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HIGHMARK FUNDS
Value Momentum Fund
P R O S P E C T U S
Class I Shares
October 1, 1999
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HIGHMARK VALUE MOMENTUM FUND
HighMark Funds is an open-end, diversified, registered investment company that
offers a convenient means of investing in one or more professionally managed
portfolios of securities. This Prospectus relates to HighMark Funds':
Value Momentum Fund
CLASS I SHARES
HighMark Funds' Class I Shares are offered to retirement and other benefit
plans sponsored by governmental entities with a minimum investment of
$70,000,000.
This Prospectus sets forth concisely the information about HighMark Funds and
the Fund that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated the same date as this Prospectus has been filed
with the Securities and Exchange Commission and is available without charge by
writing the Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania
19456, or by calling 1-800-433-6884. The SEC maintains a World Wide Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information. The Statement of
Additional Information is incorporated into this Prospectus by reference. This
Prospectus relates only to the Class I Shares of the Fund. Interested persons
who wish to obtain a prospectus for other Funds and classes of HighMark Funds
may contact the Distributor at the above address and telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HIGHMARK FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING UNION BANK OF CALIFORNIA, N.A., THE BANK OF
TOKYO-MITSUBISHI, LTD. OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS. HIGHMARK
FUNDS' SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN HIGHMARK FUNDS
INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
October 1, 1999
Class I Shares
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SUMMARY
HIGHMARK FUNDS is an open-end, diversified, registered investment company
providing a convenient way to invest in professionally managed portfolios of
securities. The following provides basic information about the Class I Shares of
the Value Momentum Fund. This summary is qualified in its entirety by reference
to the more detailed information provided elsewhere in the Prospectus and in the
Statement of Additional Information.
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES? THE FUND seeks long-term capital
growth with a secondary objective of income. (See "INVESTMENT OBJECTIVES.")
WHAT ARE THE FUND'S PERMITTED INVESTMENTS? The Fund primarily invests,
consistent with its investment objective, in equity securities including common
stocks and securities convertible into common stocks. The Fund may also invest
in a manner consistent with its investment objective and investment policies in
certain other instruments. (See "INVESTMENT POLICIES.")
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE FUND? The investment
policies of the Fund entail certain risks and considerations of which an
investor should be aware. Common stocks and other equity securities in which the
Fund invests are volatile and may fluctuate in value more than other types of
investments. (See "Risk Factors.")
ARE MY INVESTMENTS INSURED? HighMark Funds' Shares are not federally insured
by the FDIC or any other government agency. Any guarantee by the U.S.
Government, its agencies or any instrumentalities of the securities in which any
Fund invests guarantees only the payment of principal and interest on the
guaranteed security, and does not guarantee the total return or value of the
security or total return or value of Shares of that Fund.
WHO IS THE ADVISOR? HighMark Capital Management, Inc. serves as the Advisor to
HighMark Funds. (See "The Advisor.")
WHO IS THE ADMINISTRATOR? SEI Investments Mutual Funds Services serves as the
Administrator of HighMark Funds. (See "The Administrator.")
WHO IS THE CUSTODIAN? Union Bank of California, N.A. (the "Bank") serves as
the custodian of HighMark Funds' assets. (See "The Custodian.")
WHO IS THE DISTRIBUTOR? SEI Investments Distribution Co. acts as distributor
of HighMark Funds' Shares. (See "The Distributor.")
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Distributor on days on which the New York Stock Exchange is open for
business ("Business Days"). The minimum initial investment is generally
$70,000,000. A purchase order will be effective if the Distributor receives an
order prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time) and the
Custodian receives Federal Funds before the close of business on the next
Business Day. Purchase orders for Shares will be executed at a per Share price
equal to the net asset value next determined after the purchase order is
effective. Redemption orders must be placed prior to 1:00 p.m., Pacific time
(4:00 p.m., Eastern time) on any Business Day for the order to be effective that
day. (See "PURCHASE AND REDEMPTION OF SHARES.")
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HOW ARE DIVIDENDS PAID? Substantially all of the net investment income
(exclusive of capital gains) of the Fund is distributed in the form of monthly
dividends to Shareholders of record. Any capital gain is distributed at least
annually. Distributions are paid in additional Shares unless the Shareholder
elects to take the payment in cash. ( See "DIVIDENDS.")
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 2
Fee Table................................................... 5
Financial Highlights........................................ 6
Fund Description............................................ 7
Investment Objectives....................................... 7
Investment Policies......................................... 7
General..................................................... 7
Money Market Instruments.................................. 7
Illiquid and Restricted Securities........................ 8
Lending of Portfolio Securities........................... 8
Other Investments......................................... 8
Risk Factors.............................................. 9
Year 2000................................................. 10
Portfolio Turnover.......................................... 10
Purchase and Redemption of Shares........................... 10
Exchange Privileges......................................... 11
Dividends................................................... 12
Taxes....................................................... 12
Federal Taxation.......................................... 12
Service Arrangements........................................ 13
The Advisor............................................... 13
Administrator............................................. 14
The Transfer Agent........................................ 15
Shareholder Servicing Agreement........................... 15
Distributor............................................... 15
Banking Laws.............................................. 15
Custodian................................................. 15
General Information......................................... 16
Description of HighMark Funds & Its Shares................ 16
Performance Information................................... 16
Miscellaneous............................................. 17
Description of Permitted Investments........................ 17
</TABLE>
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FEE TABLE
<TABLE>
<CAPTION>
VALUE
MOMENTUM
FUND
--------
CLASS I
SHARES
--------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(a)
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price)..................................... 0%
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price).......................... 0%
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, as applicable)........... 0%
Redemption Fees (as a percentage of amount redeemed, if
applicable)(b)......................................... 0%
Exchange Fee(a)........................................... $ 0
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees........................................... 0.60%
12b-1 Fees................................................ 0%
Other Expenses (after voluntary reduction)(c)............. 0.22%
-----
Total Fund Operating Expenses (after voluntary
reduction)(d).......................................... 0.82%
=====
</TABLE>
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Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class I Shares........................................... $8 $26 $46 $101
</TABLE>
The purpose of the tables above is to assist an investor in the Fund in
understanding the various costs and expenses that a Shareholder will bear
directly or indirectly. For a more complete discussion of the Fund's annual
operating expenses, see SERVICE ARRANGEMENTS below. THE FOREGOING EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
(a) Certain entities (including Union Bank of California, N.A. and its
affiliates) making investments in the Fund on behalf of their customers may
charge customers fees for services provided in connection with the
investment in, redemption of, and exchange of Shares. (See PURCHASE AND
REDEMPTION OF SHARES, EXCHANGE PRIVILEGES, and SERVICE ARRANGEMENTS below.)
(b) A wire redemption charge of $15 is deducted from the amount of a wire
redemption payment made at the request of a Shareholder. (See REDEMPTION OF
SHARES below.)
(c) OTHER EXPENSES are based on estimated amounts for the current fiscal year.
Absent voluntary fee waivers, OTHER EXPENSES would be 0.24% for the Class I
Shares of the Fund.
(d) Absent voluntary fee waivers, TOTAL FUND OPERATING EXPENSES would be 0.84%
for the Class I Shares of the Fund.
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FINANCIAL HIGHLIGHTS
Financial information with respect to the Class I Shares of the Value Momentum
Fund is not presented because Class I Shares were not offered prior to the date
of this prospectus. Please see "Financial Statements" in the Statement of
Additional Information for financial information regarding other Share classes
of the Value Momentum Fund.
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FUND DESCRIPTION
HighMark Funds is an open-end, diversified, registered investment company that
currently offers units of beneficial interest ("Shares") in fourteen investment
portfolios ("Funds"). All of the Funds are advised by HighMark Capital
Management, Inc. (the "Advisor"), a subsidiary of UnionBanCal Corporation.
Shareholders may purchase Shares of selected Funds through four separate classes
(Class A and Class B (collectively, the "Retail Shares"), Fiduciary Shares, and
Class I Shares). Only Class I Shares of the Value Momentum Fund are offered in
this Prospectus. These classes may have different sales charges and other
expenses, which may affect performance. Information regarding HighMark Funds'
other Funds and other classes is contained in separate prospectuses that may be
obtained from HighMark Funds' Distributor, SEI Investments Distribution Co.,
Oaks, Pennsylvania 19456, or by calling 1-800-433-6884.
For information concerning those investors who qualify to purchase Class I
Shares, see PURCHASE AND REDEMPTION OF SHARES below. (Class I Shares may be
hereinafter referred to as "Shares.")
INVESTMENT OBJECTIVES
The investment objective of the Fund is to the seek long-term capital growth
with a secondary objective of income.
The investment objective and certain of the investment limitations of the Fund
may not be changed without a vote of the holders of a majority of the
outstanding Shares of the Fund (as defined under GENERAL INFORMATION--
Miscellaneous below). There can be no assurance that the Fund will achieve its
investment objective.
INVESTMENT POLICIES
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities, including common stocks, warrants to purchase
common stocks, ADRs, preferred stocks and securities (including debt securities)
convertible into or exercisable for common stocks. The Fund will be invested
primarily in securities which the Advisor believes to be undervalued relative to
the market and to the security's historic valuation. Stocks are then screened
for positive price or earnings momentum. Securities purchased will generally
have a medium to high market capitalization. A majority of the securities in
which the Fund invests will be dividend paying.
GENERAL
Money Market Instruments
Under normal market conditions, money market instruments may comprise up to
35% of the total assets of the Fund. When market conditions indicate a temporary
"defensive" investment strategy as determined by the Advisor, the Fund may
invest more than the above stated amount of its total assets in money market
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instruments. The Fund will not be pursuing its investment objective to the
extent that a substantial portion of its assets are invested in money market
instruments.
Illiquid and Restricted Securities
The Fund shall limit investment in illiquid securities to 15% or less of its
net assets. Generally, an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. The absence of a trading
market can make it difficult to ascertain the market value of the illiquid
securities. The Fund may purchase restricted securities which have not been
registered under the Securities Act of 1933 (e.g., Rule 144A Securities and
Section 4(2) commercial paper) subject to policies approved by the Board of
Trustees. See INVESTMENT RESTRICTIONS in the Statement of Additional
Information.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend its portfolio
securities to broker-dealers, banks or other institutions. The Fund may lend
portfolio securities in an amount representing up to 33 1/3% of the value of its
total assets.
Other Investments
The Fund may enter into repurchase agreements and reverse repurchase
agreements.
The Fund may enter into forward commitments or purchase securities on a
"when-issued" basis. The Fund expects that commitments by the Fund to enter into
forward commitments or purchase when-issued securities will not exceed 25% of
the value of the Fund's total assets under normal market conditions. The Fund
does not intend to purchase when-issued securities or forward commitments for
speculative or leveraging purposes but only for the purpose of acquiring
portfolio securities.
The Fund may also invest in money market instruments, money market funds, and
cash.
The Fund may invest in other registered investment companies with similar
investment objectives. The Fund may invest up to 5% of its total assets in the
shares of any one registered investment company, but may not own more than 3% of
the securities of any one registered investment company or invest more than 10%
of its assets in the securities of other registered investment companies. In
accordance with an exemptive order issued to HighMark Funds by the Securities
and Exchange Commission, such other registered investment company 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.
Because other registered investment companies employ an investment advisor,
such investment by a Fund may cause Shareholders to bear duplicative fees. The
Advisor will waive its fees attributable to the assets of the investing Fund
invested in a money market fund of HighMark 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
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company. The Fund may be subject to additional restrictions on investments in
other investment companies. See "INVESTMENT RESTRICTIONS" in the Statement of
Additional Information.
The Fund may write covered calls on its equity securities and enter into
closing transactions with respect to covered call options. The Fund's assets may
be invested in options, futures contracts and options on futures, SPDRs, and
investment grade bonds. The aggregate value of options on securities (long puts
and calls) will not exceed 10% of the Fund's net assets at the time such options
are purchased by the Fund. The Fund may enter into futures and options on
futures only to the extent that obligations under such contracts or
transactions, together with options on securities, represent not more than 25%
of the Fund's assets. The Fund may purchase options in stock indices to invest
cash on an interim basis. The aggregate premium paid on all options on stock
indices cannot exceed 20% of the Fund's total assets. All of the common stocks
in which the Fund invests (including foreign securities in the form of ADRs but
not including Rule 144A Securities) are traded on registered exchanges or in the
over-the-counter market.
For further information, see "DESCRIPTION OF PERMITTED INVESTMENTS."
Risk Factors
To the extent the Fund invests in equity securities, that Fund's Shares will
fluctuate in value, and thus may be more suitable for long-term investors who
can bear the risk of short-term fluctuations.
Equity Securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, which represent an ownership interest in
a company, are probably the most recognized type of equity security. Equity
securities have historically outperformed most other securities, although their
prices can be volatile in the short term. Market conditions, political, economic
and even company-specific news can cause significant changes in the price of a
stock. Smaller companies (as measured by market capitalization), sometimes
called small-cap companies or small-cap stocks, may be especially sensitive to
these factors.
Convertible securities include corporate bonds, notes or preferred stocks that
can be converted into common stocks or other equity securities. Convertible
securities also include other securities, such as warrants, that provide an
opportunity for equity participation. Because convertible securities can be
converted into common stock, their values will normally vary in some proportion
with those of the underlying common stock. Convertible securities usually
provide a higher yield than the underlying common stock, however, so that the
price decline of a convertible security may sometimes be less substantial than
that of the underlying common stock. The value of convertible securities that
pay dividends or interest, like the value of all fixed-income securities,
generally fluctuates inversely with changes in interest rates. Warrants have no
voting rights, pay no dividends and have no rights with respect to the assets of
the corporation issuing them. They do not represent ownership of the securities
for which they may be exercised but only the right to buy such securities at a
particular price. The Fund will not purchase any convertible debt security or
convertible preferred stock unless it has been rated as investment grade at the
time of acquisition by a NRSRO or that is not rated but is determined to be of
comparable quality by the Advisor.
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Year 2000
HighMark Funds depends on the smooth functioning of computer systems in almost
every aspect of its business. Like other mutual funds, businesses and
individuals around the world, HighMark Funds could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. HighMark Funds has made inquiry of its service providers to determine
whether they expect to have their computer systems adjusted for the year 2000
transition, and is seeking assurances from each service provider that it expects
its system to accommodate the year 2000 transition without material adverse
consequences to HighMark Funds. While it is likely that such assurances will be
obtained, HighMark Funds and its shareholders may experience losses if these
assurances prove to be incorrect or as a result of year 2000 computer
difficulties experienced by issuers of portfolio securities or custodians,
banks, broker-dealers or others with which HighMark Funds does business.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate will not be a factor preventing a sale or
purchase when the Advisor believes investment considerations warrant. The Fund's
portfolio turnover rate may vary greatly from year to year as well as within a
particular year. High portfolio turnover rates generally will result in
correspondingly higher brokerage and other transactions costs to the Fund and
could involve the realization of capital gains that would be taxable when
distributed to Shareholders of the Fund. See FEDERAL TAXATION.
PURCHASE AND REDEMPTION OF SHARES
The Fund is divided into four classes of Shares, Class A, Class B, Fiduciary,
and Class I. Class I Shares are only available to retirement and other benefit
plans sponsored by governmental entities with a minimum investment of
$70,000,000.
Purchases and redemptions of Shares of the Fund may be made on days on which
the New York Stock Exchange is open for business ("Business Days"). The minimum
initial investment is $70,000,000 and the minimum subsequent investment is
generally only $100. However, the minimum investment may be waived in the
Distributor's discretion. Shareholders may place orders by telephone.
Purchase orders will be effective if the Distributor receives an order before
1:00 p.m., Pacific time (4:00 p.m., Eastern time) and the custodian receives
Federal funds before the close of business on the next Business Day. The
purchase price of Shares of the Fund is the net asset value next determined
after a purchase order is received and accepted by HighMark Funds. The net asset
value per Share of the Fund is determined by dividing the total market value of
the Fund's investments and other assets, less any liabilities, by the total
number of outstanding Shares of the Fund. Net asset value per share is
determined daily as of 1:00 p.m., Pacific time (4:00 p.m., Eastern time) on any
Business Day. Purchases will be made in full and fractional Shares of HighMark
Funds calculated to three decimal places. HighMark Funds reserves the right to
reject a purchase order when the Distributor or Advisor determines that it is
not in the best interest of HighMark Funds and/or its Shareholders to accept
such order.
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Shares of the Fund are offered only to residents of states in which the Shares
are eligible for purchase.
Shareholders who desire to redeem shares of HighMark Funds must place their
redemption orders prior to 1:00 p.m., Pacific time (4:00 p.m., Eastern time), on
any Business Day for the order to be accepted on that Business Day. The
redemption price is the net asset value of the Fund next determined after
receipt by the Distributor of the redemption order. Payment on redemption will
be made as promptly as possible and, in any event, within seven calendar days
after the redemption order is received. The Funds reserve the right to make
payment for redemptions in securities rather than cash.
Neither HighMark Funds' transfer agent nor HighMark Funds will be responsible
for any loss, liability, cost or expense for acting upon wire instructions or
upon telephone instructions that it reasonably believes to be genuine. HighMark
Funds and its transfer agent will each employ reasonable procedures to confirm
that telephone instructions are genuine. Such procedures may include taping of
telephone conversations. If market conditions are extraordinarily active or
other extraordinary circumstances exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means.
EXCHANGE PRIVILEGES
As indicated under GENERAL INFORMATION--Description of HighMark Funds & Its
Shares, certain Funds of HighMark Funds issue four classes of Shares (Class A
and Class B Shares (collectively, "Retail Shares"), Fiduciary Shares, and Class
I Shares); as of the date of this Prospectus, the Distribution Plan and
distribution fee payable thereunder are applicable only to such Fund's Retail
Shares. A Shareholder's eligibility to exchange into a particular class of
Shares will be determined at the time of the exchange. The Shareholder must
supply, at the time of the exchange, the necessary information to permit
confirmation of qualification.
The Fund's Shares may be exchanged for Shares of the class of the various
other Funds of HighMark Funds which the Shareholder qualifies to purchase
directly so long as the Shareholder maintains the applicable minimum account
balance in each Fund in which he or she owns Shares and satisfies the minimum
initial and subsequent purchase amounts of the Fund into which the Shares are
exchanged. Class I Shares are only offered by the Value Momentum Fund.
Shareholders may exchange Class I Shares of a Fund for Retail Shares of another
Fund. Under such circumstances, the cost of the acquired Retail Shares will be
the net asset value per share plus the appropriate sales load.
Exchanges will be made on the basis of the relative net asset values of the
Shares exchanged plus any applicable sales charge. Exchanges are subject to the
terms and conditions stated herein and the terms and conditions stated in the
respective prospectuses of the Funds.
Certain entities (including participating organizations and Union Bank of
California and its affiliates), however, may charge customers a fee with respect
to exchanges made on the customer's behalf. Information about these charges, if
any, can be obtained by the entity effecting the exchange and this Prospectus
should be read in conjunction with that information.
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A Shareholder wishing to exchange Shares in a Fund may do so by contacting the
transfer agent at 1-800-433-6884. Exchanges will be effected on any Business Day
at the net asset value of the Funds involved in the exchange next determined
after the exchange request is received by the transfer agent.
An exchange is considered to be a sale of Shares for federal income tax
purposes on which a Shareholder may realize a capital gain or loss. Exchange
privileges may be exercised only in those states where Shares of such other
Funds of HighMark Funds may legally be sold. HighMark Funds may materially amend
or terminate the exchange privileges described herein upon sixty days' notice.
DIVIDENDS
The net investment income of the Fund is declared and paid monthly. Net
realized capital gains are distributed at least annually to Shareholders of
record.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of the Fund at net asset
value as of the date of declaration (which is also the ex-dividend date), unless
the Shareholder elects to receive such dividends or distributions in cash.
Shareholders wishing to receive their dividends in cash (or wishing to revoke a
previously made election) must notify the transfer agent at P.O. Box 8416,
Boston, MA 02266-8416, and such election (or revocation thereof) will become
effective with respect to dividends and distributions having record dates after
notice has been received. Dividends paid in additional Shares receive the same
tax treatment as dividends paid in cash.
TAXES
Federal Taxation
The Fund intends to qualify for treatment as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), and to
distribute substantially all of its net investment income and realized net
capital gains in a timely manner so that the Fund is not required to pay federal
taxes on these amounts.
Distributions of ordinary income and/or an excess of net short-term capital
gain over net long-term capital loss are treated for federal income tax purposes
as ordinary income to Shareholders. The 70 percent dividends received deduction
for corporations generally will apply to these distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction when received by a Fund if a Fund were a regular corporation, and to
the extent designated by a Fund as so qualifying. A corporate Shareholder will
only be eligible to claim a dividends received deduction with respect to a
dividend from a Fund if the corporate Shareholder held its Shares on the
ex-dividend date and for at least 45 other days during the 90-day period
surrounding the ex-dividend date. Distributions by the Fund of net gains on
capital assets held for more than one year are taxable to Shareholders as such,
regardless of how long the Shareholder has held Shares of the Fund. Such
distributions are not eligible for the dividends received deduction.
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The sale, exchange or redemption of Fund Shares may give rise to a gain or
loss. In general, any gain realized upon the taxable disposition of Shares will
be treated as 20% gains if the Shares have been held for more than 12 months.
Otherwise the gain on the sale, exchange or redemption of Fund Shares will be
treated as short-term capital gain. In general, any loss realized upon a taxable
disposition of shares will be treated as long-term loss if the Shares have been
held for more than 12 months, and otherwise as short-term capital loss. However,
if a Shareholder disposes of Shares in the Fund at a loss before holding such
Shares for longer than six months, such loss will be treated as a long-term
capital loss to the extent the Shareholder has received long-term capital gain
distributions on the Shares. All or a portion of any loss realized upon a
taxable disposition of Fund Shares will be disallowed if other Shares of the
Fund are purchased within 30 days before or after the disposition. In such a
case, the basis of the newly purchased Shares will be adjusted to reflect the
disallowed loss.
To the extent dividends paid to Shareholders are derived from taxable income
(for example, from interest on certificates of deposit or repurchase
agreements), or from long-term or short-term capital gains, such dividends will
be subject to federal income tax, whether such dividends are paid in the form of
cash or additional Shares. A Shareholder should consult his or her tax advisor
for special advice.
Prior to purchasing Shares of the Fund, the impact of dividends or capital
gain distributions that are expected to be declared or have been declared, but
not paid, should be carefully considered. Dividends or capital gain
distributions received after a purchase of Shares are subject to federal income
taxes, although in some circumstances, the dividends or distributions may be, as
an economic matter, a return of capital to the Shareholder. A Shareholder should
consult his or her advisor for specific advice about the tax consequences to the
Shareholder of investing in the Fund.
Additional information regarding federal taxes is contained in the Statement
of Additional Information. However, the foregoing and the material in the
Statement of Additional Information are only brief summaries of some of the
important tax considerations generally affecting the Fund and its Shareholders.
In addition, the foregoing discussion and the federal tax information in the
Statement of Additional Information are based on tax laws and regulations which
are in effect as of the date of this Prospectus; these laws and regulations may
subsequently change, and such changes could be retroactive.
Shareholders will be advised at least annually as to the federal income tax
status of distributions made during the year.
SERVICE ARRANGEMENTS
The Advisor
Prior to September 1, 1998, Pacific Alliance, a division of Union Bank of
California, N.A. served as the Funds' investment advisor. Effective September 1,
1998, Pacific Alliance was reorganized into a subsidiary of UnionBanCal
Corporation, the holding company of Union Bank of California. The new entity,
which is called HighMark Capital Management, Inc. (the "Advisor"), is a
California corporation registered under the Investment Adviser's Act of 1940.
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HighMark Capital Management, Inc. now serves as the Fund's investment advisor.
Subject to the general supervision of HighMark Funds' Board of Trustees, the
Advisor manages the Fund in accordance with its investment objective and
policies, makes decisions with respect to and places orders for all purchases
and sales and maintains the Fund's records relating to such purchases and sales.
For the expenses assumed and services provided by the Advisor as the Fund's
investment advisor, the Advisor receives a fee from the Fund, computed daily and
paid monthly, at the annual rate of sixty one-hundredths of one percent (0.60%)
of the Fund's average daily net assets. Depending on the size of the Fund, this
fee may be higher than the advisory fee paid by most mutual funds, although the
Board of Trustees believes it will be comparable to advisory fees paid by many
funds having similar objectives and policies. The Advisor may from time to time
agree to voluntarily reduce its advisory fee, however, it is not currently doing
so. While there can be no assurance that the Advisor will choose to make such an
agreement, any voluntary reductions in the Advisor's advisory fee will lower the
Fund's expenses, and thus increase the Fund's yield and total return, during the
period such voluntary reductions are in effect.
During HighMark Funds' fiscal year ended July 31, 1998, Union Bank of
California received investment advisory fees from the Fund aggregating 0.60% of
the Fund's average daily net assets.
UnionBanCal Corporation, the parent of Union Bank of California, N.A., is a
publicly held corporation, but is principally held by The Bank of
Tokyo-Mitsubishi, Ltd. As of September 30, 1998, UnionBanCal Corporation and its
subsidiaries had approximately $31.4 billion in consolidated assets. HighMark
Capital Management, Inc., as of September 30, 1998, had approximately $16
billion of assets under management. The Advisor (and its predecessors), with a
team of approximately 43 stock and bond research analysts, portfolio managers
and traders, has been providing investment management services to individuals,
institutions and large corporations since 1917.
All investment decisions for the Fund are made by a team of investment
professionals, all of whom take an active part in the decision making process.
Administrator
SEI Investments Mutual Funds Services (the "Administrator") and HighMark Funds
are parties to an administration agreement (the "Administration Agreement").
Under the terms of the Administration Agreement, the Administrator provides
HighMark Funds with certain management services, including all necessary office
space, equipment, personnel, and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of 0.20% of the average daily net assets of the Fund.
The Administrator may waive its fee or reimburse various expenses to the extent
necessary to limit the total operating expenses of a Fund's Class I Shares. Any
such waiver is voluntary and may be terminated at any time in the
Administrator's sole discretion. Currently, the Administrator has agreed to
waive its fee to the rate of 0.18% of the average daily net assets of the Fund.
Pursuant to a separate agreement with the Administrator, HighMark Capital
Management performs sub-administration services on behalf of the Fund, for which
it receives a fee paid by the Administrator at the annual rate of up to 0.05% of
the average daily net assets of the Fund. A description of the services
performed
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<PAGE> 16
by HighMark Capital Management pursuant to this Agreement is contained in the
Statement of Additional Information.
The Transfer Agent
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent, and as a shareholder servicing agent for the Class I Shares of
HighMark Funds for which services it receives a fee.
Shareholder Servicing Agreement
To support the provision of Shareholder services to the Class I Shares, the
Advisor, HighMark Funds and the California Department of Personnel
Administration have entered into a Shareholder Servicing Agreement. A
description of the services performed by the California Department of Personnel
Administration pursuant to the Shareholder Servicing Agreement is contained in
the Statement of Additional Information. In consideration of services provided
by the California Department of Personnel Administration, the Advisor will pay a
fee, calculated and paid monthly, equal to the annual rate of 0.10% of the
Fund's average monthly net assets held in the Thrift Plan and Deferred
Compensation Plan in the State of California Savings Plus Program to the
California Department of Personnel Administration.
Distributor
SEI Investments Distribution Co. (the "Distributor") and HighMark Funds are
parties to a distribution agreement ("Distribution Agreement"). The Distribution
Agreement is renewable annually and may be terminated by the Distributor, by a
majority vote of the Disinterested Trustees or by a majority vote of the
outstanding securities of HighMark Funds upon not more than 60 days written
notice by either party, or upon assignment by the Distributor. Class I Shares
are not subject to HighMark Funds' Distribution Plan or a distribution fee.
Banking Laws
HighMark Capital Management, Inc. believes that it may perform the services
for the Fund contemplated by its investment advisory agreement with HighMark
Funds without a violation of applicable banking laws and regulations. HighMark
Capital Management also believes that it may perform sub-administration services
on behalf of the Fund, for which it receives compensation from the Administrator
without a violation of applicable banking laws and regulations. Future changes
in federal or state statutes and regulations relating to permissible activities
of banks or bank holding companies and their subsidiaries and affiliates, as
well as further judicial or administrative decisions or interpretations of
present and future statutes and regulations, could change the manner in which
the Advisor could continue to perform services for the Fund. For a further
discussion of applicable banking laws and regulations, see the Statement of
Additional Information.
Custodian
Union Bank of California, N.A. serves as the custodian and as a shareholder
servicing agent for the Fund. The Custodian holds cash securities and other
assets of HighMark Funds as required by the 1940 Act.
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<PAGE> 17
Services performed by Union Bank of California, N.A., as the Fund's
shareholder servicing agent and custodian, as well as the basis of remuneration
for such services, are described in the Statement of Additional Information.
GENERAL INFORMATION
Description of HighMark Funds & Its Shares
HighMark Funds was organized as a Massachusetts business trust on March 10,
1987, and consists of fourteen series of Shares open for investment representing
units of beneficial interest in HighMark Funds' Growth Fund, Income Equity Fund,
Balanced Fund, Value Momentum Fund, Emerging Growth Fund, International Equity
Fund, Small Cap Value Fund, Bond Fund, Intermediate-Term Bond Fund, California
Intermediate Tax-Free Bond Fund, Diversified Money Market Fund, U.S. Government
Obligations Money Market Fund, 100% U.S. Treasury Obligations Money Market Fund,
and California Tax-Free Money Market Fund. Shares of each Fund are freely
transferable, are entitled to distributions from the assets of the Fund as
declared by the Board of Trustees, and, if HighMark Funds were liquidated, would
receive a pro rata share of the net assets attributable to that Fund. Shares are
without par value.
Performance Information
From time to time, HighMark Funds may advertise the aggregate total return,
average annual total return, yield and distribution rate with respect to the
Class I Shares of the Fund. Performance information is computed separately for a
Fund's Retail, Class I and Fiduciary Shares in accordance with the formulas
described below.
The aggregate total return and average annual total return of the Fund may be
quoted for the life of the Fund and for ten-year, five-year, three-year, and
one-year periods, in each case through the most recent calendar quarter.
Aggregate total return is determined by calculating the change in the value of a
hypothetical $1,000 investment in the Fund over the applicable period that would
equate the initial amount invested to the ending redeemable value of the
investment. The ending redeemable value includes dividends and capital gain
distributions reinvested at net asset value. Average annual total return is
calculated by annualizing the Fund's aggregate total return over the relevant
number of years. The resulting percentage indicates the average positive or
negative investment results that an investor in the Fund would have experienced
on an annual basis from changes in Share price and reinvestment of dividends and
capital gain distributions.
The yield of the Fund is determined by annualizing the net investment income
per Share of the Fund during a specified thirty-day period and dividing that
amount by the per Share public offering price of the Fund on the last day of the
period.
The distribution rate of the Fund is determined by dividing the income and
capital gains distributions, or where indicated the income distributions alone,
on a Share of the Fund over a twelve-month period by the per Share public
offering price of the Fund on the last day of the period.
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<PAGE> 18
The Fund may periodically compare its performance to the performance of other
mutual funds tracked by mutual fund rating services (such as Lipper Analytical);
financial and business publications and periodicals; broad groups of comparable
mutual funds; unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs; or
other investment alternatives. The Fund may advertise performance that includes
results from periods in which the Fund's assets were managed in a non-registered
predecessor vehicle.
All performance information presented for the Fund is based on past
performance and does not predict future performance.
Miscellaneous
Shareholders will be sent unaudited semi-annual reports and annual reports
audited by independent public accountants.
Shareholders are entitled to one vote for each Share held in the Fund as
determined on the record date for any action requiring a vote by the
Shareholders, and a proportionate fractional vote for each fractional Share
held. Shareholders of HighMark Funds will vote in the aggregate and not by
series or class except (i) as otherwise expressly required by law or when
HighMark Funds' Board of Trustees determines that the matter to be voted upon
affects only the interests of the Shareholders of a particular series or
particular class, and (ii) only Retail Shares will be entitled to vote on
matters submitted to a Shareholder vote relating to the Distribution Plan.
HighMark Funds is not required to hold regular annual meetings of Shareholders,
but may hold special meetings from time to time.
HighMark Funds' Trustees are elected by Shareholders, except that vacancies
may be filled by vote of the Board of Trustees. Trustees may be removed by the
Board of Trustees, or by Shareholders at a meeting called for such purpose. For
information about how Shareholders may call such a meeting and communicate with
other Shareholders for that purpose, see ADDITIONAL INFORMATION--Miscellaneous
in the Statement of Additional Information.
Inquiries may be directed in writing to SEI Investments Distribution Co.,
Oaks, Pennsylvania 19456, or by calling toll free 1-800-433-6884.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the HighMark Value
Momentum Fund:
AMERICAN DEPOSITARY RECEIPTS (ADRs) and EUROPEAN DEPOSITARY RECEIPTS
(EDRs)--Receipts, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. ADRs
include American Depositary Shares and New York Shares. EDRs, which are
sometimes referred to as Continental Depositary Receipts ("CDRs"), are receipts,
typically issued by a non-U.S. financial institution, that evidence ownership
interests in a security or a pool of securities issued by either a U.S. or
foreign issuer. ADRs, EDRs and CDRs may be available for investment through
"sponsored" or "unsponsored" facilities.
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<PAGE> 19
A sponsored facility is established jointly by the issuer of the security
underlying the receipt and a depositary, whereas an unsponsored facility may be
established by a depositary without participation by the issuer of the receipt's
underlying security. Holders of an unsponsored depositary receipt generally bear
all the costs of the unsponsored facility. The depositary of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through to the holders of the receipts voting rights with respect to the
deposited securities.
BANKERS' ACCEPTANCES--Bills of exchange or time drafts drawn on and accepted
by commercial banks. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT--Negotiable interest-bearing instruments with a
specific maturity. Certificates of deposit are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity.
COMMERCIAL PAPER--Unsecured short-term promissory notes issued by corporations
and other entities. Maturities on these issues vary from a few days to nine
months. Purchase of such instruments involves a risk of default by the issuer.
COMMON STOCK--Units of ownership of a public corporation. Owners typically are
entitled to vote on the selection of directors and other important matters as
well as to receive dividends on their holdings. In the event that a corporation
is liquidated, the claims of secured and unsecured creditors and owners of bonds
and preferred stock take precedence over the claims of those who own common
stock. For the most part, common stock has more potential for appreciation.
CONVERTIBLE BONDS AND CONVERTIBLE PREFERRED STOCK--Convertible Bonds are bonds
convertible into a set number of shares of another form of security (usually
common stock) at a prestated price. Convertible bonds have characteristics
similar to both fixed-income and equity securities. Convertible preferred stock
is a class of capital stock that pays dividends at a specified rate and that has
preference over common stock in the payment of dividends and the liquidation of
assets. Convertible preferred stock is preferred stock exchangeable for a given
number of common stock shares, and has characteristics similar to both
fixed-income and equity securities. Because of the conversion feature, the
market value of convertible bonds and convertible preferred stock tend to move
together with the market value of the underlying stock. As a result, a Fund's
selection of convertible bonds and convertible preferred stock is based, to a
great extent, on the potential for capital appreciation that may exist in the
underlying stock. The value of convertible bonds and convertible preferred stock
is also affected by prevailing interest rates, the credit quality of the issuer
and any call provisions.
DERIVATIVES--Instruments whose value is derived from an underlying contract,
index or security, or any combination thereof, including futures, options (e.g.,
puts and calls), options on futures, swap agreements, and some mortgage-backed
securities (CMOs, REMICs, IOs and POs). See elsewhere in this "DESCRIPTION OF
PERMITTED INVESTMENTS" for discussions of these various instruments, and see
"INVESTMENT OBJECTIVES" and "INVESTMENT POLICIES" for more information about any
policies and limitations applicable to their use.
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FUTURES AND OPTIONS ON FUTURES--Some futures strategies, including selling
futures, buying puts and writing calls, reduce the Fund's exposure to price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. Futures and options may be
combined with each other in order to adjust the risk and return characteristics
of the overall portfolio.
Options and futures can be volatile instruments, and involve certain risks
that, if applied at an inappropriate time, could negatively impact the Fund's
return.
INVESTMENT GRADE BONDS--Interest-bearing or discounted government or corporate
securities that obligate the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Investment grade bonds are those rated BBB or better by S&P or
Baa or better by Moody's or similarly rated by other NRSROs, or, if not rated,
determined to be of comparable quality by the Advisor.
LOAN PARTICIPATIONS--Loan participations are interests in loans to U.S.
corporations (i.e., borrowers) which are administered by the lending bank or
agent for a syndicate of lending banks, and sold by the lending bank or
syndicate member ("intermediary bank"). In a loan participation, the borrower of
the underlying loan will be deemed to be the issuer of the participation
interest (except to the extent a purchasing Fund derives its rights from the
intermediary bank). Because the intermediary bank does not guarantee a loan
participation in any way, a loan participation is subject to the credit risks
associated with the underlying corporate borrower. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, a
Fund may encounter delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower because it may be necessary under the terms
of the loan participation, for the Fund to assert its rights against the
borrower through the intermediary bank. Moreover, under the terms of a loan
participation, the purchasing Fund may be regarded as a creditor of the
intermediary bank (rather than of the underlying corporate borrower), so that a
Fund may also be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
a loan participation may be subject to certain defenses that can be asserted by
such borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is limited, and any such
participation purchased by a Fund may be regarded as illiquid.
MONEY MARKET INSTRUMENTS--Short-term, debt instruments or deposits and may
include, for example, (i) commercial paper rated within the highest rating
category by a NRSRO at the time of investment, or, if not rated, determined by
the Advisor to be of comparable quality; (ii) obligations (certificates of
deposit, time deposits, bank master notes, and bankers' acceptances) of thrift
institutions, savings and loans, U.S. commercial banks (including foreign
branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; (iii) short-term
corporate obligations rated within the three highest rating categories by a
NRSRO (e.g., at least A by S&P or A by Moody's) at the time of investment, or,
if not rated, determined by the Advisor to be of comparable quality; (iv)
general obligations issued by the U.S. Government and backed by its full faith
and credit, and obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government (e.g., obligations issued
by Farmers Home Administration,
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<PAGE> 21
Government National Mortgage Association, Federal Farm Credit Bank and Federal
Housing Administration); (v) receipts, including TRs, TIGRs and CATS; (vi)
repurchase agreements involving such obligations; (vii) loan participations
issued by a bank in the United States with assets exceeding $1 billion and for
which the underlying loan is issued by borrowers in whose obligations the Fund
may invest; (viii) money market funds and (ix) foreign commercial paper.
Certain of the obligations in which the Fund may invest may be variable or
floating rate instruments, may involve conditional or unconditional demand
features and may include variable amount master demand notes.
OBLIGATIONS OF SUPRANATIONAL ENTITIES--Obligations of supranational entities
are established through the joint participation of several governments, and
include the Asian Development Bank, the Inter-American Development Bank,
International Bank for Reconstruction and Development (World Bank), African
Development Bank, European Economic Community, European Investment Bank and the
Nordic Investment Bank.
OPTIONS--Under a call option, the purchaser of the option has the right to
purchase, and the writer (the Fund) the obligation to sell, the underlying
security at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to purchase, the
underlying security at the exercise price during the option period.
In addition, the Fund may buy options on stock indices to invest cash on an
interim basis. Such options will be listed on a national securities exchange. In
order to close out an option position, the Fund may enter into a "closing
purchase transaction"--the purchase of an option on the same security with the
same exercise price and expiration date as the option contract previously
written on any particular security. When the security is sold, the Fund effects
a closing purchase transaction so as to close out any existing option on that
security.
There are risks associated with such investments including the following: (1)
the success of a hedging strategy may depend on the ability of the Advisor or
Sub-Advisor to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of securities held by the
Fund and the price of options; (3) there may not be a liquid secondary market
for options; and (4) while the Fund will receive a premium when it writes
covered call options, it may not participate fully in a rise in the market value
of the underlying security.
RECEIPTS--Interests in separately traded interest and principal component
parts of U.S. Treasury obligations that are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of such
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS are sold as zero coupon securities, which means that they are sold at a
substantial discount and redeemed at face value at their maturity date without
interim cash payments of interest or principal. This discount is accreted over
the life of the security, and such accretion will constitute the income earned
on the security for both accounting and tax purposes. Because of these features,
such securities may be subject to greater interest rate volatility than
interest-paying securities. See also "FEDERAL TAXATION."
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<PAGE> 22
REPURCHASE AGREEMENTS--Agreements whereby the Fund will acquire securities
from approved financial institutions or registered broker-dealers that agree to
repurchase the securities at a mutually agreed-upon date and price. The
repurchase agreements entered into by the Funds will provide that the underlying
security at all times shall have a value equal to 102% of the resale price
stated in the agreement. Repurchase agreements involving government securities
are not subject to the Fund's fundamental investment limitation on purchasing
securities of any one issuer. If the seller defaults on its repurchase
obligation or becomes insolvent, the Fund holding such obligations would suffer
a loss to the extent that either the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price or the Fund's
disposition of the securities was delayed pending court action. Securities
subject to repurchase agreements will be held by a qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by the Fund under the Investment Company Act of 1940 (the "1940
Act").
REVERSE REPURCHASE AGREEMENTS--The 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, the Fund intends to limit
such investments to no more than 10% of the value of its total assets. Pursuant
to a reverse repurchase agreement, the 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. The Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions. At
the time the 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 the Fund may decline below the
price at which the Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by the Fund under the 1940
Act.
RULE 144A SECURITIES--Rule 144A Securities are securities that have not been
registered under the Securities Act of 1933, but which may be traded between
certain qualified institutional investors, including investment companies. The
absence of a secondary market may affect the value of the Rule 144A Securities.
The Board of Trustees of HighMark Funds has established guidelines and
procedures to be utilized to determine the liquidity of such securities.
SECURITIES ISSUED ON A FORWARD COMMITMENT BASIS OR WHEN-ISSUED
SECURITIES--Securities purchased for delivery beyond the normal settlement date
at a stated price and yield and which thereby involve a risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place. When the Fund agrees to purchase when-issued securities 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 segregated account. The Fund will generally not pay for such
securities and no income will accrue on the securities until they are received.
These securities are recorded as an asset and are subject to changes in value
based upon changes in the general level of interest rates. Therefore, the
purchase of securities on a "when-issued" basis or forward commitments may
increase the risk of fluctuations in the Fund's net asset value.
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<PAGE> 23
SECURITIES LENDING--During the time portfolio securities are on loan from the
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time and, while the Fund will generally not have the right to
vote securities on loan, it will terminate the loan and regain the right to vote
if that is considered important with respect to the investment. While the
lending of securities may subject the 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, the Fund will receive 100%
collateral in the form of cash or U.S. Government securities. This collateral
will be valued daily by the lending agent, with oversight by the Advisor, and,
should the market value of the loaned securities increase, the borrower will be
required to furnish additional collateral to the Fund.
SECURITIES SUBJECT TO A PUT FEATURE--A "put" feature permits the Fund to sell
a fixed income security at a fixed price prior to maturity. The underlying fixed
income securities subject to a put may be sold at any time at the market rates.
However, unless the put was an integral part of the fixed income security as
originally issued, it may not be marketable or assignable. Generally, a premium
is paid for a put feature or a put feature is purchased separately which results
in a lower yield than would otherwise be available for the same fixed income
securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS (SPDRs)--SPDRs are interests in a unit
investment trust holding a portfolio of securities linked to the S&P 500 Index.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500 Index. For further information
regarding SPDRs, see the Statement of Additional Information.
TIME DEPOSITS--Non-negotiable receipts issued by U.S. or foreign banks in
exchange for the deposit of funds. Like certificates of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
UNIT INVESTMENT TRUST--Investment vehicle, registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, that purchases a
fixed Portfolio of income-producing securities, such as corporate, municipal, or
government bonds, mortgage-backed securities, or preferred stock. Units in the
trust, which usually cost at least $1,000, are sold to investors by brokers, for
a Load charge of about 4%. Unit holders receive an undivided interest in both
the principal and the income portion of the portfolio in proportion to the
amount of capital they invest. The portfolio of securities remains fixed until
all the securities mature and unit holders have recovered their principal. Most
brokerage firms maintain a Secondary Market in the trusts they sell, so that
units can be resold if necessary.
U.S. GOVERNMENT AGENCY SECURITIES--Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the U.S. Government, are either backed by the full faith and
credit of the United States (e.g., GNMA securities) or supported by the issuing
agencies' right to borrow from the U.S. Treasury. The issues of other agencies
are supported only by the credit of the instrumentality (e.g., FNMA securities).
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<PAGE> 24
U.S. TREASURY OBLIGATIONS--Bills, notes, and bonds issued by the U.S.
Treasury, as well as separately traded interest and principal component parts of
such obligations known as Separately Traded Registered Interest and Principal
Securities ("STRIPS") that are transferable through the Federal book-entry
system.
U.S. Government Securities generally do not involve the credit risks
associated with investments in other types of fixed-income securities, although,
as a result, the yields available from U.S. Government Securities are generally
lower than the yields available from otherwise comparable corporate fixed-income
securities. Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will in many cases not affect interest income on
existing portfolio securities, but will be reflected in the Fund's net asset
value. Because the magnitude of these fluctuations will generally be greater at
times when the Fund's average maturity is longer, under certain market
conditions the Fund may invest in short-term investments yielding lower current
income rather than investing in higher yielding longer-term securities.
VARIABLE AND FLOATING RATE INSTRUMENTS--Obligations that may carry variable or
floating rates of interest, may involve conditional or unconditional demand
features and may include variable amount master demand notes. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
period exceeding seven days may be considered illiquid if there is no secondary
market for such security.
WARRANTS--Securities that entitle the holder to buy a proportionate amount of
common stock at a specified price for a limited or unlimited period of time.
Warrants are often freely transferable and are traded on major stock exchanges.
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HIGHMARK VALUE MOMENTUM FUND
INVESTMENT PORTFOLIOS OF
HIGHMARK FUNDS
For further information (including current
yield, purchase and redemption information),
call 1-800-433-6884
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFERING MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY
HIGHMARK FUNDS OR ITS DISTRIBUTOR.
THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY HIGHMARK
FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
NOT FDIC INSURED
<PAGE> 26
HighMark Funds Prospectus
INVESTMENT ADVISOR
HighMark Capital Management, Inc.
475 Sansome Street
San Francisco, CA 94104
CUSTODIAN
Union Bank of California, N.A.
475 Sansome Street
San Francisco, CA 94104
ADMINISTRATOR & DISTRIBUTOR
SEI Investments Mutual Fund Services
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, PA 19456
LEGAL COUNSEL
Ropes & Gray
1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105-2230
For further information call
1-800-433-6884
or visit our web site at
www.highmark-funds.com
[HIGHMARK(sm) FUNDS LOGO]
84823-I (10/99)
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HIGHMARK FUNDS
HIGHMARK VALUE MOMENTUM FUND
CLASS I SHARES
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of the HighMark Value Momentum
Fund -- Class I Shares, which is dated October 1, 1999, (collectively, the
"Prospectus") and any supplements thereto. This Statement of Additional
Information is incorporated in its entirety into the Prospectus. Copies of the
Prospectus 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 Prospectus.
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TABLE OF CONTENTS
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HIGHMARK FUNDS.....................................................................1
INVESTMENT OBJECTIVE AND POLICIES..................................................1
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS....................................1
Bank Instruments...............................................................1
Commercial Paper and Variable Amount Master Demand Notes.......................2
Lending of Portfolio Securities................................................3
Repurchase Agreements..........................................................3
Reverse Repurchase Agreements..................................................4
U.S. Government Obligations....................................................4
Adjustable Rate Notes..........................................................5
Shares of Mutual Funds.........................................................5
When-Issued Securities and Forward Commitments.................................5
Options (Puts and Calls) on Securities.........................................6
Covered Call Writing...........................................................6
Purchasing Call Options........................................................7
Purchasing Put Options.........................................................8
Options in Stock Indices.......................................................8
Risk Factors in Options Transactions...........................................9
Futures Contracts on Securities and Related Options...........................10
Futures Contracts on Securities...............................................10
Options on Securities' Futures Contracts......................................12
Risk of Transactions in Securities' Futures Contracts and Related Options.....12
Index Futures Contracts.......................................................13
Options on Index Futures Contracts............................................14
U.S. Dollar Denominated Obligations of Securities of Foreign Issuers..........14
Standard & Poor's Depository Receipts ("SPDRs")...............................15
Illiquid Securities...........................................................15
Restricted Securities.........................................................16
INVESTMENT RESTRICTIONS...........................................................16
Voting Information............................................................19
PORTFOLIO TURNOVER................................................................20
VALUATION ......................................................................20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................20
ADDITIONAL FEDERAL TAX INFORMATION............................................21
FOREIGN TAXES.................................................................23
MANAGEMENT OF HIGHMARK FUNDS......................................................23
TRUSTEES AND OFFICERS.........................................................23
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INVESTMENT ADVISOR............................................................28
PORTFOLIO TRANSACTIONS........................................................29
GLASS-STEAGALL ACT............................................................31
ADMINISTRATOR AND SUB-ADMINISTRATOR...........................................32
SHAREHOLDER SERVICING AGREEMENT...............................................33
EXPENSES ..................................................................34
DISTRIBUTOR ..................................................................35
The Distribution Plans..................................................35
TRANSFER AGENT AND CUSTODIAN SERVICES.........................................36
AUDITORS ..................................................................37
LEGAL COUNSEL.................................................................37
ADDITIONAL INFORMATION............................................................37
DESCRIPTION OF SHARES.........................................................37
SHAREHOLDER AND TRUSTEE LIABILITY.............................................39
CALCULATION OF PERFORMANCE DATA...............................................39
MISCELLANEOUS.................................................................42
APPENDIX ......................................................................61
FINANCIAL STATEMENTS..............................................................67
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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 fourteen 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 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 California Intermediate
Tax-Free Bond Fund, the HighMark Diversified Money Market Fund, the HighMark
U.S. Government Money Market Fund, the HighMark 100% U.S. Treasury Money Market
Fund, and the HighMark California Tax-Free Money Market Fund. The HighMark Value
Momentum Fund commenced operations in HighMark Funds on April 28, 1997.
As described in the Prospectuses, selected Funds of HighMark Funds
have been divided into four classes of Shares (designated Class A and Class B
Shares (collectively "Retail Shares"), Fiduciary Shares and Class I Shares) for
purposes of HighMark Funds' Distribution and Shareholder Services Plans (the
"Distribution Plans"), which Distribution Plans apply only to such Funds' Retail
Shares.
The Value Momentum Fund (the "Fund") is sometimes referred to herein
as an Equity Fund.
Much of the information contained herein expands upon subjects
discussed in the Prospectus for the Fund. No investment in Shares of the Fund
should be made without first reading that Fund's Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and
policies of the Fund as set forth in the Prospectus.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
1. Bank Instruments. Consistent with its investment objective,
policies, and restrictions, the Fund may invest in bankers' acceptances,
certificates of deposit, and time deposits.
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Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise that
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Investments in
bankers' acceptances will be limited to those guaranteed by domestic and foreign
banks having, at the time of investment, total assets of $1 billion or more (as
of the date of the institution's most recently published financial statements).
Certificates of deposit and time deposits represent funds deposited
in a commercial bank or a savings and loan association for a definite period of
time and earning a specified return.
Investments in certificates of deposit and time deposits may include
Eurodollar Certificates of Deposit, which are U.S. dollar denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States, Yankee Certificates of Deposit, which are
certificates of deposit issued by a U.S. branch of a foreign bank denominated in
U.S. dollars and held in the United States, Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar denominated deposits in a foreign branch of a U.S. bank or
a foreign bank, and Canadian Time Deposits ("CTDs"), which are U.S. dollar
denominated certificates of deposit issued by Canadian offices of major Canadian
banks. All investments in certificates of deposit and time deposits will be
limited to those (a) of domestic and foreign banks and savings and loan
associations which, at the time of investment, have total assets of $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.
2. Commercial Paper and Variable Amount Master Demand Notes.
Consistent with its investment objective, policies, and restrictions, the 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 the Fund and the issuer,
they are not normally traded. Although there is no secondary market in the
notes, the 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
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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, the Fund may lend its portfolio securities to broker-dealers, banks or
other institutions. During the time portfolio securities are on loan from the
Fund, the borrower will pay the Fund any dividends or interest paid on the
securities. In addition, loans will be subject to termination by the Fund or the
borrower at any time. While the lending of securities may subject the 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, the 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. The 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 the Fund may be subject
to repurchase agreements.
Under the terms of a repurchase agreement, the 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 the 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 the Fund's securities subject to repurchase
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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.
5. Reverse Repurchase Agreements. The 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, the 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, the 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. The Fund intends to enter into reverse
repurchase agreements only to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. At the time the 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 the Fund may decline below the price at which the Fund
is obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act.
6. U.S. Government Obligations. The 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.
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7. Adjustable Rate Notes. Consistent with its investment objective,
policies, and restrictions, the Fund may invest in "adjustable rate notes,"
which include variable rate notes and floating rate notes. 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 the Fund, the Fund may seek to resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for the Fund to dispose of a variable or
floating rate note in the event the issuer of the note defaulted on its payment
obligations and the Fund could, as a result or for other reasons, suffer a loss
to the extent of the default. Variable or floating rate notes may be secured by
bank letters of credit. A demand instrument with a demand notice period
exceeding seven days may be considered illiquid if there is no secondary market
for such security. Such security will be subject to the Fund's non fundamental
15% 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.
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.
8. Shares of Mutual Funds. The Fund 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 the 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.
9. When-Issued Securities and Forward Commitments. The Fund may
enter into forward commitments or purchase securities on a "when-issued" basis,
which means that the
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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. The 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 the 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 Fund expects 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 the Fund
exceeded this 25% threshold, the Fund's liquidity and the Advisor's ability to
manage it might be adversely affected. In addition, the Fund does 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.
10. Options (Puts and Calls) on Securities. The Fund may buy and
sell options (puts and calls), and write call options on a covered basis.
11. Covered Call Writing. The 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. The
Fund will not engage in option writing strategies for speculative purposes. A
call option gives the purchaser of such option the right to buy, and the writer,
in this case the Fund, has the obligation to sell the underlying security at the
exercise price during the option period. The advantage to the Fund of writing
covered calls is that the Fund receives a premium which is additional income.
However, if the value of the security rises, the Fund may not fully participate
in the market appreciation.
During the option period, a covered call option writer may be
assigned an exercise notice by the broker/dealer through whom such call option
was sold, which requires the writer to deliver the underlying security against
payment of the exercise price. This obligation is terminated upon the expiration
of the option period or at such earlier time in which the writer effects a
closing purchase transaction. A closing purchase transaction is one in which the
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
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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 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.
12. Purchasing Call Options. The Fund may purchase call options to
hedge against an increase in the price of securities that the Fund wants
ultimately to buy. Such hedge protection
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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 Fund may sell, exercise or close out positions as the Advisor deems
appropriate.
13. Purchasing Put Options. The 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, the 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.
14. Options in Stock Indices. The Fund 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 the Fund on
transactions in stock index options will depend on price movements in the stock
market generally (or in a particular industry or segment of the market) rather
than price movements of individual securities.
As with stock options, the 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.
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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.
The 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 the Fund's portfolio will
not duplicate the components of an index, the correlation will not be exact.
Consequently, the 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.
The Fund will enter into an option position only if there appears to
be a liquid secondary market for such options.
The 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 the Fund's total assets.
15. Risk Factors in Options Transactions. The successful use of
options strategies depends on the ability of the Advisor to forecast interest
rate and market movements correctly.
When it purchases an option, the 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, the Fund will lose part or all of its investment in the option. This
contrasts with an investment by the 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 the Fund's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. Although the Fund will take
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an option position only if its Advisor believes there is liquid secondary market
for the option, there is no assurance that the 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,
the 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 the Fund's ability to realize its profits
or limit its losses.
Disruptions in the markets for securities underlying options
purchased or sold by the 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, the 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, the 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 the Fund has expired, the Fund could lose the
entire value of its option.
16. Futures Contracts on Securities and Related Options. The Fund
may invest in futures and related options based on any type of security or index
traded on U.S. or foreign exchanges, or over the counter as long as the
underlying security or 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 the Fund.
17. Futures Contracts on Securities. The Fund will enter into
futures contracts on securities only when, in compliance with the SEC's
requirements, cash or equivalents equal in value to the securities' value (less
any applicable margin deposits) have been deposited in a segregated account of
the Fund's custodian.
A futures contract sale creates an obligation by the seller to
deliver the type of instrument called for in the contract in a specified
delivery month for a stated price. A futures contract purchase creates an
obligation by the purchaser to take delivery of the type of instrument called
for in the contract in a specified delivery month at a stated price. The
specific instruments delivered or taken at settlement date are not determined
until on or near
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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 the 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."
The 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. The
Fund may close its positions by taking opposite positions which will operate to
terminate the Fund's position in the futures contracts. Final determinations of
variation margin are then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. Such closing
transactions involve additional commission costs.
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18. Options on Securities' Futures Contracts. The 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. The 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. The 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.
The 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 the Fund's total assets.
19. Risk of Transactions in Securities' Futures Contracts and
Related Options. Successful use of securities' futures contracts by the Fund is
subject to the ability of the 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 the 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 the 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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To reduce or eliminate a hedge position held by the 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.
20. Index Futures Contracts. The 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. The 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 the
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.
The 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
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close a futures position prior to its maturity date. Third, the purchase of an
index futures contract involves the risk that the Fund could lose more than the
original margin deposit required to initiate a futures transaction. In order to
avoid leveraging and related risks, when the 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 the 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 Fund's
intention to qualify as such.
21. 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.
22. U.S. Dollar Denominated Obligations of Securities of Foreign
Issuers. The Fund may invest in U.S. dollar denominated obligations 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 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
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fees and sales commissions than domestic investments. Foreign issuers of
securities or obligations are often subject to accounting treatment and engage
in business practices different from those respecting domestic issuers of
similar securities or obligations. Foreign branches of U.S. banks and foreign
banks may be subject to less stringent reserve requirements than those
applicable to domestic branches of U.S. banks.
23. 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.
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.
24. Illiquid Securities. The Fund has adopted a non-fundamental
policy (which may be changed without shareholder approval) prohibiting the Fund
from investing more than 15% 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 Fund may purchase Rule 144A Securities only in
accordance with
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liquidity guidelines established by the Board of Trustees of HighMark Funds and
only if the investment would be permitted under applicable state securities
laws.
25. Restricted Securities. The 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 the Fund (as defined
below). Except with respect to the 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.
THE VALUE MOMENTUM FUND MAY NOT:
1. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its
agencies, or instrumentalities, if, immediately after the purchase,
more than 5% of the value of such Fund's total assets would be
invested in the issuer or the Fund would hold more than 10% of any
class of securities of the issuer or more than 10% of the issuer's
outstanding voting securities (except that up to 25% of the value of
the Fund's total assets may be invested without regard to these
limitations).
2. Purchase any securities that would cause more than
25% of such Fund's total assets at the time of purchase to be
invested in securities of one or more issuers conducting their
principal business activities in the same industry, provided that
(a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. or foreign governments or their agencies or
instrumentalities and repurchase agreements secured by obligations
of the U.S. Government or its agencies or instrumentalities; (b)
wholly owned finance companies will be considered to be in the
industries of their parents if their activities are primarily
related to financing the activities of their parents;
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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 the Fund may purchase or hold
debt instruments, lend portfolio securities, and enter into
repurchase agreements in accordance with its investment objective
and policies.
THE VALUE MOMENTUM 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, as
concentration is defined under the Investment Company Act of 1940,
or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
3. May issue senior securities to the extent permitted
by the Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
4. May lend or borrow money to the extent permitted by
the Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
5. May purchase or sell commodities, commodities
contracts, futures contracts, or real estate to the extent permitted
by the Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
6. May underwrite securities to the extent permitted by
the Investment Company Act of 1940, or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
7. May pledge, mortgage or hypothecate any of its assets
to the extent permitted by the Investment Company Act of 1940, or
the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
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The fundamental limitations of the Value Momentum Fund 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 Fund also has adopted nonfundamental
limitations, set forth below, which in some instances may be more restrictive
than their fundamental limitations. Any changes in the Fund's nonfundamental
limitations will be communicated to the Fund's shareholders prior to
effectiveness.
1940 ACT RESTRICTIONS. Under the 1940 Act, and the rules,
regulations and interpretations thereunder, a "diversified company," as to 75%
of its totals assets, may not purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. Government, its agencies or its
instrumentalities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer or more than 10% of
the issuer's voting securities would be held by the fund. "Concentration" is
generally interpreted under the 1940 Act to be investing more than 25% of net
assets in an industry or group of industries. The 1940 Act limits the ability of
investment companies to borrow and lend money and to underwrite securities. The
1940 Act currently prohibits an open-end fund from issuing senior securities, as
defined in the 1940 Act, except under very limited circumstances.
THE FOLLOWING INVESTMENT LIMITATIONS OF THE VALUE MOMENTUM FUND ARE
NONFUNDAMENTAL POLICIES. THE 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 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. 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
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investment purposes. All borrowings will be repaid before making
additional investments and any interest paid on such borrowings will
reduce income.
4. Pledge, mortgage or hypothecate assets except to
secure temporary borrowings permitted by (3) above in aggregate
amounts not to exceed 10% of total assets taken at current value at
the time of the incurrence of such loan, except as permitted with
respect to securities lending.
5. Purchase or sell real estate, real estate limited
partnership interest, commodities or commodities contracts may
invest in futures contracts and options on futures contracts, as
disclosed in the prospectus and interest in a pool of securities
that are secured by interests in real estate. However, subject to
their permitted investments, the 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 the 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 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
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
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<PAGE> 49
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.
PORTFOLIO TURNOVER
The Fund's turnover rate is calculated by dividing the lesser of the
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.
For the Fund, 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: 7%, 1% and 9%. 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.
VALUATION
As disclosed in the Prospectus, the 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").
Except as noted below, investments by the Fund 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 the 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchases and redemptions of shares of the Fund 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 Fund in lieu of cash. Shareholders may incur
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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 the Fund 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 Fund for any period.
If the 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
The 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, the 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 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 the 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
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in the form of dividends (including capital gain dividends). If the 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 the 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 the 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 the 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 the 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 the Fund's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as (i) a dividend to the
extent of the Fund's remaining earnings and profits (including earnings and
profits arising from tax-exempt income), (ii) thereafter as a return of capital
to the extent of the recipient's basis in the shares, and (iii) thereafter as
gain from the sale or exchange of a capital asset. If the Fund's book income is
less than its taxable income, the Fund could be required to make distributions
exceeding book income to qualify as a regulated investment company that is
accorded special tax treatment.
If the 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.
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The 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, the Fund may be
required to sell securities in its portfolio that it otherwise would have
continued to hold.
The Fund 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.
FOREIGN TAXES
Dividends and interest received by the 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
the 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 the Fund makes the
election, it will report annually to its Shareholders the respective amounts per
share of the Fund's income from sources within, and taxes paid to, foreign
countries and U.S. possessions.
MANAGEMENT OF HIGHMARK FUNDS
TRUSTEES AND OFFICERS
Overall responsibility for management of the 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.
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<PAGE> 53
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
1323 Encina Drive 1996, Vice President and Chief
Milbrae, CA 94030 Financial Officer of Bio Rad
Date of Birth: 6/7/43 Laboratories, Inc.
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 to
Pasadena, CA 91105 1997.
Date of Birth: 4/25/18
William R. Howell Trustee Director, Current Income Shares,
73-350 Calliandra Avenue Inc. from 1973 until retirement in
Palm Desert, CA 92260 1998. Chairman of the Board of
Date of Birth: 2/28/22 Trustees of Stepstone Funds from
1991 to 1997.
</TABLE>
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<PAGE> 54
<TABLE>
<S> <C> <C>
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,
Palm Desert, CA 92211-3240 Executive Vice President and head
Date of Birth: 9/11/38 of Union Bank's Financial
Management and Trust Services
Group and a member of the
bank-wide Executive Policy
Committee.
Mark E. Nagle President and Chief Vice President and Controller,
530 East Swedesford Road Executive 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 CPA, Director of Fund
530 East Swedesford Road Financial Officer Resources, employee since 1994.
Wayne, PA 19087 Prior to 1994, senior manager for
Arthur Andersen.
Kevin P. Robins Vice President and Employee since 1992. Prior to
1 Freedom Valley Drive Secretary 1992, associate with Morgan
Oaks, PA 19456 Lewis & Bockius since 1988.
</TABLE>
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<PAGE> 55
<TABLE>
<S> <C> <C>
Sandra K. Orlow Vice President and Employee since 1983.
1 Freedom Valley Drive Assistant Secretary
Oaks, PA 19456
Todd Cipperman Vice President and Employee since 1995. From 1994
1 Freedom Valley Drive Assistant Secretary to May 1995, associate with
Oaks, PA 19456 Dewey Ballantine. Prior to 1994,
associate with Winston & Strawn.
Joseph M. O'Donnell Vice President and Employee since 1998. From
1 Freedom Valley Drive Assistant Secretary March, 1993 to December, 1997,
Oaks, PA 19456 Vice President and General
Counsel with FPS Services, Inc.
Lydia A. Gavalis Vice President and Vice President and Assistant
1 Freedom Valley Drive Assistant 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 Vice President and Assistant
1 Freedom Valley Drive Assistant 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 Treasurer of SEI Investments
1 Freedom Valley Drive Assistant Secretary Company, employee since 1987.
Oaks, PA 19456
</TABLE>
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<PAGE> 56
<TABLE>
<S> <C> <C>
James R. Foggo Vice President and Vice President and Assistant
1 Freedom Valley Drive Assistant 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 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
</TABLE>
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<PAGE> 57
<TABLE>
<S> <C> <C> <C> <C>
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 the Fund
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 Fund. See "Transfer Agent,
Custodian and Fund Accounting Services" below. Union Bank of California also
serves as sub-administrator to the Fund 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 the 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 Prospectus), and a majority of the Trustees
who are not parties to the Investment Advisory Agreement or interested persons
(as defined in the 1940 Act) of any party to the Investment Advisory Agreement
by votes cast in person at a meeting called for such purpose. The Investment
Advisory Agreement is terminable as to the Fund at any time on 60 days' written
notice without penalty by the Trustees, by vote of a majority of the outstanding
Shares of the 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.
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<PAGE> 58
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 the Fund as described in the Prospectus. For the
fiscal years ended July 31, 1998, July 31, 1997, January 31, 1997, and January
31, 1996, Union Bank of California received investment advisory fees of:
$3,952,110, $1,158,537, $1,599,000 and $1,169,765, respectively, from the Fund.
For the fiscal year ended January 31, 1997,(1) Union Bank of
California, N.A. received the following investment advisory fees: $1,599,000
from the Value Momentum Fund.
For the fiscal year ended January 31, 1996, the Adviser's
predecessor received the following investment advisory fees: $1,169,765 from the
Value Momentum 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 the 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 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 Value Momentum Fund will generally involve the payment of a
brokerage fee. While the Advisor generally seeks competitive spreads or
commissions on behalf of the Fund, HighMark Funds may not necessarily pay the
lowest spread or commission available on each transaction, for reasons discussed
below.
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<PAGE> 59
Allocation of transactions, including their frequency, to various
dealers is determined by the Advisor 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 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 and does not reduce the advisory fees payable to the
Advisor by HighMark Funds. Such information may be useful to the Advisor 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 the Fund of HighMark Funds are made
independently from those for the Fund or any other investment company or account
managed by the Advisor. 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 the 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 believes 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 the Fund or the size of the
position obtained by the Fund. To the extent permitted by law, the Advisor may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for the other Fund or for other investment companies or
accounts in order to obtain best execution. As provided in the Investment
Advisory Agreement in making investment recommendations for HighMark Funds, the
Advisor 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, its parent or its subsidiaries or affiliates and, in dealing with its
commercial customers, the Advisor and its 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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<PAGE> 60
During the fiscal year ended July 31, 1998, no brokerage was
directed for the Fund. For the period ended July 31, 1997 and the fiscal year
ended January 31, 1997, the Fund paid brokerage commissions of $118,620 and
$122,239, respectively.
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 believes that it possesses the legal authority to
perform the services for the Fund contemplated by the Investment Advisory
Agreement and described in the Prospectus and this Statement of Additional
Information and has so represented in the Investment Advisory Agreement. 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 the Board of Trustees of HighMark Funds
would review HighMark Funds' relationship with the Advisor 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
-31-
<PAGE> 61
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 the Fund 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 fees of $1,185,633 from the Fund (an additional $131,737
in fees were voluntarily reduced).
For the fiscal year ended July 31, 1997, the Administrator received
fees of $298,886 from the Fund (an additional $22,063 in fees were voluntarily
reduced).
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<PAGE> 62
For the fiscal year ended January 31, 1997, the Administrator received
fees of $336,000 from the Fund.
For the fiscal year ended January 31, 1996, the Administrator received
fees of $261,423 from the 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, 2000. The Administration Agreement thereafter shall be
renewed automatically for successive annual terms. The Administration Agreement
is terminable at any time with respect to the 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 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 the 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 the Fund's average daily net assets.
SHAREHOLDER SERVICING AGREEMENT
HighMark Capital Management, Inc., HighMark Funds and the California
Department of Personnel have entered into a shareholder servicing agreement
pursuant to which HighMark Capital Management is to pay compensation to the
California Department of Personnel for providing certain shareholder support
services to plan participants in the State of California Savings Plus Program
("Plan Participants") who are the beneficial or record owners of Shares of the
Fund. In consideration for such services, the California Department of Personnel
is
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<PAGE> 63
compensated by the Advisor monthly at an annual rate of 0.10% on the average
monthly net assets of the Value Momentum Fund held in the Thrift Plan and
Deferred Compensation Plan in the State of California Savings Plus Program.
The servicing agreement adopted requires the California Department of
Personnel to perform certain shareholder support services as set forth in the
Servicing Agreement with respect to the beneficial or record owners of Class I
Shares of the Value Momentum Fund.
California Department of Personnel has agreed to provide certain
shareholder support services in connection with the Class I Shares of the Value
Momentum Fund. Such shareholder support services may include, but are not
limited to, (i) maintaining separate records for each Plan Participant with
respect to the Value Momentum Fund, which records shall reflect shares purchased
and redeemed and share balances, (ii) transmitting to the Value Momentum Fund
purchase and redemption orders on behalf of Plan Participants, (iii) preparing
and transmitting to Plan Participants periodic account statements showing the
total number of shares owned by them as of the statement closing date, purchases
and redemptions of Fund shares by the plan participant during the period covered
by the statement and the dividends and other distributions paid to the plan
participant during the statement period (whether paid in cash or reinvested in
Fund shares), and (iv) transmitting to plan participants proxy materials,
reports and other information required to be sent to shareholders under the
federal securities laws received by the California Department of Personnel from
the Value Momentum Fund.
EXPENSES
HighMark Funds' service providers bear all expenses in connection with
the performance of their respective services, except that the 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.
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<PAGE> 64
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, as re-executed January 30, 1998, between
HighMark Funds and the Distributor.
Unless terminated, the Distribution Agreement will continue in effect
until July 31, 2000 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
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Distribution Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement is terminable without
penalty, on not less than sixty days' notice by HighMark Funds' Board of
Trustees, by vote of a majority of the outstanding voting securities of HighMark
Funds or by the Distributor. The Distribution Agreement terminates in the event
of their assignment, as defined in the 1940 Act.
TRANSFER AGENT AND CUSTODIAN SERVICES
State Street Bank and Trust Company performs transfer agency services
for the Fund pursuant to a transfer agency and shareholder service agreement
with HighMark Funds dated as of February 15, 1997 (the "Transfer Agency
Agreement"). As the Fund's transfer agent, State Street Bank and Trust Company
processes purchases and redemptions of the Fund's Shares and maintains the
Fund's Shareholder transfer and accounting records, such as the history of
purchases, redemptions, dividend distributions, and similar transactions in a
Shareholders's account.
Under the Transfer Agency Agreement, HighMark Funds has agreed to pay
State Street Bank and Trust Company annual fees at the rate of $15,000 per Class
I/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 the Fund to increase
the Fund's net income available for distribution as dividends.
Union Bank of California, N.A. serves as custodian to the Fund 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 the Fund's
cash and securities, handling
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<PAGE> 65
the receipt and delivery of securities, and collecting interest and dividends on
the Fund's investments.
Under the Custodian Agreement, HighMark Funds has agreed to pay Union
Bank of California a domestic custodian fee with respect to the 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 the 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
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
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<PAGE> 66
amended, with respect to the Shares of each series of HighMark Funds. HighMark
Funds presently consists of fourteen series of Shares, representing units of
beneficial interest in the Growth Fund, the Income Equity Fund, the Balanced
Fund, the Value Momentum Fund, the Emerging Growth Fund, the International
Equity Fund, the Small Cap Value Fund, the Bond Fund, the Intermediate-Term Bond
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 four classes of Shares,
designated Class A and Class B Shares (collectively, "Retail Shares"), Fiduciary
Shares and Class I 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 the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective Fund, of any general assets not
belonging to any particular Fund that are available for distribution.
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to the Fund" means the consideration received by
HighMark Funds upon the issuance or sale of Shares in the 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 the Fund that are allocated to the 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 Fund at the time of allocation. Assets
belonging to the 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 the Fund that are allocated to that
Fund in proportion to the relative net asset values of the Fund at the time of
allocation. The timing of allocations of general assets and general liabilities
and expenses of HighMark Funds to the Fund 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 the 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
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<PAGE> 67
Funds shall not be deemed to have been effectively acted upon unless approved by
the holders of a majority of the outstanding Shares of the Fund affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding Shares of the Fund will be required in connection with a matter, the
Fund will be deemed to be affected by a matter unless it is clear that the
interests of the 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.
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 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.
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<PAGE> 68
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 Fund 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
Fund 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 Fund 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 Fund 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 Fund; (7)
comparisons of investment products (including the Fund) 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 the Fund. The Fund
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 the Fund.
-39-
<PAGE> 69
For the Class I Shares of the Fund, the average annual total returns
for the one-year and five-year periods ended July 31, 1998 were 9.22% and
19.73%, respectively.
For the period since commencement of operations of the Fund (February
1, 1991) through July 31, 1998, the average annual total return was 18.12%.
Class I Shares commenced operations October 1, 1999. Performance
figures for the periods prior to that date reflect the performance of the
Fiduciary Shares.
The 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 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
I Shares of the Fund was 1.19%. 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.
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
-40-
<PAGE> 70
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.
MISCELLANEOUS
Prior to April 28, 1997, the HighMark Value Momentum 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. The Fund is the accounting
survivor of a reorganization of two mutual funds. All fees paid by the Fund 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 the 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
the Fund for each prior fiscal year, the financial and investment information is
provided for the period February 1 through January 31.
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.
-41-
<PAGE> 71
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 Prospectus 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 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
Prospectus and this Statement of Additional Information.
As of July 28, 1999, HighMark Funds believes that the trustees and
officers of HighMark Funds, as a group, owned less than one percent of the
Shares of the Fund. As of July 28, 1999, HighMark Funds believes that Union Bank
of California was the shareholder of record of 100% of the Class I Shares of the
Fund. As of July 28, 1999, HighMark Funds believes that Union Bank of California
had voting power with respect to 100% of the Fund's Class I Shares.
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 July 28, 1999.
-42-
<PAGE> 72
5% OR MORE OWNERS
INCOME EQUITY FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
The Jackson Family Foundation 5.92%
Attn: Claire Grabowski
421 Aviation Blvd.
Santa Rosa, CA 95403-1069
</TABLE>
INCOME EQUITY FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
---------------- ----------------------------------
<S> <C>
Lane & Company 86.12%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
VALUE MOMENTUM FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Mellon Bank NA Trustee for Dept. 9.93%
of Personnel Admin. of State of California
Attn: Wally Adebayo
One Cabot Road, Mail Zone 028-003I
Medford, MA 02155-5141
Lane & Company 86.55%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
---------------- ----------------------------------
<S> <C>
Union Bank of California Retirement Plan 7.75%
350 California Street
San Francisco, CA 94104
Union Bank of California 401(k) Plan 8.64%
350 California Street
San Francisco, CA 94104
</TABLE>
GROWTH FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Lane & Company 82.06%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
Dott Pension
c/o Union Bank of Tokyo Trust Company 10.17%
Attn: Dennis Demetropoulos
1251 Avenue of the Americas FL 10
New York, NY 10020-1104
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
---------------- ----------------------------------
<S> <C>
Union Bank of California Retirement Plan 13.57%
350 California Street
San Francisco, CA 94104
Union Bank of California 401(k) Plan 10.87%
350 California Street
San Francisco, CA 94104
</TABLE>
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<PAGE> 74
BALANCED FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Ty & Wei Chen Yeh TTEE 7.79%
Yeh Family Trust
U/A 9/11/91
2048 Studebaker Rd.
Long Beach, CA 90815-3539
</TABLE>
BALANCED FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
American Express Trust Company 9.51%
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. 5.39%
Putnam Investments DCPA
Nissan Motor Corporation
Location 31
P.O. Box 9740
Providence, RI 02940-9740
Lane & Company 79.24%
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 401k Plan 5.39%
Attn: Virginia King
P.O. Box 191
Gardena, CA 90248-0191
</TABLE>
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<PAGE> 75
<TABLE>
<S> <C>
Nummi Harly Retirement Plan 9.94%
Attn: Paige Kanisberg
45500 Fremont Blvd.
Fremont, CA 94538
NEC Savings Plan 9.51%
8 Old Sod Farm Road
Melville, NY 11747
Union Bank of California 401(k) Plan 9.16%
350 California Street
San Francisco, CA 94104
Union Bank of California Retirement Plan 11.41%
Controllers Division
P.O. Box 45000
San Francisco, CA 94145
</TABLE>
SMALL CAP VALUE FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Elizabeth Pearce 5.75%
135 Driftwood
Marina Del Ray, CA 90292-5734
Small Business Plan P.S. 6.68%
Union Bank of California TTBE.
Thomas J. Gram, Prof. Corp. P/Adm.
5800 Shellmound St., Suite 210
Emeryville, CA 94608-1931
State Street Bank & Trust 21.21%
Cust for the IRA of
Harold A. Hunter
480 Oak Grove Drive, Apt. 4
Santa Clara, CA 95054-3531
</TABLE>
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<PAGE> 76
<TABLE>
<S> <C>
NFSC FEBO # OBP-373230 6.54%
Frank L. Coan
9468 Danbury Street
Cypress, CA 90630-2849
</TABLE>
SMALL CAP VALUE FUND - CLASS B SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Donaldson Lufkin Jenrette 18.19%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
State Street Bank & Trust Co. 7.03%
Cust for the Rollover IRA of
Regina L. Tilley
12698 Eagle Court
Groveland, CA 95321-9529
State Street Bank & Trust Co. 5.56%
Cust for the IRA R/O
FBO Marie L. Guerrero
1688 Yosemite Drive
Milpitas, CA 95035-6550
Donaldson Lufkin Jenrette 5.35%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
</TABLE>
SMALL CAP VALUE FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Lane & Company 96.51%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
-47-
<PAGE> 77
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
---------------- ----------------------------------
<S> <C>
Union Bank of California Retirement Plan 95.18%
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 44.88%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas, Fl. 10
New York, NY 10020-1104
Lane & Company 54.75%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
Bank of Tokyo Mitsubishi 16.723%
International Securities and Investments
Attn: Takoshi Chino, Manager
7-1 Marunouchi 2-Chome
Tokyo 100 Japan
BTM U.S. Agency Retirement Plan 6.591%
1251 Avenue of the Americas
New York, NY 11020
</TABLE>
BOND FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Northwestern Trst. & Advisory Co. TTBE 6.79%
1201 3rd Ave., Suite 2010
Seattle, WA 98101-3026
Alice A. Swenning Trust 6.33%
The Swenning Fam. TTBE
U/A 9/23/91
1447 21st Ave.
Kingsburg, CA 93631-2027
</TABLE>
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<PAGE> 78
BOND FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Lane & Company 61.88%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
Bott Pension 31.85%
c/o Bank of Tokyo Trust Company
Attn: Dennis Demetropoulos
1251 Avenue of the Americas FL 10
New York, NY 10020-1104
Union Bank of California 401(k) Plan 5.22%
350 California Street
San Francisco, CA 94104
</TABLE>
INTERMEDIATE-TERM BOND FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
National Financial Services Corp. 94.01%
for Exclusive Benefit of Our Cust.
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
INTERMEDIATE-TERM BOND FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Lane & Company 94.82%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 120109
San Diego, CA 92112-0109
</TABLE>
-49-
<PAGE> 79
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND - CLASS A SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
NFSC FEBO #OBP-436976 5.57%
Linda C. Ragland
Ronald E. Ragland
P.O. Box 224
Rancho Santa Fe, CA 92067-0324
NFSC FEGO # PCI-081639 11.19%
Marcelino EStrada Munzttee
Marcelino Estrada Muniz Living
TR of 1998 U/A 11/23/98
2840 D Street
Selma, CA 93662-2903
NFSC FEGO # OBP-435538 5.56%
The Warne Family Trust
Thomas W. Warne
U/A 06/18/91
10200 Bolsa Avenue Space 130
Westminster, CA 92683-6748
Bill S. Tsutagawa
Yuriko Tsutagawa
2242 Valley Rd.
Oceanside, CA 92056-3107
Peter Johnson 16.79%
10350 N. Torrey Pines Rd., #100
La Jolla, CA 92037-1018
Larry Strasbaugh 5.62%
2555 W. Poza Road
Santa Margarita, CA 93453-9621
The Featherston Trust 5.40%
Lawrence H. Featherston
U/A 10/19/95
1300 S. Montezuma Way
West Covina, CA 91791-3738
</TABLE>
-50-
<PAGE> 80
<TABLE>
<S> <C>
Aaron Belokamen 5.85%
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 100%
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>
Lane & Company 79.94%
c/o Union Bank of California
Attn: Katherine Hillman
P.O. Box 85484
San Diego, CA 92186-5484
AXA Banque 7.57%
972 Rus Saint Honore
75040 Paris Cedex 01 France
The Equitable Life Assurance 5.61%
Society of the United States
1290 Avenue of the Americas
12th Floor
Attn: Rosemarie Shomstein
New York, NY 10104-0101
</TABLE>
<TABLE>
<CAPTION>
Name and Address Percentage of Beneficial Ownership
---------------- ----------------------------------
<S> <C>
Nummi Hourly Retirement Plan 7.92%
45500 Fremont Blvd
Fremont, CA 94538
</TABLE>
-51-
<PAGE> 81
<TABLE>
<S> <C>
Union Bank of California Retirement Plan 61.13%
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 99.16%
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 80.07%
Lane & Co Cash
Attn: Fund Accounting
PO Box 85602
San Diego, CA 92186-5602
Lane & Company 18.30%
c/o Union Bank
Attn: Kathleen Heilman
PO Box 120109
San Diego, CA 92112-0109
</TABLE>
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 98.89%
For the Benefit of our Customers
Church Street Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
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<PAGE> 82
U.S. GOVERNMENT MONEY MARKET FUND - CLASS B SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Lakeside Business Center 35.69%
Sole Proprietorship
Ronald E. Soderling
1400 N Bristol Street Suite #150
Newport Beach, CA 97660-2957
Laguna Ridge Business Center 24.07%
Sole Proprietorship
Ronald E. Soderling
1400 N. Bristol St. Suite 150
Newport Beach, CA 92650-2957
Park Laguna Hills 23.79%
Sole Proprietorship
Ronald B. Soderling
1400 N. Bristol St. Suite 150
Newport Beach, CA 92660-2957
</TABLE>
U.S. GOVERNMENT MONEY MARKET FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Union Bank 96.17%
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 13.81%
7200 Wisconsin Avenue # 1001
Bethesda, MD 20814-4813
ELIC 98 Part CU 8.16%
</TABLE>
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<PAGE> 83
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 99.74%
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 94.54%
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>
Lane & Company 5.09%
c/o Union Bank of California
Attn: Kathleen Heilman
P.O. Box 85484
San Diego, CA 92186-5464
Muni of Anchorage 11.96%
City of Anchorage
Attn: Ellen Braden, Treasurer
632 W. Sixth Avenue
Anchorage, AK 99501
</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 99.95%
For the Benefit of our Customers
Church Street Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
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<PAGE> 84
CALIFORNIA TAX-FREE MONEY MARKET FUND - FIDUCIARY SHARES
<TABLE>
<CAPTION>
Name and Address Percentage of Ownership of Record
---------------- ---------------------------------
<S> <C>
Union Bank 99.86%
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>
Van Daele Development Corp. 6.70%
Attn: Jeff Hack
2900 Adams Street
Riverside, CA 92504
</TABLE>
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<PAGE> 85
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.
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
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<PAGE> 86
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:
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.
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<PAGE> 87
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.
- 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
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<PAGE> 88
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.
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.
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<PAGE> 89
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.
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
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<PAGE> 90
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.
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
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<PAGE> 91
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 the
HighMark Value Momentum Fund for the period ended January 31, 1999 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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