPHONES & TELECOMMUNICATION -- 6.1%
Ameritech 156,225 $ 7,684
AT&T 108,250 6,563
Bell Atlantic 139,040 6,309
GTE 129,775 7,057
SBC Communications (A) 172,200 7,039
U.S. West (A) 140,929 7,522
--------
42,174
--------
TOTAL COMMON STOCKS
(Cost $544,094) 681,546
--------
================================================================================
Commercial Paper -- 7.0%
================================================================================
McKesson Corporation (B) (C)
5.746%, 08/03/98 $12,500 12,486
Mitsubishi Motors Credit
Corporation (B) (C)
5.697%, 08/05/98 5,000 4,997
5.715%, 08/20/98 10,000 9,970
National Power PLC (B) (C)
5.657%, 08/20/98 8,000 7,976
South Western Electric PLC (B) (C)
5.705%, 08/06/98 8,000 7,992
5.725%, 08/20/98 5,000 4,985
--------
TOTAL COMMERCIAL PAPER
(Cost $48,406) 48,406
--------
================================================================================
Corporate Bonds -- 2.9%
================================================================================
Household CCMT ABT 96 Ser A-4 (B) (C)
5.656%, 01/15/99 5,000 5,000
Sigma Finance (B) (C)
5.750%, 11/10/98 5,000 5,000
Societe General, NY FYCD (B) (C)
5.760%, 08/25/98 10,000 10,000
--------
TOTAL CORPORATE BONDS
(Cost $20,000) 20,000
--------
The accompanying notes are an integral part of the financial statements.
79
<PAGE> 83
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Income Equity Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000)VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Repurchase Agreements -- 5.4%
================================================================================
J.P. Morgan Securities, Inc.
5.58%, dated 07/31/98,
matures 08/03/98, repurchase
price $12,805,269 (collateralized
by U.S. Government obligations,
par value $13,747,000, 0.00%,
07/22/99: market value
$13,055,732) $12,799 $ 12,799
Lehman Brothers, Inc. (B)
5.75%, dated 07/31/98,
matures 08/03/98, repurchase
price $24,491,057 (collateralized
by various corporate obligations,
0.00%-5.75%, 08/03/98-
01/15/99: total market
value $24,968,914) 24,479 24,479
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $37,278) 37,278
--------
TOTAL INVESTMENTS -- 113.3%
(Cost $649,778) 787,230
--------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (13.4%) (92,885)
--------
OTHER ASSETS AND LIABILITIES,
NET -- 0.1% 793
--------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par
value) based on 37,405,501
outstanding shares of beneficial
interest 468,286
Fund Shares of Retail Class A
(unlimited authorization -- no par
value) based on 1,282,736
outstanding shares of beneficial
interest 19,677
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets (continued)
================================================================================
Fund Shares of Retail Class B
(unlimited authorization -- no
par value) based on 101,381
outstanding shares of beneficial
interest $ 1,849
Undistributed net investment income 168
Accumulated net realized gain
on investments 67,706
Net unrealized appreciation
on investments 137,452
--------
TOTAL NET ASSETS -- 100.0% $695,138
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $17.92
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS A $17.95
========
MAXIMUM OFFERING PRICE PER SHARE --
RETAIL CLASS A ($17.95 / 95.5%) $18.80
========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- RETAIL CLASS B $17.90
========
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT
JULY 31, 1998 (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN
AT JULY 31, 1998 WAS $90,537,177.
(B) THIS SECURITY WAS PURCHASED WITH CASH COLLATERAL HELD FROM
SECURITIES LENDING.
(C) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT ON
NET ASSETS IS THE RATE IN EFFECT ON JULY 31, 1998.
ADR -- AMERICAN DEPOSITORY RECEIPT
SER -- SERIES
The accompanying notes are an integral part of the financial statements.
80
<PAGE> 84
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Blue Chip Growth Fund
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks -- 98.3%
================================================================================
AIR TRANSPORTATION -- 1.2%
AMR*(A) 22,000 $ 1,572
--------
AIRCRAFT -- 1.1%
Allied Signal 33,200 1,444
--------
APPAREL/TEXTILES -- 0.8%
Cintas 20,000 1,016
--------
BANKS -- 12.0%
Bank of Boston 28,800 1,393
Chase Manhattan Bank 27,000 2,042
Citicorp 13,500 2,295
Comerica 30,000 2,021
First Union 29,322 1,767
NationsBank (A) 26,524 2,115
STAR BANC (A) 29,500 2,076
U.S. Bancorp 33,000 1,518
--------
15,227
--------
BEAUTY PRODUCTS -- 2.0%
Avon Products 15,000 1,297
Colgate-Palmolive 13,200 1,220
--------
2,517
--------
BROADCASTING, NEWSPAPERS &
ADVERTISING -- 1.0%
Comcast, Cl A 27,600 1,253
--------
COMPUTERS & SERVICES -- 1.8%
Dell Computer* 21,000 2,280
--------
COMPUTERS & SOFTWARE SERVICES -- 7.4%
America Online* (A) 16,000 1,872
Cisco Systems* 25,000 2,394
EMC*(A) 45,000 2,205
HBO 10,600 312
Microsoft* 21,000 2,309
Peoplesoft* (A) 8,300 313
--------
9,405
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
DIVERSIFIED OPERATIONS -- 6.1%
Berkshire Hathaway* 1,680 $ 3,935
General Electric 43,600 3,894
--------
7,829
--------
DRUGS -- 9.8%
Eli Lilly 29,852 2,008
Forest Laboratories* 58,400 2,190
Johnson & Johnson 16,200 1,251
Pfizer 23,000 2,530
Schering Plough 16,000 1,548
Warner Lambert 38,700 2,924
--------
12,451
--------
ENTERTAINMENT -- 2.0%
Walt Disney 72,800 2,507
--------
ENVIRONMENTAL SERVICES -- 1.0%
U.S. Filter* (A) 46,000 1,242
--------
FINANCIAL SERVICES -- 5.7%
American Express 17,000 1,876
Fannie Mae 40,700 2,523
Franklin Resources 30,000 1,307
Merrill Lynch (A) 15,400 1,501
--------
7,207
--------
FOOD, BEVERAGE & TOBACCO -- 7.2%
Coca Cola Company 56,000 4,519
Hershey Foods 1,500 95
PepsiCo 41,600 1,615
Philip Morris Companies 35,000 1,533
Sara Lee 27,600 1,383
--------
9,145
--------
HOUSEHOLD PRODUCTS -- 3.5%
Clorox 7,500 769
Gillette 71,000 3,719
--------
4,488
--------
The accompanying notes are an integral part of the financial statements.
81
<PAGE> 85
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Blue Chip Growth Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
INSURANCE -- 1.5%
American International Group 12,900 $ 1,945
--------
LEISURE -- 2.4%
Carnival, Cl A 34,200 1,263
Mattel 48,400 1,860
--------
3,123
--------
MACHINERY -- 1.0%
Dresser Industries 36,200 1,278
--------
MEDICAL PRODUCTS & SERVICES -- 7.9%
Boston Scientific* (A) 35,300 2,705
Healthsouth* (A) 75,500 1,897
Ims Health Inc* 42,500 2,670
Medtronic 25,700 1,592
Safeskin* 32,700 1,228
--------
10,092
--------
MISCELLANEOUS BUSINESS SERVICES -- 1.7%
Cendant* 51,000 883
Robert Half International* 23,400 1,246
--------
2,129
--------
PETROLEUM REFINING -- 2.8%
Exxon 30,000 2,104
Mobil 15,800 1,102
Royal Dutch Petroleum 8,000 408
--------
3,614
--------
PRINTING & PUBLISHING -- 1.2%
Tribune 22,000 1,480
--------
PROFESSIONAL SERVICES -- 0.5%
Devry* 30,100 613
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES/PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
RETAIL -- 11.5%
Bed Bath & Beyond* 28,000 $ 1,208
Costco* (A) 14,500 823
CVS Corp. 40,000 1,640
General Nutrition* 30,500 873
Harley-Davidson 32,700 1,296
Home Depot 40,000 1,675
Kohls* 25,400 1,245
Lowe's 40,000 1,540
McDonald's 19,200 1,283
Safeway* (A) 48,000 2,127
Staples* 30,000 986
--------
14,696
--------
SEMI-CONDUCTORS/INSTRUMENTS -- 1.6%
Adaptec* 5,000 58
Intel 22,700 1,917
--------
1,975
--------
SPECIALTY MACHINERY -- 0.5%
Solectron* 12,500 600
--------
TELEPHONES & TELECOMMUNICATION -- 3.1%
AirTouch Communications* 22,500 1,323
WorldCom*(A) 50,000 2,644
--------
3,967
--------
TOTAL COMMON STOCKS
(Cost $105,019) 125,095
--------
================================================================================
Corporate Bonds -- 5.9%
================================================================================
Household CCMT ABT 96 Ser A4 (B) (C)
5.656%, 01/15/99 $5,000 5,000
Sigma Finance Inc. (B) (C)
5.750%, 11/10/98 2,500 2,500
--------
TOTAL CORPORATE BONDS
(Cost $7,500) 7,500
--------
The accompanying notes are an integral part of the financial statements.
82
<PAGE> 86
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Blue Chip Growth Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Commercial Paper -- 11.8%
================================================================================
Mitsubishi Motors Credit (B) (C)
5.697%, 08/05/98 $ 5,000 $ 4,997
Orange & Rockland Utility (B) (C)
5.724%, 08/11/98 5,000 4,992
South Western Electric PLC (B) (C)
5.766%, 08/27/98 5,000 4,982
--------
TOTAL COMMERCIAL PAPER
(Cost $14,971) 14,971
--------
================================================================================
Repurchase Agreements -- 14.2%
================================================================================
BZW Securities, Inc.
5.59%, dated 07/31/98,
matures 08/03/98, repurchase
price $1,962,513 (collateralized
by U.S. Treasury Note, par
value $1,978,000, 5.50%,
11/15/98: market value
$2,001,376) 1,962 1,962
Lehman Brothers, Inc. (B)
5.75%, dated 07/31/98, matures
08/03/98, repurchase price
$16,183,393 (collateralized
by various corporate
obligations, 0.00%-5.75%,
08/03/98- 11/10/98: total
market value $16,499,155) 16,176 16,176
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $18,138) 18,138
--------
TOTAL INVESTMENTS -- 130.2%
(Cost $145,628) 165,704
--------
RECEIVABLE FOR SECURITIES SOLD -- 35.8% 45,597
--------
PAYABLE FOR SECURITIES
PURCHASED -- (35.5%) (45,207)
--------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (30.4%) (38,647)
--------
OTHER ASSETS AND LIABILITIES,
NET -- (0.1% ) (152)
--------
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no
par value) based on 7,936,141
outstanding shares of beneficial
interest $ 93,722
Undistributed net investment income 11
Accumulated net realized gain
on investments 13,486
Net unrealized appreciation
on investments 20,076
--------
TOTAL NET ASSETS -- 100.0% $127,295
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $16.04
========
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT
JULY 31, 1998 (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN
AT JULY 31, 1998 WAS $21,817,470.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
(C) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS
IS THE RATE IN EFFECT ON JULY 31, 1998.
ADR -- AMERICAN DEPOSITORY RECIEPT
CL -- CLASS
SER -- SERIES
The accompanying notes are an integral part of the financial statements.
83
<PAGE> 87
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Emerging Growth Fund
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks --92.5%
================================================================================
AEROSPACE & DEFENSE -- 0.7%
Simula* (A) 30,000 $ 487
--------
AIR TRANSPORTATION -- 1.1%
Atlantic Coast Air* 20,000 527
Mesaba Holdings* 10,000 235
--------
762
--------
APPAREL/TEXTILES -- 0.9%
Interface 37,000 606
--------
AUTOMOTIVE -- 0.8%
Strattec Strategy 20,000 560
--------
BANKS -- 15.5%
Bay View Capital 25,000 692
Commercial Federal 42,000 1,181
Cullen/Frost Bankers 17,400 924
Downey Financial 31,500 1,024
FirstFed Financial* 60,000 1,305
Hibernia, Cl A 25,000 472
Long Island Bancorp 15,000 860
Mellon Bank 2,500 168
Peoples Heritage
Financial Group 20,000 453
Provident Bankshares (A) 45,000 1,204
Reliance Bancorp 20,000 675
Resource Bancshares
Mortgage Group 20,000 389
TR Financial 35,000 1,321
--------
10,668
--------
BEAUTY PRODUCTS -- 1.1%
Natures Sunshine Products 20,000 415
Pure World* 25,000 341
--------
756
--------
BROADCASTING, NEWSPAPERS &
ADVERTISING -- 3.7%
Capstar Broadcasting, Cl A* 37,000 911
Getty Images Inc.* (A) 25,000 491
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
BROADCASTING, NEWSPAPERS & ADVERTISING (CONTINUED)
Snyder Communications* (A) 25,000 $ 1,123
--------
2,525
--------
BUILDING & CONSTRUCTION -- 1.2%
Morrison Knudsen 30,000 401
Toll Brothers* 15,000 393
--------
794
--------
COMMUNICATIONS EQUIPMENT -- 3.7%
Broadcom Corporation,
Cl A* (A) 25,000 1,569
Intervoice* 25,000 464
Polycom* 20,000 332
Powerwave Technologies* (A) 15,000 197
--------
2,562
--------
COMPUTERS & SERVICES -- 2.6%
Dialogic 10,000 352
Fore Systems* 25,000 595
Splash Technologies Holdings* 20,000 456
Technology Solutions* 15,000 382
--------
1,785
--------
COMPUTERS & SOFTWARE SERVICES -- 12.3%
FileNet* 25,000 606
ISS Group* 26,400 1,228
Legato Systems* 20,000 870
Mercury Interactive* 14,000 579
New Era of Networks* 10,000 365
Open Text 12,500 194
Pegasystems* (A) 11,000 309
Peregrine Systems* (A) 20,000 680
Platinum Software 20,000 408
Platinum Technology* (A) 30,000 948
Progress Software 22,500 458
Saville Systems Ireland, ADR* 20,000 505
Timberline Software 20,000 448
Veritas Software* 15,000 842
--------
8,440
--------
The accompanying notes are an integral part of the financial statements.
84
<PAGE> 88
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Emerging Growth Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
CONSUMER PRODUCTS -- 0.3%
Stride Rite 20,000 $ 242
--------
DRUGS -- 1.2%
Medarex* 50,000 269
Medco Research* 15,000 367
Spiros Development II* 11,500 190
--------
826
--------
ENTERTAINMENT -- 1.6%
Cinar Films, Class B* 20,000 450
Family Golf Centers* (A) 20,000 495
Players International* 30,000 146
--------
1,091
--------
ENVIRONMENTAL SERVICES -- 3.8%
Allied Waste Industries* 20,000 565
American Disposal Services* 35,000 1,343
Superior Services* 25,000 703
--------
2,611
--------
FINANCIAL SERVICES -- 1.4%
Raymond James Financial 20,000 512
Waddell & Reed
Financial, Cl A* 20,000 441
--------
953
--------
FOOD, BEVERAGE & TOBACCO -- 0.3%
Horizon Organic Holding 15,000 234
--------
HOUSEHOLD FURNITURE & FIXTURES -- 1.2%
Ethan Allen Interiors 20,000 826
--------
INSURANCE -- 1.6%
Arm Financial Group* 25,000 620
Healthcare Recoveries* 30,000 491
--------
1,111
--------
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
LEISURE PRODUCTS -- 0.2%
Toymax International* (A) 15,000 $ 111
--------
MACHINERY -- 0.5%
Dresser Industries 10,000 353
--------
MEDICAL PRODUCTS & SERVICES -- 3.7%
ATS Medical* 30,000 214
Cambridge Heart* 30,000 216
PSS World Medical Inc.* 20,000 311
Safeskin* 20,000 751
Steris* 10,500 640
Theragenics* 7,500 123
Veterinary Centers of America* 15,000 283
--------
2,538
--------
MISCELLANEOUS BUSINESS SERVICES -- 3.6%
American Management Systems 20,000 600
AnswerThink Consulting Group * 20,000 432
G. & K. Services 15,000 746
Informix* 20,000 131
Staffmark* 20,000 535
--------
2,444
--------
MISCELLANEOUS CONSUMER SERVICES -- 5.6%
Carriage Services* 31,000 686
Central Parking 20,000 1,004
Equity International* 25,000 542
Rock of Ages* 50,000 669
Stewart Enterprises, Cl A 40,000 909
--------
3,810
--------
PETROLEUM & FUEL PRODUCTS -- 1.1%
Gulf Island Fabrication* 15,000 270
Key Energy Group* 10,000 108
Vintage Petroleum 25,000 358
--------
736
--------
The accompanying notes are an integral part of the financial statements.
85
<PAGE> 89
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Emerging Growth Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
PROFESSIONAL SERVICES -- 4.1%
Caliber Learning Network* 41,000 $ 410
Educational Management* 20,000 740
ITT Educational Services* 25,000 791
Sylvan Learning Systems* (A) 30,000 851
--------
2,792
--------
RETAIL -- 6.8%
Action Performance* (A) 30,000 900
American Eagle Outfitters* 20,000 988
CKE Restaurants 12,000 449
Cybershop International* (A) 10,000 103
Kmart* 10,000 163
N2K* 5,000 71
Onsale Inc* (A) 10,000 247
Party City* 15,000 339
Pier 1 Imports 26,250 409
Sportsline USA* (A) 20,000 530
Williams Sonoma* 15,000 496
--------
4,695
--------
RUBBER & PLASTIC -- 1.3%
Carlisle 20,000 879
--------
SEMI-CONDUCTORS/INSTRUMENTS -- 4.4%
MMC Networks* 25,000 538
National Semiconductor* (A) 20,000 246
Sanmina* (A) 21,000 958
Sci Systems* (A) 20,000 788
Vitesse Semiconductor* 15,000 493
--------
3,023
--------
TELEPHONES & TELECOMMUNICATIONS -- 6.2%
Advanced Fibre Communication* 27,500 548
Alpine Group* 21,500 390
Clearnet, Cl A* 15,000 165
Intermedia Communications* (A) 12,000 444
- --------------------------------------------------------------------------------
DESCRIPTION SHARES/PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Common Stocks (continued)
================================================================================
TELEPHONES & TELECOMMUNICATIONS (CONTINUED)
Metromedia International
Group* 35,000 $ 339
Positron Fiber Systems 18,000 185
Smartalk Teleservices* (A) 20,000 331
Star Telecommunications* (A) 20,000 368
Winstar Communications* (A) 25,000 825
World Access* (A) 15,000 431
Xircom* 10,000 208
--------
4,234
--------
TOTAL COMMON STOCKS
(Cost $63,610) 63,454
--------
================================================================================
Corporate Bonds -- 3.7%
================================================================================
Sigma Finance (B) (C)
5.750%, 11/10/98 $2,500 2,500
--------
TOTAL CORPORATE BONDS
(Cost $2,500) 2,500
--------
================================================================================
Commercial Paper -- 8.9%
================================================================================
Orange & Rockland Utility (B) (C)
5.724%, 08/11/98 3,150 3,145
South Western Electric PLC (B) (C)
5.725%, 08/20/98 3,000 2,991
--------
TOTAL COMMERCIAL PAPER
(Cost $6,136) 6,136
--------
================================================================================
Repurchase Agreements -- 18.6%
================================================================================
BZW Securities, Inc.
5.59%, dated 07/31/98, matures
08/03/98, repurchase price
$6,776,975 (collateralized by
U.S. Treasury Note 5.50%,
11/15/98, par value
$6,829,000: market
value $6,909,705) 6,774 6,774
The accompanying notes are an integral part of the financial statements.
86
<PAGE> 90
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
Emerging Growth Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Repurchase Agreements (continued)
================================================================================
Lehman Brothers, Inc. (B)
5.75%, dated 07/31/98, matures
08/03/98, repurchase price $5,966,722
(collateralized by U.S. Treasury Note,
5.50%, 11/15/98: market
value $6,909,706) $5,964 $ 5,964
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $12,738) 12,738
--------
TOTAL INVESTMENTS -- 123.7%
(Cost $84,984) 84,828
--------
PAYABLE UPON RETURN OF
SECURITIES LOANED -- (21.3%) (14,600)
--------
OTHER ASSETS AND LIABILITIES,
NET -- (2.4%) (1,649)
--------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par
value) based on 5,362,976 outstanding
shares of beneficial interest 59,539
Overdistributed net investment income (2)
Accumulated net realized gain
on investments 9,198
Net unrealized depreciation
on investments (156)
--------
TOTAL NET ASSETS -- 100.0% $ 68,579
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $12.79
========
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY
(A) THIS SECURITY OR A PARTIAL POSITION OF THIS SECURITY IS ON LOAN AT
JULY 31, 1998 (SEE FOOTNOTE 2). THE TOTAL VALUE OF SECURITIES ON LOAN
AT JULY 31, 1998 WAS $14,100,996.
(B) THIS SECURITY PURCHASED WITH CASH COLLATERAL HELD FROM SECURITIES LENDING.
(C) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS
IS THE RATE IN EFFECT ON JULY 31, 1998.
ADR--AMERICAN DEPOSITORY RECEIPT
CL--CLASS
The accompanying notes are an integral part of the financial statements.
87
<PAGE> 91
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
International Equity Fund
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Foreign Common Stocks -- 94.9%
================================================================================
AUSTRALIA -- 1.7%
Australia & New Zealand
Bank Group 13,000 $ 84
Brambles Industries 6,700 142
Broken Hill Proprietary 17,900 145
National Australia Bank 14,000 195
News Corporation 30,000 219
Pioneer International 35,300 82
Rio Tinto 6,700 73
Smith Howard 18,000 106
Southcorp Holdings 31,000 83
WMC 14,600 44
Westpac Banking 31,500 199
Woolworths 48,000 146
--------
1,518
--------
AUSTRIA -- 0.8%
Bank Austria 6,230 493
OMV 1,670 213
--------
706
--------
BELGIUM -- 0.9%
Dexia 4,970 816
--------
FINLAND -- 1.8%
Nokia Oyj, Cl A 15,980 1,404
Nokia, Cl A 2,480 218
--------
1,622
--------
FRANCE -- 11.3%
Accor 3,220 862
Compagnie de Saint-Gobain 4,970 870
Comptoirs Modernes 1,452 803
Credit Commercial de France 7,130 631
Elf Aquitaine 4,295 557
France Telecom 25,210 1,717
Groupe Danone 3,630 1,094
Legrand 3,280 863
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Foreign Common Stocks (continued)
================================================================================
FRANCE (CONTINUED)
Pernod Ricard 11,710 $ 825
Renault 15,100 802
Rhodia* 6,042 151
Rhone Poulenc, Cl A 14,310 783
SGS-Thomson Microelectronics,
NV, ADR 6,890 438
--------
10,396
--------
GERMANY -- 9.4%
Adidas 5,050 733
Allianz 2,420 868
Bayer 13,920 632
Bayerische Motoren Werke* 880 850
Bayerische Vereinsbank 10,820 1,022
BMW 176 167
Commerzbank 8,980 341
Daimler Benz 9,240 946
Mannesmann 15,400 1,641
Siemens 9,500 706
Veba 12,250 723
--------
8,629
--------
HONG KONG -- 1.5%
Cheung Kong Holdings 29,000 126
China Telecom (Hong Kong)* 184,000 270
Hang Seng Bank 21,500 105
Hong Kong Electric 54,000 169
Hong Kong Telecommunications 180,000 339
Hutchison Whampoa 60,000 288
Sun Hung Kai Properties 28,000 104
--------
1,401
--------
ITALY -- 5.6%
Alleanza Assicurazioni 47,320 646
Autogrill 50,700 349
Banca Intesa 62,310 370
Credito Italiano 200,950 1,149
The accompanying notes are an integral part of the financial statements.
88
<PAGE> 92
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
International Equity Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Foreign Common Stocks (continued)
================================================================================
ITALY (CONTINUED)
ENI SPA 114,790 $ 747
INA 123,800 393
Istituto Bancario San Paolo
di Torino 30,620 535
Telecom Italia 168,090 991
--------
5,180
--------
JAPAN -- 18.7%
Bridgestone 27,000 654
Canon 32,000 730
Credit Saison 17,000 327
Dai Nippon Printing 28,000 445
East Japan Railway 131 630
Fuji Photo Film 20,000 737
Fujitsu 41,000 448
Honda Motor 33,000 1,230
Industrial Bank of Japan 760 4
Kao 16,000 263
Mitsubishi Estate 35,000 305
Mitsui Mining & Smelting* 110,000 492
Mitsukoshi 121,000 319
NEC 51,000 472
Nintendo 4,200 399
Nippon Steel 187,000 326
Nippon Telegraph & Telephone 210 1,816
NTT Data 14 544
Osaka Gas 148,000 342
Rohm Company 6,000 647
Shizuoka Bank 52,000 510
Sony 13,300 1,131
Sumitomo Bank 80,000 754
Sumitomo Chemical 141,000 423
Sumitomo Special Metals 39,000 782
Takeda Chemical 30,000 770
Tokio Marine & Fire Insurance 47,000 475
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Foreign Common Stocks (continued)
================================================================================
JAPAN (CONTINUED)
Tokyo Electric Power 28,000 $ 525
Toyota Motor 27,000 663
--------
17,163
--------
MALAYSIA -- 0.1%
Petronas Gas 33,000 57
Tan Jong 8,000 10
Telekom Malaysia 27,000 42
--------
109
--------
NETHERLANDS -- 5.2%
Aegon 1,243 114
Akzo Nobel 10,050 512
Hagemeyer 3,972 168
ING Groep 18,097 1,369
Philips Electronics 9,010 730
Royal Dutch Petroleum 23,400 1,195
Unilever 10,380 743
--------
4,831
--------
PORTUGAL -- 1.1%
Banco Espirito Santo 16,032 579
Portugal Telecom 8,350 479
--------
1,058
--------
SINGAPORE -- 0.4%
City Developments 12,000 34
Natsteel Electronics 26,000 49
Overseas Chinese Bank 15,000 53
Singapore Airlines 7,000 35
Singapore Press Holdings 8,932 63
Singapore Tech Engineering 59,000 44
Singapore Telecommunications 64,000 97
--------
375
--------
The accompanying notes are an integral part of the financial statements.
89
<PAGE> 93
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
International Equity Fund (continued)
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Foreign Common Stocks (continued)
================================================================================
SPAIN -- 2.6%
Banco Central Hispano 17,677 $ 666
Banco Santander 7,440 210
Cortefiel 11,290 259
Endesa 41,330 911
Grupo Acciona 1,460 390
--------
2,436
--------
SWEDEN -- 3.0%
Astra AB, Cl A 35,233 678
Electrolux AB 42,500 679
Ericsson, Cl B 31,960 897
Volvo, Cl B 15,500 479
--------
2,733
--------
SWITZERLAND -- 8.0%
Alusuisse Lonza, Reg 280 343
Credit Suisse Holdings, Reg 3,220 811
Nestle SA, Reg 520 1,080
Novartis SA, Reg 570 962
Rieter 420 322
Roche Holdings 109 1,174
Schindler Holding 170 248
Sulzer AG 260 200
UBS AG, Reg 3,293 1,430
Zuerich Versicherung, Reg 980 779
--------
7,349
--------
UNITED KINGDOM -- 22.8%
Abbey National 19,080 347
Alliance & Leicester 25,830 363
BAA 468 5
Bank of Scotland 94,740 1,037
Bank of Ireland 34,040 689
Barclays 37,250 1,064
British Aerospace 57,600 439
British Petroleum 64,960 863
- --------------------------------------------------------------------------------
DESCRIPTION SHARES/PAR (000) VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Foreign Common Stocks (continued)
================================================================================
UNITED KINGDOM (CONTINUED)
British Telecom 39,282 $ 569
CMG 80,360 2,834
Compass Group 97,339 1,009
Glaxo Wellcome 51,713 1,594
HSBC Holdings 20,920 520
Lloyds TSB Group 100,550 1,370
Misys 24,478 1,197
Norwich Union 66,960 523
Prudential 95,463 1,309
Reed International 90,310 867
SmithKline Beecham 100,220 1,164
Southern Electric 46,800 424
Vodafone Group 103,930 1,433
Zeneca Group 35,880 1,360
--------
20,980
--------
TOTAL FOREIGN COMMON STOCKS
(Cost $73,206) 87,302
--------
================================================================================
Foreign Preferred Stock -- 2.0%
================================================================================
GERMANY -- 2.0%
SAP* 2,480 1,834
--------
TOTAL FOREIGN PREFERRED STOCK
(Cost $946) 1,834
--------
================================================================================
Cash Equivalent -- 0.6%
================================================================================
SEI Daily Income Money Market $500 500
--------
TOTAL CASH EQUIVALENT
(Cost $500) 500
--------
TOTAL INVESTMENTS -- 97.5%
(Cost $74,652) 89,636
--------
OTHER ASSETS AND LIABILITIES,
NET -- 2.5% 2,334
--------
The accompanying notes are an integral part of the financial statements.
90
<PAGE> 94
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
International Equity Fund (concluded)
- --------------------------------------------------------------------------------
DESCRIPTION VALUE (000)
- --------------------------------------------------------------------------------
================================================================================
Net Assets:
================================================================================
Fund Shares of Fiduciary Class
(unlimited authorization -- no par
value) based on 2,464,336 outstanding
shares of beneficial interest $ 83,737
Undistributed net investment income 325
Accumulated net realized loss
on investments (7,063)
Net unrealized depreciation on forward
foreign currency contracts, foreign
currency and translation of other
assets and liabilities in foreign
currency (13)
Net unrealized appreciation
on investments 14,984
--------
TOTAL NET ASSETS -- 100.0% $ 91,970
========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- FIDUCIARY CLASS $37.32
========
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY
CL -- CLASS
REG -- REGISTERED
ADR -- AMERICAN DEPOSITORY RECEIPT
The accompanying notes are an integral part of the financial statements.
91
<PAGE> 95
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (000)
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31, 1998
100%
U.S.TREASURY U.S. GOVERNMENT DIVERSIFIED CALIFORNIA TAX-FREE
MONEY MARKET MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND FUND
------------ --------------- ------------ -------------------
<S> <C> <C> <C> <C>
Interest Income .................................. $51,120 $16,795 $117,718 $15,691
Dividend Income .................................. -- -- -- --
------- ------- -------- -------
Total Investment Income ............... 51,120 16,795 117,718 15,691
------- ------- -------- -------
Expenses:
Administrative Fees ........................... 1,907 604 4,167 925
Administrative Fees Waived .................... (191) (60) (416) (93)
Investment Advisor Fees ....................... 2,860 907 6,251 1,388
Investment Advisor Fees Waived ................ (476) -- -- (925)
Shareholder Servicing Fees Fiduciary .......... 662 584 2,728 505
Shareholder Servicing Fees Retail Class A ..... 1,721 172 2,481 652
Shareholder Servicing Fees Retail Class B ..... -- -- -- --
Shareholder Servicing Fees Waived ............. (2,383) (756) (5,209) (1,157)
Custodian Fees ................................ 95 30 209 46
Professional Fees ............................. 50 30 62 10
Registration Fees ............................. 31 6 73 32
Transfer Agency Fees .......................... 52 21 80 22
Distribution Fees Retail Class A .............. 1,721 172 2,481 652
Distribution Fees Retail Class B .............. -- -- -- --
Distribution Fees Waived ...................... -- -- -- --
Insurance Fees ................................ 10 3 11 1
Trustees Fees ................................. 15 3 7 2
Printing Fees ................................. 42 15 59 26
Miscellaneous Fees ............................ 1 2 7 --
------- ------- -------- -------
Total Expenses ........................ 6,117 1,733 12,991 2,086
Reduction of Expenses (1) ............. (25) (8) (54) (12)
------- ------- -------- -------
Total Net Expenses .................... 6,092 1,725 12,937 2,074
------- ------- -------- -------
Net Investment Income ......................... 45,028 15,070 104,781 13,617
------- ------- -------- -------
Net Realized Gain (Loss) on Investments .......... 2 7 2 (2)
------- ------- -------- -------
Change in Unrealized Appreciation (Depreciation)
on Investments ................................ -- -- -- --
------- ------- -------- -------
Net Realized and Unrealized Gain (Loss) on
Investments ................................... 2 7 2 (2)
------- ------- -------- -------
Increase in Net Assets Resulting from
Operations .................................... $45,030 $15,077 $104,783 $13,615
======= ======= ======== =======
- -------------------------------------------------------------------------------------------------------------------
CALIFORNIA
INTERMEDIATE
INTERMEDIATE- TAX-FREE CONVERTIBLE
TERM BOND BOND BOND SECURITIES
FUND FUND FUND FUND
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Interest Income .................................. $11,416 $3,223 $7,851 $ 381
Dividend Income .................................. -- -- -- 833
------- ------ ------ ------
Total Investment Income ............... 11,416 3,223 7,851 1,214
------- ------ ------ ------
Expenses:
Administrative Fees ........................... 346 133 237 59
Administrative Fees Waived .................... (35) (16) (24) (6)
Investment Advisor Fees ....................... 864 333 593 176
Investment Advisor Fees Waived ................ -- (245) -- --
Shareholder Servicing Fees Fiduciary .......... 420 134 294 73
Shareholder Servicing Fees Retail Class A ..... 12 33 3 --
Shareholder Servicing Fees Retail Class B ..... -- -- -- --
Shareholder Servicing Fees Waived ............. (380) (167) (285) (73)
Custodian Fees ................................ 17 7 12 3
Professional Fees ............................. 9 5 11 4
Registration Fees ............................. 15 24 15 3
Transfer Agency Fees .......................... 11 14 20 1
Distribution Fees Retail Class A .............. 12 33 2 --
Distribution Fees Retail Class B .............. -- -- -- --
Distribution Fees Waived ...................... (12) (33) (2) --
Insurance Fees ................................ 2 -- -- 1
Trustees Fees ................................. 4 4 3 2
Printing Fees ................................. 14 8 13 4
Miscellaneous Fees ............................ 1 1 4 4
------- ------ ------ ------
Total Expenses ........................ 1,300 268 896 251
Reduction of Expenses (1) ............. (4) (2) (3) (1)
------- ------ ------ ------
Total Net Expenses .................... 1,296 266 893 250
------- ------ ------ ------
Net Investment Income ......................... 10,120 2,957 6,958 964
------- ------ ------ ------
Net Realized Gain (Loss) on Investments .......... 768 305 122 559
------- ------ ------ ------
Change in Unrealized Appreciation (Depreciation)
on Investments ................................ (25) 1,305 1,732 (638)
------- ------ ------ ------
Net Realized and Unrealized Gain (Loss) on
Investments ................................... 743 1,610 1,854 (79)
------- ------ ------ ------
Increase in Net Assets Resulting from
Operations .................................... $10,863 $4,567 $8,812 $ 885
======= ====== ====== ======
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) SEE NOTE 3.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
92 & 93
<PAGE> 96
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (000)
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31, 1998
GOVERNMENT VALUE
SECURITIES BALANCED GROWTH MOMENTUM
FUND FUND FUND FUND
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest Income ........................................ $4,944 $10,933 $ 600 $ 2,292
Dividend Income ........................................ -- 4,597 3,150 11,296
Less: Foreign Taxes withheld, net of reclaims .......... -- -- -- --
------ ------- ------- -------
Total Investment Income ..................... 4,944 15,530 3,750 13,588
------ ------- ------- -------
Expenses:
Administrative Fees ................................. 161 868 755 1,317
Administration Fees Waived .......................... (16) (100) (86) (132)
Investment Advisor Fees ............................. 403 2,603 2,265 3,952
Investment Advisor Fees Waived ...................... -- -- -- --
Shareholder Servicing Fees Fiduciary ................ 201 1,059 917 1,570
Shareholder Servicing Fees Retail Class A ........... -- 25 26 73
Shareholder Servicing Fees Retail Class B ........... -- -- 1 4
Shareholder Servicing Fees Waived ................... (201) (650) (566) (1,643)
Custodian Fees ...................................... 8 43 38 66
Professional Fees ................................... 8 16 17 22
Registration Fees ................................... 18 20 21 36
Transfer Agency Fees ................................ 2 29 21 39
Distribution Fees Retail Class A .................... -- 25 26 72
Distribution Fees Retail Class B .................... -- 1 3 11
Distribution Fees Waived ............................ -- -- -- --
Insurance Fees ...................................... 2 4 3 3
Trustees Fees ....................................... 5 9 6 15
Printing Fees ....................................... 8 24 23 40
Miscellaneous Fees .................................. 7 3 4 10
------ ------- ------- -------
Total Expenses .............................. 606 3,979 3,474 5,455
Reduction of Expenses (1) ................... (2) (11) (10) (17)
------ ------- ------- -------
Total Net Expenses .......................... 604 3,968 3,464 5,438
------ ------- ------- -------
Net Investment Income ............................... 4,340 11,562 286 8,150
------ ------- ------- -------
Net Realized Gain (Loss) on Investments ................ 348 21,780 58,251 16,588
------ ------- ------- -------
Net Realized Gain (Loss) on Option Contracts ........... -- -- -- --
------ ------- ------- -------
Net Realized Loss on Foreign Currency Transactions ..... -- -- -- --
------ ------- ------- -------
Change in Unrealized Appreciation (Depreciation)
on Investments ...................................... 906 (4,261) 16,670 7,625
------ ------- ------- -------
Change in Unrealized Appreciation on Foreign Currency .. -- -- -- --
------ ------- ------- -------
Net Realized and Unrealized Gain on Investments ........ 1,254 17,519 74,921 24,213
------ ------- ------- -------
Increase in Net Assets Resulting from Operations ....... $5,594 $29,081 $75,207 $32,363
====== ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BLUE CHIP EMERGING INTERNATIONAL
EQUITY GROWTH GROWTH EQUITY
FUND FUND FUND FUND
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Interest Income ........................................ $ 577 $ 536 $ 474 $ 93
Dividend Income ........................................ 11,420 912 303 1,419
Less: Foreign Taxes withheld, net of reclaims .......... -- -- -- (152)
------- ------- ------- -------
Total Investment Income ..................... 11,997 1,448 777 1,360
------- ------- ------- -------
Expenses:
Administrative Fees ................................. 942 227 144 132
Administration Fees Waived .......................... (94) (23) (14) (13)
Investment Advisor Fees ............................. 2,826 680 577 629
Investment Advisor Fees Waived ...................... -- -- -- --
Shareholder Servicing Fees Fiduciary ................ 1,130 283 180 166
Shareholder Servicing Fees Retail Class A ........... 46 -- -- --
Shareholder Servicing Fees Retail Class B ........... 1 -- -- --
Shareholder Servicing Fees Waived ................... (706) (283) (180) (166)
Custodian Fees ...................................... 47 12 7 100
Professional Fees ................................... 30 6 6 9
Registration Fees ................................... 40 9 5 14
Transfer Agency Fees ................................ 50 3 2 2
Distribution Fees Retail Class A .................... 46 -- -- --
Distribution Fees Retail Class B .................... 3 -- -- --
Distribution Fees Waived ............................ -- -- -- --
Insurance Fees ...................................... 1 1 1 --
Trustees Fees ....................................... 8 2 5 1
Printing Fees ....................................... 18 14 9 6
Miscellaneous Fees .................................. 7 1 3 11
------- ------- ------- -------
Total Expenses .............................. 4,395 932 745 891
Reduction of Expenses (1) ................... (12) (3) (2) (2)
------- ------- ------- -------
Total Net Expenses .......................... 4,383 929 743 889
------- ------- ------- -------
Net Investment Income ............................... 7,614 519 34 471
------- ------- ------- -------
Net Realized Gain (Loss) on Investments ................ 75,433 16,737 14,448 (6,100)
------- ------- ------- -------
Net Realized Gain (Loss) on Option Contracts ........... -- 17 (410) --
------- ------- ------- -------
Net Realized Loss on Foreign Currency Transactions ..... -- -- -- (142)
------- ------- ------- -------
Change in Unrealized Appreciation (Depreciation)
on Investments ...................................... (50,106) (7,709) (12,019) 9,175
------- ------- ------- -------
Change in Unrealized Appreciation on Foreign Currency .. -- -- -- 28
------- ------- ------- -------
Net Realized and Unrealized Gain on Investments ........ 25,327 9,045 2,019 2,961
------- ------- ------- -------
Increase in Net Assets Resulting from Operations ....... $32,941 $ 9,564 $ 2,053 $ 3,432
======= ======= ======= =======
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) SEE NOTE 3.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
94 & 95
<PAGE> 97
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (000)
- ----------------------------------------------------------------------------------------------------------------
100% U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET MONEY MARKET
FUND FUND
------------------------ -------------------------
08/01/97 08/01/96 08/01/97 08/01/96
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ -------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income .................................. $ 45,028 $ 19,694 $ 15,070 $ 10,584
Net Realized Gain (Loss) on Investments ................ 2 46 7 18
Change in Unrealized Appreciation (Depreciation)
on Investments ....................................... -- -- -- --
---------- -------- ----------- -----------
Net Increase in Net Assets Resulting From Operations ... 45,030 19,740 15,077 10,602
---------- -------- ----------- -----------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares ..................................... (13,003) (9,631) (11,796) (8,350)
Retail A Shares ...................................... (32,025) (10,063) (3,274) (2,234)
Retail B Shares ...................................... -- -- -- --
Capital Gains:
Fiduciary Shares ..................................... -- -- -- --
Retail A Shares ...................................... -- -- -- --
Retail B Shares ...................................... -- -- -- --
---------- -------- ----------- -----------
Total Distributions ................................ (45,028) (19,694) (15,070) (10,584)
---------- -------- ----------- -----------
Change in Net Assets ..................................... 2 46 7 18
---------- -------- ----------- -----------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- 181,083 -- --
Proceeds in connection with the acquisition of
Common Trust Fund Assets ........................... -- -- -- --
Proceeds from Shares Issued .......................... 678,448 444,667 1,374,048 1,103,212
Reinvestment of Distributions ........................ 635 740 256 253
Cost of Shares Redeemed .............................. (694,817) (556,386) (1,344,194) (1,001,968)
---------- -------- ----------- -----------
Total Fiduciary Share Transactions ................. (15,734) 70,104 30,110 101,497
---------- -------- ----------- -----------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- 436,482 -- --
Proceeds from Shares Issued .......................... 1,308,435 526,646 369,119 331,210
Reinvestment of Distributions ........................ 31,361 8,189 2,968 2,297
Cost of Shares Redeemed .............................. (1,171,680) (512,994) (292,826) (366,427)
---------- -------- ----------- -----------
Total Retail Class A Share Transactions ............ 168,116 458,323 79,261 (32,920)
---------- -------- ----------- -----------
Retail Class B Shares:
Proceeds from Shares Issued .......................... -- -- -- --
Reinvestment of Distributions ........................ -- -- -- --
Cost of Shares Redeemed .............................. -- -- -- --
---------- -------- ----------- -----------
Total Retail Class B Share Transactions ............ -- -- -- --
---------- -------- ----------- -----------
Net Increase in Net Assets From Share Transactions ....... 152,382 528,427 109,371 68,577
---------- -------- ----------- -----------
Total Increase in Net Assets ....................... 152,384 528,473 109,378 68,595
---------- -------- ----------- -----------
Net Assets:
Beginning of Period .................................... 802,436 273,963 295,792 227,197
---------- -------- ----------- -----------
End of Period .......................................... $ 954,820 $802,436 $ 405,170 $ 295,792
========== ======== =========== ===========
DIVERSIFIED CALIFORNIA TAX-FREE
MONEY MARKET MONEY MARKET
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income .................................. $ 104,781 $ 36,038 $ 13,617 $ 4,100
Net Realized Gain (Loss) on Investments ................ 2 31 (2) --
Change in Unrealized Appreciation (Depreciation)
on Investments ....................................... -- -- -- --
---------- ---------- ---------- --------
Net Increase in Net Assets Resulting From Operations ... 104,783 36,069 13,615 4,100
---------- ---------- ---------- --------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares ..................................... (56,174) (20,558) (6,202) (1,618)
Retail A Shares ...................................... (48,607) (15,480) (7,416) (2,478)
Retail B Shares ...................................... -- -- -- --
Capital Gains:
Fiduciary Shares ..................................... -- -- -- --
Retail A Shares ...................................... -- -- -- --
Retail B Shares ...................................... -- -- -- --
---------- ---------- ---------- --------
Total Distributions ................................ (104,781) (36,038) (13,618) (4,096)
---------- ---------- ---------- --------
Change in Net Assets ..................................... 2 31 (3) 4
---------- ---------- ---------- --------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- 283,586 -- 114,246
Proceeds in connection with the acquisition of
Common Trust Fund Assets ........................... 33,913 -- -- --
Proceeds from Shares Issued .......................... 2,317,898 2,066,619 455,192 131,018
Reinvestment of Distributions ........................ 9,864 4,034 16 6
Cost of Shares Redeemed .............................. (2,153,396) (1,905,972) (373,015) (122,182)
---------- ---------- ---------- --------
Total Fiduciary Share Transactions ................. 208,279 448,267 82,193 123,088
---------- ---------- ---------- --------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- 139,246 -- 61,460
Proceeds from Shares Issued .......................... 1,900,298 621,422 512,922 159,066
Reinvestment of Distributions ........................ 47,070 14,984 7,326 2,370
Cost of Shares Redeemed .............................. (1,622,743) (552,572) (432,217) (156,357)
---------- ---------- ---------- --------
Total Retail Class A Share Transactions ............ 324,625 223,080 88,031 66,539
---------- ---------- ---------- --------
Retail Class B Shares:
Proceeds from Shares Issued .......................... -- -- -- --
Reinvestment of Distributions ........................ -- -- -- --
Cost of Shares Redeemed .............................. -- -- -- --
---------- ---------- ---------- --------
Total Retail Class B Share Transactions ............ -- -- -- --
---------- ---------- ---------- --------
Net Increase in Net Assets From Share Transactions ....... 532,904 671,347 170,224 189,627
---------- ---------- ---------- --------
Total Increase in Net Assets ....................... 532,906 671,378 170,221 189,631
---------- ---------- ---------- --------
Net Assets:
Beginning of Period .................................... 1,771,515 1,100,137 376,526 186,895
---------- ---------- ---------- --------
End of Period .......................................... $2,304,421 $1,771,515 $ 546,747 $376,526
========== ========== ========== ========
INTERMEDIATE- CALIFORNIA INTERMEDIATE
TERM BOND TAX-FREE BOND
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income .................................. $ 10,120 $ 4,793 $ 2,957 $ 387
Net Realized Gain (Loss) on Investments ................ 768 (364) 305 4
Change in Unrealized Appreciation (Depreciation)
on Investments ....................................... (25) 2,370 1,305 576
-------- -------- -------- -------
Net Increase in Net Assets Resulting From Operations ... 10,863 6,799 4,567 967
-------- -------- -------- -------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares ..................................... (9,859) (4,648) (2,294) (202)
Retail A Shares ...................................... (296) (157) (555) (176)
Retail B Shares ...................................... -- -- -- --
Capital Gains:
Fiduciary Shares ..................................... -- -- -- --
Retail A Shares ...................................... -- -- -- --
Retail B Shares ...................................... -- -- -- --
-------- -------- -------- -------
Total Distributions ................................ (10,155) (4,805) (2,849) (378)
-------- -------- -------- -------
Change in Net Assets ..................................... 708 1,994 1,718 589
-------- -------- -------- -------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- -- -- --
Proceeds in connection with the acquisition of
Common Trust Fund Assets ........................... 153,900 -- 137,628 --
Proceeds from Shares Issued .......................... 33,011 13,541 21,826 4,761
Reinvestment of Distributions ........................ 5,544 3,112 300 93
Cost of Shares Redeemed .............................. (96,305) (16,318) (15,638) (1,268)
-------- -------- -------- -------
Total Fiduciary Share Transactions ................. 96,150 335 144,116 3,586
-------- -------- -------- -------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- -- -- --
Proceeds from Shares Issued .......................... 414 126 8,581 5,443
Reinvestment of Distributions ........................ 295 157 425 160
Cost of Shares Redeemed .............................. (727) (436) (7,359) (498)
-------- -------- -------- -------
Total Retail Class A Share Transactions ............ (18) (153) 1,647 5,105
-------- -------- -------- -------
Retail Class B Shares:
Proceeds from Shares Issued .......................... -- -- -- --
Reinvestment of Distributions ........................ -- -- -- --
Cost of Shares Redeemed .............................. -- -- -- --
-------- -------- -------- -------
Total Retail Class B Share Transactions ............ -- -- -- --
-------- -------- -------- -------
Net Increase in Net Assets From Share Transactions ....... 96,132 182 145,763 8,691
-------- -------- -------- -------
Total Increase in Net Assets ....................... 96,840 2,176 147,481 9,280
-------- -------- -------- -------
Net Assets:
Beginning of Period .................................... 157,800 155,624 22,506 13,226
-------- -------- -------- -------
End of Period .......................................... $254,640 $157,800 $169,987 $22,506
======== ======== ======== =======
BOND CONVERTIBLE SECURITIES
FUND FUND
------------------------ ------------------------
08/01/97 08/01/96 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income .................................. $ 6,958 $ 3,883 $ 964 $ 367
Net Realized Gain (Loss) on Investments ................ 122 (119) 559 1,124
Change in Unrealized Appreciation (Depreciation)
on Investments ....................................... 1,732 2,823 (638) 718
-------- ------- ------- -------
Net Increase in Net Assets Resulting From Operations ... 8,812 6,587 885 2,209
-------- ------- ------- -------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares ..................................... (6,823) (3,682) (920) (371)
Retail A Shares ...................................... (58) (50) -- --
Retail B Shares ...................................... -- -- -- --
Capital Gains:
Fiduciary Shares ..................................... -- -- (1,783) --
Retail A Shares ...................................... -- -- -- --
Retail B Shares ...................................... -- -- -- --
-------- ------- ------- -------
Total Distributions ................................ (6,881) (3,732) (2,703) (371)
-------- ------- ------- -------
Change in Net Assets ..................................... 1,931 2,855 (1,818) 1,838
-------- ------- ------- -------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- -- -- --
Proceeds in connection with the acquisition of
Common Trust Fund Assets ........................... 100,626 -- -- --
Proceeds from Shares Issued .......................... 57,404 20,964 16,944 5,864
Reinvestment of Distributions ........................ 3,832 2,935 2,698 371
Cost of Shares Redeemed .............................. (29,230) (15,525) (10,154) (3,864)
-------- ------- ------- -------
Total Fiduciary Share Transactions ................. 132,632 8,374 9,488 2,371
-------- ------- ------- -------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark .............................. -- -- -- --
Proceeds from Shares Issued .......................... 1,333 222 -- --
Reinvestment of Distributions ........................ 44 53 -- --
Cost of Shares Redeemed .............................. (80) (858) -- --
-------- ------- ------- -------
Total Retail Class A Share Transactions ............ 1,297 (583) -- --
-------- ------- ------- -------
Retail Class B Shares:
Proceeds from Shares Issued .......................... -- -- -- --
Reinvestment of Distributions ........................ -- -- -- --
Cost of Shares Redeemed .............................. -- -- -- --
-------- ------- ------- -------
Total Retail Class B Share Transactions ............ -- -- -- --
-------- ------- ------- -------
Net Increase in Net Assets From Share Transactions ....... 133,929 7,791 9,488 2,371
-------- ------- ------- -------
Total Increase in Net Assets ....................... 135,860 10,646 7,670 4,209
-------- ------- ------- -------
Net Assets:
Beginning of Period .................................... 72,177 61,531 25,338 21,129
-------- ------- ------- -------
End of Period .......................................... $208,037 $72,177 $33,008 $25,338
======== ======= ======= =======
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
96 & 97
<PAGE> 98
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (000)
- -------------------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES BALANCED
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income ................................. $ 4,340 $ 1,588 $ 11,562 $ 5,151
Net Realized Gain (Loss) on Investments ............... 348 (287) 21,780 7,454
Net Realized Gain (Loss) on Option Contracts .......... -- -- -- --
Net Realized Loss on Foreign Currency Transactions .... -- -- -- --
Change in Unrealized Appreciation (Depreciation)
on Investments ...................................... 906 1,569 (4,261) 36,114
Change in Unrealized Appreciation (Depreciation)
on Foreign Currency ................................. -- -- -- --
-------- ------- -------- --------
Net Increase in Net Assets Resulting From Operations .... 5,594 2,870 29,081 48,719
-------- ------- -------- --------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares .................................... (4,344) (1,582) (11,577) (4,955)
Retail A Shares ..................................... -- -- (248) (113)
Retail B Shares ..................................... -- -- (4) --
Capital Gains:
Fiduciary Shares .................................... -- -- (10,762) (5,775)
Retail A Shares ..................................... -- -- (250) (150)
Retail B Shares ..................................... -- -- -- --
-------- ------- -------- --------
Total Distributions ............................... (4,344) (1,582) (22,841) (10,993)
-------- ------- -------- --------
Change in Net Assets .................................... 1,250 1,288 6,240 37,726
-------- ------- -------- --------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- -- -- 44,366
Proceeds in connection with the acquisition of
Common Trust Fund Assets .......................... -- -- 15,276 --
Proceeds from Shares Issued ......................... 88,628 14,934 96,493 49,160
Reinvestment of Distributions ....................... 4,319 1,582 22,162 10,043
Cost of Shares Redeemed ............................. (37,505) (11,930) (91,701) (47,541)
-------- ------- -------- --------
Total Fiduciary Share Transactions ................ 55,442 4,586 42,230 56,028
-------- ------- -------- --------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- -- -- 594
Proceeds from Shares Issued ......................... -- -- 2,541 872
Reinvestment of Distributions ....................... -- -- 479 262
Cost of Shares Redeemed ............................. -- -- (1,763) (2,190)
-------- ------- -------- --------
Total Retail Class A Share Transactions ........... -- -- 1,257 (462)
-------- ------- -------- --------
Retail Class B Shares:
Proceeds from Shares Issued ......................... -- -- 1,008 --
Reinvestment of Distributions ....................... -- -- 4 --
Cost of Shares Redeemed ............................. -- -- (16) --
-------- ------- -------- --------
Total Retail Class B Share Transactions ........... -- -- 996 --
-------- ------- -------- --------
Net Increase (Decrease) in Net Assets From
Share Transactions .................................... 55,442 4,586 44,483 55,566
-------- ------- -------- --------
Total Increase in Net Assets ...................... 56,692 5,874 50,723 93,292
-------- ------- -------- --------
Net Assets:
Beginning of Period ................................... 57,256 51,382 409,656 316,364
-------- ------- -------- --------
End of Period ......................................... $113,948 $57,256 $460,379 $409,656
======== ======= ======== ========
- -------------------------------------------------------------------------------------------------------------
GROWTH VALUE MOMENTUM
FUND FUND
------------------------ ------------------------
08/01/97 08/01/96 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income ................................. $ 286 $ 432 $ 8,150 $ 3,065
Net Realized Gain (Loss) on Investments ............... 58,251 40,894 16,588 2,055
Net Realized Gain (Loss) on Option Contracts .......... -- -- -- --
Net Realized Loss on Foreign Currency Transactions .... -- -- -- --
Change in Unrealized Appreciation (Depreciation)
on Investments ...................................... 16,670 28,516 7,625 68,691
Change in Unrealized Appreciation (Depreciation)
on Foreign Currency ................................. -- -- -- --
-------- -------- -------- --------
Net Increase in Net Assets Resulting From Operations .... 75,207 69,842 32,363 73,811
-------- -------- -------- --------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares .................................... (497) (354) (7,844) (2,920)
Retail A Shares ..................................... (4) (12) (296) (115)
Retail B Shares ..................................... -- -- (6) --
Capital Gains:
Fiduciary Shares .................................... (63,262) (3,457) (3,243) --
Retail A Shares ..................................... (1,951) (229) (161) --
Retail B Shares ..................................... -- -- -- --
-------- -------- -------- --------
Total Distributions ............................... (65,714) (4,052) (11,550) (3,035)
-------- -------- -------- --------
Change in Net Assets .................................... 9,493 65,790 20,813 70,776
-------- -------- -------- --------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- 184,625 -- --
Proceeds in connection with the acquisition of
Common Trust Fund Assets .......................... 110,041 -- 298,528 --
Proceeds from Shares Issued ......................... 113,184 29,160 200,308 110,431
Reinvestment of Distributions ....................... 44,542 3,648 8,410 2,053
Cost of Shares Redeemed ............................. (76,109) (24,942) (126,506) (34,176)
-------- -------- -------- --------
Total Fiduciary Share Transactions ................ 191,658 192,491 380,740 78,308
-------- -------- -------- --------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- 3,366 -- --
Proceeds from Shares Issued ......................... 9,352 1,023 16,308 2,942
Reinvestment of Distributions ....................... 1,763 234 442 113
Cost of Shares Redeemed ............................. (1,696) (1,547) (3,772) (1,400)
-------- -------- -------- --------
Total Retail Class A Share Transactions ........... 9,419 3,076 12,978 1,655
-------- -------- -------- --------
Retail Class B Shares:
Proceeds from Shares Issued ......................... 1,949 -- 5,561 --
Reinvestment of Distributions ....................... -- -- 5 --
Cost of Shares Redeemed ............................. (33) -- (127) --
-------- -------- -------- --------
Total Retail Class B Share Transactions ........... 1,916 -- 5,439 --
-------- -------- -------- --------
Net Increase (Decrease) in Net Assets From
Share Transactions .................................... 202,993 195,567 399,157 79,963
-------- -------- -------- --------
Total Increase in Net Assets ...................... 212,486 261,357 419,970 150,739
-------- -------- -------- --------
Net Assets:
Beginning of Period ................................... 305,695 44,338 484,184 333,445
-------- -------- -------- --------
End of Period ......................................... $518,181 $305,695 $904,154 $484,184
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------
INCOME EQUITY BLUE CHIP GROWTH
FUND FUND
------------------------ ------------------------
08/01/97 08/01/96 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income ................................. $ 7,614 $ 7,455 $ 519 $ 464
Net Realized Gain (Loss) on Investments ............... 75,433 34,297 16,737 8,315
Net Realized Gain (Loss) on Option Contracts .......... -- -- 17 21
Net Realized Loss on Foreign Currency Transactions .... -- -- -- --
Change in Unrealized Appreciation (Depreciation)
on Investments ...................................... (50,106) 65,148 (7,709) 7,929
Change in Unrealized Appreciation (Depreciation)
on Foreign Currency ................................. -- -- -- --
-------- -------- -------- -------
Net Increase in Net Assets Resulting From Operations .... 32,941 106,900 9,564 16,729
-------- -------- -------- -------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares .................................... (7,261) (7,008) (531) (447)
Retail A Shares ..................................... (263) (263) -- --
Retail B Shares ..................................... (3) -- -- --
Capital Gains:
Fiduciary Shares .................................... (34,725) (19,912) (14,205) --
Retail A Shares ..................................... (1,703) (761) -- --
Retail B Shares ..................................... -- -- -- --
-------- -------- -------- -------
Total Distributions ............................... (43,955) (27,944) (14,736) (447)
-------- -------- -------- -------
Change in Net Assets .................................... (11,014) 78,956 (5,172) 16,282
-------- -------- -------- -------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- -- -- --
Proceeds in connection with the acquisition of
Common Trust Fund Assets .......................... 344,504 -- -- --
Proceeds from Shares Issued ......................... 70,835 48,928 65,918 17,168
Reinvestment of Distributions ....................... 34,479 24,742 14,663 447
Cost of Shares Redeemed ............................. (121,446) (59,638) (44,997) (17,696)
-------- -------- -------- -------
Total Fiduciary Share Transactions ................ 328,372 14,032 35,584 (81)
-------- -------- -------- -------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- -- -- --
Proceeds from Shares Issued ......................... 9,577 3,294 -- --
Reinvestment of Distributions ....................... 1,938 1,039 -- --
Cost of Shares Redeemed ............................. (2,461) (3,247) -- --
-------- -------- -------- -------
Total Retail Class A Share Transactions ........... 9,054 1,086 -- --
-------- -------- -------- -------
Retail Class B Shares:
Proceeds from Shares Issued ......................... 1,881 -- -- --
Reinvestment of Distributions ....................... 3 -- -- --
Cost of Shares Redeemed ............................. (35) -- -- --
-------- -------- -------- -------
Total Retail Class B Share Transactions ........... 1,849 -- -- --
-------- -------- -------- -------
Net Increase (Decrease) in Net Assets From
Share Transactions .................................... 339,275 15,118 35,584 (81)
-------- -------- -------- -------
Total Increase in Net Assets ...................... 328,261 94,074 30,412 16,201
-------- -------- -------- -------
Net Assets:
Beginning of Period ................................... 366,877 272,803 96,883 80,682
-------- -------- -------- -------
End of Period ......................................... $695,138 $366,877 $127,295 $96,883
======== ======== ======== =======
- ------------------------------------------------------------------------------------------------------------
EMERGING GROWTH INTERNATIONAL EQUITY
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Investment Activities From Operations:
Net Investment Income ................................. $ 34 $ 73 $ 471 $ 280
Net Realized Gain (Loss) on Investments ............... 14,448 3,445 (6,100) (207)
Net Realized Gain (Loss) on Option Contracts .......... (410) (320) -- --
Net Realized Loss on Foreign Currency Transactions .... -- -- (142) (59)
Change in Unrealized Appreciation (Depreciation)
on Investments ...................................... (12,019) 1,474 9,175 5,628
Change in Unrealized Appreciation (Depreciation)
on Foreign Currency ................................. -- -- 28 (27)
------- ------- ------- -------
Net Increase in Net Assets Resulting From Operations .... 2,053 4,672 3,432 5,615
------- ------- ------- -------
Distributions to Shareholders:
Net Investment Income:
Fiduciary Shares .................................... (43) (57) (789) --
Retail A Shares ..................................... -- -- -- --
Retail B Shares ..................................... -- -- -- --
Capital Gains:
Fiduciary Shares .................................... (9,793) -- (484) --
Retail A Shares ..................................... -- -- -- --
Retail B Shares ..................................... -- -- -- --
------- ------- ------- -------
Total Distributions ............................... (9,836) (57) (1,273) --
------- ------- ------- -------
Change in Net Assets .................................... (7,783) 4,615 2,159 5,615
------- ------- ------- -------
Share Transactions:
Fiduciary Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- -- -- --
Proceeds in connection with the acquisition of
Common Trust Fund Assets .......................... -- -- -- --
Proceeds from Shares Issued ......................... 32,520 16,568 46,760 3,528
Reinvestment of Distributions ....................... 9,757 57 709 --
Cost of Shares Redeemed ............................. (32,251) (12,060) (10,125) (3,049)
------- ------- ------- -------
Total Fiduciary Share Transactions ................ 10,026 4,565 37,344 479
------- ------- ------- -------
Retail Class A Shares:
Proceeds from the reorganization of
Stepstone or Highmark ............................. -- -- -- --
Proceeds from Shares Issued ......................... -- -- -- --
Reinvestment of Distributions ....................... -- -- -- --
Cost of Shares Redeemed ............................. -- -- -- --
------- ------- ------- -------
Total Retail Class A Share Transactions ........... -- -- -- --
------- ------- ------- -------
Retail Class B Shares:
Proceeds from Shares Issued ......................... -- -- -- --
Reinvestment of Distributions ....................... -- -- -- --
Cost of Shares Redeemed ............................. -- -- -- --
------- ------- ------- -------
Total Retail Class B Share Transactions ........... -- -- -- --
------- ------- ------- -------
Net Increase (Decrease) in Net Assets From
Share Transactions .................................... 10,026 4,565 37,344 479
------- ------- ------- -------
Total Increase in Net Assets ...................... 2,243 9,180 39,503 6,094
------- ------- ------- -------
Net Assets:
Beginning of Period ................................... 66,336 57,156 52,467 46,373
------- ------- ------- -------
End of Period ......................................... $68,579 $66,336 $91,970 $52,467
======= ======= ======= =======
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
98 & 99
<PAGE> 99
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET --------------------------- --------------------- NET NET
ASSET NET REALIZED ASSET ASSETS, RATIO TO
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>
- -------------------------------------
100% U.S. TREASURY MONEY MARKET FUND
- ------------------------------------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $1.00 0.049 -- (0.049) -- $1.00 5.02% $227,733 0.46%
1997 1.00 0.046 -- (0.046) -- 1.00 4.65% 243,464 0.64%
1996 1.00 0.046 -- (0.046) -- 1.00 4.74% 173,340 0.74%
1995 1.00 0.046 -- (0.046) -- 1.00 4.69% 190,604 0.73%
1994 1.00 0.026 -- (0.026) -- 1.00 2.68% 160,721 0.74%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $1.00 0.047 -- (0.047) -- $1.00 4.75% $727,087 0.71%
1997 1.00 0.045 -- (0.045) -- 1.00 4.58% 558,972 0.72%
1996 1.00 0.046 -- (0.046) -- 1.00 4.74% 100,623 0.74%
1995 1.00 0.046 -- (0.046) -- 1.00 4.69% 88,660 0.73%
1994 1.00 0.026 -- (0.026) -- 1.00 2.68% 39,157 0.74%
- ---------------------------------
U.S. GOVERNMENT MONEY MARKET FUND
- ---------------------------------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $1.00 0.050 -- (0.050) -- $1.00 5.16% $283,096 0.51%
1997 1.00 0.047 -- (0.047) -- 1.00 4.78% 252,995 0.70%
1996 1.00 0.048 -- (0.048) -- 1.00 4.88% 151,483 0.77%
1995 1.00 0.048 -- (0.048) -- 1.00 4.87% 159,747 0.78%
1994 1.00 0.027 -- (0.027) -- 1.00 2.74% 162,094 0.78%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $1.00 0.048 -- (0.048) -- $1.00 4.90% $122,074 0.76%
1997 1.00 0.046 -- (0.046) -- 1.00 4.70% 42,797 0.78%
1996 1.00 0.048 -- (0.048) -- 1.00 4.86% 75,714 0.79%
1995 1.00 0.048 -- (0.048) -- 1.00 4.86% 48,474 0.78%
1994 1.00 0.027 -- (0.027) -- 1.00 2.74% 24,055 0.77%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) $1.00 0.021 -- (0.021) -- $1.00 4.25%* $ -- 1.26%*
- ------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
AVERAGE NET INVESTMENT AVERAGE
NET ASSETS INCOME NET ASSETS
EXCLUDING TO AVERAGE EXCLUDING
FEE WAIVERS NET ASSETS FEE WAIVERS
- ------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------
100% U.S. TREASURY MONEY MARKET FUND
- ------------------------------------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 0.78% 4.91% 4.59%
1997 0.92% 4.61% 4.33%
1996 0.97% 4.64% 4.41%
1995 0.97% 4.60% 4.36%
1994 0.90% 2.63% 2.48%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.03% 4.65% 4.33%
1997 1.10% 4.55% 4.17%
1996 1.23% 4.64% 4.15%
1995 1.22% 4.68% 4.19%
1994 1.15% 2.68% 2.27%
- ---------------------------------
U.S. GOVERNMENT MONEY MARKET FUND
- ---------------------------------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 0.79% 5.05% 4.77%
1997 0.95% 4.69% 4.44%
1996 1.00% 4.76% 4.53%
1995 1.02% 4.76% 4.52%
1994 0.94% 2.70% 2.54%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.04% 4.80% 4.52%
1997 1.22% 4.60% 4.16%
1996 1.26% 4.77% 4.30%
1995 1.27% 4.82% 4.33%
1994 1.17% 2.63% 2.23%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) 1.54%* 4.30%* 4.02%*
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
* ANNUALIZED.
(1) COMMENCED OPERATIONS ON FEBRUARY 2, 1998.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
100
<PAGE> 100
<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> <C> <C>
- -----------------------------
DIVERSIFIED MONEY MARKET FUND
- -----------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $1.00 0.051 -- (0.051) -- -- $1.00 5.27% $1,180,141
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $1.00 0.025 -- (0.025) -- -- $1.00 5.11%* $ 971,858
FOR THE YEARS ENDED JANUARY 31,:
1997 $1.00 0.049 -- (0.049) -- -- $1.00 5.03% $ 523,571
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
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $1.00 0.049 -- (0.049) -- -- $1.00 5.01% $1,124,280
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $1.00 0.024 -- (0.024) -- -- $1.00 4.86%* $ 799,657
FOR THE YEARS ENDED JANUARY 31,:
1997 $1.00 0.047 -- (0.047) -- -- $1.00 4.78% $ 576,566
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
- -------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- -------------------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $1.00 0.031 -- (0.031) -- -- $1.00 3.14% $ 241,487
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $1.00 0.016 -- (0.016) -- -- $1.00 3.28%* $ 159,297
FOR THE YEARS ENDED JANUARY 31,:
1997 $1.00 0.031 -- (0.031) -- -- $1.00 3.12% $ 36,207
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
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $1.00 0.028 -- (0.028) -- -- $1.00 2.89% $ 305,260
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $1.00 0.015 -- (0.015) -- -- $1.00 2.99%* $ 217,229
FOR THE YEARS ENDED JANUARY 31,:
1997 $1.00 0.027 -- (0.027) -- -- $1.00 2.78% $ 150,688
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
- --------------------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME TO
RATIO 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>
- -----------------------------
DIVERSIFIED MONEY MARKET FUND
- -----------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 0.50% 0.77% 5.15% 4.88%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.48%* 0.64%* 5.07%* 4.90%*
FOR THE YEARS ENDED JANUARY 31,:
1997 0.49% 0.49% 4.93% 4.93%
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%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 0.75% 1.02% 4.90% 4.63%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.72%* 0.95%* 4.82%* 4.59%*
FOR THE YEARS ENDED JANUARY 31,:
1997 0.73% 0.88% 4.69% 4.54%
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%
- -------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- -------------------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 0.31% 0.78% 3.07% 2.60%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.28%* 0.69%* 3.36%* 2.96%*
FOR THE YEARS ENDED JANUARY 31,:
1997 0.27% 0.49% 3.08% 2.86%
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%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 0.56% 1.03% 2.84% 2.37%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.55%* 0.97%* 3.02%* 2.59%*
FOR THE YEARS ENDED JANUARY 31,:
1997 0.60% 0.88% 2.75% 2.47%
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%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
*ANNUALIZED.
</FN>
</TABLE>
101
<PAGE> 101
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET --------------------------- --------------------- NET NET
ASSET NET REALIZED ASSET ASSETS, RATIO TO
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>
- ---------------------------
INTERMEDIATE-TERM BOND FUND
- ---------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $10.30 0.613 0.021 (0.616) -- $10.32 6.37% $249,520 0.75%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $10.16 0.309 0.138 (0.310) -- $10.30 4.54% $152,676 0.69%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $10.62 0.599 (0.460) (0.595) -- $10.16 1.43% $150,411 0.67%
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%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $10.29 0.609 0.031 (0.616) -- $10.31 6.38% $ 5,120 0.75%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $10.16 0.309 0.128 (0.310) -- $10.29 4.44% $ 5,124 0.69%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $10.61 0.602 (0.462) (0.595) -- $10.16 1.54% $ 5,213 0.67%
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%
- ------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $10.01 0.457 0.008 (0.435) -- $10.04 4.75% $157,062 0.42%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $ 9.76 0.206 0.256 (0.215) -- $10.01 4.84% $ 11,292 0.21%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $ 9.85 0.430 (0.078) (0.442) -- $ 9.76 3.72% $ 7,435 0.20%
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%*
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $ 9.99 0.423 0.032 (0.435) -- $10.01 4.66% $ 12,925 0.31%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $ 9.74 0.222 0.240 (0.215) -- $ 9.99 4.85% $ 11,214 0.21%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $ 9.84 0.458 (0.112) (0.442) -- $ 9.74 3.62% $ 5,791 0.20%
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%*
- ---------------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME 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
- ---------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 0.99% 5.86% 5.61% 51%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.82%* 6.17%* 6.04%* 58%
FOR THE YEARS ENDED JANUARY 31,:
1997 0.68% 5.93% 5.92% 106%
1996 0.68% 5.97% 5.97% 147%
1995 0.71% 5.89% 5.89% 95%
1994 0.69% 5.56% 5.56% 72%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.24% 5.83% 5.34% 51%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 1.14%* 6.17%* 5.71%* 58%
FOR THE YEARS ENDED JANUARY 31,:
1997 1.08% 5.91% 5.50% 106%
1996 1.09% 5.99% 5.58% 147%
1995 1.11% 5.87% 5.47% 95%
1994 1.09% 5.51% 5.11% 72%
- ------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.04% 4.46% 3.84% 23%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.91%* 4.56%* 3.85%* 5%
FOR THE YEARS ENDED JANUARY 31,:
1997 0.85% 4.69% 4.04% 6%
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%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.29% 4.37% 3.39% 23%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 1.22%* 4.55%* 3.54%* 5%
FOR THE YEARS ENDED JANUARY 31,:
1997 1.25% 4.69% 3.64% 6%
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%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(1) COMMENCED OPERATIONS ON OCTOBER 15, 1993.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
102
<PAGE> 102
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET --------------------------- --------------------- NET NET
ASSET NET REALIZED ASSET ASSETS, RATIO TO
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>
- ---------
BOND FUND
- ---------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $10.67 0.615 0.150 (0.627) -- $10.81 7.41% $206,125 0.75%
1997 10.23 0.628 0.421 (0.609) -- 10.67 10.59% 71,571 0.85%
1996 10.38 0.660 (0.160) (0.650) -- 10.23 4.81% 60,374 0.89%
1995 10.11 0.640 0.270 (0.640) -- 10.38 9.43% 59,758 0.92%
1994 11.13 0.630 (1.020) (0.630) -- 10.11 (3.14)% 64,185 0.86%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $10.59 0.605 0.162 (0.627) -- $10.73 7.47% $ 1,912 0.75%
1997 10.15 0.642 0.403 (0.609) -- 10.59 10.68% 606 0.85%
1996 10.29 0.690 (0.180) (0.650) -- 10.15 4.95% 1,157 0.89%
1995 10.04 0.660 0.230 (0.640) -- 10.29 9.29% 558 0.92%
1994 10.12 0.070 (0.050) (0.100) -- 10.04 (3.81)%(A) 7 0.99%*
- --------------------- ------
CONVERTIBLE SECURITIES FUND
- ---------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $12.41 0.382 (0.065) (0.369) (0.822) $11.54 3.02% $ 33,008 0.85%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $11.58 0.183 0.833 (0.186) -- $12.41 8.92% $ 25,338 0.85%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $10.43 0.376 1.423 (0.378) (0.270) $11.58 17.72% $ 21,129 0.85%
1996 9.08 0.407 1.350 (0.404) -- 10.43 19.67% 16,668 0.85%
1995 (1) 10.00 0.354 (0.930) (0.343) -- 9.08 (5.83)% 10,297 0.85%
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $ 9.64 0.523 0.142 (0.533) -- $ 9.77 7.08% $113,948 0.75%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $ 9.44 0.268 0.203 (0.269) -- $ 9.64 5.08% $ 57,256 0.73%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $ 9.94 0.524 (0.505) (0.520) -- $ 9.44 0.34% $ 51,382 0.74%
1996 9.07 0.556 0.870 (0.556) -- 9.94 16.16% 46,725 0.75%
1995 (1) 10.00 0.491 (0.950) (0.475) -- 9.07 (4.49)% 32,178 0.75%
- ---------------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME 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>
- ---------
BOND FUND
- ---------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.02% 5.86% 5.60% 16%
1997 1.42% 6.11% 5.54% 14%
1996 1.61% 6.10% 5.38% 21%
1995 1.64% 6.35% 5.62% 36%
1994 1.37% 6.11% 5.60% 44%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.26% 5.85% 5.33% 16%
1997 1.68% 6.10% 5.27% 14%
1996 1.85% 6.10% 5.14% 21%
1995 1.89% 6.29% 5.32% 36%
1994 2.96%* 5.77%* 3.80%* 44%
- ---------------------------
CONVERTIBLE SECURITIES FUND
- ---------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.12% 3.28% 3.01% 50%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 1.00%* 3.25%* 3.10%* 33%
FOR THE YEARS ENDED JANUARY 31,:
1997 0.85% 3.47% 3.47% 89%
1996 0.85% 4.14% 4.14% 46%
1995 (1) 0.85% 3.87% 3.87% 36%
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.02% 5.39% 5.12% 62%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.88%* 5.79%* 5.64%* 40%
FOR THE YEARS ENDED JANUARY 31,:
1997 0.74% 5.59% 5.59% 186%
1996 0.75% 5.89% 5.89% 239%
1995 (1) 0.75% 5.46% 5.46% 184%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(A) 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.
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(1) COMMENCED OPERATIONS ON FEBRUARY 1, 1994.
</FN>
</TABLE>
103
<PAGE> 103
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET --------------------------- --------------------- NET NET
ASSET NET REALIZED ASSET ASSETS, RATIO TO
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>
- -------------
BALANCED FUND
- -------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $16.46 0.446 0.724 (0.458) (0.442) $16.73 7.31% $448,783 0.91%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $15.04 0.228 1.712 (0.228) (0.290) $16.46 13.35% $400,442 0.83%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $13.92 0.422 1.699 (0.409) (0.595) $15.04 16.30% $307,531 0.79%
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%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $16.45 0.402 0.736 (0.416) (0.442) $16.73 7.12% $ 10,629 1.16%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $15.03 0.209 1.712 (0.209) (0.290) $16.45 13.22% $ 9,214 1.07%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $13.91 0.464 1.706 (0.455) (0.595) $15.03 16.04% $ 8,833 1.04%
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%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) $16.55 0.155 0.197 (0.175) -- $16.73 4.32%* $ 967 1.80%*
- ---------------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME 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
- -------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.08% 2.67% 2.50% 22%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.98%* 2.99% 2.85%* 10%
FOR THE YEARS ENDED JANUARY 31,:
1997 0.79% 3.48% 3.48% 27%
1996 0.80% 3.20% 3.20% 26%
1995 0.80% 3.41% 3.41% 48%
1994 0.79% 3.35% 3.25% 49%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.33% 2.42% 2.24% 22%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 1.30%* 2.75%* 2.53%* 10%
FOR THE YEARS ENDED JANUARY 31,:
1997 1.19% 3.22% 3.07% 27%
1996 1.20% 3.12% 2.81% 26%
1995 1.19% 3.41% 3.01% 48%
1994 1.19% 3.26% 2.76% 49%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) 1.83%* 1.77%* 1.74%* 22%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(1) COMMENCED OPERATIONS ON FEBRUARY 2, 1998.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
104
<PAGE> 104
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET --------------------------- --------------------- NET NET
ASSET NET REALIZED ASSET ASSETS, RATIO TO
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 FUND
- -----------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $17.36 0.017 3.108 (0.033) (3.532) $16.92 22.59% $499,060 0.91%
1997 12.58 0.057 5.773 (0.053) (0.996) 17.36 48.54% 297,879 0.92%
1996 11.87 0.120 1.350 (0.120) (0.640) 12.58 12.72% 41,495 0.93%
1995 9.76 0.150 2.260 (0.150) (0.150) 11.87 25.23% 25,096 0.79%
1994 10.00 0.050 (0.240) (0.050) -- 9.76 (1.87)% 15,254 0.77%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $17.39 (0.018) 3.100 (0.015) (3.532) $16.93 22.26% $ 17,173 1.16%
1997 12.60 0.049 5.784 (0.048) (0.996) 17.39 48.49% 7,816 1.04%
1996 11.87 0.110 1.380 (0.120) (0.640) 12.60 12.88% 2,843 0.93%
1995 9.77 0.150 2.250 (0.150) (0.150) 11.87 25.10% 1,218 0.84%
1994 9.74 -- 0.040 (0.010) -- 9.77 (1.77)%(A) -- --
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) $14.76 (0.035) 2.125 -- -- $16.85 28.71%* $ 1,948 1.81%*
- ---------------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME 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 FUND
- -----------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.08% 0.08% (0.09)% 67%
1997 1.24% 0.39% 0.07% 118%
1996 1.67% 0.98% 0.23% 79%
1995 1.92% 1.40% 0.26% 68%
1994 2.61% 0.86% (0.98)% 123%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.34% (0.17)% (0.35)% 67%
1997 1.49% 0.28% (0.18)% 118%
1996 1.91% 0.96% (0.02)% 79%
1995 2.11% 1.17% (0.10)% 68%
1994 -- -- -- 123%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) 1.84%* (0.94)%* (0.97)%* 67%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(A) 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.
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(1) COMMENCED OPERATIONS ON FEBRUARY 2, 1998.
</FN>
</TABLE>
105
<PAGE> 105
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET --------------------------- --------------------- NET NET
ASSET NET REALIZED ASSET ASSETS, RATIO TO
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>
- -------------------
VALUE MOMENTUM FUND
- -------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $25.48 0.332 2.003 (0.341) (0.164) $27.31 9.22% $863,627 0.81%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $21.57 0.132 3.955 (0.176) -- $25.48 19.06% $463,434 0.78%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $18.05 0.436 4.371 (0.438) (0.848) $21.57 27.33% $317,482 0.79%
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%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $25.48 0.262 2.007 (0.275) (0.164) $27.31 8.96% $ 35,325 1.06%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $21.57 0.106 3.953 (0.147) -- $25.48 18.90% $ 20,750 1.03%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $18.05 0.389 4.368 (0.393) (0.848) $21.57 27.04% $ 15,963 1.04%
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%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) $26.82 0.046 0.479 (0.064) -- $27.28 3.94%* $ 5,202 1.81%*
- ------------------
INCOME EQUITY FUND
- ------------------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $18.21 0.305 1.486 (0.302) (1.776) $17.92 10.79% $670,298 0.92%
1997 14.27 0.372 5.019 (0.368) (1.083) 18.21 40.13% 352,725 0.99%
1996 13.00 0.420 1.930 (0.420) (0.660) 14.27 18.25% 262,660 1.03%
1995 11.92 0.440 1.500 (0.440) (0.420) 13.00 17.26% 221,325 1.06%
1994 12.13 0.390 0.120 (0.390) (0.330) 11.92 4.23% 213,328 1.06%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 $18.24 0.262 1.486 (0.258) (1.776) $17.95 10.50% $ 23,024 1.17%
1997 14.29 0.363 5.028 (0.358) (1.083) 18.24 39.97% 14,152 1.06%
1996 13.03 0.420 1.920 (0.420) (0.660) 14.29 18.21% 10,143 1.03%
1995 11.92 0.420 1.550 (0.440) (0.420) 13.03 17.52% 3,881 1.06%
1994 (2) 11.85 0.040 0.080 (0.050) -- 11.92 4.23%(A) 24 1.10%*
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) $16.88 0.057 1.034 (0.072) -- $17.90 13.10%* $ 1,816 1.82%*
- ---------------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME 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>
- -------------------
VALUE MOMENTUM FUND
- -------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.08% 1.25% 0.98% 7%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.94%* 1.65%* 1.49%* 1%
FOR THE YEARS ENDED JANUARY 31,:
1997 0.79% 2.26% 2.26% 9%
1996 0.80% 2.07% 2.07% 20%
1995 0.81% 2.36% 2.36% 6%
1994 0.79% 2.19% 2.17% 5%
RETAIL CLASS A SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.33% 0.99% 0.72% 7%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 1.25%* 1.40%* 1.17%* 1%
FOR THE YEARS ENDED JANUARY 31,:
1997 1.19% 2.01% 1.86% 9%
1996 1.20% 2.00% 1.69% 20%
1995 1.21% 2.37% 1.97% 6%
1994 1.20% 2.12% 1.69% 5%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) 1.84%* 0.15%* 0.13%* 7%
- ------------------
INCOME EQUITY FUND
- ------------------
FIDUCIARY SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.09% 1.63% 1.45% 69%
1997 1.21% 2.39% 2.17% 46%
1996 1.27% 2.95% 2.71% 42%
1995 1.30% 3.59% 3.34% 37%
1994 1.10% 3.29% 3.24% 34%
RETAIL CLASS A SHARES
FOR THE YEARS ENDED JULY 31,:
1998 1.34% 1.39% 1.22% 69%
1997 1.46% 2.32% 1.92% 46%
1996 1.51% 2.89% 2.41% 42%
1995 1.55% 3.06% 2.57% 37%
1994 (2) 1.33%* 0.93%* 0.71%* 34%
RETAIL CLASS B SHARES
FOR THE PERIOD ENDED JULY 31,:
1998 (1) 1.85%* 0.38%* 0.36%* 69%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(A) 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.
* ANNUALIZED
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(1) COMMENCED OPERATIONS ON FEBRUARY 2, 1998.
(2) COMMENCED OPERATIONS ON JUNE 20, 1994.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
106
<PAGE> 106
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET --------------------------- --------------------- NET NET
ASSET NET REALIZED ASSET ASSETS, RATIO TO
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>
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $17.32 0.073 1.143 (0.075) (2.425) $16.04 8.67% $127,295 0.82%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $14.50 0.081 2.818 (0.078) -- $17.32 20.08% $ 96,883 0.80%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $12.63 0.160 2.449 (0.162) (0.574) $14.50 21.11% $ 80,682 0.84%
1996 9.53 0.174 3.311 (0.180) (0.203) 12.63 36.95% 63,410 0.83%
1995 (1) 10.00 0.167 (0.479) (0.158) -- 9.53 (3.10)% 39,319 0.85%
- --------------------
EMERGING GROWTH FUND
- --------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $14.39 0.006 0.432 (0.008) (2.033) $12.79 3.37% $ 68,579 1.03%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $13.50 0.014 0.888 (0.012) -- $14.39 6.70% $ 66,336 1.01%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $11.94 0.008 2.556 (0.009) (0.991) $13.50 21.79% $ 57,156 1.04%
1996 9.42 0.026 2.807 (0.033) (0.277) 11.94 30.24% 41,770 1.05%
1995 (1) 10.00 0.086 (0.535) (0.080) (0.051) 9.42 (4.48)% 23,928 1.05%
- -------------------------
INTERNATIONAL EQUITY FUND
- -------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 $38.69 0.767 (1.178) (0.592) (0.367) $37.32 (0.82)% $ 91,970 1.34%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 $34.52 0.212 3.958 -- -- $38.69 12.08% $ 52,467 1.22%*
FOR THE YEARS ENDED JANUARY 31,:
1997 $37.49 0.220 (0.965) (0.812) (1.416) $34.52 (2.14)% $ 46,373 1.18%
1996 (2) 33.51 0.447 4.084 (0.446) (0.105) 37.49 13.56% 44,188 1.16%
- ---------------------------------------------------------------
RATIO OF
RATIO NET INVESTMENT
OF EXPENSES RATIO OF INCOME 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>
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.09% 0.46% 0.19% 168%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 0.95%* 1.09%* 0.94%* 54%
FOR THE YEARS ENDED JANUARY 31,:
1997 0.84% 1.21% 1.21% 80%
1996 0.83% 1.54% 1.54% 69%
1995 (1) 0.85% 1.84% 1.84% 89%
- --------------------
EMERGING GROWTH FUND
- --------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.30% 0.05% (0.22)% 289%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 1.16%* 0.26%* 0.10%* 116%
FOR THE YEARS ENDED JANUARY 31,:
1997 1.04% 0.06% 0.06% 134%
1996 1.05% 0.22% 0.22% 131%
1995 (1) 1.05% 1.01% 1.01% 123%
- -------------------------
INTERNATIONAL EQUITY FUND
- -------------------------
FIDUCIARY SHARES
FOR THE YEAR ENDED JULY 31,:
1998 1.61% 0.71% 0.44% 72%
FOR THE SIX MONTH PERIOD ENDED JULY 31,:
1997 1.41%* 1.16%* 0.97%* 18%
FOR THE YEARS ENDED JANUARY 31,:
1997 1.28% 0.60% 0.50% 29%
1996 (2) 1.36% 1.31% 1.11% 21%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
* ANNUALIZED
(1) COMMENCED OPERATIONS ON FEBRUARY 1, 1994.
(2) COMMENCED OPERATIONS ON FEBRUARY 1, 1995.
</FN>
</TABLE>
107
<PAGE> 107
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION
- --------------------------------------------------------------------------------
HighMark Funds ("HighMark" or "the Funds") was organized as a Massachusetts
business trust under a Declaration of Trust dated March 10, 1987. Prior to
December 4, 1996, HighMark was known as the HighMark Group.
The Funds are registered under the Investment Company Act of 1940, as amended,
as a diversified open-end investment company with sixteen funds: the 100% U.S.
Treasury Money Market Fund, the U.S. Government Money Market Fund, the
Diversified Money Market Fund and the California Tax-Free Money Market Fund (the
"Money Market Funds") and the Intermediate-Term Bond Fund, the California
Intermediate Tax-Free Bond Fund, the Bond Fund, the Convertible Securities Fund,
the Government Securities Fund, the Balanced Fund, the Growth Fund, the Value
Momentum Fund, the Income Equity Fund, the Blue Chip Growth Fund, the Emerging
Growth Fund, and the International Equity Fund (the "Non-Money Market Funds").
HighMark is registered to offer three classes of shares, Class A and Class B
shares (collectively called the "Retail Shares") and Fiduciary Shares. The
Funds' prospectuses provide a description of each Fund's investment objectives,
policies and strategies.
On October 18, 1996 and October 17, 1996, respectively, the Board of Trustees of
the HighMark Funds and the Board of Trustees of the Stepstone Funds (Stepstone)
approved an Agreement and Plan of Reorganization (the "Reorganization
Agreement") providing for the transfer of all assets and liabilities of the
Stepstone Funds in exchange for the issuance of shares in the Funds in a
tax-free reorganization.
2. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The following is a summary of significant accounting policies followed by the
Funds.
BASIS OF PRESENTATION OF STATEMENTS -- The HighMark Funds acquired the Stepstone
Funds in a series of tax-free business combinations. While each Fund now exists
legally as a HighMark Fund, a number of the surviving funds for accounting
purposes are Stepstone Funds. In accordance with generally accepted accounting
principles, the financial statements presented herein represent those of the
accounting survivors. Accordingly, the Statements of Changes in Net Assets and
Financial Highlights presented reflect prior periods beginning on the first day
of the accounting survivor's fiscal year (August 1, 1996 and February 1, 1997,
respectively).
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 that 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 on 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 International
Equity 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 International Equity Fund does not isolate the portion of gains and losses
on investments in securities that is due to changes in the foreign exchange
rates
108
<PAGE> 108
- --------------------------------------------------------------------------------
from that which is due to changes in market prices of such securities.
The International Equity 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.
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated each
business day for each Fund. 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, except for the Bond Fund, are
accreted or amortized over the life of each security and are recorded as
interest income for each of the Funds using a method that approximates the
effective interest method. The Bond Fund follows the same basis for financial
reporting and federal income tax purposes and does not amortize premiums or
accrete discounts, with the applicable portion of market discount recognized as
ordinary income upon disposition or maturity.
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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation
of financial statements in accordance with generally accepted accounting
principles 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 estimates.
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, certain
of the Funds, as described in their prospectuses, may participate in options
transactions including writing 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.
Also, certain funds may purchase call or put 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, if any, during the
respective holding periods. Interest income is recorded on the accrual basis;
dividend income is recorded on the ex-dividend date.
109
<PAGE> 109
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income for
the Money Market Funds are declared daily and paid monthly. Each of the
Non-Money Market Funds except the International Equity Fund declare and make
distributions from net investment income monthly. The International Equity Fund
declares and make distributions from net investment income periodically. Any net
realized capital gains will be distributed at least annually for all Funds.
SECURITY LENDING -- Certain of the Funds lend their securities to approved
brokers to earn additional income and receive cash and/or securities as
collateral to secure the loans. Collateral is maintained at not less than 102%
of the value of loaned securities. Although the risk of lending is mitigated by
the collateral, the Fund could experience a delay in recovering its securities
and a possible loss of income or value if the borrower fails to return them.
RECLASSIFICATION OF 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", differences attributable to the classification of capital gains and
net investment income for tax distribution purposes, as of July 31, 1998, have
been reclassified between accumulated net realized gains/losses and
undistributed net income, as appropriate. These reclassifications had no effect
on net asset value.
3. TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Effective February 15, 1997, SEI Investments Mutual Funds Services (the
"Administrator"), a Delaware business trust, became the Administrator for the
Funds. SEI Investments Management Corporation, a wholly-owned subsidiary of SEI
Investments Company, is the owner of all beneficial interest in the
Administrator. The Funds and the Administrator are parties to an Administration
Agreement (the "Agreement") dated February 15, 1997, under which the
Administrator provides the Fund with management, administrative and shareholder
services for an annual fee of .20% of the average daily net assets of the Funds.
The Administrator may voluntarily waive its fee, subject to termination at any
time by the Administrator, to the extent necessary to limit the total operating
expenses of a Fund. During the period August 1, 1997 to July 31, 1998 the
Administrator voluntarily 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. ("UBOC") 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. During the period
August 1, 1997 to November 30, 1997 UBOC voluntarily agreed to reduce its fee to
0.03% (with the exception of California Intermediate Tax Free Fund for which
UBOC agreed to waive its fee to 0.00%). Effective December 1, 1997, UBOC
terminated its waiver. For the period from August 1, 1997 to June 31, 1998, UBOC
received sub- administration fees from the Funds in the amount of $2,637,000.
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent and shareholder servicing agent for HighMark. The Administrator
has agreed to absorb certain transfer agency related expenses on behalf of the
Fund.
SEI Investments Distribution Co. (the "Distributor") and the Funds are parties
to a distribution agreement dated February 15, 1997. No compensation is paid to
the Distributor for services rendered to the Fiduciary Shares under this
agreement. The Funds have adopted Distribution Plans (the "Plans") on behalf of
Retail A Shares and Retail B Shares pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The Plans provide that Retail A Shares and Retail B Shares
will bear the cost of their distribution expenses. The Distributor, as
compensation for its services under the Plan, receives a distribution fee,
computed daily and payable monthly, of 0.25% of the average daily net assets
attributable to each Fund's Retail A Shares and 0.75% of the average daily net
assets attributable to each Fund's Retail B Shares. The Intermediate-Term Bond,
California Intermediate Tax-Free Bond and Bond Funds are currently waiving all
distribution fees.
The Funds have also adopted Shareholder Service Plans permitting payment of
compensation to service providers, that may include Union Bank of California,
N.A., Bank
110
<PAGE> 110
- --------------------------------------------------------------------------------
of Tokyo-Mitsubishi, Ltd., or their respective affiliates, that have agreed to
provide certain shareholder support services for their customers who own Retail
A, Retail B or Fiduciary Shares. In consideration for such services, a service
provider is entitled to receive compensation at the annual rate of up to .25% of
each Fund's average daily net assets. The service provider may waive such fees
at any time. Any such waiver is voluntary and may be terminated at any time. For
the period from August 1, 1997 to July 31, 1998,
Union Bank of California, N.A. received shareholder servicing fees from the
Funds in the amount of approximately $1,351,000. Union Bank of California, N.A.
acts as custodian ("the Custodian") for the Funds. Fees of the Custodian are
being paid on the basis of net assets of the Funds.
Certain officers of the Funds are also officers and/or Directors of the
Administrator. The Funds pay each unaffiliated Trustee an annual fee for
attendance at quarterly, interim and committee meetings. Compensation of
officers is paid by the Administrator.
4. INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
The Funds and HighMark Capital Management, Inc. a subsidiary of UnionBanCal
Corporation, formerly Pacific Alliance, a division of Union Bank of California,
N.A., (the "Advisor") are parties to an Advisory Agreement. For its services,
the Advisor is entitled to receive a fee, that is calculated daily and paid
monthly, at an annual rate of .30% of the average daily net assets of the 100%
U.S. Treasury Money Market Fund, the U.S. Government Money Market Fund, the
Diversified Money Market Fund, and the California Tax-Free Money Market Fund,
.60% of the Growth Fund, the Income 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 Bond Fund, the Government
Securities Fund and the California Intermediate Tax-Free Bond Fund, .80% of the
Emerging Growth Fund and .95% of the International Equity Fund. For the year
ended July 31, 1998 the Advisor voluntarily waived all or a portion of its fee
in the 100% U.S. Treasury Money Market Fund, the California Tax-Free Money
Market Fund and the California Intermediate Tax-Free Bond Fund in order to limit
the operating expenses of the Funds.
The Advisor and Bank of Tokyo-Mitsubishi Trust Company are parties to a
Sub-Advisory Agreement for the Blue Chip Growth Fund, the Emerging Growth Fund,
the Convertible Securities Fund and the Government Securities Fund. Effective
July 28,1998, Bank of Tokyo-Mitsubishi Trust Company ceased providing
sub-advisory services to the Blue Chip Growth and Government Securities Funds.
Highmark Capital Management, Inc. provides investment advisory services to each
Fund pursuant to an investment advisory agreement dated April 1, 1996. Bank of
Tokyo-Mitsubishi Trust Company is entitled to a fee ranging from 0.20% to 0.50%
of the average daily net assets of the Fund for which it acts as Sub-Advisor.
During the period August 1, 1997 to December 31, 1997 the Advisor and
Tokyo-Mitsubishi Asset Management (U.K.), Ltd. were parties to a Sub-Advisory
Agreement for the International Equity Fund. Tokyo-Mitsubishi Asset Management
(U.K.), Ltd. was entitled to a fee of 0.30% of the average daily nets assets of
the Fund.
On January 1, 1998 the Advisor and AXA Asset Management Partenaires ("AXA")
entered into an investment sub-advisory agreement for the International Equity
Fund. AXA is entitled to a fee of .30% of the average daily net assets of the
Fund.
111
<PAGE> 111
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
The purchases and sales (including maturities) of investment securities other
than short-term securities were as follows:
INVESTMENT
SECURITIES
--------------------
PURCHASES SALES
(000'S) (000'S)
-------- --------
Intermediate-Term Bond ...... $175,620 $ 82,817
California Intermediate
Tax-Free Bond ............. 156,219 15,960
Bond ........................ 147,795 18,620
Convertible Securities ...... 18,759 12,349
Government Securities ....... 100,513 46,617
Balanced .................... 134,350 90,986
Growth ...................... 351,681 252,485
Value Momentum .............. 298,592 43,584
Income Equity ............... 542,454 328,205
Blue Chip Growth ............ 200,684 176,222
Emerging Growth ............. 186,997 184,997
International Equity ........ 82,041 46,937
Cost for financial statement purposes differs from cost for Federal income tax
purposes primarily due to the deferral of certain losses under Federal income
tax regulations. The aggregate gross unrealized appreciation and depreciation
for Federal income tax purposes at July 31, 1998 for each portfolio was as
follows:
APPRECIATION DEPRECIATION TOTAL
(000'S) (000'S) (000'S)
------------ ------------ -------
Intermediate-Term Bond .... $ 6,211 $ (92) $ 6,119
California Intermediate
Tax-Free Bond ........... 6,684 (74) 6,610
Bond ...................... 8,449 (287) 8,162
Convertible Securities .... 4,869 (2,000) 2,869
Government Securities ..... 2,630 (67) 2,563
Balanced .................. 114,523 (8,833) 105,690
Growth .................... 154,837 (7,851) 146,986
Value Momentum ............ 368,101 (28,717) 339,384
Income Equity ............. 147,650 (10,441) 137,209
Blue Chip Growth .......... 22,884 (2,880) 20,004
Emerging Growth ........... 5,264 (5,644) (380)
International Equity ...... 11,752 (2,860) 8,892
The Funds have capital loss carryforwards at July 31, 1998, to the extent
provided in the regulations for federal income tax as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYOVER EXPIRES EXPIRES EXPIRES EXPIRES EXPIRES EXPIRES
07/31/98 2001 2002 2003 2004 2005 2006
------------ --------- ---------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Money Market ........... $ 149,444 $149,444 $ -- $ -- $ -- $ -- $ --
Diversified
Money Market ........... 1,420,929 300,452 29,246 1,078,029 13,202 -- --
Cal. Tax-Free
Money Market ........... 64,602 -- 24,741 24,115 -- -- 15,746
Bond ..................... 3,179,541 -- 2,679,139 -- 69,995 430,407 --
Int.-Term Bond ........... 3,160,224 -- -- 1,196,317 -- 1,963,907 --
Cal. Int. Tax-Free Bond .. 1,001,080 -- -- 279,938 711,043 10,099 --
Government Securities .... 1,668,433 -- -- 247,809 -- 1,420,624 --
International Equity ..... 971,846 -- -- -- -- -- 971,846
</TABLE>
The U.S. Treasury Money Market Fund and the International Equity Fund had post
10/31 loss deferrals of $3,641 and $6,077,003, respectively that can be used to
offset future capital gains.
6. CONCENTRATION OF CREDIT RISK
- --------------------------------------------------------------------------------
The California Tax-Free Money Market Fund and the California Intermediate
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 and political 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, lack of liquidity, low market capitalizations, foreign currency
fluctuations, and the level of governmental supervision and regulation of
securities markets in the respective countries.
112
<PAGE> 112
7. COMMON TRUST FUND CONVERSIONS
- --------------------------------------------------------------------------------
On April 24, 1998, certain common trust funds of Union Bank of California, N.A.
were converted into the HighMark Funds. The assets, which consisted of
securities and related receivables less liabilities, were converted on a
tax-free basis. The Funds involved in the conversion are as follows:
UNREALIZED
COMMON TRUST FUND HIGHMARK FUND APPRECIATION
PT Income Equity Income Equity ............... $ 88,061
PT Balanced Balanced .................... 3,468
PT Growth A & B Growth ...................... 36,913
PT Diversified Bond A & B Bond ........................ 4,162
PT Intermediate Bond A & B Intermediate-Term Bond ...... 2,778
PT Value Momentum A & B Value Momentum .............. 141,260
PT Prime Money Market Diversified Money Market .... --
PT California Tax-Free Bond California Intermediate
Tax-Free Bond ............ 4,581
8. OPTION CONTRACTS
- --------------------------------------------------------------------------------
Transactions in covered call options and purchased put options during the period
ended July 31, 1998 are summarized as follows:
BLUE CHIP GROWTH
---------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- -----------
Option written and outstanding at
beginning of period ......................... 270 $ 32,299
Call option written during period ........... 4,317 1,413,874
Call option exercised during period ......... (1,984) (740,661)
Call option expired during period ........... (1,364) (373,893)
Call option closed during period ............ (1,239) (331,619)
------ ----------
Option written and outstanding at end
of period ................................... -- $ --
====== ==========
EMERGING GROWTH
---------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- -------------------------------------- ---------- -----------
Option written and outstanding at
beginning of period ........................... 1,029 $ 244,745
Call option written during period ............. 4,839 1,039,159
Call option exercised during period ........... (1,167) (264,084)
Call option expired during period ............. (2,312) (462,421)
Call option closed during period .............. (2,389) (557,399)
------- ----------
Option written and outstanding at end
of period ..................................... -- $ --
====== ==========
BLUE CHIP GROWTH
---------------------------
NUMBER OF
PURCHASE OPTION TRANSACTION CONTRACTS PREMIUM
- ---------------------------------------- ---------- ----------
Purchased put option outstanding at
beginning of period ......................... 10 $ 833
Put option purchased during period ............ 772 163,178
Put option sold during period ................. (455) (104,194)
Put option expired during period .............. (327) (59,817)
Put option exercised during period ............ -- --
---- ---------
Purchased put option outstanding at end
of period ..................................... -- $ --
==== =========
EMERGING GROWTH
---------------------------
NUMBER OF
PURCHASE OPTION TRANSACTION CONTRACTS PREMIUM
- ---------------------------------------- ---------- ----------
Purchase put option outstanding at
beginning of period ......................... 267 $ 97,342
Put option purchased during period ............ 3,288 819,430
Put option sold during period ................. (1,012) (148,749)
Put option expired during period .............. (1,517) (409,787)
Put option exercised during period ............ (1,026) (358,236)
------- --------
Purchased put option outstanding at
end of period ................................. -- $ --
======= ========
113
<PAGE> 113
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. SHARES ISSUED AND REDEEMED (000):
- --------------------------------------------------------------------------------
Transactions in Fund Shares were as follows:
<TABLE>
<CAPTION>
100% U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET MONEY MARKET
FUND FUND
------------------------ -------------------------
08/01/97 08/01/96 08/01/97 08/01/96
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ -------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- 181,083 -- --
Issued in connection with the acquisition of
Common Trust Fund Assets .................................. -- -- -- --
Issued ...................................................... 678,448 444,667 1,374,048 1,103,212
Issued in Lieu of Cash Distributions ........................ 635 740 256 253
Redeemed .................................................... (694,817) (556,386) (1,344,194) (1,001,968)
---------- --------- ----------- -----------
Total Fiduciary Share Transactions ........................ (15,734) 70,104 30,110 101,497
---------- --------- ----------- -----------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- 436,482 -- --
Issued ...................................................... 1,308,434 526,646 369,119 331,210
Issued in Lieu of Cash Distributions ........................ 31,361 8,189 2,968 2,297
Redeemed .................................................... (1,171,680) (512,994) (292,826) (366,427)
---------- --------- ----------- -----------
Total Retail A Share Transactions ......................... 168,115 458,323 79,261 (32,920)
---------- --------- ----------- -----------
Net Increase in Share Transactions .......................... 152,381 528,427 109,371 68,577
========== ========= =========== ===========
- ----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED CALIFORNIA TAX-FREE
MONEY MARKET MONEY MARKET
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- 283,586 -- 114,246
Issued in connection with the acquisition of
Common Trust Fund Assets .................................. 33,913 -- -- --
Issued ...................................................... 2,317,898 2,066,619 455,192 131,018
Issued in Lieu of Cash Distributions ........................ 9,864 4,034 16 6
Redeemed .................................................... (2,153,396) (1,905,972) (373,015) (122,182)
----------- ----------- --------- ---------
Total Fiduciary Share Transactions ........................ 208,279 448,267 82,193 123,088
----------- ----------- --------- ---------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- 139,246 -- 61,460
Issued ...................................................... 1,900,298 621,422 512,922 159,066
Issued in Lieu of Cash Distributions ........................ 47,070 14,984 7,326 2,370
Redeemed .................................................... (1,622,743) (552,572) (432,217) (156,357)
----------- ----------- --------- ---------
Total Retail A Share Transactions ......................... 324,625 223,080 88,031 66,539
----------- ----------- --------- ---------
Net Increase in Share Transactions .......................... 532,904 671,347 170,224 189,627
=========== =========== ========= =========
- ----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE- CALIFORNIA INTERMEDIATE
TERM BOND TAX-FREE BOND
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- -- -- --
Issued in connection with the acquisition of
Common Trust Fund Assets .................................. 14,956 -- 13,818 --
Issued ...................................................... 3,217 1,339 2,217 486
Issued in Lieu of Cash Distributions ........................ 540 309 30 10
Redeemed .................................................... (9,352) (1,618) (1,557) (129)
------- ------ ------- -------
Total Fiduciary Share Transactions ........................ 9,361 30 14,508 367
------- ------ ------- -------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- -- -- --
Issued ...................................................... 42 13 860 563
Issued in Lieu of Cash Distributions ........................ 29 16 43 16
Redeemed .................................................... (70) (44) (735) (51)
------- ------ ------- -------
Total Retail A Share Transactions ......................... 1 (15) 168 528
------- ------ ------- -------
Net Increase in Share Transactions .......................... 9,362 15 14,676 895
======= ====== ======= =======
- -----------------------------------------------------------------------------------------------------------------------
BOND CONVERTIBLE SECURITIES
FUND FUND
------------------------ ------------------------
08/01/97 08/01/96 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- -- -- --
Issued in connection with the acquisition of
Common Trust Fund Assets .................................. 9,361 -- -- --
Issued ...................................................... 5,348 2,017 1,447 526
Issued in Lieu of Cash Distributions ........................ 357 283 237 32
Redeemed .................................................... (2,711) (1,494) (865) (341)
------- ------- ------- -------
Total Fiduciary Share Transactions ........................ 12,355 806 819 217
------- ------- ------- -------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark ..... -- -- -- --
Issued ...................................................... 124 21 -- --
Issued in Lieu of Cash Distributions ........................ 4 5 -- --
Redeemed .................................................... (7) (83) -- --
------- ------- ------- -------
Total Retail A Share Transactions ......................... 121 (57) -- --
------- ------- ------- -------
Net Increase in Share Transactions .......................... 12,476 749 819 217
======= ======= ======= =======
GOVERNMENT SECURITIES BALANCED
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark .... -- -- -- 3,120
Issued in connection with the acquisition of
Common Trust Fund Assets ................................. -- -- 881 --
Issued ..................................................... 9,129 1,599 5,729 3,210
Issued in Lieu of Cash Distributions ....................... 446 169 1,346 683
Redeemed ................................................... (3,854) (1,273) (5,471) (3,134)
------- ------- ------- -------
Total Fiduciary Share Transactions ....................... 5,721 495 2,485 3,879
------- ------- ------- -------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark .... -- -- -- 42
Issued ..................................................... -- -- 151 56
Issued in Lieu of Cash Distributions ....................... -- -- 29 18
Redeemed ................................................... -- -- (105) (144)
------- ------- ------- -------
Total Retail A Share Transactions ........................ -- -- 75 (28)
------- ------- ------- -------
Retail B Shares:
Issued ..................................................... -- -- 59 --
Issued in Lieu of Cash Distributions ....................... -- -- -- --
Redeemed ................................................... -- -- (1) --
------- ------- ------- -------
Total Retail B Share Transactions ........................ -- -- 58 --
------- ------- ------- -------
Net Increase in Share Transactions ......................... 5,721 495 2,618 3,851
======= ======= ======= =======
GROWTH VALUE MOMENTUM
FUND FUND
------------------------ ------------------------
08/01/97 08/01/96 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark .... -- 13,293 -- --
Issued in connection with the acquisition of
Common Trust Fund Assets ................................. 6,689 -- 10,319 --
Issued ..................................................... 7,071 1,944 7,388 4,899
Issued in Lieu of Cash Distributions ....................... 3,216 264 315 91
Redeemed ................................................... (4,643) (1,642) (4,589) (1,521)
------- ------- ------- -------
Total Fiduciary Share Transactions ....................... 12,333 13,859 13,433 3,469
------- ------- ------- -------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark .... -- 242 -- --
Issued ..................................................... 543 68 600 130
Issued in Lieu of Cash Distributions ....................... 127 17 16 5
Redeemed ................................................... (105) (103) (136) (61)
------- ------- ------- -------
Total Retail A Share Transactions ........................ 565 224 480 74
------- ------- ------- -------
Retail B Shares:
Issued ..................................................... 118 -- 194 --
Issued in Lieu of Cash Distributions ....................... -- -- -- --
Redeemed ................................................... (2) -- (4) --
------- ------- ------- -------
Total Retail B Share Transactions ........................ 116 -- 190 --
------- ------- ------- -------
Net Increase in Share Transactions ......................... 13,014 14,083 14,103 3,543
======= ======= ======= =======
INCOME EQUITY BLUE CHIP GROWTH
FUND FUND
------------------------ ------------------------
08/01/97 08/01/96 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark .... -- -- -- --
Issued in connection with the acquisition of
Common Trust Fund Assets ................................. 18,743 -- -- --
Issued ..................................................... 3,942 3,110 4,109 1,198
Issued in Lieu of Cash Distributions ....................... 2,054 1,630 989 30
Redeemed ................................................... (6,700) (3,787) (2,754) (1,199)
------- ------- ------- -------
Total Fiduciary Share Transactions ....................... 18,039 953 2,344 29
------- ------- ------- -------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark .... -- -- -- --
Issued ..................................................... 527 204 -- --
Issued in Lieu of Cash Distributions ....................... 115 68 -- --
Redeemed ................................................... (135) (206) -- --
------- ------- ------- -------
Total Retail A Share Transactions ........................ 507 66 -- --
------- ------- ------- -------
Retail B Shares:
Issued ..................................................... 103 -- -- --
Issued in Lieu of Cash Distributions ....................... -- -- -- --
Redeemed ................................................... (2) -- -- --
------- ------- ------- -------
Total Retail B Share Transactions ........................ 101 -- -- --
------- ------- ------- -------
Net Increase in Share Transactions ......................... 18,647 1,019 2,344 29
======= ======= ======= =======
EMERGING GROWTH INTERNATIONAL EQUITY
FUND FUND
------------------------ ------------------------
08/01/97 02/01/97 08/01/97 02/01/97
TO 07/31/98 TO 07/31/97 TO 07/31/98 TO 07/31/97
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Issued and Redeemed:
Fiduciary Shares:
Issued from the reorganization of Stepstone or Highmark .... -- -- -- --
Issued in connection with the acquisition of
Common Trust Fund Assets ................................. -- -- -- --
Issued ..................................................... 2,362 1,332 1,372 96
Issued in Lieu of Cash Distributions ....................... 760 5 20 --
Redeemed ................................................... (2,369) (961) (284) (84)
------- ------ ------ ------
Total Fiduciary Share Transactions ....................... 753 376 1,108 12
------- ------ ------ ------
Retail A Shares:
Issued from the reorganization of Stepstone or Highmark .... -- -- -- --
Issued ..................................................... -- -- -- --
Issued in Lieu of Cash Distributions ....................... -- -- -- --
Redeemed ................................................... -- -- -- --
------- ------ ------ ------
Total Retail A Share Transactions ........................ -- -- -- --
------- ------ ------ ------
Retail B Shares:
Issued ..................................................... -- -- -- --
Issued in Lieu of Cash Distributions ....................... -- -- -- --
Redeemed ................................................... -- -- -- --
------- ------ ------ ------
Total Retail B Share Transactions ........................ -- -- -- --
------- ------ ------ ------
Net Increase in Share Transactions ......................... 753 376 1,108 12
======= ====== ====== ======
</TABLE>
114 & 115
<PAGE> 114
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
Effective September 17, 1998 the Small Cap Value Fund commenced operations.
On September 23, 1998, the Board of Trustees of HighMark approved, subject to
shareholder approval, the reorganization of the Blue Chip Growth Fund into the
Growth Fund and the Government Securities Fund into the Bond Fund. Under the
terms of a Plan of Reorganization, the Growth and Bond Funds would acquire all
of the assets and stated liabilities of the Blue Chip Growth and Government
Securities Funds, respectively. The proposed reorganization is expected to take
place on or about January 8, 1999. The Board also approved, subject to
shareholder approval, the liquidation of the assets of the Convertible
Securities Fund. It is expected that the Convertible Securities Fund will cease
operations on or about December 31, 1998.
11. SHAREHOLDER VOTING RESULTS (UNAUDITED)
- --------------------------------------------------------------------------------
At a shareholder meeting held on March 31, 1998, the shareholders of the
International Equity Fund voted to approve a new sub-investment advisory
agreement between HighMark Capital Management, Inc. (formerly, Pacific Alliance)
and AXA Asset Management Partenaires. The results of the voting were as follows:
INTERNATIONAL EQUITY FUND
- -------------------------
FOR 265,750 87.24% of shares voted 48.46% of shares outstanding
AGAINST 38,658 12.69% of shares voted 7.05% of shares outstanding
ABSTAIN 203 0.07% of shares voted 0.04% of shares outstanding
116
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
HIGHMARK FUNDS:
We have audited the accompanying statements of net assets of HighMark Funds (the
"Funds"), including 100% U.S. Treasury Money Market Fund, U.S. Government Money
Market Fund, Diversified Money Market Fund, California Tax-Free Money Market
Fund, Intermediate-Term Bond Fund, California Intermediate Tax-Free Bond Fund,
Bond Fund, Convertible Securities Fund, Government Securities Fund, Balanced
Fund, Growth Fund, Value Momentum Fund, Income Equity Fund, Blue Chip Growth
Fund, Emerging Growth Fund, and International Equity Fund as of July 31, 1998,
and the related statements of operations for the year then ended, statements of
changes in net assets for the periods ended July 31, 1998 and July 31, 1997, and
financial highlights for the periods ended July 31, 1998, July 31, 1997, and
July 31, 1996, respectively. These financial statements and financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for the fiscal periods ended July 31,
1995 and prior were audited by other auditors whose report, dated September 22,
1995, expressed an unqualified opinion on those statements. The financial
highlights for the fiscal periods ended January 31, 1997 and prior were audited
by other auditors whose report, dated March 15, 1997, 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, 1998 by correspondence with the custodians and brokers, and where replies
were not received, we performed other auditing procedures. 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 and financial highlights present
fairly, in all material respects, the financial position of the Funds as of July
31, 1998, the results of their operations, the changes in their net assets, and
the financial highlights for the respective stated periods, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, CA
September 14, 1998
117
<PAGE> 116
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
NOTICE TO SHAREHOLDERS OF THE HIGHMARK FUNDS (Unaudited)
- --------------------------------------------------------------------------------
For shareholders that do not have a July 31, 1998 tax year end, this notice is
for informational purposes only. For shareholders with a July 31, 1998 tax year
end, please consult your tax advisor as to the pertinence of this notice.
For the fiscal year ended July 31, 1998, each Portfolio is designating the
following items with regard to distributions paid during the year.
<TABLE>
<CAPTION>
LONG TERM MID TERM
(20% RATE) (28% RATE) ORDINARY
CAPITAL GAINS CAPITAL GAINS INCOME TAX EXEMPT
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTION INCOME
FUND (TAX BASIS) (TAX BASIS) (TAX BASIS) DISTRIBUTION TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100% U.S. Treasury Money Market .............. 0% 0% 100% 0% 100%
U.S. Government Money Market ................. 0% 0% 100% 0% 100%
Diversified Money Market ..................... 0% 0% 100% 0% 100%
California Tax-Free Money Market ............. 0% 0% 0% 100% 100%
Intermediate-Term Bond ....................... 0% 0% 100% 0% 100%
California Intermediate Tax-Free Bond ........ 0% 0% 0% 100% 100%
Bond ......................................... 0% 0% 100% 0% 100%
Convertible Securities ....................... 30% 2% 68% 0% 100%
Government Securities ........................ 0% 0% 100% 0% 100%
Balanced ..................................... 46% 3% 51% 0% 100%
Growth ....................................... 84% 11% 5% 0% 100%
Value Momentum ............................... 5% 19% 76% 0% 100%
Income Equity ................................ 39% 39% 22% 0% 100%
Blue Chip Growth ............................. 34% 58% 8% 0% 100%
Emerging Growth .............................. 45% 40% 15% 0% 100%
International Equity ......................... 0% 35% 65% 0% 100%
QUALIFYING FOREIGN
FUND DIVIDENDS(1) TAX CREDIT (4)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
100% U.S. Treasury Money Market .............. 0% 0%
U.S. Government Money Market ................. 0% 0%
Diversified Money Market ..................... 0% 0%
California Tax-Free Money Market ............. 0% 0%
Intermediate-Term Bond ....................... 0% 0%
California Intermediate Tax-Free Bond ........ 0% 0%
Bond ......................................... 0% 0%
Convertible Securities ....................... 27% 0%
Government Securities ........................ 0% 0%
Balanced ..................................... 33% 0%
Growth ....................................... 55% 0%
Value Momentum ............................... 45% 0%
Income Equity ................................ 88% 0%
Blue Chip Growth ............................. 36% 0%
Emerging Growth .............................. 19% 0%
International Equity ......................... 0% 16%
<FN>
- -------------
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
(2) For residents of California, Connecticut and New York: The 100% U.S.
Treasury Money Market, U.S. Government Money Market and Government
Securities Funds met the quarterly diversification test for the fiscal
quarters ended during July 31, 1998.
(3) For residents of California, the California Intermediate Tax-Free Bond and
California Tax-Free Money Market Funds met the quarterly diversification
test for the fiscal quarter ended during July 31, 1998.
(4) The foreign tax credit is based on the percentage of ordinary income of
each fund.
</FN>
</TABLE>
118
<PAGE> 117
NOTES
- --------------------------------------------------------------------------------
<PAGE> 118
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
NOTES
- --------------------------------------------------------------------------------
<PAGE> 119
Thank you for
your investment.
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
-------------------------------
Mutual Funds:
[BULLET] are not FDIC insured
[BULLET] have no bank guarantee
[BULLET] may lose value
-------------------------------
<PAGE> 120
[PHOTO OF FAMILY AT PLAY OMITTED]
For further information
call 1-800-433-6884
or visit our Web site at
www.highmark-funds.com
[LOGO OMITTED] HIGHMARK [SERVICE MARK] FUNDS
HIGHMARK ANNUAL REPORT
July 31, 1998
HighMark Funds Service Providers:
Investment Advisor
HighMark Capital Management, Inc.
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, NY 10116
Sub-Advisor
AXA Asset Management Partenaires
46, Avenue de la Grande Armee
Paris, 75017, France
Custodian
Union Bank of California, N.A.
475 Sansome Street
Post Office Box 45000
San Francisco, CA 94104
Administrator & Distributor
SEI Investments Mutual Funds Services &
SEI Investments Distribution Co.
Oaks, PA 19456
Legal Counsel
Ropes & Gray
One Franklin Square
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105-2230
84806 (7/98)
