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CROSS REFERENCE SHEET
HIGHMARK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
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FORM N-1A PART B ITEM INFORMATION CAPTION
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10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Additional Information -- Description of Shares
13. Investment Objectives and Policies Investment Objectives and Policies; Additional Information
on Portfolio Instruments
14. Management of HighMark Funds Management of HighMark Funds
15. Control Persons and Principal
Holders of Securities Additional Information -- Miscellaneous
16. Investment Advisory and Other
Services Management of HighMark Funds
17. Brokerage Allocation Management of HighMark Funds -- Portfolio Transactions
18. Capital Stock and Other Securities Valuation; Additional Purchase and Redemption
Information; Management of HighMark Funds -- Distributor;
The Distribution Plans; Additional Information
19. Purchase, Redemption and Valuation; Additional Purchase and Redemption
Pricing of Securities Being Information; Management of HighMark Funds
Offered
20. Tax Status Additional Purchase and Redemption Information --
Additional Federal Tax Information; Additional Tax
Information Concerning the California Tax-Free
Money Market Fund and the California Intermediate
Tax-Free Bond Fund
21. Underwriters Management of HighMark Funds -- Distributor
22. Calculation of Performance Data Additional Information -- Calculation of Performance Data
23. Financial Statements Financial Statements
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HIGHMARK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 30, 1998,
AS AMENDED JANUARY 8, 1999
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 30, 1998, (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.
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TABLE OF CONTENTS
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HIGHMARK FUNDS....................................................................................................1
INVESTMENT OBJECTIVES AND POLICIES................................................................................2
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS...................................................................2
Bank Instruments.........................................................................................2
Commercial Paper and Variable Amount Master Demand Notes.................................................3
Lending of Portfolio Securities..........................................................................3
Repurchase Agreements....................................................................................4
Reverse Repurchase Agreements............................................................................5
U.S. Government Obligations..............................................................................5
Mortgage-Related Securities..............................................................................5
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
Options (Puts and Calls) on Securities..................................................................15
Covered Call Writing....................................................................................15
Purchasing Call Options.................................................................................17
Purchasing Put Options..................................................................................17
Options in Stock Indices................................................................................17
Risk Factors in Options Transactions....................................................................18
Futures Contracts on Securities and Related Options.....................................................19
Futures Contracts on Securities.........................................................................19
Options on Securities' Futures Contracts................................................................21
Risk of Transactions in Securities' Futures Contracts and Related Options...............................21
Index Futures Contracts.................................................................................22
Options on Index Futures Contracts......................................................................23
U.S. Dollar Denominated Obligations of Securities of Foreign Issuers....................................23
Foreign Currency Transactions...........................................................................24
Transaction Hedging.....................................................................................24
Position Hedging........................................................................................25
Currency Forward and Futures Contracts..................................................................25
General Characteristics of Currency Futures Contracts...................................................26
Foreign Currency Options................................................................................27
Foreign Currency Conversion.............................................................................27
Standard & Poor's Depository Receipts ("SPDRs").........................................................27
High Yield Securities...................................................................................28
High Quality Investments with Regard to the Money Market Funds..........................................29
Illiquid Securities.....................................................................................31
INVESTMENT RESTRICTIONS..........................................................................................31
Voting Information......................................................................................41
PORTFOLIO TURNOVER...............................................................................................42
VALUATION........................................................................................................42
VALUATION OF THE MONEY MARKET FUNDS.....................................................................43
VALUATION OF THE EQUITY FUNDS AND THE FIXED INCOME FUNDS................................................43
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................................................................44
ADDITIONAL FEDERAL TAX INFORMATION......................................................................44
ADDITIONAL TAX INFORMATION CONCERNING THE CALIFORNIA TAX-
FREE MONEY MARKET FUND AND THE CALIFORNIA
INTERMEDIATE TAX-FREE BOND FUND................................................................46
FOREIGN TAXES...........................................................................................50
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MANAGEMENT OF HIGHMARK FUNDS.....................................................................................51
TRUSTEES AND OFFICERS...................................................................................51
INVESTMENT ADVISOR......................................................................................55
THE SUB-ADVISORS........................................................................................58
PORTFOLIO TRANSACTIONS..................................................................................59
GLASS-STEAGALL ACT......................................................................................61
ADMINISTRATOR AND SUB-ADMINISTRATOR.....................................................................62
SHAREHOLDER SERVICES PLANS..............................................................................65
EXPENSES ...............................................................................................66
DISTRIBUTOR.............................................................................................66
The Distribution Plans.........................................................................67
TRANSFER AGENT AND CUSTODIAN SERVICES...................................................................67
AUDITORS ...............................................................................................68
LEGAL COUNSEL...........................................................................................68
ADDITIONAL INFORMATION...........................................................................................69
DESCRIPTION OF SHARES...................................................................................69
SHAREHOLDER AND TRUSTEE LIABILITY.......................................................................70
THE REORGANIZATION OF THE IRA FUND AND HIGHMARK FUNDS...................................................71
CALCULATION OF PERFORMANCE DATA.........................................................................72
MISCELLANEOUS...........................................................................................79
APPENDIX ........................................................................................................88
FINANCIAL STATEMENTS.............................................................................................95
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STATEMENT OF ADDITIONAL INFORMATION
HIGHMARK FUNDS
HighMark Funds is a diversified, open-end management investment
company. HighMark Funds presently consists of seventeen 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 Small Cap Value 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 Small Cap Value Fund commenced operations on September
14, 1998. 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 Funds on April 28, 1997, and the HighMark Convertible Securities
Fund commenced operations in HighMark Funds 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
Funds" 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 Funds 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
Funds' 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, International Equity
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and Small Cap Value 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 Equity Portfolio and
the Bond Portfolio of the IRA Fund (which were reorganized into certain Funds of
HighMark 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 Funds 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
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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 $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. Lending of Portfolio Securities. In order to generate additional
income, each Fund (other than the California Tax-Free Money Market Fund and the
100% U.S. Treasury 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
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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 HighMark Capital
Management, Inc. (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 and the 100% U.S. Treasury 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.
4. 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 Funds' 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. 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 Funds' 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 Funds' 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.
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5. 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.
6. 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.
For information concerning mortgage-related securities issued by
certain agencies or instrumentalities of the U.S. Government, see
"Mortgage-Related Securities" below.
7. 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
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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
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
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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.
8. Adjustable Rate Notes. Consistent with its investment objective,
policies, and restrictions, each Fund (other than the 100% U.S. Treasury Money
Market Fund) may invest in "adjustable rate notes," which include variable rate
notes and floating rate notes. For Money Market Fund purposes, a variable rate
note is one whose terms provide for the readjustment of its interest rate on set
dates and that, upon such readjustment, can reasonably be expected to have a
market value that approximates its amortized cost; the degree to which a
variable rate note's market value approximates its amortized cost subsequent to
readjustment will depend on the frequency of the readjustment of the note's
interest rate and the length of time that must elapse before the next
readjustment. A floating rate note is one whose terms provide for the
readjustment of its interest rate whenever a specified interest rate changes and
that, at any time, can reasonably be expected to have a market value that
approximates its amortized cost. Although there may be no active secondary
market with respect to a particular variable or floating rate note purchased by
a Fund, the Fund may seek to resell the note at any time to a third party. The
absence of an active secondary market, however, could make it difficult for the
Fund to dispose of a variable or floating rate note in the event the issuer of
the note defaulted on its payment obligations and the Fund could, as a result or
for other reasons, suffer a loss to the extent of the default. Variable or
floating rate notes may be secured by bank
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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.
9. 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 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
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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 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
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<PAGE> 14
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
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
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<PAGE> 15
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.
10. 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.
During the first half of the 1990's 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 California's economy has made a strong steady recovery since
1994 and California's credit rating has climbed from the lows experienced during
the recession, as of the date of this Statement of Additional Information,
rating agencies, underwriters and investors appear to have some lingering
concerns about California's creditworthiness. Major credit rating agencies
continue to cite, among other things,
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<PAGE> 16
concerns about California's lack of contingency planning (such as adequate
reserves), missed budget deadlines and on-going structural budget impediments.
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 nearly a decade and a half, 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
1996-1997 fiscal year or the 1997-1998 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
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<PAGE> 17
state or of any local government to meet its obligations with respect to
existing or future bonded indebtedness," concern has been expressed with respect
to the combined effect of such constitutionally imposed spending limits on the
ability of California state and local governments to utilize bond financing.
Article XIII B was modified substantially by Propositions 98 and 111 of
1988 and 1990, respectively. These initiatives changed the State's Article XIII
B appropriations limit to require that the State set aside a prudent reserve
fund for public education, and guarantee a minimum level of State funding for
public elementary and secondary schools as well as community colleges. Such
guaranteed spending was often cited as one of the causes of the State's earlier
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 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 could result in the loss of
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.
11. 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).
12. 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 Funds by the
Securities and Exchange Commission, such other registered investment companies
securities may include shares of a money market fund of HighMark Funds, and may
include registered investment companies for which the Advisor or Sub-Advisor to
a Fund of HighMark Funds, 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 Funds, 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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<PAGE> 19
13. 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 Funds' 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.
14. 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.
15. 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.
16. Covered Call Writing. Each Equity Fund may write covered call
options from time to time on such portion of its assets, without limit, as the
Advisor determines is appropriate in seeking to obtain its investment objective.
A Fund will not engage in option writing strategies for speculative purposes. A
call option gives the purchaser of such option the right to buy, and the writer,
in this case the Fund, has the obligation to sell the underlying
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<PAGE> 20
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.
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
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<PAGE> 21
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.
17. 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.
18. 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.
19. Options in Stock Indices. The Equity Funds may engage in options on
stock indices. A stock index assigns relative values to the common stock
included in the index with the index fluctuating with changes in the market
values of the underlying common stock.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return of the
premium received, to make delivery of this amount. Gain or loss to a Fund on
transactions in stock
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<PAGE> 22
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.
20. Risk Factors in Options Transactions. The successful use of options
strategies depends on the ability of the Advisor or, where applicable, the
Sub-Advisor to forecast interest rate and market movements correctly.
When it purchases an option, a Fund runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction with respect
to the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, a Fund
will lose part
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<PAGE> 23
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.
21. 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.
22. Futures Contracts on Securities. A Fund will enter into futures
contracts on securities only when, in compliance with the SEC's requirements,
cash or equivalents equal in value to the securities' value (less any applicable
margin deposits) have been deposited in a segregated account of the Fund's
custodian.
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<PAGE> 24
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 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
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released to the Fund, and the Fund realizes a loss or a gain. Such closing
transactions involve additional commission costs.
23. 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.
24. Risk of Transactions in Securities' Futures Contracts and Related
Options. Successful use of securities' futures contracts by a Fund is subject to
the ability of the Advisor or, where applicable, the Sub-Advisor to predict
correctly movements in the direction of interest rates and other factors
affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to a Fund when the purchase
or sale of a futures contract would not, such as when there is no movement in
the price of the hedged investments. The writing of an option on a futures
contract involves risks similar to those risks relating to the sale of futures
contracts.
There is no assurance that higher than anticipated trading activity or
other unforeseen events will not, at times, render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.
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<PAGE> 26
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.
25. Index Futures Contracts. A Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective, and may purchase and sell options on such index
futures contracts. A Fund will not enter into any index futures contract for the
purpose of speculation, and will only enter into contracts traded on securities
exchanges with standardized maturity dates.
An index futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contracts and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made; generally contracts are closed out prior to the expiration date of the
contract. No price is paid upon entering into index futures contracts. When a
Fund purchases or sells an index futures contract, it is required to make an
initial margin deposit in the name of the futures broker and to make variation
margin deposits as the value of the contract fluctuates, similar to the deposits
made with respect to futures contracts on securities. Positions in index futures
contracts may be closed only on an exchange or board of trade providing a
secondary market for such index futures contracts. The value of the contract
usually will vary in direct proportion to the total face value.
A Fund's ability to effectively utilize index futures contracts depends
on several factors. First, it is possible that there will not be a perfect price
correlation between the index futures contracts and their underlying index.
Second, it is possible that a lack of liquidity for index futures contracts
could exist in the secondary market, resulting in the Fund's inability to close
a futures position prior to its maturity date. Third, the purchase of an index
futures contract involves the risk that the Fund could lose more than the
original margin deposit required to
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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.
26. 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.
27. U.S. Dollar Denominated Obligations of Securities of Foreign
Issuers. Certain of the Funds may invest in U.S. dollar denominated obligations
of securities of foreign issuers. Permissible investments may consist of
obligations of foreign branches of U.S. banks and foreign or domestic branches
of foreign banks, including European Certificates of Deposit, European Time
Deposits, Canadian Time Deposits and Yankee Certificates of Deposits, and
investments in Canadian Commercial Paper, foreign securities and Europaper. In
addition, the Equity Funds, the Government Securities Fund and Convertible
Securities Fund may invest in American Depositary Receipts. These instruments
may subject the Fund to investment risks that differ in some respects from those
related to investments in obligations of U.S. domestic issuers. Such risks
include future adverse political and economic developments, the possible
imposition of withholding taxes on interest or other income, possible seizure,
nationalization, or expropriation of foreign deposits, the possible
establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches
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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.
28. 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.
29. 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 Fund the right to assume a short position in the futures contract until
expiration of the option. A put option on currency gives the Fund the right to
sell a currency at an exercise price until the expiration of the option. A call
option on a futures contract gives the Fund the right to assume a long position
in the futures contract until the expiration of the option. A call option on
currency gives the Fund the right to purchase a currency at the exercise price
until the expiration of the option.
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<PAGE> 29
30. 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 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.
31. Currency Forward and Futures Contracts. A forward contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract as agreed by the
parties, at a price set at the time of the contract. In the case of a cancelable
forward contract, the holder has the unilateral right to cancel the contract at
maturity by paying a specified fee. Forward contracts are trades in the
interbank markets conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
A futures contract is a standardized contract for the future delivery
of a specified amount of a foreign currency at a future date at a price set at
the time of the contract. Futures contracts are designed by and traded on
exchanges. The Fund would enter into futures
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<PAGE> 30
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.
32. General Characteristics of Currency Futures Contracts. When the
International Equity 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 Fund upon termination of the contract,
assuming the Fund satisfies its contractual obligation.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin," and are made as the value of the underlying futures contract
fluctuates. For example, when the Fund sells a futures contract and the price of
the underlying currency rises above the delivery price, the International Equity
Fund's position declines in value. The Fund then pays a broker a variation
margin payment equal to the difference between the delivery price of the futures
contract and the market price of the currency underlying the futures contract.
Conversely, if the price of the underlying currency falls below the delivery
price of the contract, the Fund's
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<PAGE> 31
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 Fund, and the Fund realizes a loss or gain. Such closing
transactions involve additional commission costs.
33. 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.
34. Foreign Currency Conversion. Although foreign exchange dealers do
not charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
International Equity Fund or the Small Cap Value Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
35. Standard & Poor's Depository Receipts ("SPDRs"). SPDRs are
interests in a unit investment trust ("UIT") that may be obtained from the UIT
or purchased in the secondary market as SPDRs are listed on the American Stock
Exchange.
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<PAGE> 32
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.
36. High Yield Securities
The Convertible Securities Fund may invest in lower rated securities.
Fixed income securities are subject to the risk of an issuer's ability to meet
principal and interest payments on the obligation (credit risk), and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower rated or unrated (i.e., high yield) securities
are more likely to react to developments affecting market and credit risk than
are more highly rated securities, which primarily react to movements in the
general level of interest rates. The market values of fixed-income securities
tend to vary inversely with the level of interest rates. Yields and market
values of high yield securities will fluctuate over time, reflecting not only
changing interest rates but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of the prevailing interest
rates. Investors should carefully consider the relative risks of investing in
high yield securities and understand that such securities are not generally
meant for short-term investing.
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<PAGE> 33
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.
37. 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 Funds' Board of Trustees.
With regard to the Diversified Money Market Fund and the California
Tax-Free Money Market Fund, investments will be limited to "Eligible Securities"
that (i) in the case of the Diversified Money Market Fund, include those
obligations that, at the time of purchase, possess the highest short-term rating
from at least one NRSRO (the Diversified Money Market Fund may also invest up to
5% of its net assets in obligations that, at the time of purchase, possess one
of the two highest short-term ratings from at least one NRSRO, and in
obligations that do not possess a short-term rating (i.e., are unrated) but are
determined by the Advisor to be of comparable quality to the rated instruments
eligible for purchase by the Fund under guidelines adopted by the Board of
Trustees) and (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
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<PAGE> 34
(i.e., are unrated) but are determined by the Advisor to be of comparable
quality to the rated obligations eligible for purchase by the Fund under
guidelines adopted by the Board of Trustees.
A security subject to a tender or demand feature will be considered an
Eligible Security only if both the demand feature and the underlying security
possess a high quality rating or, if such do not possess a rating, are
determined by the Advisor to be of comparable quality; provided, however, that
where the demand feature would be readily exercisable in the event of a default
in payment of principal or interest on the underlying security, the obligation
may be acquired based on the rating possessed by the demand feature or, if the
demand feature does not possess a rating, a determination of comparable quality
by the Advisor. In applying the above-described investment policies, a security
that has not received a short-term rating will be deemed to possess the rating
assigned to an outstanding class of the issuer's short-term debt obligations if
determined by the Advisor to be comparable in priority and security to the
obligation selected for purchase by the Fund, or, if not available, the issuer's
long-term obligations, but only in accordance with the requirements of Rule
2a-7. A security that at the time of issuance had a maturity exceeding 397 days
but, at the time of purchase, has a remaining maturity of 397 days or less, is
considered an Eligible Security if it possesses a long-term rating, within the
two highest rating categories.
Eligible Securities include First Tier Securities and Second Tier
Securities. First Tier Securities include those that possess at least one rating
in the highest category and, if the securities do not possess a rating, those
that are determined to be of comparable quality by the Advisor pursuant to
guidelines adopted by the Board of Trustees. Second Tier Securities are all
other Eligible Securities.
The Diversified Money Market Fund will not invest more than 5% of its
total assets in the First Tier Securities of any one issuer, except that the
Fund may invest up to 25% of its total assets in First Tier Securities of a
single issuer for a period of up to three business days. (This three day "safe
harbor" provision will not be applicable to the California Tax-Free Money Market
Fund, because single state funds are specifically excluded from this Rule 2a-7
provision.) In addition, the Diversified Money Market Fund may not invest more
than 5% of its total assets in Second Tier Securities, with investments in the
Second Tier Securities of any one issuer further limited to the greater of 1% of
the Fund's total assets or $1.0 million. If a percentage limitation is satisfied
at the time of purchase, a later increase in such percentage resulting from a
change in the Diversified Money Market Fund's net asset value or a subsequent
change in a security's qualification as a First Tier or Second Tier Security
will not constitute a violation of the limitation. In addition, there is no
limit on the percentage of the Diversified Money Market Fund's assets that may
be invested in obligations issued or guaranteed by the U.S. Government, its
agencies, or instrumentalities and repurchase agreements fully collateralized by
such obligations.
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Under the guidelines adopted by HighMark Funds' 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 Funds 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) permitting the Fund to
invest in restricted securities provided the Fund complies with the illiquid
securities policy described above. Restricted securities are securities that may
not be sold to the public without registration under the Securities Act of 1933
("1933 Act") and may be either liquid or illiquid. The Advisor will determine
the liquidity of restricted securities in accordance with guidelines established
by HighMark Funds' 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).
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.
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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;
4. 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;
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
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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
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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 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;
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<PAGE> 39
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 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
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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; 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) 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;
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<PAGE> 41
7. Acquire any other investment company or investment company
security except in connection with a merger, consolidation,
reorganization or acquisition of assets;
8. Borrow money or issue senior securities, except that the
Fund may borrow from banks or enter into reverse repurchase agreements
for temporary emergency purposes in amounts up to 10% of the value of
its total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets, except in connection with permissible
borrowings and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the Fund's total assets at the
time of its borrowing. The Fund will not invest in additional
securities until all its borrowings (including reverse repurchase
agreements) have been repaid;
9. Write or sell puts, calls, straddles, spreads, or
combinations thereof, except that the Fund may acquire puts with
respect to Municipal Securities in its portfolio and sell the puts in
conjunction with a sale of the underlying Municipal Securities;
10. Acquire a put, if, immediately after the acquisition, more
than 5% of the total amortized cost value of the Fund's assets would be
subject to puts from the same institution (except that (i) up to 25% of
the value of the Fund's total assets may be subject to puts without
regard to the 5% limitation and (ii) the 5% limitation is inapplicable
to puts that, by their terms, would be readily exercisable in the event
of a default in payment of principal or interest on the underlying
securities). In applying the above-described limitation, the Fund will
aggregate securities subject to puts from any one institution with the
Fund's investments, if any, in securities issued or guaranteed by that
institution. In addition, for the purpose of this investment
restriction and investment restriction No. 11 below, a put will be
considered to be from the party to whom the Fund will look for payment
of the exercise price;
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
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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 be private activity bond that is backed
only by the assets and revenues of 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
by 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.
EACH OF THE VALUE MOMENTUM FUND, THE BLUE CHIP GROWTH FUND, THE EMERGING GROWTH
FUND, THE INTERNATIONAL EQUITY FUND, THE SMALL CAP VALUE 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
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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 Small Cap Value Fund, the Intermediate-Term Bond Fund,
the Government Securities Fund, the Convertible Securities Fund, and
the California Intermediate Tax-Free Bond Fund have been adopted to
avoid wherever possible the necessity of shareholder meetings otherwise
required by the 1940 Act. This recognizes the need to react quickly to
changes in the law or new investment opportunities in the securities
markets and the cost and time involved in obtaining shareholder
approvals for diversely held investment companies. However, the Funds
also have adopted nonfundamental limitations, set forth below, which in
some instances may be more restrictive than their fundamental
limitations. Any changes in a Fund's nonfundamental limitations will be
communicated to the Fund's shareholders prior to effectiveness.
1940 ACT RESTRICTIONS. Under the 1940 Act, and the rules,
regulations and interpretations thereunder, a "diversified company," as
to 75% of its totals assets, may not purchase securities of any issuer
(other than obligations of, or
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<PAGE> 44
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 SMALL
CAP VALUE 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 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.
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<PAGE> 45
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 Funds 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 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 or 1% of the
shares or securities or such issuer and all such officers,
trustees, partners and directors owning more than 1/2 or 1% of
such shares or securities together own more than 5% of such
shares or securities.
10. Invest in interest in oil, gas, or other mineral exploration
or development programs and oil, gas or mineral leases.
Voting Information. As used in this Statement of Additional
Information, a "vote of a majority of the outstanding Shares" of HighMark Funds
or a particular Fund or a particular Class of Shares of HighMark Funds or a Fund
means the affirmative vote of the lesser of (a) more than 50% of the outstanding
Shares of HighMark Funds or such Fund or such Class, or (b) 67% or more of the
Shares of HighMark Funds or such Fund or such Class present at a meeting at
which the holders of more than 50% of the outstanding Shares of HighMark Funds
or such Fund or such Class are represented in person or by proxy.
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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 Funds' fiscal years ended July
31, 1998 and July 31, 1997, each Funds' portfolio turnover rate was: 67% and
118% for the HighMark Growth Fund; 69% and 46% for the HighMark Income Equity
Fund; and 16% and 14% for the HighMark Bond Fund. For each of the following
Funds, the portfolio turnover rate for the fiscal year ended July 31, 1998, the
six-month period ended July 31, 1997 and the prior year ended January 31, 1997
was: 22%, 10% and 27% for the HighMark Balanced Fund; 7%, 1% and 9% for the
HighMark Value Momentum Fund; 168%, 54% and 80% for the HighMark Blue Chip
Growth Fund; 289%, 116% and 134% for the HighMark Emerging Growth Fund; 72%, 18%
and 29% for the HighMark International Equity Fund; 51%, 58% and 106% for the
HighMark Intermediate-Term Bond Fund; 62%, 40% and 186% for the HighMark
Government Securities Fund; 50%, 33% and 89% for the HighMark Convertible
Securities Fund; and 23%, 5% and 6% for the HighMark California Intermediate
Tax-Free Bond Fund. It is currently expected that the Small Cap Value Fund's
portfolio turnover rate will not exceed 100%. The portfolio turnover rate may
vary greatly from year to year as well as within a particular year, and may also
be affected by cash requirements for redemption of Shares and, in the case of
the California Tax-Free Money Market Fund, by requirements that enable them to
receive certain favorable tax treatment.
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 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").
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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 Funds' 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 Funds' Board of Trustees. With the
exception of short-term securities as described below, the value of each Fund's
investments may be based on valuations provided by a pricing service. Short-term
securities (i.e., securities with remaining maturities of 60 days or less) may
be valued at amortized cost, which approximates current value.
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<PAGE> 48
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 Funds' policy to pay redemptions in cash.
HighMark Funds 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 Funds during any 90-day
period of up to the lesser of $250,000 or 1% of HighMark Funds' net assets.
HighMark Funds 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 Funds 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) 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
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<PAGE> 49
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.
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 net capital gain
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.
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
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<PAGE> 50
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 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
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<PAGE> 51
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 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
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<PAGE> 52
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 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 the Fund).
Like the other Funds, if for any taxable year the California Tax-Free
Money Market Fund or the California Intermediate Tax-Free Bond Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of such Fund's taxable income will be subject to tax at regular corporate
rates (without any deduction for distributions to Shareholders), and Municipal
Securities interest income, although not taxable to the California Tax-Free
Money Market Fund or the California Intermediate Tax-Free Bond Fund, would be
taxable to Shareholders 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.
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
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<PAGE> 53
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 California Exempt-Interest Securities
(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 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.
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<PAGE> 54
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. If a Fund makes the election, it will report annually to its
Shareholders the respective amounts per share of the Fund's income from sources
within, and taxes paid to, foreign countries and U.S. possessions.
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<PAGE> 55
MANAGEMENT OF HIGHMARK FUNDS
TRUSTEES AND OFFICERS
Overall responsibility for management of each Fund rests with the
Trustees of HighMark Funds, who are elected by HighMark Funds' Shareholders.
There are currently six Trustees, all of whom are not "interested persons" of
HighMark Funds within the meaning of that term under the 1940 Act.
The Trustees, in turn, elect the officers of HighMark Funds to
supervise actively its day-to-day operations.
The Trustees and officers of HighMark Funds, 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 FUNDS DURING PAST 5 YEARS
- ---------------- ------------------- -------------------
<S> <C> <C>
Thomas L. Braje Trustee Prior to retirement in October 1996,
1323 Encina Drive Vice President and Chief Financial
Milbrae, CA 94030 Officer of Bio Rad Laboratories, Inc.
Date of Birth: 6/7/43
David A. Goldfarb Trustee Partner, Goldfarb & Simens,
111 Pine Street Certified Public Accountants.
18th Floor
San Francisco, CA 94111
Date of Birth: 8/2/42
Joseph C. Jaeger Trustee Prior to retirement in June 1998,
19 Crest Road Senior Vice President and Chief
Lafayette, CA 94549 Financial Officer, Delta Dental
Date of Birth: 8/21/35 Plan of California.
Frederick J. Long Trustee President and Chief Executive
520 Pike Street Officer, Acordia West and
20th Floor Acordia Northwest Inc. (each an
Seattle, WA 98101 insurance brokerage firm).
Date of Birth: 9/17/35
Paul L. Smith Trustee Member of the Board of Trustees
422 Gordon Terrace of Stepstone Funds from 1991
Pasadena, CA 91105 to 1997.
Date of Birth: 4/25/18
</TABLE>
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<PAGE> 56
<TABLE>
<CAPTION>
<S> <C> <C>
William R. Howell Trustee Director, Current Income Shares,
73-350 Calliandro Avenue Inc. from 1973 until retirement in
Palm Spring, CA 92260 1998. Chairman of the Board of
Date of Birth: 2/28/22 Trustees of Stepstone Funds from
1991 to 1997.
Michael L. Noel Member Advisory Board President, Noel Consulting
1107 Pine Country Court Company since 1998. From 1991
Prescott, AZ 86303-6405 to 1997, Member of the Board of
Date of Birth: 4/5/41 Trustees of Stepstone Funds.
Prior to retirement in December 1994,
Senior Vice President and Chief
Financial Officer, Southern California
Edison Company; Director of Amerwest
Company, Current Income Shares, Inc.
and SCAN Health Plan.
Robert M. Whitler Member Advisory Board Director, Current Income Shares, Inc.
336 Running Spring Drive Prior to retirement in 1996, Executive
Palm Desert, CA 92211-3240 Vice President and head of Union Bank's
Date of Birth: 9/11/38 Financial Management and Trust Services
Group and a member of the bank-wide
Executive Policy Committee.
Mark E. Nagle President and Chief Executive Vice President and Controller,
530 East Swedesford Road Officer Funds Account, Vice President of
Wayne, PA 19087 the Administrator and Distributor,
employee since November 1996.
From 1995 to 1996, Vice President
of Fund Accounting of BISYS
Fund Services. Prior to 1995,
Senior Vice President for Fidelity
Investments since 1981.
Robert DellaCroce Controller and Chief Financial CPA, Director of Fund Resources,
530 East Swedesford Road Officer employee since 1994. Prior to
Wayne, PA 19087 1994, senior manager for Arthur
Andersen.
Kevin P. Robins Vice President and Secretary Employee since 1992. Prior to
1 Freedom Valley Drive 1992, associate with Morgan Lewis
Oaks, PA 19456 & Bockius since 1988.
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
<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
1 Freedom Valley Drive Secretary. to May 1995, associate with Dewey
Oaks, PA 19456 Ballantine. Prior to 1994, associate
with Winston & Strawn.
Joseph M. O'Donnell Vice President and Assistant Employee since 1998. From
1 Freedom Valley Drive Secretary. March, 1993 to December, 1997,
Oaks, PA 19456 Vice President and General
Counsel with FPS Services, Inc.
Lydia A. Gavalis Vice President and Assistant Vice President and Assistant
1 Freedom Valley Drive Secretary Secretary of SEI Investments
Oaks, PA 19456 Company, employee since 1998.
Prior to 1998, Assistant General
Counsel and Director of
Arbitration, Philadelphia Stock
Exchange.
Lynda J. Striegel Vice President and Assistant Vice President and Assistant
1 Freedom Valley Drive Secretary Secretary of SEI Investments
Oaks, PA 19456 Company, employee since 1998.
From 1997 to 1998, Senior Assets
Management Counsel, Barnett
Banks, Inc. From 1996 to 1997,
Partner, Groom and Nordberg,
Chartered. Prior to 1995, Associate
General Counsel, Riggs Bank, N.A.
Kathy Heilig Vice President and Assistant Treasurer of SEI Investments
1 Freedom Valley Drive Secretary Company, employee since 1987.
Oaks, PA 19456
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
<S> <C> <C>
James R. Foggo Vice President and Assistant Vice President and Assistant
1 Freedom Valley Drive Secretary Secretary of the Administrator and
Oaks, PA 19456 the Distributor, employee since
1998. In 1998, associate Paul
Weiss, Rifkind, Wharton &
Garrison. From 1995 to 1998,
associate, Baker & McKenzie.
Prior to 1995, associate, Battle
Fowler, L.L.P.
</TABLE>
The Trustees of HighMark Funds receive quarterly retainer fees and fees
and expenses for each meeting of the Board of Trustees attended. No employee,
officer or stockholder of SEI Investments Mutual Funds Services and/or SEI
Investments Distribution Co. receives any compensation directly from HighMark
Funds for serving as a Trustee and/or officer. SEI Investments Mutual Funds
Services and/or SEI Investments Distribution Co. receive administration, fund
accounting servicing and distribution fees from each of the Funds. See "Manager
and Administrator" and "Distributor" below. Messrs. Nagle, Robins, Cipperman,
DellaCroce, O'Donnell and Foggo, and Ms. Orlow, Ms. Striegel, Ms. Gavalis and
Ms. Heilig are employees and officers of SEI Investments Company. While SEI
Investments Mutual Funds Services is a distinct legal entity from SEI
Investments Distribution Co., SEI Investments Mutual Funds Services 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 Investments Mutual Funds Services are both controlled
by the same ultimate parent company, SEI Investments Company.
During the fiscal year ended July 31, 1998, fees paid to the
disinterested Trustees for their services as Trustees aggregated $102,000. For
the disinterested Trustees, the
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<PAGE> 59
following table sets forth information concerning fees paid and retirement
benefits accrued during the fiscal year ended July 31, 1998:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Annual Total Compensation
Trustee Compensation Retirement Benefits Upon from Fund
from Group Benefits Accrued Retirement Complex Paid to
as Trustees
Part of Fund
Expenses
<S> <C> <C> <C> <C>
Thomas L. Braje $17,000 None None $17,000
David A. Goldfarb $17,000 None None $17,000
William R. Howell $17,000 None None $17,000
Joseph C. Jaeger $17,000 None None $17,000
Frederick J. Long $17,000 None None $17,000
Paul L. Smith $17,000 None None $17,000
Michael L. Noel* $17,000 None None $17,000
Robert M. Whitler* $17,000 None None $17,000
</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 advisory and management services are provided to each of the
Funds by HighMark Capital Management, Inc. (the "Advisor"), (formerly Pacific
Alliance Capital Management, a division of Union Bank of California), pursuant
to an investment advisory agreement between the Advisor and HighMark Funds dated
as of September 1, 1998 (the "Investment Advisory Agreement"). Union Bank of
California serves as custodian for each of the Funds. See "Transfer Agent,
Custodian and Fund Accounting Services" below. Union Bank of California also
serves as sub-administrator to each of the Funds pursuant to an agreement with
SEI Investments Mutual Funds Services. 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 Funds' 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
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<PAGE> 60
Investment Advisory Agreement is terminable as to a particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding Shares of that Fund, or by the Advisor. The
Investment Advisory Agreement terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Advisor will not be
liable for any error of judgment or mistake of law or for any loss suffered by
HighMark Funds 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 September 1, 1998, the investment management unit at Union Bank of
California, N.A., Pacific Alliance Capital Management was reorganized into a
subsidiary of UnionBanCal Corporation. The new entity, HighMark Capital
Management, Inc., is a California corporation registered under the 1940 Act.
On April 1, 1996, the Bank of California, N.A., HighMark Funds'
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 The Bank of Tokyo - Mitsubishi, Ltd.
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, 1998, Union Bank of California received the following
investment advisory fees: $2,265,301 from the Growth Fund; $2,825,963 from the
Income Equity Fund; $2,602,642 from the Balanced Fund; $3,952,110 from the Value
Momentum Fund; $680,108 from the Blue Chip Growth Fund; $577,471 from the
Emerging Growth Fund; $629,025 from the International Equity Fund; $593,291 from
the Bond Fund; $863,851 from the Intermediate-Term Bond Fund; $402,773 from the
Government Securities Fund; $176,340 from the Convertible Securities Fund;
$87,732 from the California Intermediate Tax-Free Bond Fund (an additional
$245,284 in fees were voluntarily reduced); $6,250,527 from the Diversified
Money Market Fund; $906,618 from the U.S. Government Money Market Fund;
$2,383,235 from the 100% U.S. Treasury Money Market Fund (an additional $476,647
in fees were voluntarily reduced); and $462,600 from the California Tax-Free
Money Market Fund (an additional $925,201 in fees were voluntarily reduced).
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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).
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
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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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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).
THE SUB-ADVISORS
The Advisor and Bank of Tokyo-Mitsubishi Trust Company ("BTMT") have
entered into a sub-advisory agreement which relates to the Emerging Growth and
Convertible Securities Funds. Prior to July 28, 1998, BTMT also served as the
Sub-Advisor to the Blue Chip Growth Fund and Government Securities Fund. The
Advisor and AXA Asset Management Partenaires ("AXA") have entered into a
sub-advisory agreement which relates to the International Equity Fund. Prior to
January 1, 1998, Tokyo-Mitsubishi Asset Management (U.K.), Ltd. ("TMAM") served
as the International Equity Fund's Sub-Advisor. The Advisor and Brandes
Investment Partners LP ("Brandes") have entered into a sub-advisory agreement
which relates to the Small Cap Value Fund (BTMT, together with AXA and Brandes,
are hereafter collectively, the "Sub-Advisors").
Under its sub-advisory agreement, BTMT is entitled to a fee which is
calculated daily and paid monthly at an annual rate of .30% of the average
daily net assets of the Convertible Securities Fund and .50% of the average
daily net assets of the Emerging Growth Fund. Such fee is paid by the Advisor,
and BTMT receives no fees directly from a Fund. For the fiscal year ended July
31, 1998, BTMT received sub-advisory fees of $336,872 with respect to the Blue
Chip Growth Fund (for the period August 1, 1997 to July 27, 1998); $36,920 with
respect to the Emerging Growth Fund; $159,228 with respect to the Government
Securities Fund (for the period August 1, 1997 to December 31, 1997); and
$88,170 with respect to the Convertible Securities Fund. For the period ended
July 31, 1997, BTMT 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, BTMT, or its predecessor, Bank of Tokyo Trust Company
received sub-advisory fees of: $218,366 and $144,472, respectively, with
respect to the Blue Chip Growth Fund; $267,497 and $159,198, respectively, with
respect to the Emerging Growth Fund; $97,150 and $74,358, respectively, with
respect to the Government Securities Fund; and $58,100 and $37,745,
respectively, with respect to the Convertible Securities Fund.
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BTMT operates as a subsidiary of The Bank of Tokyo-Mitsubishi, Ltd.
BTMT was established in 1955 and has been providing asset management services
since 1965.
Under its sub-advisory agreement, AXA is entitled to a fee which is
calculated daily and paid monthly at an annual rate of 0.50% of the average
daily net assets of the International Equity Fund. Such a fee is paid by the
Advisor, and AXA receives no fees directly from the International Equity Fund.
For the period from January 1, 1998 to July 31, 1998, AXA received sub-advisory
fees of $192,406. For the period from August 1, 1997 to December 31, 1997, TMAM
received sub-advisory fees of $59,319. For the period ended July 31, 1997 and
the fiscal year ended January 31, 1997, TMAM received sub-advisory fees of
$72,131 and $145,865, respectively, with respect to the International Equity
Fund.
AXA operates as a subsidiary of the AXA Group. AXA was established in
1994.
Under its sub-advisory agreement, Brandes is entitled to a fee which is
calculated and paid monthly at the annual rate of .50% of the average of the
market value of the assets of the Small Cap Value Fund allocated to Brandes.
Such fee is paid by the Advisor, and Brandes receives no fees directly from the
Small Cap Value Fund.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Advisor determines,
subject to the general supervision of the Board of Trustees of HighMark Funds
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, the International Equity Fund and the Small Cap
Value 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 Funds may not
necessarily pay the lowest spread or commission available on each transaction,
for reasons discussed below.
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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 Funds. 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 the Advisor by
HighMark Funds. Such information may be useful to the Advisor or the
Sub-Advisors in serving both HighMark Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Advisor in carrying out its obligations to HighMark Funds.
Upon adoption by the Board of Trustees of certain procedures pursuant
to Rule 17e-1 under the 1940 Act, HighMark Funds may execute portfolio
transactions involving the payment of a brokerage fee through the Advisor, SEI
Investments Distribution Co., and their affiliates in accordance with such
procedures. HighMark Funds 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 Funds are made
independently from those for the other Funds or any other investment company or
account managed by the Advisor or the Sub-Advisors. However, any such other
investment company or account may invest in the same securities as HighMark
Funds. 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 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 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
Funds, 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 Funds is a customer of the Advisor, the Sub-Advisors, their parent or
its subsidiaries or affiliates and, in dealing with its commercial customers,
the Advisor and the Sub-Advisors, their parent, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such customers
are held by HighMark Funds.
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During the fiscal year ended July 31, 1998, the following Funds paid
the following aggregate brokerage commissions: Balanced Fund: $205,232; Blue
Chip Growth Fund: $351,904; Emerging Growth Fund: $447,405; Growth Fund:
$465,576; Income Equity Fund: $638,230; Value Momentum Fund: $248,933;
Convertible Securities Fund: $8,338; and International Equity Fund: $389,285. No
brokerage was directed for any of the Funds. The following brokerage commissions
were paid in the period ended July 31, 1997: Balanced Fund: $64,473; Blue Chip
Growth Fund: $80,454; Emerging Growth Fund: $170,553; Growth Fund: $334,472;
Income Equity Fund: $97,957; Value Momentum Fund: $118,620; Convertible
Securities Fund: $990; and International Equity Fund: $58,381. The following
brokerage commissions were paid in the fiscal year ended January 31, 1997:
$5,607 by the Convertible Securities Fund, $122,239 by the Value Momentum Fund,
$133,907 by the Blue Chip Growth Fund, $159,120 by the Balanced Fund, $206,286
by the Emerging Growth Fund and $107,379 by the International Equity Fund. The
following brokerage commissions were paid in the fiscal year ended July 31,
1996: $104,127 by the Growth Fund and $318,261 by the Income Equity Fund.
GLASS-STEAGALL ACT
In 1971, the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a mutual fund for
the collective investment of managing agency accounts. Subsequently, the Board
of Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
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.
The Advisor and the Sub-Advisors believe that they 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 Funds. 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 Funds would review HighMark Funds'
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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, the Advisor, its
affiliates, and its correspondent banks in connection with Customer purchases of
Shares of HighMark Funds, 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 Funds' method of operations would affect
its net asset value per Share or result in financial losses to any Customer.
ADMINISTRATOR AND SUB-ADMINISTRATOR
SEI Investments Mutual Funds Services (the "Administrator") serves as
administrator to each of the Funds pursuant to the administration agreement
dated as of February 15, 1997 between HighMark Funds and the Administrator (the
"Administration Agreement").
SEI Investments Mutual Funds Services is a Delaware business trust
whose sole beneficiary is SEI Investments Management Corporation. SEI
Investments 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 Institutional International Trust, SEI Institutional
Managed Trust, Boston 1784(R) Funds, The Advisors' Inner Circle Fund, The Pillar
Funds, CUFund, STI Classic Funds, First American Funds, Inc., First American
Investment Funds, Inc., The Arbor Fund, Morgan Grenfell Investment Trust, The
PBHG Funds, Inc., The Achievement Funds Trust, Bishop Street Funds, CrestFunds,
Inc., STI Classic Variable Trust, Monitor Funds, TIP Funds, ARK Funds, SEI Asset
Allocation Trust, SEI Institutional Investments Trust, TIP Institutional Funds,
ARMADA Funds, The Expedition Funds and Oak Associates Funds.
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, 1998 for its services as
administrator and expenses assumed pursuant to the Administration Agreement, the
Administrator received the following fees: $669,261 from the Growth Fund (an
additional $85,839 in fees were voluntarily
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reduced); $847,789 from the Income Equity Fund (an additional $94,199 in fees
were voluntarily reduced); $767,123 from the Balanced Fund (an additional
$100,424 in fees were voluntarily reduced); $1,185,633 from the Value Momentum
Fund (an additional $131,737 in fees were voluntarily reduced); $204,032 from
the Blue Chip Growth Fund (an additional $22,670 in fees were voluntarily
reduced); $129,931 from the Emerging Growth Fund (an additional $14,437 in fees
were voluntarily reduced); $119,187 from the International Equity Fund (an
additional $13,243 in fees were voluntarily reduced); $213,585 from the Bond
Fund (an additional $23,732 in fees were voluntarily reduced); $310,986 from the
Intermediate-Term Bond Fund (an additional $34,554 in fees were voluntarily
reduced); $144,998 from the Government Securities Fund (an additional $16,111 in
fees were voluntarily reduced); $52,902 from the Convertible Securities Fund (an
additional $5,878 in fees were voluntarily reduced); $117,410 from the
California Intermediate Tax-Free Bond Fund (an additional $15,796 in fees were
voluntarily reduced); $3,750,316 from the Diversified Money Market Fund (an
additional $416,702 in fees were voluntarily reduced); $543,971 from the U.S.
Government Money Market Fund (an additional $60,441 in fees were voluntarily
reduced); $1,715,929 from the 100% U.S. Treasury Money Market Fund (an
additional $190,659 in fees were voluntarily reduced); and $832,681 from the
California Tax-Free Money Market Fund (an additional $92,520 in fees were
voluntarily reduced).
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 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).
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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
Funds' administrator. For its services as administrator and expenses assumed
pursuant to the administration agreement between BISYS Fund Services and
HighMark Funds, 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.
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 Funds 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 Funds 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
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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 Funds 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 Funds 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 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 Funds 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 the 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
Funds (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
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such orders with HighMark Funds 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 Funds on behalf of
the Shareholders; and (xi) providing such other similar services as HighMark
Funds may reasonably request to the extent that the service provider is
permitted to do so under applicable laws or regulations.
EXPENSES
HighMark Funds' 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 HighMark Capital
Management, Inc., Union Bank of California, SEI Investments Mutual Funds
Services 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 Funds, inside auditing and legal fees and
expenses, fees charged by rating agencies in having the Fund's Shares rated,
advisory and administration fees, fees and reasonable out-of-pocket expenses of
the custodian and transfer agent, expenses incurred for pricing securities owned
by the Fund, costs of maintenance of corporate existence, typesetting and
printing prospectuses for regulatory purposes and for distribution to current
Shareholders, costs and expenses of Shareholders' and Trustees' reports and
meetings and any extraordinary expenses.
DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned
subsidiary of SEI, serves as distributor to the Funds pursuant to a distribution
agreement dated February 15, 1997 between HighMark Funds and the Distributor for
the Fiduciary Class and Class A Shares, and pursuant to a distribution agreement
dated June 18, 1997 between HighMark Funds 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 Funds' Board of Trustees or by the vote of a majority
of the outstanding Shares of HighMark Funds, and (ii) by the vote of a majority
of the Trustees of HighMark Funds 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 Funds' Board of
Trustees, by vote of a majority of the outstanding voting securities of HighMark
Funds or by the Distributor. The Distribution Agreements terminate in the event
of their assignment, as defined in the 1940 Act.
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The Distribution Plans. The operation of the Distribution Plans, the
0.25% fee payable under HighMark Funds' Distribution Plans to which the Class A
Shares of the 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, 1998, the Distributor received in respect of the sale of Class A Shares
distribution fees of: $26,261 from the Growth Fund; $46,119 from the Income
Equity Fund; $24,891 from the Balanced Fund; $72,706 from the Value Momentum
Fund; $2,480,819 from the Diversified Money Market Fund; $171,678 from the U.S.
Government Money Market Fund; $1,720,731 from the 100% U.S. Treasury Money
Market Fund; and $651,837 from the California Tax-Free Money Market Fund. For
the fiscal year ended July 31, 1998, the Distributor received in respect of the
sale of Class B Shares distribution fees of: $1 from the U.S. Government Money
Market Fund; $3,364 from the Income Equity Fund; $10,778 from the Value Momentum
Fund; $3,192 from the Growth Fund; and $1,282 from the Balanced 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 Funds' 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 Funds' Board of Trustees will review on a quarterly and
annual basis written reports of the amounts received and expended under the
Distribution Plans (including amounts expended by the Distributor to
Participating Organizations pursuant to the Servicing Agreements entered into
under the Distribution Plans) indicating the purposes for which such
expenditures were made.
Each Distribution Plan provides that it will continue in effect with
respect to each Fund for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a majority of the
Independent Trustees and (ii) by the vote of the entire Board of Trustees, cast
in person at a meeting called for such purpose. For so long as each of the
Distribution Plans remains in effect, the selection and nomination of those
trustees who are not interested persons of HighMark Funds (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 the Funds pursuant to a transfer agency and shareholder service agreement
with HighMark Funds 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
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the history of purchases, redemptions, dividend distributions, and similar
transactions in a Shareholders's account.
Under the Transfer Agency Agreement, HighMark Funds 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 totaling $15.00 per account, as well as
out-of-pocket expenses as defined in the Transfer Agency Agreement. HighMark
Funds 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 the Funds
pursuant to a custodian agreement with HighMark Funds 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 Funds 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 Funds for its
reasonable out-of-pocket expenses incurred in the performance of its duties
under the Custodian Agreement. Global custody fees shall be determined on a
transaction basis. Union Bank of California may periodically voluntarily reduce
all or a portion of its custodian fee with respect to a Fund to increase the
Fund's net income available for distribution as dividends.
AUDITORS
The financial statements of HighMark Funds for the period ended July
31, 1998, 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
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Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, are counsel to HighMark Funds and will pass upon the
legality of the Shares offered hereby.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
HighMark Funds is a Massachusetts business trust. HighMark Funds'
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
Funds' Declaration of Trust, as amended, further authorizes the Board of
Trustees to establish one or more series of Shares of HighMark Funds, 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 Funds. HighMark Funds presently consists of seventeen 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 Small Cap Value Fund,
the Bond Fund, the Intermediate-Term Bond Fund, the Government Securities Fund,
the Convertible Securities Fund, the California Intermediate Tax-Free Bond Fund,
the Diversified Money Market Fund, the U.S. Government Money Market Fund, the
100% U.S. Treasury Money Market Fund, and the California Tax-Free Money Market
Fund. As described in the Prospectuses, selected Funds have been divided into
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 Funds' Shares will be fully paid
and non-assessable. In the event of a liquidation or dissolution of HighMark
Funds, 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 Funds, 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 Funds upon the issuance
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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 Funds not readily identified as belonging to a particular Fund that are
allocated to that Fund by HighMark Funds' 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 Funds 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 Funds 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 Funds shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
Shares of each Fund affected by the matter. For purposes of determining whether
the approval of a majority of the outstanding Shares of a Fund will be required
in connection with a matter, a Fund will be deemed to be affected by a matter
unless it is clear that the interests of each Fund in the matter are identical,
or that the matter does not affect any interest of the Fund.
Under Rule 18f-2, the approval of an investment advisory agreement or
any change in fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding Shares of
such Fund. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
Shareholders of HighMark Funds 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 Funds' Declaration of Trust,
as amended, provides that Shareholders shall not be subject to any personal
liability for the obligations of HighMark Funds, and that
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every written agreement, obligation, instrument, or undertaking made by HighMark
Funds 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 Funds shall, upon
request, assume the defense of any claim made against any Shareholder for any
act or obligation of HighMark Funds, 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 Funds itself
would be unable to meet its obligations.
The Declaration of Trust, as amended, states further that no Trustee,
officer, or agent of HighMark Funds shall be personally liable in connection
with the administration or preservation of the assets of the trust or the
conduct of HighMark Funds' 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 Funds shall look solely to the
assets of the trust for payment.
THE REORGANIZATION OF THE IRA FUND AND HIGHMARK FUNDS
As of June 23, 1988, pursuant to an Agreement and Plan of
Reorganization between the IRA Fund, HighMark Funds, 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 Funds' 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 Funds' Money Market Funds in exchange for Shares of such Money
Market Fund or Funds. Prior to June 23, 1988, the aggregate total return and
average annual total return of the Bond Fund and Income Equity Fund reflect the
aggregate total return and average annual total return of the IRA Fund Bond
Portfolio and the IRA Fund Income Equity Portfolio, respectively. The IRA Fund
Bond Portfolio and the IRA Fund Income Equity Portfolio both received investment
advice from the same division of the Bank of California subsequently known as
Pacific Alliance Capital Management and eventually reorganized as HighMark
Capital Management, Inc. 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.
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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 the 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 the
Funds and the Advisor. Various mutual fund or market indices may also serve as a
basis for comparison of the performance of the 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 Funds' 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 the 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 Funds; (5) descriptions of
investment strategies for one or more of the Funds; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, insured bank products, annuities, qualified retirement plans and
individual stocks and bonds), which may or may not include the Funds; (7)
comparisons of investment products (including the Funds) with relevant market or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) testimonials
describing the experience of persons that have invested in one or more of the
Funds. The Funds may also include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results in such communications.
Such performance examples will be based on an express set of assumptions and are
not indicative of the performance of any of the Funds. In addition, the
California Tax- Free Fund may include charts comparing various tax-free yields
versus taxable yield equivalents at different income levels.
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Based on the seven-day period ended July 31, 1998 (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 Class A Shares
and Fiduciary Shares was 4.91% and 5.15%, respectively, and the effective yield
of the Fund's Class A Shares and Fiduciary Shares was 5.03% and 5.29%,
respectively; the yield of the U.S. Government Money Market Fund's Class A
Shares, Class B Shares and Fiduciary Shares was 4.76%, 4.32% and 5.01%,
respectively, and the effective yield of the Fund's Class A Shares, Class B
Shares and Fiduciary Shares was 4.88%, 4.42% and 5.14%, respectively; the yield
of the 100% U.S. Treasury Money Market Fund's Class A Shares and Fiduciary
Shares was 4.57% and 4.82% respectively, and the effective yield of the Fund's
Class A Shares and Fiduciary Shares was 4.67% and 4.93% respectively; and the
yield of the California Tax-Free Money Market Fund's Class A Shares and
Fiduciary Shares was 2.71% and 2.96% respectively, and the effective yield of
the Fund's Class A Shares and Fiduciary Shares was 2.74% and 3.00%,
respectively. The yield of each Fund's Class A 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 Class A Shares, Class B 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, 1998, the yield of the
Diversified Money Market Fund's Class A Shares and Fiduciary Shares was 4.88%
and 5.12% respectively, and the effective yield of the Fund's Class A Shares and
Fiduciary Shares was 5.00% and 5.26%, respectively; the yield of the U.S.
Government Money Market Fund's Class A Shares, Class B Shares and Fiduciary
Shares was 4.76%, 4.32% and 5.00%, respectively, and the effective yield of the
Fund's Class A Shares, Class B Shares and Fiduciary Shares was 4.87%, 4.42% and
5.13%, respectively; the yield of the 100% U.S. Treasury Money Market Fund's
Class A Shares and Fiduciary Shares was 4.55% and 4.80%, respectively, and the
effective yield of the Fund's Class A Shares and Fiduciary Shares was 4.65% and
4.92%, respectively; and the yield of the California Tax-Free Money Market
Fund's Class A Shares and Fiduciary Shares was 2.49% and 2.73%, respectively,
and the effective yield of the Fund's Class A Shares and Fiduciary Shares was
2.51% and 2.77%, respectively. The yield of each Fund's Class A Shares, Class B
Shares and Fiduciary Shares, respectively, was computed by determining the
percentage net change, excluding capital changes, in the value of an investment
in one Share of the Class over the thirty-day period, and multiplying the net
change by 365/30 (or approximately twelve months). The effective yield of each
Fund's Class A Shares, Class B 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.
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Based on the seven-day period ended July 31, 1998, the tax-equivalent
yield of the California Tax-Free Money Market Fund's Class A Shares and
Fiduciary Shares was 4.49% and 4.90% respectively (using a federal income tax
rate of 39.6%), and 5.49% and 5.99% 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 Class A Shares and Fiduciary Shares
was 4.54% and 4.97%, respectively (using a federal income tax rate of 39.6%),
and 5.55% and 6.07%, 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, 1998, the tax-equivalent
yield of the California Tax-Free Money Market Fund's Class A Shares and
Fiduciary Shares was 4.12% and 4.52%, respectively (using a federal income tax
rate of 39.6%), and 5.04% and 5.53%, 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 Class A Shares and Fiduciary Shares
was 4.16% and 4.59%, respectively (using a federal income tax rate of 39.6%),
and 5.08% and 5.61%, 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 Class A 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 Class A 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, 1998, the one-year average annual total
return of the Diversified Money Market Fund's Class A and Fiduciary Shares was
5.01% and 5.27%, respectively; of the U.S. Government Money Market Fund's
Class A and Fiduciary Shares was 4.90% and 5.16%, respectively; of the 100%
U.S. Treasury Money Market Fund's Class A and Fiduciary Shares was 4.75% and
5.02%, respectively; and of the California Tax-Free Money Market Fund's Class A
and Fiduciary Shares was 2.89% and 3.14%, respectively.
For the period ended July 31, 1998, the five-year average annual total
return of the Diversified Money Market Fund's Class A and Fiduciary Shares was
4.54% and 4.78%, respectively; of the U.S. Government Money Market Fund's Class
A and Fiduciary Shares was 4.41% and 4.48%, respectively; of the 100% U.S.
Treasury Money Market Fund's Class A and Fiduciary Shares was 4.29% and 4.35%,
respectively; and of the California Tax-Free Money Market Fund's Class A and
Fiduciary Shares was 2.72% and 3.04%, respectively.
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For the period since commencement of operations of each class of
shares of the Funds through July 31, 1998, the average annual total return of
the Diversified Money Market Fund's Class A Shares (class inception on May 28,
1991) and Fiduciary Shares (commencement of operations on February 2, 1991) was
4.33% and 4.65%, respectively; of the U.S. Government Money Market Fund's Class
A Shares (class inception on December 1, 1990), Class B Shares (class inception
on February 2, 1998) and Fiduciary Shares (commencement of operations on August
10, 1987) was 5.35%, 5.35% (annualized) and 5.36%, respectively; of the 100%
U.S. Treasury Money Market Fund's Class A Shares (class inception on December
1, 1990) and Fiduciary Shares (commencement of operations on August 10, 1987)
was 5.26% and 5.29%, respectively; and of the California Tax-Free Money Market
Fund's Class A Shares (class inception on June 25, 1991) and Fiduciary Shares
(commencement of operations on June 10, 1991) was 2.66% and 2.98%, respectively.
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 Funds" 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 subsequently
known as Pacific Alliance Capital Management and then reorganized as HighMark
Capital Management, Inc, 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 Funds - 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.
The performance figures relating to the Class A Shares and Class B
Shares reflect the sales charge and distribution fees to which each Class is
subject. Because only Class A Shares and Class B 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 Class A Shares and Class B Shares will be lower than
that relating to the Funds' Fiduciary Shares.
With respect to Fiduciary Shares, for the one-year period ended July
31, 1998, average annual total returns were as follows: for the Income Equity --
10.79%, Value Momentum -- 9.22%, Growth -- 22.59%, Emerging Growth -- 3.37%,
Blue Chip Growth -- 8.67%, Balanced -- 7.31%, International Equity -- (0.82)%,
Convertible Securities -- 3.02%, Government Securities -- 7.08%,
Intermediate-Term Bond -- 6.37%, Bond -- 7.41% and California Intermediate
Tax-Free Bond Funds -- 4.75%.
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With respect to Class A Shares, for the one-year period ended July 31,
1998, average annual total returns (with maximum sales load) were as follows:
for the Income Equity -- 5.53%, Value Momentum -- 4.06%, Growth -- 16.76%,
Balanced -- 2.27%, Intermediate- Term Bond -- 3.17%, Bond -- 4.22% and
California Intermediate Tax-Free Bond Funds -- 1.51%. For the same period,
average annual total returns (without sales load) were as follows: for the
Income Equity -- 10.50%, Value Momentum -- 8.96%, Growth -- 22.26%, Balanced --
7.12%, Intermediate-Term Bond -- 6.38%, Bond -- 7.47%, California Intermediate
Tax-Free Bond Funds -- 4.66%.
With respect to Fiduciary Shares, for the five year period through July
31, 1998, average annual total returns were as follows: for the Income Equity --
17.54%, Value Momentum -- 19.73%, Balanced -- 13.75%, Intermediate-Term Bond --
5.52% and Bond Funds -- 5.70%.
With respect to Class A Shares, for the five year period through July
31, 1998, average annual total returns (with maximum sales load) were as
follows: for the Value Momentum -- 18.48%, Balanced -- 12.56% and
Intermediate-Term Bond Funds -- 4.87%. For the same period, average annual total
returns (without sales load) were as follows: for the Value Momentum -- 19.57%,
Balanced -- 13.59% and Intermediate-Term Bond -- 5.50%.
With respect to Fiduciary Shares, for the ten year period through July
31, 1998, average annual total returns were as follows: for the Income Equity --
15.12% and Bond Funds -- 8.17%.
With respect to Fiduciary Shares, for the period since commencement of
operations of each of the Funds through July 31, 1998, average annual total
returns were as follows: for the Income Equity -- 15.88% (commencement of
operations on February 9, 1984), Value Momentum -- 18.12% (commencement of
operations on February 1, 1991), Growth -- 21.76% (commencement of operations on
November 18, 1993), Emerging Growth -- 12.11% (commencement of operations on
February 1, 1994), Blue Chip Growth -- 17.92% (commencement of operations on
February 1, 1994), Balanced -- 13.21% (commencement of operations on February 1,
1991), International Equity -- 6.24% (commencement of operations on February 1,
1995), Convertible Securities -- 9.26% (commencement of operations on February
1, 1994), Government Securities -- 5.14% (commencement of operations on February
1, 1994), Intermediate-Term Bond -- 7.63% (commencement of operations on
February 1, 1991), Bond -- 9.34% (commencement of operations on February 15,
1984) and California Intermediate Tax-Free Bond Funds -- 4.84% (commencement of
operations on October 15, 1993).
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With respect to Class A Shares, for the period since commencement of
operations of each of the Funds through July 31, 1998, average annual total
returns (with maximum sales load) were as follows: for the Income Equity --
19.38% (class inception on June 20, 1994), Value Momentum -- 17.49% (class
inception on April 2, 1994), Growth -- 24.46% (class inception on June 20,
1994), Balanced -- 12.51% (class inception on November 13, 1992),
Intermediate-Term Bond -- 6.18% (class inception on February 3, 1992), Bond --
7.12% (class inception on June 20, 1994) and California Intermediate Tax-Free
Bond Funds -- 4.12% (class inception on October 15, 1993). For the same period,
average annual total returns (without sales load) were as follows: for the
Income Equity -- 20.73%, Value Momentum -- 18.34%, Growth -- 25.87%, Balanced --
13.42%, Intermediate-Term Bond -- 6.67%, Bond -- 7.91% and California
Intermediate Tax-Free Bond Funds -- 4.78%.
With respect to Class B Shares, for the period since commencement of
operations (class inception on February 2, 1998) of each of the Funds through
July 31, 1998, average annual total returns (annualized), with maximum sales
load, were as follows: for the Income Equity -- 8.10%, Value Momentum --
(1.06)%, Growth -- 23.71% and Balanced Funds -- (0.68)%. For the same period,
average annual total returns, without sales load, were as follows: for the
Income Equity -- 13.10%, Value Momentum -- 3.94%, Growth -- 28.71% and Balanced
Funds -- 11.32%.
-77-
<PAGE> 82
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, 1998, the yield for the Class
A, Class B and Fiduciary Shares of the Growth Fund was 0%, 0% and 0%,
respectively; for the Class A, Class B and Fiduciary Shares of the Income Equity
Fund was 1.00%, 0.41% and 1.34%, respectively; for the Class A, Class B and
Fiduciary Shares of the Balanced Fund was 2.25%, 1.75% and 2.61%, respectively;
for the Class A, Class B and Fiduciary Shares of the Value Momentum Fund was
0.89%, 0.18% and 1.19%, respectively; for the Fiduciary Shares of the Emerging
Growth Fund was 0.29%, respectively; for the Class A and Fiduciary Shares of the
Intermediate-Term Bond Fund was 5.30% and 5.47%, respectively; for the Class A
and Fiduciary Shares of the California Intermediate Tax-Free Bond Fund was 3.83%
and 3.95%, respectively; for the Class A and Fiduciary Shares of the Bond Fund
was 5.48% and 5.68%, respectively; for the Fiduciary Shares of the Blue Chip
Growth Fund was 0.14%; for the Fiduciary Shares of the International Equity Fund
was 0%; for the Fiduciary Shares of the Convertible Securities Fund was 2.89%;
and for the Government Securities Fund was 5.02%. The Fund's "yield" (referred
to as "standardized yield") for a given 30-day period for a class of shares is
calculated using the following formula set forth in rules adopted by the
Commission that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)(6) - 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.
-78-
<PAGE> 83
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.
All performance information presented is based on past performance and
does not predict future performance. No performance information is presented
for the Small Cap Value Fund because it had not commenced operations
as of July 31, 1998.
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
-79-
<PAGE> 84
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 Funds is not required to hold meetings of Shareholders for the
purpose of electing Trustees except that (i) HighMark Funds 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 Funds at a meeting
duly called for the purpose, which meeting shall be held upon the written
request of the holders of Shares representing not less than 10% of the
outstanding Shares of HighMark Funds. Upon written request by the holders of
Shares representing 1% of the outstanding Shares of HighMark Funds 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 Funds 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 Funds 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 Funds.
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 1998 Annual Report to Shareholders of HighMark Funds is
incorporated herein by reference. This Report includes audited financial
statements for the fiscal year ended July 31, 1998. 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
-80-
<PAGE> 85
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 18, 1998, HighMark Funds believes that the trustees and
officers of HighMark Funds, as a group, owned less than one percent of the
Shares of any Fund of HighMark Funds. As of November 18, 1998, HighMark Funds
believes that Union Bank of California was the shareholder of record of 97.95%
of the Fiduciary Shares of the Growth Fund, 84.03% of the Fiduciary Shares of
the Income Equity Fund, 78.98% of the Fiduciary Shares of the Balanced Fund,
97.29% of the Fiduciary Shares of the Bond Fund, 99.69% of the Fiduciary Shares
of the Intermediate-Term Bond Fund, 94.99% of the Fiduciary Shares of the
California Intermediate Tax-Free Bond Fund, 8.59% of the Fiduciary Shares of the
Government Securities Fund, 17.61% of the Fiduciary Shares of the Convertible
Securities Fund, 84.76% of the Fiduciary Shares of the Value Momentum Fund,
39.68% of the Fiduciary Shares of the Blue Chip Growth Fund, 51.38% of the
Fiduciary Shares of the Emerging Growth Fund, 97.47% of the Fiduciary Shares of
the U.S. Government Money Market Fund, 97.16% of the Fiduciary Shares of the
Diversified Money Market Fund, 95.20% of the Fiduciary Shares of the 100% U.S.
Treasury Money Market Fund and 99.84% of the Fiduciary Shares of the California
Tax-Free Money Market Fund. As of November 18, 1998, HighMark Funds believes
that Bank of Tokyo Trust Company was the shareholder of record of 87.07% of the
Fiduciary Shares of the Government Securities Fund, 82.37% of the Fiduciary
Shares of the Convertible Securities Fund, 60.31% of the Fiduciary Shares of the
Blue Chip Growth Fund, and 48.26% of the Fiduciary Shares of the Emerging Growth
Fund.
As of November 18, 1998, HighMark Funds believes that Union Bank of
California had voting power with respect to 35.28% of the Growth Fund Fiduciary
Shares, 11.91% of the Income Equity Fund Fiduciary Shares, 11.85% of the
Balanced Fund Fiduciary Shares, 6.77% of the Bond Fund Fiduciary Shares, 19.13%
of the Value Momentum Fund Fiduciary Shares, and 57.14% of the International
Equity Fund Fiduciary Shares.
-81-
<PAGE> 86
The table below indicates each additional person known by HighMark
Funds to own of record or beneficially 5% or more of the Shares of the following
Funds of HighMark Funds as of November 18, 1998.
-82-
<PAGE> 87
5% OR MORE OWNERS
INCOME EQUITY FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
The Kendall Jackson Fndtn. Inc. 5.48%
Wendy Petersen
421 Aviation Blvd.
Santa Rosa, CA 95403-1069
</TABLE>
INCOME EQUITY FUND - CLASS B SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Sergey Tikhomirov 6.03%
c/o Gary Dunn CPA
1690 West Shaw, Suite 210
Fresno, CA 93711-3516
</TABLE>
INCOME EQUITY FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Lane & Company 50.36%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
Union Bank 33.67%
Lane & Co. Reinvest
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Union Bank of California 401(k) Plan 11.91%
350 California Street
San Francisco, CA 94104
</TABLE>
VALUE MOMENTUM FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Mellon Bank NA Trustee for Dept. 10.41%
of Personnel Admin. of State of California
Attn: Wally Adebayo
One Cabot Road, Mail Zone 028-003I
Medford, MA 02155-5141
Lane & Company 84.76%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Union Bank of California Retirement Plan 9.79%
350 California Street
San Francisco, CA 94104
Union Bank of California 401(k) Plan 9.34%
350 California Street
San Francisco, CA 94104
</TABLE>
GROWTH FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
The Kendall Jackson Fndtn. Inc. 6.16%
Wendy Petersen
421 Aviation Blvd.
Santa Rosa, CA 95403-1069
</TABLE>
GROWTH FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Lane & Company 97.95%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Union Bank of California Retirement Plan 17.78%
350 California Street
San Francisco, CA 94104
Union Bank of California 401(k) Plan 17.50%
350 California Street
San Francisco, CA 94104
</TABLE>
BALANCED FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Ty Yeh 7.50%
Yeh Family Trust
U/A 9/11/91
2048 Studebaker Rd.
Long Beach, CA 90815-3539
</TABLE>
BALANCED FUND - CLASS B SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Union Bank of California Cust. 5.73%
IRA of Joji Yoshida
Rollover
5218 Carmen St.
Torrance, CA 90503-6318
</TABLE>
<PAGE> 88
BALANCED FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
American Express Trust Company 9.58%
As Agent for NBC Savings and Retirement Plan
Attn: Nancy Jendro Trust Operations
P.O. Box 534
Minneapolis, MN 55440-0534
PFTC. Trustee Nissan Empl. Sav. Pln. 5.20%
Putnam Investments DCPA
Nissan Motor Corporation
Location 31
P.O. Box 9740
Providence, RI 02940-9740
Lane & Company 78.98%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Nissan Motor Corp USA 5.20%
P.O. Box 191
Gardena, Ca 90248-0191
Nummi Savings Plan 9.32%
45500 Fremont Blvd.
Fremont, CA 94538
NEC America, Inc 9.58%
8 Old Sod Farm Road
Melville, NY 11747
Union Bank of California 401(k) Plan 11.85%
350 California Street
San Francisco, CA 94104
</TABLE>
SMALL CAP VALUE FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Elizabeth Pearce 7.48%
135 Driftwood
Marina Del Ray, CA 90292-5734
Charles J. Bommarito 11.84%
1101 Chardonnay Way
Modesto, CA 95351-5113
Union Bank TTBE. 16.32%
IRA of Clark R. Gates
Rollover IRA
2090 Pacific Ave., #404
San Francisco, CA 94109-2248
Small Business Plan P.S. 41.11%
Union Bank of California TTBE.
Thomas J. Gram, Prof. Corp. P/Adm.
5800 Shellmound St., Suite 210
Emeryville, CA 94608-1931
Union Bank TTBE. 8.22%
IRA of Janice Anderson Gram
Rollover IRA
8 Venado Drive
Tiburon, CA 94920-1626
</TABLE>
SMALL CAP VALUE FUND - CLASS B SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Hayakawa Trust 31.43%
William N. Hayakawa
U/A 03/09/1995
4805 Terra Granada Dr., #1B
Walnut Creek, CA 94595-4088
David Benvenuti MD TTBE. 63.91%
The Ret. Tr. David Benvenuti MD Inc.
106 Linda Isle
Newport Beach, CA 92660-7210
</TABLE>
SMALL CAP VALUE FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Lane & Company 99.27%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Union Bank of California Retirement Plan 99.02%
350 California Street
San Francisco, CA 94104
</TABLE>
EMERGING GROWTH FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
BOTT Pension 48.26%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas, Fl. 10
New York, NY 10020-1104
Lane & Company 51.38%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<PAGE> 89
BLUE CHIP GROWTH FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
BOTT Pension 60.31%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas, Fl. 10
New York, NY 10020-1104
Lane & Company 39.68%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
TDK USA Pension Plan 6.43%
12 Harbor Park Drive
Port Washington, NY 11050
BTM U.S. Agency Retirement Plan 15.91%
1251 Avenue of the Americas
New York, NY 11020
</TABLE>
CONVERTIBLE SECURITIES FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
BOTT Pension 82.37%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas, Fl. 10
New York, NY 10020-1104
Lane & Company 17.61%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
BTM U.S. Agency Retirement Plan 33.16%
1251 Avenue of the Americas
New York, NY 11020
TDK USA Pension Plan 5.61%
12 Harbor Park Drive
Port Washington, NY 11050
</TABLE>
GOVERNMENT SECURITIES FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
BOTT Pension 87.07%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas, Fl. 10
New York, NY 10020-1104
Lane & Company 8.59%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
BTM U.S. Agency Retirement Plan 14.21%
1251 Avenue of the Americas
New York, NY 10020
Marubeni America Retirement Plan 7.95%
450 Lexington Avenue
New York, NY 10017
Tokio Marine Retirement Plan 7.04%
101 Park Avenue
New York, NY 10178
TDK USA Pension Plan 6.89%
12 Harbor Park Drive
Port Washington, NY 11050
</TABLE>
BOND FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Northwestern Trst. & Advisory Co. TTBE 6.98%
1201 3rd Ave., Suite 2010
Seattle, WA 98101-3026
Exchange Bank TTBE 6.00%
FBO Helen Kelly Trust
P.O. Box 208
Santa Rosa, CA 95402-0208
Alice A. Swenning Trust 6.51%
The Swenning Fam. TTBE
U/A 9/23/91
1447 21st Ave.
Kingsburg, CA 93631-2027
P&H Metal Products Corp. 9.80%
George Paikos David Long TTBE
U/A 07/01/93
27795 Avenue Hopkins
Valencia, CA 91355-1223
</TABLE>
BOND FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Lane & Company 59.84%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
Union Bank 37.45%
Lane & Co. Reinvest
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Union Bank of California 401(k) Plan 6.77%
350 California Street
San Francisco, CA 94104
Nummi Hourly Retirement Plan 5.18%
45500 Fremont Blvd.
Fremont, CA 94538
</TABLE>
INTERMEDIATE-TERM BOND FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
National Financial Services Corp. 91.76%
for Exclusive Benefit of Our Cust.
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
<PAGE> 90
INTERMEDIATE-TERM BOND FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Lane & Company 99.69%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Henry & Marcy Tenenblatt Trust 12.74%
Henry Tenenblatt
U/A 08/03/87
16323 Shadow Mountain
Pacific Palisades, CA 90272-2353
Bill S. Tsutagawa 6.28%
Yuriko Tsutagawa
2242 Valley Rd.
Oceanside, CA 92056-3107
Peter Johnson 21.10%
10350 N. Torrey Pines Rd., #100
La Jolla, CA 92037-1018
Larry Strasbaugh 6.16%
2555 W. Poza Road
Santa Margarita, CA 93453-9621
The Featherston Trust 6.11%
Lawrence H. Featherston
U/A 10/19/95
1300 S. Montezuma Way
West Covina, CA 91791-3738
Aaron Belokamen 6.62%
Lilian Belokamen
11610 Bellagio Rd.
Los Angeles, CA 90049-2113
</TABLE>
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Lane & Company 94.99%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
INTERNATIONAL EQUITY FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Nummi Hourly Retirement Plan 5.72%
45500 Fremont Blvd
Fremont, CA 94538
Union Bank of California Retirement Plan 57.14%
350 California Street
San Francisco, CA 94104
</TABLE>
DIVERSIFIED MONEY MARKET FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
National Financial Services Corp 99.38%
For the Benefit of our Customers
Church Street Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
DIVERSIFIED MONEY MARKET FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Union Bank 78.98%
Lane & Co Cash
Attn: Fund Accounting
PO Box 85602
San Diego, CA 92186-5602
Union Bank 18.18%
Lane & Co Reinvest
Attn: Kathleen Heilman
PO Box 120109
San Diego, CA 92112-0109
</TABLE>
<PAGE> 91
U.S GOVERNMENT MONEY MARKET FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
National Financial Services Corp 98.48%
For the Benefit of our Customers
Church Street Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
U.S GOVERNMENT MONEY MARKET FUND - CLASS B SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Zenadia F. Loreto 43.01%
18225 Camino Bello #2
Rowland Heights, CA 91748-2642
Kendall Cho Cust 18.88%
Andrew Cho UTMA CA
12110 Rivera
Tustin, CA 92782-1207
Kendall Cho Cust 18.88%
Addison Cho UTMA CA
12110 Rivera
Tustin, CA 92782-1207
Kendall Cho Cust 18.88%
Austin Cho UTMA CA
12110 Rivera
Tustin, CA 92782-1207
</TABLE>
U.S GOVERNMENT MONEY MARKET FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Union Bank 97.47%
Lane & Co Cash
Attn: Fund Accounting
PO Box 85602
San Diego, CA 92186-5602
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
RCM Capital Management 5.28%
7200 Wisconsin Avenue # 1001
Bethesda, MD 20814-4813
City of Hope National Medical Center 8.26%
1500 East Duarte Road
Duarte, CA 91010-0269
</TABLE>
100% U.S TREASURY MONEY MARKET FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
National Financial Services Corp 99.68%
For the Benefit of our Customers
Church Street Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
100% U.S TREASURY MONEY MARKET FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Union Bank 95.20%
Lane & Co Cash
Attn: Fund Accounting
PO Box 85602
San Diego, CA 92186-5602
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
<S> <C>
Weber Metals, Inc. 5.84%
P.O. Box 318
Paramount, CA 90723-0318
</TABLE>
CALIFORNIA TAX-FREE MONEY MARKET FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
National Financial Services Corp 99.19%
For the Benefit of our Customers
Church Street Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
CALIFORNIA TAX-FREE MONEY MARKET FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
<S> <C>
Union Bank 99.84%
Lane & Co Cash
Attn: Fund Accounting
PO Box 85602
San Diego, CA 92186-5602
</TABLE>
<PAGE> 92
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by the Funds 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 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 Funds 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 five 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> 93
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five 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 An obligation rated AAA has the highest rating assigned by
S&P. The obligor's capacity to meet its financial commitment
on the obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated
obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very
strong.
A An obligation rated A is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such
obligations will likely have some quality and protective
characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
Description of the three highest long-term debt ratings by Duff:
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<PAGE> 94
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
AA- time 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.
Description of the three highest long-term debt ratings by Fitch IBCA (plus or
minus signs are used with a rating symbol to indicate the relative position of
the credit within the rating category):
AAA Obligations which have the highest rating assigned by Fitch
IBCA. Capacity for timely repayment principal and interest is
extremely strong relative to other obligors in the same
country.
AA Obligations for which capacity for timely repayment of
principal and interest is very strong relative to other
obligors in the same country. The risk attached to these
obligations differs only slightly from the country's highest
rated debt.
A Obligations for which capacity for timely repayment of
principal and interest is strong relative to other obligors in
the same country. However, adverse changes in business,
economic or financial conditions are more likely to affect the
capacity for timely repayment than for obligations in higher
rated categories.
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 ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- Leading market positions in well-established
industries.
- High rates of return on funds employed.
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<PAGE> 95
-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 ability 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 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 A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category,
certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
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<PAGE> 96
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):
D-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.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
D-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.
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Fitch IBCA's description of its three highest short-term debt ratings:
Fl Obligations assigned this rating have the highest capacity for
timely repayment under Fitch IBCA's national rating scale for
that country, relative to other obligations in the same
country. Where issues possess a particularly strong credit
feature, a "+" is added to the assigned rating.
F2 Obligations supported by a strong capacity for timely
repayment relative to other obligors in the same country.
However, the relative degree of risk is slightly higher than
for issues classified as 'Al' and capacity for timely
repayment may be susceptible to adverse changes in business,
economic, or financial conditions.
F3 Obligations supported by an adequate capacity for timely
repayment relative to other obligors in the same country. Such
capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in
higher categories.
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<PAGE> 97
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.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch(TM) Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.
TBW-1 The highest category; indicates a very high likelihood
that principal and interest will be paid on a timely
basis.
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 the obligation is more susceptible to adverse
developments (both internal and external) than those
with higher ratings, capacity to service principal and
interest in a timely fashion is considered adequate.
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<PAGE> 98
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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<PAGE> 99
FINANCIAL STATEMENTS
The Independent Auditors' Report for HighMark Funds for the fiscal year ended
July 31, 1998, audited Financial Statements for HighMark Funds for the fiscal
year ended July 31, 1998, and unaudited Financial Statements for HighMark Funds
for the period ended January 31, 1998 are all incorporated by reference to the
Annual and Semi-Annual Reports of HighMark Funds, 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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