<PAGE>
BISHOP STREET FUNDS
EQUITY FUND, HIGH GRADE INCOME FUND, HAWAII MUNICIPAL BOND FUND,
MONEY MARKET FUND AND TREASURY MONEY MARKET FUND
INSTITUTIONAL CLASS SHARES
SUPPLEMENT DATED JUNE 14, 1999
TO PROSPECTUS DATED APRIL 30, 1999
The Supplement provides new and additional information beyond that contained in
the Prospectus, and should be read in conjunction with the Prospectus.
The third paragraph in the section entitled "HOW TO PURCHASE FUND SHARES" on
page 15 of the Prospectus should be removed and replaced with the following:
Institutional Class Shares may be purchased by: (i) holders of fiduciary,
advisory, agency, custodial and other similar accounts maintained with
BancWest Corporation and its banking and non-banking subsidiaries; (ii)
shareholders of the Bishop Street Funds with an existing Fund account prior
to June 14, 1999; (iii) registered investment advisors, regulated by a
federal or state governmental authority, or financial planners who purchase
shares for an account for which they are authorized to make investment
decisions and who are compensated by their clients for their services; (iv)
retirement and other benefit plans sponsored by governmental entities; and
(v) financial institutions, which may purchase shares on their own account or
as record owner on behalf of their fiduciary, agency or custodial accounts.
You may also purchase Institutional Class Shares of the Bishop Street Money
Market Fund through a representative of BancWest Corporation and its banking
and non-banking subsidiaries.
The first sentence of the section entitled "MINIMUM PURCHASES & AUTOMATIC
INVESTMENT PLANS" should be removed and replaced with the following:
You may open an account with a $1,000 minimum initial investment per fund ($500
for those investing in retirement plans and for officers, directors and
employees of BancWest Corporation and its banking and non-banking subsidiaries).
The first sentence of the second paragraph of the section entitled "MINIMUM
PURCHASES & AUTOMATIC INVESTMENT PLANS" should be removed and replaced with the
following:
If you have a checking or savings account, you may establish an AIP and open an
account with a $100 minimum initial investment per fund ($50 for officers,
directors and employees of BancWest Corporation and its banking and non-banking
subsidiaries).
The first sentence of the section entitled "INVOLUNTARY SALES OF YOUR SHARES"
should be removed and replaced with the following:
If your account balance drops below $1,000 ($500 for those investing in
retirement plans; $100 for officers, directors and employees of BancWest
Corporation and its banking and non-banking subsidiaries, who have arranged to
purchase shares through the AIP) because of redemptions, you may be required to
sell your shares.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
<PAGE>
BISHOP STREET FUNDS
A MUTUAL FUND FAMILY ADVISED BY FIRST HAWAIIAN BANK
EQUITY FUND, HIGH GRADE INCOME FUND, HAWAII MUNICIPAL BOND FUND,
MONEY MARKET FUND AND TREASURY MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL CLASS SHARES
APRIL 30, 1999 AS SUPPLEMENTED ON JUNE 14, 1999
This Statement of Additional Information is not a prospectus. It is intended
to provide additional information regarding the activities and operations of
the Bishop Street Funds. Please read this in conjunction with the Bishop
Street Funds' prospectus dated April 30, 1999. Prospectuses may be obtained
through the Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania
19456.
TABLE OF CONTENTS
Page
The Trust.........................................................S-2
Description of Permitted Investments..............................S-2
Investment Limitations...........................................S-12
The Adviser......................................................S-13
The Sub-Adviser..................................................S-14
The Administrator................................................S-15
The Distributor..................................................S-16
The Transfer Agent...............................................S-17
The Custodian....................................................S-17
Independent Auditors.............................................S-17
Legal Counsel....................................................S-17
Trustees and Officers of the Trust...............................S-18
Reporting........................................................S-20
Performance......................................................S-21
Calculation of Total Return......................................S-22
Purchasing Shares................................................S-24
Redeeming Shares.................................................S-24
Determination of Net Asset Value.................................S-24
Taxes............................................................S-26
Fund Transactions................................................S-31
Description of Shares............................................S-33
Voting...........................................................S-35
Shareholder Liability............................................S-35
Limitation of Trustees' Liability................................S-35
5% and 25% Shareholders..........................................S-36
Financial Information............................................S-37
S-1
<PAGE>
THE TRUST
Bishop Street Funds (the "Trust") is an open-ended management
investment company. The Trust is organized under Massachusetts law, as a
Massachusetts business trust, under an Amended and Restated Agreement and
Declaration of Trust dated September 1, 1994. The Agreement and Declaration
of Trust permits the Trust to offer separate series of units of beneficial
interest (the "shares") and separate classes of funds. Shareholders may
purchase shares in certain funds through two separate classes, Class A and
Institutional Class, which provide for variations in sales charges,
distribution costs, transfer agent fees, voting rights and dividends. Except
for differences between the Class A shares and the Institutional Class shares
pertaining to sales charges, distribution and shareholder servicing, voting
rights, dividends and transfer agent expenses, each share of each series
represents an equal proportionate interest in that series. Please see
"Description of Shares" for more information.
This Statement of Additional Information relates to the
Institutional Class shares of the Trust's Equity Fund, High Grade Income
Fund, Hawaii Municipal Bond Fund, Money Market Fund and Treasury Money Market
Fund (the "Funds").
DESCRIPTION OF PERMITTED INVESTMENTS
The following information supplements the information about
permitted investments set forth in the Prospectus.
FUND INVESTMENTS & PRACTICES
LEGEND
% - Maximum percentage permissible. All percentages shown are of
total assets unless otherwise noted.
X - No Policy limitation; Fund may be currently using.
* - Permitted, but not typically used.
- - Not permitted
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS
- -------------------------------------------------------------------------- -------------------- --------------------
TREASURY
MONEY MARKET MONEY MARKET
FUND FUND
- --------------------------------------------------------------------------------------------------------------------
TRADITIONAL INVESTMENTS
- -------------------------------------------------------------------------- -------------------- --------------------
Bank Obligations X -
- -------------------------------------------------------------------------- -------------------- --------------------
Commercial Paper X(1) -
- -------------------------------------------------------------------------- -------------------- --------------------
Municipal Securities X(2) -
- -------------------------------------------------------------------------- -------------------- --------------------
Repurchase Agreements X X(3)
- -------------------------------------------------------------------------- -------------------- --------------------
U.S. Government Agency and Treasury Obligations X X(4)
- -------------------------------------------------------------------------- -------------------- --------------------
Zero Coupon Obligations X -
- -------------------------------------------------------------------------- -------------------- --------------------
Variable & Floating Rate Instruments X -
- -------------------------------------------------------------------------- -------------------- --------------------
Yankee Bonds X -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT PRACTICES
- -------------------------------------------------------------------------- -------------------- --------------------
Borrowing 33 1/3% 33 1/3%
- -------------------------------------------------------------------------- -------------------- --------------------
Illiquid Securities 10%(5) 10%(5)
- -------------------------------------------------------------------------- -------------------- --------------------
Securities Lending 50% 50%
- -------------------------------------------------------------------------- -------------------- --------------------
Standby Commitments 33 1/3% 33 1/3%
- -------------------------------------------------------------------------- -------------------- --------------------
When-Issued Securities 33 1/3% 33 1/3%
- -------------------------------------------------------------------------- -------------------- --------------------
</TABLE>
1. Rated in the highest category by S&P or Moody's, or unrated equivalent.
2. Rated in the two highest ratings categories by S&P or Moody's, or
unrated equivalent.
3. Limited to repurchase agreements involving U.S. Treasury Obligations.
4. Limited to U.S. Treasury Obligations.
5. Percentage based on net assets, not total assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NON-MONEY MARKET FUNDS
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
HAWAII
MUNICIPAL HIGH GRADE
EQUITY FUND BOND FUND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------
TRADITIONAL INVESTMENTS
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
ADRs 35% - X
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Asset-Backed Securities - - 35%(7)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Bank Obligations - - 35%(1)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Commercial Paper - - 35%(1)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Convertible Securities 35% - -
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Corporate Debt Obligations - 20%(3) X(1),(2)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Equity Securities X - -
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Investment Company Shares 10% 10% 10%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Mortgage-Backed Securities - - 35%(4)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Municipal Securities - X(5) -
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Repurchase Agreements 35% 20%(3) 35%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Restricted Securities 15% 15% 15%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Securities of Foreign Issuers * - X(1)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Supranational Agency Obligations - - 35%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
U.S. Government Agency and Treasury Obligations - 20%(3) X(6)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Variable & Floating Rate Instruments - X X
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Zero Coupon Obligations - X X
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Borrowing 33 1/3% 33 1/3% 33 1/3%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Illiquid Securities 15%(3) 15%(3) 15%(3)
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Securities Lending 15% 15% 50%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
Standby Commitments 33 1/3% 33 1/3% 33 1/3%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
When-Issued Securities 33 1/3% 33 1/3% 33 1/3%
- ---------------------------------------------------------------- ---------------- ---------------- -----------------
</TABLE>
1. Rated in the two highest ratings category by S&P or Moody's, or unrated
equivalent.
S-3
<PAGE>
2. May invest up to 5% in securities rated BBB by S&P or BAA by
Moody's, or unrated equivalent.
3. Percentage is based on net assets, not total assets.
4. Includes privately issued mortgage-backed securities rated A or higher by
S&P or Moody's, or unrated equivalents.
5. Will invest at least 65% of its assets in municipal securities issued by
the State of Hawaii. Will invest at least 80% of its net assets in
investment grade securities that pay income exempt from regular federal
income tax.
6. May invest in U.S. Treasury Receipts.
7. Rated in the three highest ratings categories by S&P or Moody's, or unrated
equivalents.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- ADRs are securities typically
issued by U.S. financial institutions (depositaries). ADRs represent ownership
interests in a security, or a pool of securities, issued by a foreign issuer and
deposited with the depositary. ADRs may be available through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the security underlying the receipt and a depositary. An unsponsored
facility may be established by a depositary without the participation of the
issuer of the underlying security.
ARMs (ADJUSTABLE RATE MORTGAGE SECURITIES) are pass-through
certificates representing ownership in a pool of adjustable rate mortgages. ARMs
make monthly payments based on a pro rata share of interest and principal
payments, and prepayments of principal on the pool of underlying mortgages. The
adjustable rate feature reduces, but does not eliminate, price fluctuations in
this type of mortgage-backed security.
ASSET-BACKED SECURITIES are securities backed by non-mortgage assets
such as company receivables, truck and auto loans, leases, and credit card
receivables. These securities are generally issued as pass-through certificates,
which represent undivided fractional ownership interests in the underlying pools
of assets. Asset-backed securities may also be OBLIGATIONS, which are also known
as collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning
these assets and issuing DEBT OBLIGATIONS.
BANK OBLIGATIONS are SHORT-TERM OBLIGATIONS issued by U.S. and foreign
banks, including bankers' acceptances, certificates of deposit, custodial
receipts, and time deposits.
COMMERCIAL PAPER is a term used to describe unsecured short-term
promissory notes issued by municipalities, corporations, and other entities that
have maturities generally from a few days to nine months.
FOREIGN SECURITIES -- U.S. dollar denominated obligations of foreign
issuers may consist of obligations of foreign branches of U.S. banks and of
foreign banks, including European Certificates of Deposit, European Time
Deposits, Canadian Time Deposits and Yankee
S-4
<PAGE>
Certificates of Deposits, and investments in Canadian Commercial Paper,
foreign securities and Europaper. American Depositary Receipts have
investment risks that differ in some respects from those related to
investments in obligations of U.S. domestic issuers. Such risks include
future adverse political and economic developments, the possible imposition
of withholding taxes on interest or other income, possible seizure,
nationalization, or expropriation of foreign deposits, the possible
establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of
other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Such investments may
also entail higher custodial fees and sales commissions than domestic
investments. Foreign issuers of securities or obligations are often subject
to accounting treatment and engage in business practices different from those
respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
GNMA SECURITIES--Securities issued by the Government National
Mortgage Association ("GNMA"), a wholly-owned U.S. Government corporation,
guarantee the timely payment of principal and interest. The market value and
interest yield of these instruments can vary due to market interest rate
fluctuations and early prepayments of underlying mortgages. These securities
represent ownership in a pool of federally insured mortgage loans. GNMA
certificates consist of underlying mortgages with a maximum maturity of 30
years. However, due to scheduled and unscheduled principal payments, GNMA
certificates have a shorter average maturity and, therefore, less principal
volatility than a comparable 30-year bond. Since prepayment rates vary
widely, it is not possible to accurately predict the average maturity of a
particular GNMA pool. GNMA securities differ from conventional bonds in that
principal is paid back to the certificate holders over the life of the loan
rather than at maturity. The scheduled monthly interest and principal
payments relating to mortgages in the pool are "passed through" to investors.
In addition, there may be unscheduled principal payments representing
prepayments on the underlying mortgages. Although GNMA certificates may offer
yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of
the prepayment feature. For instance, when interest rates decline, the value
of a GNMA certificate likely will not rise as much as comparable debt
securities due to the prepayment feature. In addition, these prepayments can
cause the price of a GNMA certificate originally purchased at a premium to
decline in price to its par value, which may result in a loss.
GOVERNMENT PASS-THROUGH SECURITIES are securities issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. Government and private guarantees do not extend to the
securities' value, which is likely to vary inversely with fluctuations in
interest rates.
S-5
<PAGE>
ILLIQUID SECURITIES are securities that cannot be disposed of within
seven days at approximately the price at which they are being carried on a
mutual fund's books.
INVESTMENT COMPANY SHARES--Shares of other mutual funds which may be
purchased by the Funds to the extent consistent with applicable law. Under
these rules and regulations of the Investment Company Act of 1940 (the "1940
Act"), a Fund is prohibited from acquiring the securities of other investment
companies if, as a result of such acquisition, the Fund would own more than
3% of the total voting stock of the company; securities issued by any one
investment company represented more than 5% of the Fund's assets; or
securities (other than treasury stock) issued by all investment companies
would represent more than 10% of the total assets of the Fund. These
investment companies typically incur fees that are separate from those fees
incurred directly by the Fund. A Fund's purchase of such investment company
securities results in the layering of expenses, such that shareholders of the
Funds would indirectly bear a proportionate share of the operating expenses
of such investment companies, including advisory fees.
MORTGAGE-BACKED--Two principal types of mortgage-backed securities
are collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). CMOs are securities collateralized by
mortgages, mortgage pass-through certificates, mortgage pay-through bonds
(bonds representing an interest in a pool of mortgages where the cash flow
generated from the mortgage collateral pool is dedicated to bond repayment),
and mortgage-backed bonds (general obligations of issuers payable out of the
issuers' general funds and additional secured by a first lien on a pool of
single family properties).
Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence. Investors purchasing CMOs
in the shortest maturities receive or are credited with their PRO RATA
portion of the scheduled payments of interest and principal on the underlying
mortgages plus all unscheduled prepayments of principal up to a predetermined
portion of the total CMO obligation. Until that portion of such CMO
obligation is repaid, investors in the longer maturities receive interest
only. Accordingly, CMOs in longer maturity series are less likely than other
mortgage pass-throughs to be prepaid prior to their stated maturity. Although
some of the mortgages underlying CMOs may be supported by various types of
insurance, and while some CMOs may be backed by GNMA certificates or other
mortgage pass-throughs issued or guaranteed by U.S. Government agencies or
instrumentalities, CMOs themselves are not generally guaranteed by the U.S.
Government or any other entity.
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities.
MUNICIPAL SECURITIES -- Municipal notes include, but are not limited
to, general obligation notes, tax anticipation notes (notes sold to finance
working capital needs of the issuer in anticipation of receiving taxes on a
future date), revenue anticipation notes (notes sold to
S-6
<PAGE>
provide needed cash prior to receipt of expected non-tax revenues from a
specific source), bond anticipation notes, certificates of indebtedness,
demand notes and construction loan notes.
Private activity bonds are issued by or on behalf of states or
political subdivisions thereof to finance privately owned or operated
facilities for business and manufacturing housing, sports, and pollution
control and to finance activities of and facilities for charitable
institutions. Private activity bonds are also used to finance public
facilities such as airports, mass transit systems, ports parking and low
income housing. The payment of the principal and interest on private activity
bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and may be secured by a pledge of real and personal
property so financed.
Investments in floating rate instruments will normally involve
industrial development or revenue bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate (such as
the prime rate) at a major commercial bank, and that the Fund can demand
payment of the obligation at all times or at stipulated dates on short notice
(not to exceed 30 days) at par plus accrued interest. Such obligations are
frequently secured by letters of credit or other credit support arrangements
provided by banks. The quality of the underlying credit or of the bank, as
the case may be, must, in the Adviser's opinion be equivalent to the
long-term bond or commercial paper ratings stated above. The Adviser will
monitor the earning power, cash flow and liquidity ratios of the issuers of
such instruments and the ability of an issuer of a demand instrument to pay
principal and interest on demand. The Adviser may purchase other types of
tax-exempt instruments as long as they are of a quality equivalent to the
bond or commercial paper ratings stated above.
The Adviser has the authority to purchase securities at a price
which would result in a yield to maturity lower than that generally offered
by the seller at the time of purchase when they can simultaneously acquire
the right to sell the securities back to the seller, the issuer, or a third
party (the "writer") at an agreed-upon price at any time during a stated
period or on a certain date. Such a right is generally denoted as a "standby
commitment" or a "put." The purpose of engaging in transactions involving
puts is to maintain flexibility and liquidity in order to meet redemptions
and remain as fully invested as possible in municipal securities. The right
to put the securities depends on the writer's ability to pay for the
securities at the time the put is exercised. The Funds will limit their put
transactions to those with institutions which the Adviser believes present
minimum credit risks, and the Adviser will use its best efforts to initially
determine and thereafter monitor the financial strength of the put providers
by evaluating their financial statements and such other information as is
available in the marketplace. It may, however, be difficult to monitor the
financial strength of the writers where adequate current financial
information is not available. In the event that any writer is unable to honor
a put for financial reasons, the affected Fund would be a general creditor
(i.e., on a parity with all other unsecured creditors) of the writer.
Furthermore, particular provisions of the contract between a Fund and the
writer may excuse the writer from repurchasing the securities in certain
circumstances (for example, a change in the published rating of the
underlying municipal securities or any similar
S-7
<PAGE>
event that has an adverse effect on the issuer's credit); or a provision in
the contract may provide that the put will not be exercised except in certain
special cases, for example, to maintain portfolio liquidity. A Fund could,
however, sell the underlying portfolio security in the open market or wait
until the portfolio security matures, at which time it should realize the
full par value of the security.
Municipal securities purchased subject to a put may be sold to third
persons at any time, even though the put is outstanding, but the put itself,
unless it is an integral part of the security as originally issued, may not
be marketable or otherwise assignable. Sale of the securities to third
parties or lapse of time with the put unexercised may terminate the right to
put the securities. Prior to the expiration of any put option, a Fund could
seek to negotiate terms for the extension of such an option. If such a
renewal cannot be negotiated on terms satisfactory to a Fund, such Fund
could, of course, sell the portfolio security. The maturity of the underlying
security will generally be different from that of the put. There will be no
limit to the percentage of portfolio securities that the Funds may purchase
subject to a put. For the purpose of determining the "maturity" of securities
purchased subject to an option to put, and for the purpose of determining the
dollar-weighted average maturity of the Funds including such securities, the
Trust will consider "maturity" to be the first date on which it has the right
to demand payment from the writer of the put although the final maturity of
the security is later than such date.
SPECIAL CONSIDERATIONS RELATING TO HAWAII MUNICIPAL SECURITIES
The ability of issues to pay interest on, and repay principal of,
Hawaii Municipal Securities may be affected by: (1) the general financial
condition of the State of Hawaii; (2) amendments to the Hawaii Constitution
and related statutes that limit the taxing and spending authority of Hawaii
government entities; (3) voter initiatives; (4) civil actions; and (5) a wide
variety of Hawaii laws and regulations.
Municipal securities which are payable only from the revenues
derived from a particular facility may be adversely affected by Hawaii laws
or regulations which make it more difficult for the particular facility to
generate revenues sufficient to pay such interest and principal including,
among others, laws and regulations which limit the amount of fees, rates or
other charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have
the effect of reducing the use of such facilities generally, thereby reducing
the revenues generated by the particular facility. Municipal securities, the
payment of interest and principal on which is insured in whole or in part by
a Hawaii governmentally created fund, may be adversely affected by Hawaii
laws or regulations which restrict the aggregate proceeds available for
payment of principal and interest in the event of a default on such municipal
securities. Similarly, municipal securities, the payment of interest and
principal on which is secured, in whole or in part, by an interest in real
property may be adversely affected by Hawaii laws which limit the
availability of remedies or the scope of remedies available in the event of a
default on such municipal securities. Because of the diverse
S-8
<PAGE>
nature of such laws and regulations and the impossibility of either
predicting in which specific municipal securities the Hawaii Municipal Bond
Fund will invest from time to time or predicting the nature or extent of
future changes in existing laws or regulations or the future enactment or
adoption of additional laws or regulations, it is not presently possible to
determine the impact of such laws and regulations on the securities in which
the Fund may invest and, therefore, on the shares of the Fund.
OTHER INVESTMENTS -- The Funds are not prohibited from investing in
obligations of banks which are clients of SEI Investments Company ("SEI").
However, the purchase of shares of the Trust by them or by their customers
will not be a consideration in determining which bank obligations the Funds
will purchase. The Funds will not purchase obligations of the Adviser or the
Sub-Adviser.
PRIVATE PASS-THROUGH SECURITIES are mortgage-backed securities
issued by a non-governmental entity, such as a trust. While they are
generally structured with one or more types of credit enhancement, private
pass-through securities typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality.
REPURCHASE AGREEMENTS are agreements by which a person (E.G., a
Fund) obtains a security and simultaneously commits to return the security to
the seller (a financial institution deemed to present minimal risk of
bankruptcy during the term of the agreement based on guidelines established
and periodically reviewed by the Trustees) at an agreed upon price (including
principal and interest) on an agreed upon date within a number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which
is unrelated to the coupon rate or maturity date of the underlying security.
A repurchase agreement involves the obligation of the seller to pay the
agreed upon price, which obligation is in effect secured by the value of the
underlying security.
Repurchase agreements are considered to be loans by the
participating Fund for purposes of its investment limitations. Repurchase
agreements entered into by the Funds will provide that the underlying
security at all times shall have a value at least equal to 102% of the resale
price stated in the agreement. Under all repurchase agreements entered into
by the Funds, the Fund takes actual or constructive possession of the
underlying collateral. However, if the seller defaults, the Fund could
realize a loss on the sale of the underlying security to the extent that the
proceeds of sale including accrued interest are less than the resale price
provided in the agreement including interest. In addition, even though the
Bankruptcy Code provides protection for most repurchase agreements, if the
seller should be involved in bankruptcy or insolvency proceedings, the Fund
may incur delay and costs in selling the underlying security or may suffer a
loss of principal and interest if the Fund is treated as an unsecured
creditor and required to return the underlying security to the seller's
estate.
S-9
<PAGE>
SECURITIES LENDING--Each of the Funds may lend securities pursuant
to agreements requiring that the loans be continuously secured by cash or
liquid securities as collateral equal to 100% of the market value at all
times of the securities lent. Such loans will not be made if, as a result,
the aggregate amount of all outstanding securities loans for a Fund exceed
one-third of the value of its total assets taken at fair market value. A Fund
will continue to receive interest on the securities lent while simultaneously
earning interest on the investment of the cash collateral in U.S. Government
securities. However, a Fund will normally pay lending fees to broker-dealers
and related expenses from the interest earned on invested collateral. There
may be risks of delay in receiving additional collateral or risks of delay in
recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans are made only
to borrowers deemed by the Adviser to be of good standing and when, in the
judgment of the Adviser, the consideration which can be earned currently from
such securities loans justifies the attendant risk. Any loan may be
terminated by either party upon reasonable notice to the other party.
STANDBY COMMITMENTS AND PUTS permit the holder to sell securities
subject to the standby commitment or put at a fixed price prior to maturity.
Securities subject to a standby commitment or put may be sold at any time at
the current market price. However, unless the standby commitment or put was
an integral part of the security as originally issued, it may not be
marketable or assignable.
STRIPPED MORTGAGE-BACKED SECURITIES (SMBs) are usually structured
with two classes that receive specified proportions of monthly interest and
principal payments from a pool of mortgage securities. One class may receive
all of the interest payments, and the other class may receive all of the
principal payments. SMBs are extremely sensitive to changes in interest rates
because of the impact of prepayment of principal on the underlying mortgage
securities.
SUPRANATIONAL AGENCY OBLIGATIONS are DEBT OBLIGATIONS 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.
U.S. GOVERNMENT AGENCY OBLIGATIONS are obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government. Some
of these securities are supported by the full faith and credit of
the U.S. Treasury, others are supported by the right of the issuer to
borrow from the U.S. Treasury, and others are supported only by the
credit of the agency or instrumentality.
U.S. TREASURY OBLIGATIONS consist of bills, notes, and bonds issued
by the U.S. Treasury. They also consist of separately traded interest and
principal component parts of these obligations that are transferable through
the Federal book-entry system known as Separately Traded Registered Interest
and Principal Securities (STRIPS). Receipts are similar to STRIPS,
S-10
<PAGE>
but are issued by banks or broker-dealers, and are created by depositing U.S.
Treasury obligations into a special account at a custodian bank. The
custodian holds the income from the receipts for the benefit of the receipt
owners.
VARIABLE AMOUNT MASTER DEMAND NOTES are DEBT OBLIGATIONS which may
or may not be backed by bank letters of credit. These notes permit the
investment of fluctuating amounts at varying market rates of interest
pursuant to direct arrangements between the Trust, as lender, and the
borrower. Such notes provide that the interest rate on the amount outstanding
varies on a daily, weekly or monthly basis depending upon a stated short-term
interest rate index. Both the lender and the borrower have the right to
reduce the amount of outstanding indebtedness at any time. There is no
secondary market for the notes. It is not generally contemplated that such
instruments will be traded.
VARIABLE AND FLOATING RATE INSTRUMENTS involve certain DEBT
OBLIGATIONS that may carry variable or floating rates of interest, and may
involve a conditional or unconditional demand feature. Such instruments bear
interest at rates which are not fixed, but which vary with changes in
specified market rates or indices.
WHEN-ISSUED SECURITIES involve the purchase of DEBT OBLIGATIONS on a
when-issued basis, in which case delivery and payment normally take place
within 45 days after the date of commitment to purchase. The Funds will only
make commitments to purchase obligations on a when-issued basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date. The when-issued securities are subject to market
fluctuation, and no interest accrues on the security to the purchaser during
this period. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the purchaser enters
into the commitment. Purchasing obligations on a when-issued basis is a form
of leveraging and can involve a risk that the yields available in the market
when the delivery takes place may actually be higher than those obtained in
the transaction itself. In that case there could be an unrealized loss at the
time of delivery.
Segregated accounts will be established with the custodian, and the
Funds will maintain liquid assets in an amount at least equal in value to the
Funds' commitments to purchase when-issued securities. If the value of these
assets declines, the Funds will place additional liquid assets in the account
on a daily basis so that the value of the assets in the account is equal to
the amount of such commitments.
YANKEE BONDS are U.S. dollar denominated DEBT OBLIGATIONS
issued by the U.S. by foreign banks and corporations.
ZERO COUPON OBLIGATIONS are DEBT OBLIGATIONS that do not bear any
interest, but instead are issued at a deep discount from face value or par.
The value of a zero coupon obligation increases over time to reflect the
interest accredited. Such obligations will not result
S-11
<PAGE>
in the payment of interest until maturity, and will have greater price
volatility than similar securities that are issued at face value or par and
pay interest periodically.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
A Fund may not:
1. Invest more than 25% of its assets in any one industry, except that the
money market funds may do so with respect to U.S. Government obligations
and U.S. bank obligations. This limitation does not apply to the Hawaii
Municipal Bond fund, but the Fund will not invest more than 25% of its
assets in securities of non-governmental entities that are in the same
industry.
2. Invest more than 5% of its assets in the securities of any one issuer
(except for the Hawaii Municipal Bond Fund).
3. Acquire more than 10% of the voting securities of any one issuer, provided
that this limitation shall apply only to 75% of the Fund's net assets
except that this restriction does not apply to the Hawaii Municipal Bond
Fund.
4. Invest in companies for the purpose of exercising control.
5. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding one-third of the value of total assets. To the extent
that such borrowing exceeds 5% of the value of the borrowing Fund's assets,
asset coverage of at least 300% is required. No Fund will purchase
securities while its borrowings exceed 5% of its total assets.
6. Make loans, except that (a) each Fund may purchase or hold debt instruments
in accordance with its investment objective and policies; (b) each Fund may
enter into repurchase agreements; and (c) the Equity, High Grade Income,
Hawaii Municipal Bond, Money Market and Treasury Money Market Funds may
engage in securities lending.
7. Pledge, mortgage or hypothecate assets except to secure borrowings
permitted by (5) above in aggregate amounts not to exceed 33% of total
assets taken at current value at the time of the incurrence of such loan.
8. Purchase or sell real estate, real estate limited partnership interests,
commodities or commodities contracts. However, each of the Funds (other
than the Money Market and Treasury Money Market Funds) may invest in
companies which invest in real estate, and in commodities contracts.
S-12
<PAGE>
9. Make short sales of securities or purchase securities on margin, except
that each Fund may obtain short-term credits as necessary for the clearance
of security transactions.
10. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
11. Purchase securities of other investment companies, except as permitted by
the 1940 Act and the rules and regulations thereunder.
12. Issue senior securities (as defined in the 1940 Act) except in connection
with permitted borrowings as described above or as permitted by rule,
regulation or order of the Securities and Exchange Commission (the "SEC").
13. Invest in interests in oil, gas or other mineral exploration or development
programs and oil, gas or mineral leases.
NON-FUNDAMENTAL POLICY
No Fund may invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of the Fund's net assets (except for all money market funds, for
which the limit is 10%).
The foregoing percentages will apply at the time the Fund purchases the
security and shall not be considered violated unless an excess occurs or exists
immediately after and as a result of a purchase of such security.
THE ADVISER
The Trust and First Hawaiian Bank (the "Adviser") have entered into an
advisory agreement (the "Advisory Agreement") dated March 31, 1999. The Advisory
Agreement provides that the Adviser shall not be protected against any liability
to the Trust or its Shareholders by reason of willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless
disregard of its obligations or duties thereunder.
The Advisory Agreement provides that if, for any fiscal year, the ratio
of expenses of any Fund (including amounts payable to the Adviser but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by any state, the Adviser will bear the amount
of such excess. The Adviser will not be required to bear expenses of the Trust
to an extent which would result in a Fund's inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code.
S-13
<PAGE>
The continuance of the Advisory Agreement, after the first two
years, must be specifically approved at least annually (i) by the vote of a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval, and (ii) by the vote of the Trustees or a
majority of outstanding shares of the Funds, as defined in the 1940 Act. The
Advisory Agreement will terminate automatically in the event of its
assignment, and is terminable at any time without penalty by the Trustees of
the Trust or, with respect to the Funds by a majority of the outstanding
shares of the Funds, on not less than 30 days' nor more than 60 days' written
notice to the Adviser, or by the Adviser on 90 days' written notice to the
Trust.
The Adviser is entitled to a fee which is calculated daily and paid
monthly at an annual rate of 0.74% of the daily average net assets of the
Equity Fund, 0.55% of the daily average net assets of the High Grade Income
Fund, 0.35% of the daily average net assets of the Hawaii Municipal Bond
Fund, 0.30% of the daily average net assets of the Money Market Fund and
0.30% of the daily average net assets of the Treasury Money Market Fund.
For the fiscal years ended December 31, 1996, 1997 and 1998, the
Funds paid the following advisory fees:
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------------- -----------------------------------------
ADVISORY FEES PAID ADVISORY FEES WAIVED
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
1996 1997 1998 1996 1997 1998
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Equity Fund * $311,840 $514,451 * $121,268 $75,127
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
High Grade Income Fund * $77,201 $94,508 * $49,860 $47,128
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Hawaii Municipal Bond Fund $0 $8,620 $16,208 $78,455 $84,733 $94,685
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Money Market Fund $931,000 $445,870 $558,662 $0 $328,496 $209,398
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Treasury Money Market Fund $189,543 $192,621 $421,356 $126,363 $469,439 $545,821
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
-------------------------
* Not in operation during such period.
THE SUB-ADVISER
The Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Wellington Management Company, LLP (the
"Sub-Adviser") dated March 31, 1999, relating to the Money Market and
Treasury Money Market Funds. Under the Sub-Advisory Agreement, the
Sub-Adviser is entitled to fees which are calculated daily and paid monthly
at an annual rate of 0.075% of the aggregate average daily net assets of the
Money Market and Treasury Money Market Funds, respectively, up to $500
million and 0.020% of the aggregate average daily net assets of the Money
Market and Treasury Money Market Funds, respectively, in excess of $500
million. Such fees are paid by the Adviser and the Sub-Adviser receives no
fees directly from these Funds.
S-14
<PAGE>
For the fiscal years ended December 31, 1996, 1997 and 1998,
the Money Market and Treasury Money Market Funds paid the following
sub-advisory fees:
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------------- -----------------------------------------
SUB-ADVISORY FEES PAID SUB-ADVISORY FEES WAIVED
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
1996 1997 1998 1996 1997 1998
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund $245,175 $193,585 $172,523 $0 $0 $0
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Treasury Money Market Fund $ 78,977 $165,499 $214,421 $0 $0 $0
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
- ---------------------------------
* Not in operation during such period.
THE ADMINISTRATOR
The Trust and SEI Investments Mutual Funds Services (the
"Administrator") have entered into an administration agreement (the
"Administration Agreement") dated January 27, 1995. Under the Administration
Agreement, the Administrator provides the Trust with administrative services,
including fund accounting, regulatory reporting, necessary office space,
equipment, personnel and facilities. The Administrator also acts as shareholder
servicing agent for the Funds.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Trust in connection with the matters to which the Administration
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence on the part of the Administrator in the performance of its duties
or from reckless disregard by it of its duties and obligations thereunder.
For the fiscal years ended December 31, 1996, 1997 and 1998, the Funds
paid the following administrative fees:
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------------- -----------------------------------------
ADMINISTRATIVE FEES PAID ADMINISTRATIVE FEES WAIVED
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
1996 1997 1998 1996 1997 1998
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL CLASS
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Equity Fund * $78,619 $95,607 * $38,478 $63,739
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
High Grade Income Fund * $31,706 $30,902 * $14,505 $20,602
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Hawaii Municipal Bond Fund $0 $8,621 $15,841 $44,816 $44,724 $47,526
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Money Market Fund $326,909 $298,045 $307,224 $326,909 $218,415 $204,816
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Treasury Money Market Fund $105,303 $255,368 $386,871 $105,000 $186,006 $257,914
- -------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
- ----------------------------
* Not in operation during such period.
S-15
<PAGE>
The Administrator, a Delaware business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI
Investments"), is the owner of all beneficial interest in the Administrator.
SEI Investments and its subsidiaries and affiliates, including the
Administrator, are leading providers of 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 or sub-administrator to the
following other mutual funds: The Achievement Funds Trust, The Advisors'
Inner Circle Fund, Alpha Select Funds, The Arbor Fund, ARK Funds, Armada
Funds, Boston 1784 Funds(R), CrestFunds(R), Inc., CNI Charter Funds, CUFUND,
The Expedition Funds, First American Funds, Inc., First American Investment
Funds, Inc., First American Strategy Funds, Inc., HighMark Funds, Huntington
Funds, The Nevis Fund, Inc., Oak Associates Funds, The PBHG Funds, Inc., PBHG
Insurance Series Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Index Funds, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI Institutional Managed Trust,
SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI Classic Funds, STI Classic
Variable Trust, TIP Funds and UAM Funds, Inc. II.
The Administrator is entitled to a fee, calculated daily and paid
monthly, at an annual rate of 0.20% of average daily net assets of each of
the Funds.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned
subsidiary of SEI, serves as a distributor. Financial institutions that are
the record owner of shares for the account of their customers may impose
separate fees for account services to their customers.
Each Fund has adopted a shareholder servicing plan (the "Service
Plan") under which a shareholder servicing fee of up to 0.25% of average
daily net assets attributable to each Fund will be paid to the Distributor.
Under the Service Plan, the Distributor may perform, or may compensate other
service providers for performing, the following shareholder and
administrative services: maintaining client account; arranging for bank
wires; responding to client inquiries concerning services provided on
investments; assisting clients in changing dividend options, account
designations and addresses; sub-accounting; providing information on share
positions to clients; forwarding shareholder communications to clients;
processing purchase, exchange and redemption orders; and processing dividend
payments. Under the Service Plan, the Distributor may retain as profit any
difference between the fee it receives and amount is pays to third parties.
S-16
<PAGE>
For the fiscal year ended December 31, 1998, the Funds incurred the
following distribution expenses:
<TABLE>
<CAPTION>
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
AMOUNT PAID
TO 3RD
PARTIES PROSPECTUS
BY THE PRINTING & COSTS
DISTRIBUTOR MAILING COSTS ASSOCIATED
FOR (NEW WITH
DISTRIBUTOR SALES SHAREHOLDERS REGISTRATION
TOTAL RELATED EXPENSES ADVERTISING ONLY) FEES
FUND ($ AMOUNT) SERVICES ($ AMOUNT) ($ AMOUNT) ($ AMOUNT) ($ AMOUNT)
($ AMOUNT)
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL CLASS
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
Equity Fund $77,851 $77,851 $0 $0 $0 $0
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
High Grade Income Fund $25,850 $25,850 $0 $0 $0 $0
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
Hawaii Municipal Bond Fund $31,077 $31,077 $0 $0 $0 $0
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
Money Market Fund $255,357 $255,357 $0 $0 $0 $0
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
Treasury Money Market Fund $325,143 $325,143 $0 $0 $0 $0
- -------------------------------- ------------- -------------- ------------ ------------ -------------- -------------
</TABLE>
THE TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent"), 330 W. 9th Street,
Kansas City, Missouri 64105 serves as the Funds' transfer agent.
THE CUSTODIAN
Chase Manhattan Bank (the "Custodian"), New York, New York 10041
serves as the Funds' custodian.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP, 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103 serves as the Funds' independent auditors.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street,
Philadelphia, Pennsylvania 19103 serves as legal counsel to the Funds.
S-17
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the
Trustees under the laws governing business trusts in the Commonwealth of
Massachusetts. The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth below. An
asterisk (*) indicates an interested person as defined by the 1940 Act.
*MARTIN ANDERSON (DOB 11/16/23) - Trustee - Attorney, Goodsill,
Anderson, Quinn & Stifel since 1951.
CHARLES E. CARLBOM (DOB 08/20/34) - Trustee - Senior
Executive - Mergers & Acquisitions, United Grocers, Inc. since 1999;
President and CEO, United Grocers Inc. (1997-1999); President and CEO,
Western Family Food Inc. - Western Family Holding Inc. (1982-1997).
*PHILIP H. CHING (DOB 01/11/31) - Trustee - Retired since 1996;
Vice Chairman, First Hawaiian Bank (1968-1996).
TODD B. CIPPERMAN (DOB 02/14/66) - Vice President and Assistant
Secretary - Vice President and Assistant Secretary of SEI Investments, the
Administrator and the Distributor since 1995; Associate, Dewey Ballantine
(law firm) (1994-1995); Associate, Winston & Strawn (law firm) (1991-1994).
ROBERT DELLACROCE (DOB 12/17/63) - Controller, Chief Financial
Officer - Director, Funds Administration and Accounting since 1994; Senior
Audit Manager; Arthur Andersen LLP (1986-1994).
LYDIA A. GAVALIS (DOB 06/05/64) - Vice President and Assistant
Secretary - Vice President and Assistant Secretary of the Administrator and
the Distributor since 1998; Assistant General Counsel and Director of
Arbitration, Philadelphia Stock Exchange (1989-1998).
JOHN H. GRADY, JR. (DOB 06/01/61) - Secretary; Partner since
1995, Morgan, Lewis & Bockius LLP (law firm), counsel to the Trust, SEI
Investments, the Administrator and the Distributor.
KATHY HEILIG (DOB 12/21/58) - Vice President and Assistant
Secretary - Treasurer of SEI Investments since 1997; Assistant Controller of
SEI Investments since 1995; Vice President of SEI Investments since 1991.
JAMES L. HUFFMAN (DOB 03/25/45) - Trustee - Dean and Professor,
Lewis & Clark Law School since 1973.
S-18
<PAGE>
SHUNICHI KIMURA (DOB 03/15/30) - Trustee - Mediator - Mediation
Specialists of Hawaii from (1994-1997); Judge - State of Hawaii Judiciary
(1974-1994); Regent - University of Hawaii (1995-1996).
ROBERT A. NESHER (DOB 08/17/46) - Trustee - The Advisors' Inner
Circle Fund, The Arbor Fund, Boston 1784 Funds-Registered Trademark-, The
Expedition Funds, Oak Associates Funds, Pillar Funds, SEI Asset Allocation
Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI Institutional International
Trust, SEI Liquid Asset Trust and SEI Tax Exempt Trust; Chairman SEI Mutual
Funds since 1974; Trustee and Executive Vice President of the Administrator
and the Distributor (1981-1994).
JOSEPH M. O'DONNELL (DOB 11/13/54) - Vice President and
Assistant Secretary - Vice President and Assistant Secretary of the
Administrator and the Distributor since 1998; Vice President and General
Counsel, FPS Services, Inc. (1993-1997).
SANDRA K. ORLOW (DOB 10/18/53) - Vice President and Assistant
Secretary - Secretary of the Distributor since 1998; Vice President of the
Distributor since 1988. Vice President and Assistant Secretary of the
Manager since 1988; Assistant Secretary of the Distributor (1988-1998).
*WILLIAM S. RICHARDSON (DOB 12/22/19) - Trustee - Retired since
1992.
KEVIN P. ROBINS (DOB 04/15/61) - Vice President and
Assistant Secretary - Senior Vice President, General Counsel and Assistant
Secretary of SEI, the Administrator and Distributor since 1994. Vice
President of SEI, the Administrator and Distributor (1992-1994).
*PETER F. SANSEVERO (DOB 01/06/33) - Trustee - Regional Director
of the Northwestern Region and First Vice President, Merrill Lynch
(1958-1997).
LYNDA J. STRIEGEL (DOB 10/30/48) - Vice President and Assistant
Secretary of the Administrator and the Distributor since 1998; Senior
Asset Management Counsel, Barnett Banks, Inc. (1997-1998); Partner,
Groom and Nordberg, Chartered (1996-1997); Associate General Counsel, Riggs
Bank, N.A. (1991-1995).
MANUEL R. SYLVESTER (DOB 06/20/30) - Trustee - Retired since 1992.
JOYCE S. TSUNODA (DOB 01/01/38) - Trustee - Chancellor - Community
Colleges - University of Hawaii since 1983. Senior Vice President -
University of Hawaii System since 1989.
S-19
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------- --------------------------------------- ----------------------------------------
NAME OF PERSON AND POSITION AGGREGATE TOTAL COMPENSATION FROM
COMPENSATION REGISTRANT AND FUND COMPLEX
FROM REGISTRANT PAID TO DIRECTORS FOR FYE
FOR FYE 12/31/98 12/31/98
- ---------------------------------- --------------------------------------- ----------------------------------------
<S> <C> <C>
Martin Anderson, Trustee* $10,000 $10,000 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Charles E. Carlbom, $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Philip H. Ching, Trustee* $10,000 $10,000 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Todd B. Cipperman, Vice
President and Assistant Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Robert Dellacroce, Controller
and Chief Financial Officer $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Lydia A. Gavalis, Vice President
and Assistant Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
John H. Grady, Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Kathy Heilig, Vice President and
Assistant Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
James L. Huffman, Trustee $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Shunichi Kimura, Trustee $10,000 $10,000 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Robert A. Nesher, Trustee $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Joseph M. O'Donnell, Vice
President and Assistant Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Sandra K. Orlow, Vice President
and Assistant Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
William S. Richardson, Trustee* $10,000 $10,000 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Kevin P. Robins, Vice President
and Assistant Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Peter S. Sansevero, Trustee* $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Lynda J. Striegel, Vice
President and Assistant Secretary $0 $0 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Manuel R. Sylvester, Trustee $10,000 $10,000 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
Joyce S. Tsunoda, Trustee $10,000 $10,000 for services on 1 board
- ---------------------------------- --------------------------------------- ----------------------------------------
</TABLE>
_________________
* Messrs. Ching, Anderson, Richardson and Sansevero are Trustees who may be
deemed to be "interested" persons of the Trust as the term is defined in
the 1940 Act.
The Trustees and officers of the Trust own less than 1% of the
outstanding shares of the Trust.
REPORTING
The Trust issues unaudited financial information semi-annually and
audited financial statements annually. The Trust furnishes proxy statements
and other shareholder reports to shareholders of record.
S-20
<PAGE>
PERFORMANCE
YIELDS. Yields are one basis upon which investors may compare the
Funds with other funds; however, yields of other funds and other investment
vehicles may not be comparable because of the factors set forth below and
differences in the methods used in valuing portfolio instruments.
The yield of a money market fund fluctuates, and the annualization
of a week's dividend is not a representation by the Trust as to what an
investment in a money market fund will actually yield in the future. Actual
yields will depend on such variables as asset quality, average asset
maturity, the type of instruments the Fund invests in, changes in interest
rates on money market instruments, changes in the expenses of the Fund and
other factors.
MONEY MARKET FUND YIELDS. From time to time the Money Market and
Treasury Money Market Funds advertise their "current yield" and "effective
yield" (also called "effective compound yield"). Both yield figures are based
on historical earnings and are not intended to indicate future performance.
The "current yield" of these Funds refers to the income generated by an
investment in the Funds over a seven-day period (which period will be stated
in the advertisement). This income is then "annualized." That is, the amount
of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is similarly calculated but, when
annualized, the income earned by an investment in the Funds is assumed to be
reinvested. The "effective yield" will be slightly higher than the "current
yield" because of the compounding effect of this assumed reinvestment.
The current yield of the Money Market and Treasury Money Market
Funds will be calculated daily based upon the seven days ending on the date
of calculation ("base period"). The yield is computed by determining the net
change (exclusive of capital changes) in the value of a hypothetical
pre-existing shareholder account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing such net change by the
value of the account at the beginning of the same period to obtain the base
period return and multiplying the result by (365/7). Realized and unrealized
gains and losses are not included in the calculation of the yield.
The effective compound yield of these Funds is determined by
computing the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the
value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting
S-21
<PAGE>
1 from the result, according to the following formula: Effective Yield =
(Base Period Return + 1) to the power of (365/7) - 1. The current and the
effective yields reflect the reinvestment of net income earned daily on
portfolio assets.
For the seven-day period ended December 31, 1998, the seven-day
yield and seven-day effective yield for the Money Market Fund were 4.85% and
4.96%, respectively.
For the seven-day period ended December 31, 1998, the seven-day
yield and seven-day effective yield for the Treasury Money Market Fund were
4.53% and 4.63%, respectively.
OTHER YIELDS. The Hawaii Municipal Bond Fund and the High Grade
Income Fund may advertise a 30-day yield. The Hawaii Municipal Bond Fund also
may advertise a 30-day tax-equivalent yield. Tax equivalent yields are
computed by dividing that portion of the Fund's yield which is tax-exempt by
1 minus a stated federal and state income tax rate and adding the product to
that portion, if any, of the Fund's yield that is not tax-exempt. (Tax
equivalent yields assume the payment of Federal income taxes at a rate of 31%
and Hawaii income taxes at a rate of 10%.) These figures will be based on
historical earnings and are not intended to indicate future performance. The
30-day yield of these Funds refers to the annualized income generated by an
investment in the Funds over a specified 30-day period. The yield is
calculated by assuming that the income generated by the investment during
that period generated each period over one year and is shown as a percentage
of the investment. In particular, yield will be calculated according to the
following formula:
Yield = (2 (a - b/cd + 1) to the power of (6) - 1) where a =
dividends and interest earned during the period; b = expenses accrued for the
period (net of reimbursements); c = the average daily number of shares
outstanding during the period that were entitled to receive dividends; and d
= the maximum offering price per share on the last day of the period.
Tax equivalent yields are computed by dividing that portion of a
Fund's yield which is tax-exempt by one minus a stated federal and state
income tax rate and adding the product to that portion, if any, of the Fund's
yield that is not tax-exempt.
For the 30-day period ended December 31, 1998, the 30-day yield and
30-day tax equivalent yield for the Institutional Class of the Hawaii
Municipal Bond Fund were 4.43% and 8.15%, respectively.
For the 30-day period ended December 31, 1998, the 30-day yield for
the Institutional Class of the High Grade Income Fund was 4.44%.
CALCULATION OF TOTAL RETURN
From time to time, certain of the Funds may advertise total return
on an "average annual total return" basis and on an "aggregate total return"
basis for various periods. Average annual
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total return reflects the average annual percentage change in the value of an
investment in a Fund over a particular measuring period. Aggregate total
return reflects the cumulative percentage change in value over the measuring
period. Aggregate total return is computed according to a formula prescribed
by the SEC. The formula can be expressed as follows: P (1 + T) to the power
of (n) = ERV, where P = a hypothetical initial payment of $1,000; T = average
annual total return; n = number of years; and ERV = ending redeemable value
of a hypothetical $1,000 payment made at the beginning of the designated time
period as of the end of such period or the life of the fund. The formula for
calculating aggregate total return can be expressed as (ERV/P) - 1.
The calculation of total return assumes reinvestment of all
dividends and capital gain distribution on the reinvestment dates during the
period and that the entire investment is redeemed at the end of the period.
The performance results listed below refer to results for the fiscal year
ended December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------- -----------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------- ----------------- -----------------
SINCE
FUND 1-YEAR INCEPTION
- --------------------------------------- ----------------- -----------------
<S> <C> <C>
INSTITUTIONAL CLASS
- --------------------------------------- ----------------- -----------------
Equity Fund 33.05% 28.47%
- --------------------------------------- ----------------- -----------------
High Grade Income Fund 9.09% 8.90%
- --------------------------------------- ----------------- -----------------
Hawaii Municipal Bond Fund 5.84% 7.22%
- --------------------------------------- ----------------- -----------------
Money Market Fund 5.26% 5.33%
- --------------------------------------- ----------------- -----------------
Treasury Money Market Fund 5.10% 5.14%
- --------------------------------------- ----------------- -----------------
</TABLE>
The Funds' performance may from time to time be compared to other
mutual funds tracked by mutual fund rating services (such as Lipper
Analytical Services), financial and business publications and periodicals, to
broad groups of comparable mutual funds or to unmanaged indices which may
assume investment of dividends but generally do not reflect deductions for
administrative and management costs. The Funds may quote Morningstar, Inc., a
service that ranks mutual funds on the basis of risk-adjusted performance.
The Funds may quote Ibbotson Associates of Chicago, Illinois, which provides
historical returns of the capitals markets in the U.S. The Funds may use long
term performance of these capital markets to demonstrate general long-term
risk vs. reward scenarios and could include the value of a hypothetical
investment in any of the capital markets. The Funds may also quote financial
and business publications and periodicals as they relate to fund management,
investment philosophy, and investment techniques.
The Funds may quote various measures of volatility and benchmark
correlation in advertising and may compare these measures to those of other
funds. Measures of volatility attempt to compare historical share price
fluctuations or total returns to a benchmark while
S-23
<PAGE>
measures of benchmark correlation indicate how valid a comparative benchmark
might be. Measures of volatility and correlation are calculated using
averages of historical data and cannot be calculated precisely.
PURCHASING SHARES
Purchases and redemptions of shares of the Funds may be made on any
day the New York Stock Exchange and the Federal Reserve wire system are open
for business. Currently, the weekdays on which the Trust is closed for
business are: New Year's Day, Martin Luther King, Jr.'s Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day. Purchases and redemptions
will be made in full and fractional shares that are calculated to three
decimal places.
REDEEMING SHARES
It is the Trust's policy to pay for redemptions in cash. The Trust
retains the right, however, to provide for redemptions in whole or in part by
a distribution in-kind of securities held by the Funds in lieu of cash.
Shareholders may incur brokerage charges on the sale of any such securities
so received in payment of redemptions. A Shareholder will at all times be
entitled to aggregate cash redemptions from all Funds of the Trust during any
90-day period of up to the lesser of $250,000 or 1% of the Trust's net assets.
The Trust reserves the right to suspend the right of redemption
and/or to postpone the date of payment upon redemption for any period on
which trading on the New York Stock Exchange is restricted, or during the
existence of an emergency (as determined by the SEC by rule or regulation) as
a result of disposal or valuation of the Fund's securities is not reasonably
practicable, or for such other periods as the SEC has by order permitted. The
Trust also reserves the right to suspend sales of shares of the Funds for any
period during which the New York Stock Exchange, the Adviser, the
Administrator and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Money Market and Treasury Money
Market Funds is calculated by adding the value of securities and other
assets, subtracting liabilities and dividing by the number of outstanding
shares. Securities will be valued by the amortized cost method which involves
valuing a security at its cost on the date of purchase and thereafter (absent
unusual circumstances) assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuations in general
market rates of interest on the value of the instrument. While this method
provides certainty in valuation, it may result in periods during which a
security's value, as determined by this method, is higher or lower than the
price
S-24
<PAGE>
these Funds would receive if they sold the instrument. During periods of
declining interest rates, the daily yield of the Funds may tend to be higher
than a like computation made by a company with identical investments
utilizing a method of valuation based upon market prices and estimates of
market prices for all of its portfolio securities. Thus, if the use of
amortized cost by these Funds resulted in a lower aggregate portfolio value
on a particular day, a prospective investor in these Funds would be able to
obtain a somewhat higher yield than would result from investment in a company
utilizing solely market values, and existing investors in these Funds would
experience a lower yield. The converse would apply in a period of rising
interest rates.
The Money Market and Treasury Money Market Funds' use of amortized
cost and the maintenance of these Funds' net asset value at $1.00 are
permitted by regulations promulgated by Rule 2a-7 under the 1940 Act,
provided that certain conditions are met. These conditions currently require
that the Funds maintain a dollar-weighted average maturity of 90 days or
less, not purchase any instrument having a remaining maturity of more than
397 days, and will limit their investments to those U.S. dollar-denominated
instruments which the Trustees determine to present minimal credit risks and
which are of "eligible" quality. The regulations also require the Trustees to
establish procedures which are reasonably designed to stabilize the net asset
value per share at $1.00 for the Funds. Such procedures include the
determination of the extent of deviation, if any, of the Funds' current net
asset value per share calculated using available market quotations from the
Funds' amortized cost price per share at such intervals as the Trustees deem
appropriate and reasonable in light of market conditions and periodic reviews
of the amount of the deviation and the methods used to calculate such
deviation. In the event that such deviation exceeds 1/2 of 1%, the Trustees
are required to consider promptly what action, if any, should be initiated,
and, if the Trustees believe that the extent of any deviation may result in
material dilution or other unfair results to Shareholders, the Trustees are
required to take such corrective action as they deem appropriate to eliminate
or reduce such dilution or unfair results to the extent reasonably
practicable. Such actions may include the sale of portfolio instruments prior
to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends; redeeming shares in kind; or
establishing a net asset value per share by using available market
quotations. In addition, if the Funds incur a significant loss or liability,
the Trustees have the authority to reduce pro rata the number of shares of
these Funds in each shareholder's account and to offset each shareholder's
pro rata portion of such loss or liability from the shareholder's accrued but
unpaid dividends or from future dividends.
The securities of the Equity, High Grade Income and Hawaii Municipal
Bond Funds are valued pursuant to prices and valuations provided by an
independent pricing service. The pricing service relies primarily on prices
of actual market transactions as well as trader quotations. However, the
service may also use a matrix system to determine valuations, which system
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of the
Trustees.
S-25
<PAGE>
TAXES
The following is only a summary of certain additional federal income
tax considerations generally affecting the Funds and their shareholders that
are not described in the Funds' prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Funds or their shareholders,
and the discussion here and in the Funds' prospectus is not intended as a
substitute for careful tax planning. Shareholders are urged to consult with
their tax advisors with specific reference to their own tax situation,
including their state and local tax liabilities.
FEDERAL INCOME TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following general discussion of certain federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations issued thereunder as in effect on the date of
this Statement of Additional Information. New legislation, as well as
administrative changes or court decisions, may significantly change the
conclusions expressed herein, and may have a retroactive effect with respect
to the transactions contemplated herein.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund intends to qualify and elect to be treated as a "regulated
investment company" ("RIC") as defined under Subchapter M of the Code. By
following such a policy, each Fund expects to eliminate or reduce to a
nominal amount the federal taxes to which they may be subject.
In order to qualify as a RIC, a Fund must distribute at least 90% of
its net investment income (that generally includes dividends, taxable
interest, and the excess of net short-term capital gains over net long-term
capital losses less operating expenses) and at least 90% of its net tax
exempt interest income, for each tax year, if any, to its shareholders and
also must meet several additional requirements. Included among these
requirements are the following: (i) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, or certain other income; (ii) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with such other
securities limited, in respect to any one issuer, to an amount that does not
exceed 5% of the value of the Fund's assets and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (iii) at
the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer or
of two or more issuers which the Fund controls and which are engaged in the
same, similar or related trades or businesses.
S-26
<PAGE>
Some of the Funds may make investments in securities (such as
STRIPS) that bear "original issue discount" or "acquisition discount"
(collectively, "OID Securities"). The holder of such securities is deemed to
have received interest income even though no cash payments have been
received. Accordingly, OID Securities may not produce sufficient current cash
receipts to match the amount of distributable net investment income the Funds
must distribute to satisfy the distribution requirement. In some cases, the
Funds may have to borrow money or dispose of other investments in order to
make sufficient cash distributions to satisfy the distribution requirement.
Although each Fund intends to distribute substantially all of its
net investment income and may distribute its capital gains for any taxable
year, each Fund will be subject to federal income taxation to the extent any
such income or gains are not distributed.
If the Funds fail to qualify for any taxable year as a RIC, all of
their taxable income will be subject to tax at regular corporate income tax
rates without any deduction for distributions to shareholders and such
distributions generally will be taxable to shareholders as ordinary dividends
to the extent of a Fund's current and accumulated earnings and profits. In
this event, distributions generally will be eligible for the
dividends-received deduction for corporate shareholders.
FUND DISTRIBUTIONS
Distributions of investment company taxable income will be taxable
to shareholders as ordinary income, regardless of whether such distributions
are paid in cash or are reinvested in additional Shares, to the extent of a
Fund's earnings and profits. Each Fund anticipates that it will distribute
substantially all of its investment company taxable income for each taxable
year.
Each Fund may either retain or distribute to shareholders its excess
of net long-term capital gains over net short-term capital losses ("net
capital gains"). If such gains are distributed as a capital gains
distribution, they are taxable to shareholders who are individuals at a
maximum rate of 20%, regardless of the length of time the shareholder has
held the shares. If any such gains are retained, a Fund will pay federal
income tax thereon.
In the case of corporate shareholders, distributions (other than
capital gains distributions) from a RIC generally qualify for the
dividends-received deduction to the extent of the gross amount of qualifying
dividends received by a Fund for the year. Generally, and subject to certain
limitations, a dividend will be treated as a qualifying dividend if it has
been received from a domestic corporation. Accordingly, it is not expected
that any High Grade Income Fund, Hawaii Municipal Bond Fund, Money Market
Fund, or Treasury Money Market Fund distribution will qualify for the
corporate dividends-received deduction. Conversely, distributions from the
Equity Fund generally will qualify for the corporate dividends-received
deduction.
Ordinarily, investors should include all dividends as income in the
year of payment. However, dividends declared payable to shareholders of
record in October, November, or
S-27
<PAGE>
December of one year, but paid in January of the following year, will be
deemed for tax purposes to have been received by the shareholder and paid by
the Fund in the year in which the dividends were declared.
Each Fund will provide a statement annually to shareholders as to
the federal tax status of distributions paid (or deemed to be paid) by the
Fund during the year, including the amount of dividends eligible for the
corporate dividends-received deduction.
SALE OR EXCHANGE OF FUND SHARES
Generally, gain or loss on the sale or exchange of a share will be
capital gain or loss that will be long-term if the Share has been held for
more than twelve months and otherwise will be short-term. For individuals,
long-term capital gains are currently taxed at a maximum rate of 20% and
short-term capital gains are currently taxed at ordinary income tax rates.
However, if a shareholder realizes a loss on the sale, exchange or redemption
of a Share held for six months or less and has previously received a capital
gains distribution with respect to the Share (or any undistributed net
capital gains of a Fund with respect to such Share are included in
determining the shareholder's long-term capital gains), the shareholder must
treat the loss as a long-term capital loss to the extent of the amount of the
prior capital gains distribution (or any undistributed net capital gains of a
Fund that have been included in determining such shareholder's long-term
capital gains). In addition, any loss realized on a sale or other disposition
of Shares will be disallowed to the extent an investor repurchases (or enters
into a contract or option to repurchase) Shares within a period of 61 days
(beginning 30 days before and ending 30 days after the disposition of the
Shares). This loss disallowance rule will apply to Shares received through
the reinvestment of dividends during the 61-day period.
In certain cases, a Fund will be required to withhold, and remit to
the United States Treasury, 31% of any distributions paid to a shareholder
who (1) has failed to provide a correct taxpayer identification number, (2)
is subject to backup withholding by the Internal Revenue Service, or (3) has
failed to certify to the Fund that such shareholder is not subject to backup
withholding.
FEDERAL EXCISE TAX
If a Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the
excess of short and long term capital gains over short and long term capital
losses) for the one-year period ending October 31 of that year (and any
retained amount from the prior calendar year), the Fund will be subject to a
nondeductible 4% Federal excise tax on the undistributed amounts. Each Fund
intends to make sufficient distributions to avoid imposition of this tax, or
to retain, at most its net capital gains and pay tax thereon.
S-28
<PAGE>
ADDITIONAL CONSIDERATIONS FOR HAWAII MUNICIPAL BOND FUND
The Fund intends to qualify to pay "exempt interest dividends" to
its shareholders by satisfying the Code's requirement that at the close of
each quarter of its taxable year at least 50% of the value of its total
assets consist of obligations the interest on which is exempt from federal
income tax. As long as this and certain other requirements are met, dividends
derived from the Fund's net tax-exempt interest income will be "exempt
interest dividends" that are excluded from your gross income for federal
income tax purposes. Exempt interest dividends may, however, have collateral
deferral income tax consequences, including alternative minimum tax
consequences, as discussed below.
Exempt-interest dividends may be subject to the alternative minimum
tax imposed by Section 55 of the Code (the "Alternative Minimum Tax"). The
Alternative Minimum Tax is imposed at a rate of up to 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Alternative Minimum Tax may be affected by the receipt of exempt-interest
dividends in two circumstances. First, exempt-interest dividends derived from
certain "private activity bonds" issued after August 7, 1986, will generally
be an item of tax preference and therefore potentially subject to the
Alternative Minimum Tax. The Fund intends, when possible, to avoid investing
in private activity bonds. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless
of when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alternative minimum taxable income for purposes
of determining the Alternative Minimum Tax.
The percentage of income that constitutes "exempt-interest
dividends" will be determined for each year for the Fund and will be applied
uniformly to all dividends declared with respect to the Fund during that
year. This percentage may differ from the actual percentage for any
particular day.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry Shares of the Fund will not be deductible for federal
income tax purposes. The deduction otherwise allowable to property and
casualty insurance companies for "losses incurred" will be reduced by an
amount equal to a portion of exempt-interest dividends received or accrued
during any taxable year. Foreign corporations engaged in a trade or business
in the United States will be subject to a "branch profits tax" on their
"dividend equivalent amount" for the taxable year, which will include
exempt-interest dividends. Certain Subchapter S corporations may also be
subject to taxes on their "passive investment income," which could include
exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable
year will be included in the gross income of such individual if the
individual's "modified adjusted gross income" (which includes exempt-interest
dividends) plus one-half of the Social Security benefits or railroad
retirement benefits received by such individual during that taxable year
exceeds the base amount described in Section 86 of the Code.
S-29
<PAGE>
Entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by industrial development
bonds or private activity bonds should consult their tax advisors before
purchasing Shares. "Substantial user" is defined generally as including a
"non-exempt person" who regularly uses in trade or business a part of such a
facility.
Current federal law limits the types and volume of bonds qualifying
for the federal income tax exemption of interest, which may have an effect on
the ability of the Fund to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirements for the payment of exempt
interest dividends.
Issuers of bonds purchased by the Fund (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with
the issuance of such bonds to satisfy certain requirements of the Code that
must be satisfied subsequent to the issuance of such bonds. Investors should
be aware that exempt-interest dividends derived from such bonds may become
subject to federal income taxation retroactively to the date thereof if such
representations are determined to have been inaccurate or if the issuer of
such bonds (or the beneficiary of such bonds) fails to comply with such
covenants.
The Fund may not be a suitable investment for tax-exempt
shareholders and plans because such shareholders and plans would not gain any
additional benefit from the receipt of exempt-interest dividends.
STATE AND LOCAL TAXES
A Fund is not liable for any income or franchise tax in
Massachusetts if it qualifies as a RIC for federal income tax purposes.
Depending upon state and local law, distributions by the Funds to
shareholders and the ownership of shares may be subject to state and local
taxes. Shareholders are urged to consult their tax advisors as to the
consequences of these and other state and local tax rules affecting an
investment in the Funds.
HAWAII TAXATION
The State of Hawaii has specifically adopted Sections 852 through
855 of the Code, which provisions provide for pass-through treatment of
exempt interest dividends and capital gains, i.e., distributions by the
Hawaii Municipal Bond Fund of dividends representing exempt interest and
capital gains retain their original character in the hands of shareholders.
As the State of Hawaii's Department of Taxation has confirmed in response to
a request by special counsel for the Trust, distributions from the Hawaii
Municipal Bond Fund to its shareholders which are attributable to interest on
obligations exempt from income tax in the State of Hawaii will not be subject
to Hawaii income tax in the hands of shareholders so long as at least 50% of
the Hawaii Municipal Bond Fund's assets are invested in securities the
interest from which is exempt from Hawaii state taxation. In addition, the
Department of Taxation has confirmed that interest
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<PAGE>
income on obligations issued by the U.S. Government and its territories is
exempt from State of Hawaii income taxation. While the Hawaii Municipal Bond
Fund intends to invest primarily in obligations which produce tax-exempt
interest, if the Fund invests in obligations that are not exempt for Hawaii
purposes, a portion of the Fund's distribution will be subject to Hawaii
income tax.
FUND TRANSACTIONS
Subject to policies established by the Trustees, the Adviser (and,
where applicable, the Sub-Adviser) are responsible for placing the orders to
execute transactions for the Funds. In placing orders, it is the policy of
the Adviser to seek to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved. While the Adviser generally seeks reasonably competitive spreads or
commissions, the Funds will not necessarily be paying the lowest spread or
commission available. The Funds will not purchase portfolio securities from
any affiliated person acting as principal except in conformity with the
regulations of the SEC.
The money market securities in which the Funds invest are traded
primarily in the over-the-counter market. Bonds and debentures are usually
traded over-the-counter, but may be traded on an exchange. Where possible,
the Adviser will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Money market securities are generally traded on a
net basis and do not normally involve either brokerage commissions or
transfer taxes. The cost of executing portfolio securities transactions of
the Trust will primarily consist of dealer spreads and underwriting
commissions.
The Trust selects brokers or dealers to execute transactions for the
purchase or sale of portfolio securities on the basis of its judgment of
their professional capability to provide the service. The primary
consideration is to have brokers or dealers provide transactions at best
price and execution for the Trust. Best price and execution includes many
factors, including the price paid or received for a security, the commission
charged, the promptness and reliability of execution, the confidentiality and
placement accorded the order and other factors affecting the overall benefit
obtained by the account on the transaction. The Trust's determination of what
are reasonably competitive rates is based upon the professional knowledge of
its trading department as to rates paid and charged for similar transactions
throughout the securities industry. In some instances, the Trust pays a
minimal share transaction cost when the transaction presents no difficulty.
Some trades are made on a net basis where the Trust either buys securities
directly from the dealer or sells them to the dealer. In these instances,
there is no direct commission charged but there is a spread (the difference
between the buy and sell price) which is the equivalent of a commission.
S-31
<PAGE>
The Trust may allocate out of all commission business generated by
all of the Funds and accounts under management by the Adviser, brokerage
business to brokers or dealers who provide brokerage and research services.
These research services include advice, either directly or through
publications or writings, as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; furnishing of analyses and
reports concerning issuers, securities or industries; providing information
on economic factors and trends, assisting in determining portfolio strategy,
providing computer software used in security analyses, and providing
portfolio performance evaluation and technical market analyses. Such services
are used by the Adviser in connection with its investment decision-making
process with respect to one or more funds and accounts managed by it, and may
not be used exclusively with respect to the Fund or account generating the
brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act"),
higher commissions may be paid to broker-dealers who provide brokerage and
research services than to broker-dealers who do not provide such services if
such higher commissions are deemed reasonable in relation to the value of the
brokerage and research services provided. Although transactions are directed
to broker-dealers who provide such brokerage and research services, the Trust
believes that the commissions paid to such broker-dealers are not, in
general, higher than commissions that would be paid to broker-dealers not
providing such services and that such commissions are reasonable in relation
to the value of the brokerage and research services provided. In addition,
portfolio transactions which generate commissions or their equivalent are
directed to broker-dealers who provide daily portfolio pricing services to
the Trust. Subject to best price and execution, commissions used for pricing
may or may not be generated by the Funds receiving the pricing service.
The Adviser may place a combined order for two or more accounts or
Funds engaged in the purchase or sale of the same security if, in its
judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account or Fund. It
is believed that the ability of the accounts to participate in volume
transactions will generally be beneficial to the accounts and Funds. Although
it is recognized that, in some cases, the joint execution of orders could
adversely affect the price or volume of the security that a particular
account or Fund may obtain, it is the opinion of the Adviser and the Trust's
Board of Trustees that the advantages of combined orders outweigh the
possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution,
the Funds, at the request of the Distributor, give consideration to sales of
shares of the Trust as a factor in the selection of brokers and dealers to
execute Trust portfolio transactions.
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<PAGE>
The Funds may execute brokerage or other agency transactions through
the Distributor, which is a registered broker-dealer in conformity with the
1940 Act, the 1934 Act and rules promulgated by the SEC. Under these
provisions, the Distributor is permitted to receive and retain compensation
for effecting portfolio transactions for the Funds on an exchange if a
written contract is in effect between the Distributor and the Trust expressly
permitting the Distributor to receive and retain such compensation.
These rules further require that commissions paid to the Distributor
by the Trust for exchange transactions not exceed "usual and customary"
brokerage commissions. The rules define "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission,
fee or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of
time." In addition, the Funds may direct commission business to one or more
designated broker/dealers, including the Distributor, in connection with such
broker/dealer's payment of certain of the Funds' expenses. The Trustees,
including those who are not "interested persons" of the Trust, have adopted
procedures for evaluating the reasonableness of commissions paid to the
Distributor and will review the procedures periodically.
Since the Trust does not market its shares through intermediary
broker-dealers, it is not the Trust's practice to allocate brokerage business
on the basis of sales of its shares which may be made through such firms.
However, the Adviser may place Fund orders with qualified broker-dealers who
recommend the Trust to clients, and may, when a number of brokers and dealers
can provide best price and execution on a particular transaction, consider
such recommendations by a broker or dealer in selecting among broker-dealers.
The portfolio turnover rate for the Equity Fund was 30% for the
fiscal year ending December 31, 1997 and 41% for the fiscal year ended
December 31, 1998. The portfolio turnover rate for the Hawaii Municipal Bond
Fund was 29% for the fiscal year ending December 31, 1997 and 21% for the
fiscal year ended December 31, 1998. The portfolio turnover rate for the High
Grade Income Fund was 32% for the fiscal year ending December 31, 1997 and
98% for the fiscal year ended December 31, 1998.
For the fiscal year ended December 31, 1996, the Trust paid no
brokerage fees. For the fiscal year ended December 31, 1997, the Trust paid
$40,380. For the fiscal year ended December 31, 1998, the Trust paid $58,933.
DESCRIPTION OF SHARES
The Agreement and Declaration of Trust ("Declaration of Trust")
authorizes the issuance of an unlimited number of each series. Each share of
each Fund represents an equal proportionate interest in that Fund with each
other share of that Fund. Each share upon liquidation entitles a shareholder
to a PRO RATA share in the net assets of that Fund, after taking
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into account additional distribution and transfer agency expenses
attributable to Class A shares. Shareholders have no preemptive rights. The
Agreement and Declaration of Trust provides that the Trustees of the Trust
may create additional series of shares or separate classes of funds. All
consideration received by the Trust for shares of any additional series or
separate class and all assets in which such consideration is invested would
belong to that series or separate class and would be subject to the
liabilities related thereto. Share certificates representing shares will not
be issued.
S-34
<PAGE>
VOTING
Each share held entitles the shareholder of record to one vote. The
shareholders of each Fund or class will vote separately on matters pertaining
solely to that Fund or class, such as any distribution plan. As a
Massachusetts business trust, the Trust is not required to hold annual
meetings of shareholders, but approval will be sought for certain changes in
the operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining
Trustees or by shareholders at a special meeting called upon written request
of shareholders owning at least 10% of the outstanding shares of the Trust.
In the event that such a meeting is requested, the Trust will provide
appropriate assistance and information to the shareholders requesting the
meeting.
Where the Trust's Prospectuses or Statements of Additional
Information state that an investment limitation or a fundamental policy may
not be changed without shareholder approval, such approval means the vote of
(1) 67% or more of the affected Fund's shares present at a meeting if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the affected Fund's
outstanding shares, whichever is less.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such
a trust could, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. Even if, however, the Trust were
held to be a partnership, the possibility of the shareholders' incurring
financial loss for that reason appears remote because the Trust's Declaration
of Trust contains an express disclaimer of shareholder liability for
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by or on
behalf of the Trust or the Trustees, and because the Declaration of Trust
provides for indemnification out of the Trust property for any shareholder
held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable
only for his or her own willful defaults and, if reasonable care has been
exercised in the selection of officers, agents, employees or investment
advisers, shall not be liable for any neglect or wrongdoing of any such
person. The Declaration of Trust also provides that the Trust will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with actual or threatened litigation in which they may be involved
because of their Offices with the Trust unless it is determined in the manner
provided in the Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust. However, nothing in the Declaration of Trust shall protect or
indemnify a Trustee against any liability for his or her willful misfeasance,
bad faith, gross negligence or reckless disregard of his or her duties.
S-35
<PAGE>
5% AND 25% SHAREHOLDERS
A shareholder owning of record or beneficially more than 25% of a particular
Fund's shares may be considered to be a "controlling person" of that Fund.
Accordingly, its vote could have a more significant effect on matters
presented at shareholder meetings than the votes of the Fund's other
shareholders. As of April 22, 1999, the following persons were the only
persons who were record owners (or to the knowledge of the Adviser,
beneficial owners) of 5% and 25% or more of the Fund's shares:
<TABLE>
<CAPTION>
FUND SHAREHOLDER %
- ---- ----------- --
<S> <C> <C>
Equity Fund Miter & Co. 91.60%
FBO TA
C/O Marshall & Ilsley Trust Co.
P.O. Box 2977
Milwaukee, WI 53201-2977
REINCO 5.95%
P.O. Box 1930
Honolulu, HI 96805-1930
High Grade Income Fund Miter & Co. 93.69%
FBA TA
C/O Marshall & Ilsley Trust Co.
P.O. Box 2977
Milwaukee, WI 53201-2977
Hawaii Municipal Bond Fund FIDAC 36.61%
C/O Marshall & Ilsley Trust Co.
P.O. Box 2977
Milwaukee, WI 53201-2977
Miter & Co. 19.22%
FBA TA
C/O Marshall & Ilsley Trust Co.
P.O. Box 2977
Milwaukee, WI 53201-2977
Money Market Fund Maril & Co. 85.23%
C/O First Hawaiian Bank
Trust & Investments Division
P.O. Box 3708
Honolulu, HI 96811-3708
S-36
<PAGE>
Maril & Co. 11.80%
C/O First Hawaiian Bank
Trust & Investments Division
P.O. Box 3708
Honolulu, HI 96811-3708
Treasury Money Market Fund Maril & Co. 69.56%
C/O First Hawaiian Bank
Trust & Investments Division
P.O. Box 3708
Honolulu, HI 96811-3708
Maril & Co. 30.37%
C/O First Hawaiian Bank
Trust & Investments Division
P.O. Box 3708
Honolulu, HI 96811-3708
</TABLE>
FINANCIAL INFORMATION
The Trust's financial statements for the fiscal year ended December
31, 1998, including notes thereto and the report of PricewaterhouseCoopers
LLP thereon, are herein incorporated by reference. A copy of the 1998 Annual
Report must accompany the delivery of this Statement of Additional
Information.
S-37
