<PAGE>
STI CLASSIC FUNDS
TRUST SHARES
CAPITAL GROWTH FUND
VALUE INCOME STOCK FUND
SUNBELT EQUITY FUND
INVESTMENT GRADE BOND FUND
SHORT-TERM BOND FUND
PRIME QUALITY MONEY MARKET FUND
INVESTMENT ADVISORS TO THE FUNDS:
STI CAPITAL MANAGEMENT, N.A.
TRUSCO CAPITAL MANAGEMENT, INC.
(THE "ADVISORS")
The STI Classic Funds (the "Trust") is a mutual fund that offers shares in a
number of separate investment portfolios (each a "Fund" and, collectively, the
"Funds"). This Prospectus sets forth concisely the information about the Trust
Shares of the above-referenced Funds. Investors are advised to read this
Prospectus and retain it for future reference.
A Statement of Additional Information relating to the Funds dated the same date
as this Prospectus has been filed with the Securities and Exchange Commission
and is available without charge through the Distributor, SEI Financial Services
Company, Oaks, Pennsylvania 19456 or by calling 1-800-874-4770. The Statement of
Additional Information is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE PRIME QUALITY MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE PRIME
QUALITY MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
- --------------------------------------------------------------------------------
THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT
CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISORS OR ANY OF THEIR AFFILIATES
OR CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
OCTOBER 1, 1996
AS RESTATED APRIL 15, 1997
<PAGE>
2
Throughout this Prospectus, the Investment Grade Bond Fund and Short-Term Bond
Fund, which invest primarily in bonds and other fixed income instruments, may be
referred to as the "Bond Funds." The Prime Quality Money Market Fund may be
referred to as the "Money Market Fund." The Capital Growth Fund, Value Income
Stock Fund and Sunbelt Equity Fund may be referred to as the "Equity Funds."
The Trust Shares are offered primarily to financial institutions and
intermediaries ("Shareholders"), including SunTrust Banks, Inc. and its
affiliates and correspondents, for the investment of funds for which they act in
a fiduciary, agency, investment advisory or custodial capacity. Individuals may
not purchase Trust Shares directly, although individuals may be able to purchase
Trust Shares through accounts maintained with financial institutions.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Expense Summary........................................................... 3
Financial Highlights...................................................... 4
Performance Information for the Predecessor Collective Funds.............. 6
The Trust................................................................. 6
Funds and Investment Objectives........................................... 7
Investment Policies and Strategies........................................ 7
General Investment Policies and Strategies................................ 12
Investment Risks.......................................................... 13
Investment Limitations.................................................... 15
Performance Information................................................... 15
Purchase of Fund Shares................................................... 16
Redemption of Fund Shares................................................. 18
Dividends and Distributions............................................... 18
Tax Information........................................................... 19
STI Classic Funds Information............................................. 21
The Trust................................................................. 21
Board of Trustees......................................................... 21
Investment Advisors....................................................... 21
Portfolio Managers........................................................ 22
Banking Laws.............................................................. 23
Distribution.............................................................. 23
Administration............................................................ 24
Transfer Agent and Dividend Disbursing Agent.............................. 24
Custodian................................................................. 24
Legal Counsel............................................................. 24
Independent Public Accountants............................................ 24
Other Information......................................................... 24
Voting Rights............................................................. 24
Reporting................................................................. 24
Shareholder Inquiries..................................................... 25
Description of Permitted Investments...................................... 25
Appendix.................................................................. A-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE TRUST'S STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR SEI FINANCIAL SERVICES COMPANY
(THE "DISTRIBUTOR"). THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
TRUST OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE>
3
EXPENSE SUMMARY
TRUST SHARES
The purpose of the following table is to help you understand the various costs
and expenses that a shareholder will bear, directly or indirectly, in connection
with an investment in the Trust Shares of each Fund.
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
CAPITAL SUNBELT INVESTMENT SHORT-TERM PRIME QUALITY
GROWTH VALUE INCOME EQUITY GRADE BOND BOND MONEY MARKET
FUND STOCK FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Management Fees (after fee
waivers & reimbursements)(1)... 1.03% .80% 1.02% .63% .46% .50%
Other Fund Expenses (after fee
waivers & reimbursements)(2)... .12% .15% .13% .12% .19% .08%
- ----------------------------------------------------------------------------------------------------------------------
Total Fund Operating Expenses
(after fee waivers &
reimbursements)(3)(4).......... 1.15% .95% 1.15% .75% .65% .58%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each Advisor is waiving, on a voluntary basis, a portion of its fee from
each Fund. Each Advisor reserves the right to terminate its waiver at any
time in its sole discretion. Absent such waivers, Advisory Fees for the
Funds would be as follows: Capital Growth Fund -- 1.15%, Value Income Stock
Fund -- .80%, Sunbelt Equity Fund -- 1.15%, Investment Grade Bond Fund --
.74%, Short-Term Bond Fund -- .65%, and Prime Quality Money Market Fund --
.65%. See "Investment Advisors."
(2) The Administrator is waiving, on a voluntary basis, a portion of its fee
from the Prime Quality Money Market Fund. The Administrator reserves the
right to terminate its waiver at any time in its sole discretion. Absent
such waiver, Other Fund Expenses would be .13%.
(3) Absent the voluntary waivers described above, Total Fund Operating Expenses
would be as follows: Capital Growth Fund -- 1.27%, Value Income Stock Fund
-- .95%, Sunbelt Equity Fund -- 1.28%, Investment Grade Bond Fund -- .86%,
Short-Term Bond Fund -- .84%, and Prime Quality Money Market Fund -- .78%.
(4) Total Fund Operating Expenses for the Value Income Stock Fund have been
restated to reflect current fees.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLES YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
An investor would pay the following expenses on a
$1,000 investment assuming: (1) a 5% annual
return and (2) redemption at the end of each
time period.
CAPITAL GROWTH FUND............................... $12 $ 37 $ 63 $140
VALUE INCOME STOCK FUND........................... $10 $ 30 $ 53 $117
SUNBELT EQUITY FUND............................... $12 $ 37 $ 63 $140
INVESTMENT GRADE BOND FUND........................ $ 8 $ 24 $ 42 $ 93
SHORT-TERM BOND FUND.............................. $ 7 $ 21 $ 36 $ 81
PRIME QUALITY MONEY MARKET FUND................... $ 6 $ 19 $ 32 $ 73
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
THE EXAMPLES ARE BASED UPON THE TOTAL OPERATING EXPENSES OF THE FUNDS AND SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, independent
public accountants to the Trust, whose report thereon was unqualified. This
information should be read in conjunction with the Trust's financial statements
and notes thereto, which are included in the Trust's Statement of Additional
Information and which appear, along with the report of Arthur Andersen LLP, in
the Trust's 1996 Annual Report to Shareholders. Additional performance
information regarding each Fund is contained in the Trust's Annual Report to
Shareholders and is available without charge by calling 1-800-874-4770.
For a Trust Share Outstanding Throughout the Period Ended May 31,
<TABLE>
<CAPTION>
NET REALIZED
AND
NET ASSET NET UNREALIZED DISTRIBUTIONS
VALUE INVESTMENT GAINS FROM NET DISTRIBUTIONS NET ASSET
BEGINNING INCOME (LOSSES) ON INVESTMENT FROM REALIZED VALUE END
OF PERIOD (LOSS) INVESTMENTS INCOME CAPITAL GAINS OF PERIOD
--------- ---------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
--------------------
CAPITAL GROWTH FUND
- -------------------
TRUST SHARES
1996......................... $ 12.18 $ 0.12 $ 3.32 $ (0.13) $ (0.59) $ 14.90
1995......................... 11.99 0.16 0.57 (0.14) (0.40) 12.18
1994......................... 11.95 0.16 0.31 (0.17) (0.26) 11.99
1993 (1)..................... 10.36 0.12 1.57 (0.10) -- 11.95
-------------------------
VALUE INCOME STOCK FUND
- ------------------------
TRUST SHARES
1996......................... $ 11.59 $ 0.35 $ 2.71 $ (0.34) $ (1.16) $ 13.15
1995......................... 10.54 0.32 1.56 (0.32) (0.51) 11.59
1994......................... 10.23 0.29 0.70 (0.32) (0.36) 10.54
1993 (2)..................... 10.00 0.11 0.16 (0.04) -- 10.23
--------------------
SUNBELT EQUITY FUND
- -------------------
TRUST SHARES
1996......................... $ 10.03 $ (0.04) $ 4.32 -- $ (0.20) $ 14.11
1995......................... 9.70 (0.01) 0.38 -- (0.04) 10.03
1994 (3)..................... 10.00 -- (0.30) -- -- 9.70
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
RATIO OF NET EXPENSES TO INCOME (LOSS)
INVESTMENT AVERAGE NET TO AVERAGE NET
RATIO OF INCOME ASSETS ASSETS
NET ASSETS EXPENSES (LOSS) TO (EXCLUDING (EXCLUDING PORTFOLIO
TOTAL END OF PERIOD TO AVERAGE AVERAGE NET WAIVERS AND WAIVERS AND TURNOVER
RETURN (000) NET ASSETS ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE
-------- ------------- ---------- ------------ --------------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------
CAPITAL GROWTH FUND
- -------------------
TRUST SHARES
1996......................... 28.97% $ 981,498 1.15% 0.90% 1.27% 0.78% 156.46%
1995......................... 6.63% 984,205 1.15% 1.38% 1.28% 1.25% 127.79%
1994......................... 3.87% 891,870 1.15% 1.25% 1.29% 1.11% 123.87%
1993 (1)..................... 17.90%* 507,692 1.15%* 1.43%* 1.28%* 1.30%* 95.02%
-------------------------
VALUE INCOME STOCK FUND
- ------------------------
TRUST SHARES
1996......................... 27.91% $ 1,244,399 0.92% 2.86% 0.92% 2.86% 133.99%
1995......................... 19.06% 991,977 0.95% 3.16% 0.95% 3.16% 125.71%
1994......................... 9.95% 573,082 0.88% 3.21% 0.97% 3.12% 149.28%
1993 (2)..................... 9.05%* 137,761 0.80%* 4.32%* 0.96%* 4.16%* 34.71%
--------------------
SUNBELT EQUITY FUND
- -------------------
TRUST SHARES
1996......................... 43.19% $ 412,430 1.15% (0.34%) 1.28% (0.47%) 106.27%
1995......................... 3.81% 258,908 1.15% (0.12%) 1.30% (0.27%) 80.03%
1994 (3)..................... (2.99%)+ 128,280 1.15%* (0.19%)* 1.58%* (0.62%)* 21.42%
</TABLE>
<PAGE>
5
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
NET REALIZED
NET ASSET AND DISTRIBUTIONS
VALUE NET UNREALIZED FROM NET DISTRIBUTIONS NET ASSET
BEGINNING INVESTMENT GAINS ON INVESTMENT FROM REALIZED VALUE END
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS OF PERIOD
---------- ---------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
-----------------------------
INVESTMENT GRADE BOND FUND
- ----------------------------
TRUST SHARES
1996......................... $ 10.26 $ 0.80 $ (0.19) $ (0.60) -- $ 10.07
1995......................... 9.89 0.61 0.37 (0.61) -- 10.26
1994......................... 10.45 0.50 (0.38) (0.50) $ (0.20) 9.69
1993 (4)..................... 10.09 0.45 0.36 (0.45) -- 10.45
----------------------
SHORT-TERM BOND FUND
- ---------------------
TRUST SHARES
1996......................... $ 9.98 $ 0.54 $ (0.10) $ (0.54) $ (0.02) $ 9.96
1995......................... 9.79 0.53 0.19 (0.53) -- 9.98
1994......................... 10.01 0.42 (0.21) (0.42) (0.01) 9.79
1993 (5)..................... 10.00 0.06 0.01 (0.08) -- 10.01
---------------------------------
PRIME QUALITY MONEY MARKET FUND
- --------------------------------
TRUST SHARES
1996......................... $ 1.00 $ 0.05 -- $ (0.05) -- $ 1.00
1995......................... 1.00 0.05 -- (0.05) -- 1.00
1994......................... 1.00 0.03 -- (0.03) -- 1.00
1993 (6)..................... 1.00 0.03 -- (0.03) -- 1.00
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES TO INCOME TO
RATIO OF NET AVERAGE NET AVERAGE NET
RATIO OF INVESTMENT ASSETS ASSETS
NET ASSETS EXPENSES INCOME TO (EXCLUDING (EXCLUDING PORTFOLIO
TOTAL END OF PERIOD TO AVERAGE AVERAGE NET WAIVERS AND WAIVERS AND TURNOVER
RETURN (000) NET ASSETS ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE
-------- ------------- ---------- ------------ --------------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------
INVESTMENT GRADE BOND FUND
- ----------------------------
TRUST SHARES
1996......................... 4.02% $ 599,514 0.75% 5.81% 0.87% 5.89% 184.33%
1995......................... 10.39% 543,308 0.75% 6.22% 0.88% 6.09% 237.66%
1994......................... 1.17% 460,538 0.75% 4.77% 0.88% 4.64% 259.19%
1993 (4)..................... 9.34%* 336,132 0.74%* 5.14%* 0.87%* 5.01%* 299.32%
----------------------
SHORT-TERM BOND FUND
- ---------------------
TRUST SHARES
1996......................... 4.45% $ 91,156 0.65% 5.39% 0.61% 5.23% 182.62%
1995......................... 7.60% 60,952 0.65% 5.49% 0.85% 5.29% 299.49%
1994......................... 2.02% 34,772 0.65% 4.15% 0.85% 3.95% 74.85%
1993 (5)..................... 4.45%* 25,334 0.64%* 3.68%* 1.11%* 3.41%* 83.89%
------------------------------
PRIME QUALITY MONEY MARKET FUND
- -------------------------------
TRUST SHARES
1996......................... 5.25% $ 1,050,800 0.56% 5.11% 0.78% 4.91% --
1995......................... 4.79% 799,189 0.58% 4.77% 0.79% 4.56% --
1994......................... 2.88% 583,398 0.58% 2.88% 0.79% 2.65% --
1993 (6)..................... 2.92%* 410,997 0.58%* 2.85%* 0.78%* 2.65%* --
</TABLE>
* Annualized.
+ Cumulative since commencement of operations.
(1) The Capital Growth Fund Trust Shares commenced operations on July 1, 1992.
(2) The Value Income Stock Fund Trust Shares commenced operations on February
12, 1993.
(3) The Sunbelt Equity Fund Trust Shares commenced operations on January 3,
1994.
(4) The Investment Grade Bond Fund Trust Shares commenced operations on July 16,
1992.
(5) The Short-Term Bond Fund Trust Shares commenced operations on March 15,
1993.
(6) The Prime Quality Money Market Fund Trust Shares commenced operations on
June 8, 1992.
<PAGE>
6
PERFORMANCE INFORMATION FOR PREDECESSOR COLLECTIVE FUNDS
The Value Income Stock Fund and Sunbelt Equity Fund are each the successor to
collective investment funds previously managed by STI Capital Management, Inc.
and Trusco Capital Management, Inc. A substantial portion of the assets of those
collective investment funds was transferred to the Funds in connection with each
Fund's commencement of operations. Set forth below is certain performance data
for the predecessor collective investment funds, which is deemed relevant
because the collective investment funds were managed using virtually the same
investment objectives, policies and restrictions as those used by each
respective Fund. The performance data, however, is not necessarily indicative of
the future performance of each Fund. Further, the predecessor collective funds
were not subject to certain investment limitations imposed on mutual funds,
which, if they had been imposed, may have adversely affected a collective fund's
performance.
The predecessor collective funds did not incur expenses that correspond to the
advisory, administrative, and other fees to which each Fund is subject.
Accordingly, the following performance information has been adjusted by applying
the total expense ratios for the corresponding Fund, as disclosed in the
Prospectus at the time the Fund commenced operations, which reduced the actual
performance of the collective fund.
The average annual total returns (adjusted to reflect current Fund expenses, net
of voluntary waivers and reimbursements) for the following periods are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Value Income Stock 20.05% N/A N/A 16.29%
Collective Fund (ending (10/1/89-
12/31/92) 12/31/92)
Sunbelt Equity 22.87% 21.63 16.34 17.08%
Collective Fund (ending (12/1/80-
12/31/93) 12/31/93)
</TABLE>
The average annual total returns for the Funds from inception through May 31,
1996 and for the one- and three-year periods ended May 31, 1996 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
ONE THREE SINCE
YEAR YEARS INCEPTION
- -------------------------------------------------------------------
<S> <C> <C> <C>
Value Income Stock Fund* 27.91% 18.76% 17.89%
Sunbelt Equity Fund** 43.19% N/A 16.44%
</TABLE>
*Value Income Stock Fund commenced operations on February 12, 1993.
**Sunbelt Equity Fund commenced operations on January 3, 1994.
THE TRUST
STI CLASSIC FUNDS (the "Trust") is a diversified, open-end management investment
company that provides a convenient and economical means of investing in several
professionally managed portfolios of securities. The Trust currently offers
units of beneficial interest ("shares") in a number of separate Funds.
Shareholders may purchase shares in each non-money market Fund through three
separate classes (Trust Shares, Investor Shares and Flex Shares) and in each
Money Market Fund through two separate classes (Trust Shares and Investor
Shares), which provide for variations in distribution and service fees, transfer
agent fees, voting rights and dividends. Except for differences between classes,
each
<PAGE>
7
share of each Fund represents an undivided, proportionate interest in that Fund.
This Prospectus relates to the Trust Shares of the Funds described below.
FUNDS AND INVESTMENT OBJECTIVES
EQUITY FUNDS:
THE CAPITAL GROWTH FUND seeks to provide capital appreciation by investing
primarily in a portfolio of common stocks, warrants and securities convertible
into common stock which, in its Advisor's opinion, are undervalued in the
marketplace at the time of purchase.
THE VALUE INCOME STOCK FUND seeks to provide current income with the secondary
goal of achieving capital appreciation by investing primarily in equity
securities.
THE SUNBELT EQUITY FUND seeks to provide capital appreciation by investing
substantially all, and under normal market conditions at least 65%, of its
assets in common stocks, preferred stocks, warrants and securities convertible
into common stock of U.S. companies headquartered and/or conducting a
substantial portion of their operations in the southern region of the United
States. Current income will not be an important criterion of investment
selection and any such income should be considered incidental.
BOND FUNDS:
THE INVESTMENT GRADE BOND FUND seeks to provide as high a level of total return
through current income and capital appreciation as is consistent with the
preservation of capital primarily through investment in investment grade fixed
income securities.
THE SHORT-TERM BOND FUND seeks to provide as high a level of current income,
relative to funds with like investment objectives, as is consistent with the
preservation of capital primarily through investment in short- to
intermediate-term investment grade fixed income securities.
MONEY MARKET FUND:
THE PRIME QUALITY MONEY MARKET FUND seeks to provide as high a level of current
income as is consistent with preservation of capital and liquidity by investing
exclusively in high quality money market instruments.
There can be no assurance that a Fund will achieve its investment objective.
The investment objective of each Fund is nonfundamental and may be changed
without shareholder approval.
INVESTMENT POLICIES AND STRATEGIES
CAPITAL GROWTH FUND
The Capital Growth Fund invests primarily in a diversified portfolio of common
stocks, warrants, and securities convertible into common stocks which, in the
Advisor's opinion, are undervalued in the marketplace at the time of purchase.
In selecting securities for the Fund, its Advisor will evaluate factors believed
to affect capital appreciation such as the issuer's background, industry
position, historical returns on equity and experience and qualifications of the
management team. Dividend and interest income should be considered incidental to
the growth of capital. The Fund's Advisor will rotate the Capital Growth Fund's
holdings between various market sectors based on economic analysis of the
overall business cycle. Under normal conditions, at least 65% of the total
assets of
<PAGE>
8
the Capital Growth Fund will be invested in common stocks.
All of the common stocks in which the Fund invests are traded on registered
exchanges or on the over-the-counter market in the United States. Assets of the
Capital Growth Fund not invested in the securities described above may be
invested in U.S. dollar denominated equity securities of foreign issuers
(including sponsored American Depositary Receipts ("ADRs") that are traded on
exchanges or listed on National Association of Securities Dealers Automated
Quotations ("NASDAQ")); securities issued by money market mutual funds;
pay-in-kind securities; and bonds. The bonds that the Capital Growth Fund may
purchase may be rated in any rating category or may be unrated, provided that no
more than 10% of the Fund's total assets will be invested in bonds rated below
BBB by Standard & Poor's Corporation ("S&P") or below Baa by Moody's Investors
Services, Inc. ("Moody's") or securities not rated by S&P or Moody's and of
comparable quality. See "Investment Risks -- High Yield, Lower Rated Bonds." In
addition, the Fund may invest up to 10% of its assets in restricted securities.
The Fund's turnover rate for the fiscal year ended May 31, 1996 was 156%. This
rate of turnover, if continued, will likely result in higher brokerage
commissions and higher levels of realized capital gains than if the turnover
rate was lower.
VALUE INCOME STOCK FUND
The Value Income Stock Fund seeks to provide current income by structuring its
investments in an attempt to maintain the Fund's yield at a level above the
average dividend yield of the securities comprising the S&P 500 Stock Index.
Achieving such a yield will be the Fund's primary consideration when purchasing
securities. A secondary consideration of the Fund will be capital appreciation.
The Fund will invest at least 80% of its total assets in equity securities.
Investments will consist primarily of common stocks, and, under normal market
conditions, at least 65% of the Fund's assets will be invested in common stocks
issued by corporations which have a history of paying regular dividends,
although there can be no assurance that such corporations will continue to pay
dividends. Other equity securities in which the Fund may invest are convertible
debt securities; preferred stocks and warrants which are convertible into or
exchangeable for common stocks; and U.S. dollar denominated equity securities of
foreign issuers (including sponsored ADRs that are traded on exchanges or listed
on NASDAQ). All of the common stocks in which the Fund invests are traded on
registered exchanges such as the New York or American Stock Exchange or on the
over-the-counter market in the United States (i.e., NASDAQ). The Fund may also
purchase debt securities (corporate debt obligations and U.S. Treasury
obligations) which may be rated in any rating category or may be unrated,
provided that no more than 10% of the Fund's total assets will be invested in
bonds rated below BBB by S&P or below Baa by Moody's or securities not rated by
S&P or Moody's and of comparable quality. The Fund may also invest in futures
and options.
The Fund will invest primarily in stocks of companies operating in all aspects
of the U.S. and world economies that have a market capitalization of at least
$500 million, and that the Fund's Advisor believes possess fundamentally
favorable long-term characteristics. However, stocks of companies with smaller
market capitalizations and stocks that are out of favor in the financial
community and in which little opportunity for price appreciation is recognized
by the financial
<PAGE>
9
community may also be purchased if the Fund's Advisor believes they are
undervalued.
The Fund's turnover rate for the fiscal year ended May 31, 1996 was 134%. This
rate of turnover, if continued, will likely result in higher brokerage
commissions and higher levels of realized capital gains than if the turnover
rate was lower.
SUNBELT EQUITY FUND
The Sunbelt Equity Fund seeks to provide capital appreciation by investing
substantially all, and under normal market conditions at least 65%, of its
assets in common stocks; preferred stocks; warrants; and securities convertible
into common stock of U.S. companies headquartered and/or conducting a
substantial portion of their operations in (i.e., maintaining at least 50% of
their assets in or deriving at least 50% of their revenues and/or sales from)
the southern region of the United States. Current income will not be an
important criterion of investment selection and any such income should be
considered incidental. The Fund's Advisor will seek to identify and purchase
securities of companies that it believes to be undervalued and that possess a
strong balance sheet, a strong earnings record and adequate market liquidity.
Most of the common stocks in which the Fund invests are traded on registered
exchanges such as the New York or American Stock Exchange or on NASDAQ. The Fund
will invest no more than 10% of its assets in convertible securities rated lower
than BBB. (See "Investment Risks -- High Yield, Lower Rated Bonds.") The Fund
may invest up to 10% of its total assets in restricted securities. The Fund may
also purchase futures and options for hedging purposes. Obligations relating to
futures contracts will be limited to not more than 20% of the Fund's total
assets.
The Fund will invest primarily in stocks of U.S. companies headquartered and/or
operating in the following U.S. states: Texas, Arkansas, Alabama, Mississippi,
Tennessee, Kentucky, Florida, Virginia, Georgia, North Carolina, South Carolina
and Louisiana. To the extent that the Fund's investments are not as
geographically dispersed across the U.S. as other funds with comparable
objectives, the impact of economic forces on and the relative economic
conditions of these states will be greater on Shareholders.
The Fund's turnover rate for the fiscal year ended May 31, 1996 was 106%. This
rate of turnover, if continued, will likely result in higher brokerage
commissions and higher levels of realized capital gains than if the turnover
rate was lower.
INVESTMENT GRADE BOND FUND
The Investment Grade Bond Fund will invest only in those obligations deemed
investment grade obligations rated BBB or better by S&P or Baa or better by
Moody's or, if not rated by S&P or Moody's, of comparable quality at the time of
purchase as determined by the Fund's Advisor, including corporate debt
obligations; mortgage-backed securities, collateralized mortgage obligations
("CMOs") and asset-backed securities; obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies or
instrumentalities; custodial receipts involving U.S. Treasury obligations;
securities of the government of Canada and its provincial and local governments;
securities issued or guaranteed by foreign governments, their political
subdivisions, agencies or instrumentalities; obligations of supranational
entities and sponsored ADRs that are traded on exchanges or listed on NASDAQ.
Under normal circumstances, at least 65% of the Fund's total assets will be
invested in corporate and
<PAGE>
10
government bonds and debentures. No more than 25% of the Fund's assets will be
invested in securities rated BBB by S&P or Baa by Moody's or, if not rated by
S&P or Moody's, of comparable quality at the time of purchase as determined by
the Fund's Advisor.
The Fund may purchase mortgage-backed securities issued or guaranteed as to the
payment of principal and interest by the U.S. Government, its agencies or
instrumentalities or, subject to a limit of 35% of the Fund's assets,
mortgage-backed securities issued by private issuers. These mortgage-backed
securities may be backed or collateralized by fixed, adjustable or floating rate
mortgages. The Fund may also invest in asset-backed securities which consist of
securities backed by company receivables, truck and auto loans, leases, credit
card receivables and home equity loans.
In order to reduce interest rate risk, and subject to a general limit of 25% of
the Fund's assets, the Fund may purchase floating or variable rate securities.
Some floating or variable rate securities will be subject to interest rate
"caps" or "floors." It may also buy securities on a when-issued basis, putable
securities, medium term notes, and zero coupon securities. The Fund may also
invest up to 10% of its assets in restricted securities. The Fund may also
engage in futures and options.
Under normal market conditions, it is anticipated that the Fund's average
weighted maturity will range from 4 to 10 years. In the case of mortgage related
securities and asset-backed securities, maturity will be determined based on the
expected average life of the security. The Fund may shorten its average weighted
maturity to as little as 90 days if deemed appropriate for temporary defensive
purposes. By so limiting the maturity of its investments, the Fund expects that
its net asset value will experience less price movement in response to changes
in interest rates than the net asset values of mutual funds investing in similar
credit quality securities with longer maturities.
The Fund's portfolio turnover rate was 184% for the fiscal year ended May 31,
1996. This rate of turnover, if continued, will likely result in higher
transaction costs and higher levels of realized capital gains than if the
turnover rate was lower.
In fact, the Advisor to the Investment Grade Bond Fund may buy or sell portfolio
securities with the intention of generating capital gains. Such gains will
increase the Fund's total return and will be taxable upon distribution to
Shareholders. See "Tax Information."
SHORT-TERM BOND FUND
Under normal circumstances, the Short-Term Bond Fund will invest solely in
investment grade obligations rated BBB or better by S&P or Baa or better by
Moody's or, if not rated by S&P or Moody's, of comparable quality at the time of
purchase as determined by the Fund's Advisor consisting of debt obligations of
U.S. and foreign corporations; mortgage-backed securities; CMOs; asset-backed
securities; obligations (including mortgage-backed securities) issued or
guaranteed as to principal and interest by the U.S. Government, its agencies or
instrumentalities; and custodial receipts involving U.S. Treasury obligations;
(including Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry System ("CUBES")). Under normal
circumstances, at least 65% of the Fund's total assets will be invested in
corporate and government bonds and debentures. No more than 25% of the Fund's
assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if
not rated by S&P or Moody's, of comparable quality at the time of purchase by
the Fund's Advisor.
<PAGE>
11
The Fund may purchase, without limitation, mortgage-backed securities issued or
guaranteed as to the payment of principal and interest by the U.S. Government,
its agencies or instrumentalities and, subject to a limit of 25% of the Fund's
assets, mortgage-backed securities issued by private issuers. These
mortgage-backed securities may be backed or collateralized by fixed, adjustable
or floating rate mortgages. The Fund may also invest in asset- backed
securities, which consist of securities backed by company receivables, truck and
auto loans; leases; credit card receivables; and home equity loans. The Fund
will purchase mortgage-backed and asset-backed securities only if they are rated
at least AA by S&P or Aa by Moody's or, if unrated, determined to be of
comparable quality at the time of purchase by the Fund's Advisor.
The Fund may purchase securities on a when-issued basis and may acquire floating
or variable rate securities, medium term notes, putable securities, and zero
coupon securities. The Fund may also purchase securities issued by foreign
governments and supranational agencies. The Fund may also invest in municipal
securities when the Fund's Advisor feels it is consistent with the Fund's
investment objective. The Fund will not invest in municipal securities unless
the Fund's Advisor believes that the yield will be higher than the yield for
comparable taxable investments in which the Fund is permitted to invest. The
following quality criteria apply to the Fund's investments in municipal
securities. The Fund's investments in municipal notes will be limited to those
obligations (i) where both principal and interest are backed by the full faith
and credit of the United States, (ii) which are rated MIG-2 or V-MIG-2 or better
at the time of investment by Moody's, (iii) which are rated SP-2 or better at
the time of investment by S&P, or (iv) which, if not rated, are of equivalent
quality to MIG-2, V-MIG-2, or SP-2 or better in the Advisor's judgment. The
Fund's investment in municipal bonds will be limited to bonds rated BBB or
better by S&P or Baa or better by Moody's, or, if not rated by S&P or Moody's,
deemed by the Fund's Advisor to be of comparable quality. For the Fund's
investments in other types of tax-exempt municipal investments, such as
participation interests in municipal lease/ purchase agreements, the quality of
the underlying credit or of the bank providing a credit support arrangement
must, in the Fund's Advisor's opinion, be equivalent to the municipal note or
bond ratings stated above. The Fund is also authorized to invest up to 10% of
its assets in restricted securities, including Rule 144A securities, that the
Fund's Advisor determines are liquid under guidelines adopted by the Trust's
Board of Trustees. The Fund may also enter into bond futures contracts and
options on bond futures contracts and engage in securities lending.
The Fund intends to maintain a dollar-weighted average maturity of 3 years or
less, and the maximum remaining maturity for any security held by the Fund is 7
years. Under normal market conditions it is anticipated that the Fund's
dollar-weighted average maturity will range from 2 to 3 years. In the case of
mortgage related securities and asset-backed securities, maturity will be
determined based on the expected average life of the security. The Fund may
shorten its average weighted maturity to as little as 90 days if deemed
appropriate for temporary defensive purposes. By so limiting the maturity of its
investments, the Fund expects that its net asset value will experience less
price movement in response to changes in interest rates than the net asset
values of mutual funds investing in similar credit quality securities with
longer maturities.
The Fund's turnover rate was 163% for the fiscal year ended May 31, 1996. This
rate of
<PAGE>
12
turnover, if continued, will likely result in higher transaction costs and
higher levels of realized capital gains than if the turnover rate was lower.
PRIME QUALITY MONEY MARKET FUND
The Prime Quality Money Market Fund will invest in money market instruments
denominated in U.S. dollars consisting of (i) U.S. Treasury obligations; (ii)
custodial receipts representing interests in component parts of U.S. Treasury
obligations; (iii) obligations issued or guaranteed as to principal and interest
by agencies and instrumentalities of the U.S. Government; (iv) commercial paper
issued by domestic and foreign issuers rated in the highest short-term rating
category by one or more NRSROs as described in the "Appendix" or, if not rated,
determined by the Fund's Advisor to be of comparable quality; (v) high quality
obligations (including certificates of deposit, time deposits, bankers'
acceptances, Eurodollar and Yankee bank obligations) of U.S. commercial banks
(including foreign branches of such banks), and U.S. and London branches of
foreign banks or savings and loan and thrift institutions that are members of
the Federal Reserve System, the Federal Deposit Insurance Corporation, or the
Federal Savings and Loan Insurance Corporation; (vi) high quality short-term
corporate obligations issued by companies with commercial paper meeting the
ratings indicated in (iv), above, or, if not rated, determined by the Fund's
Advisor to be of comparable quality; (vii) repurchase agreements involving such
obligations; (viii) high quality obligations of supranational entities
satisfying the credit ratings described in (iv), above, or, if not rated,
determined by the Fund's Advisor to be of comparable quality; and (ix) medium
term notes. The Fund may not invest more than 25% of its total assets in
obligations issued by foreign branches of U.S. banks and London branches of
foreign banks. The Fund may purchase securities subject to standby commitments.
As a money market fund, the Fund is subject to limitations on the percentage of
its assets that may be invested in any one issuer and on the percentage that may
be invested in securities carrying the second highest rating assigned by the
requisite NRSROs.
GENERAL INVESTMENT POLICIES AND STRATEGIES
For temporary defensive purposes, during periods when its Advisor determines
that market conditions warrant, each Fund may hold a portion of its assets in
cash and invest up to 100% of its assets in money market instruments consisting
of: securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities; custodial receipts involving U.S.
Treasury obligations; repurchase agreements; certificates of deposit; bankers'
acceptances; time deposits issued by banks or savings and loan associations; and
commercial paper rated in the highest rating category. A Fund may not be
pursuing its investment objective when it is engaged in temporary defensive
investing.
The Capital Growth Fund, the Value Income Stock Fund, and the Sunbelt Equity
Fund may purchase restricted securities, including Rule 144A securities, that
its respective Advisor determines are liquid pursuant to guidelines established
by the Trust's Board of Trustees.
In the event that a security owned by a Fund is downgraded below the stated
rating categories, its Advisor will review and take appropriate action with
regard to the security.
The Capital Growth Fund, the Value Income Stock Fund, and the Sunbelt Equity
Fund may borrow money for temporary or emergency
<PAGE>
13
purposes in an amount not to exceed one-third of the value of its total assets.
Each of these Funds may not purchase additional securities while its outstanding
borrowings exceed 5% of its assets.
The Capital Growth Fund, the Value Income Stock Fund, and the Sunbelt Equity
Fund may purchase securities issued by money market mutual funds. A Fund's
purchase of shares of other investment companies, including money market mutual
funds, is limited by the Investment Company Act of 1940 (the "1940 Act") and
will ordinarily result in an additional layer of charges and expenses.
Each of the Funds may engage in securities lending and will limit such practice
to 33 1/3% of its total assets.
The Investment Grade Bond Fund, the Short-Term Bond Fund, and the Prime Quality
Money Market Fund may not purchase additional securities while its outstanding
borrowings exceed 5% of its assets.
It is a non-fundamental policy of each Fund to invest no more than 15% of its
net assets in illiquid securities (10% of the total assets of the Prime Quality
Money Market Fund). An illiquid security is a security which cannot be disposed
of in the usual course of business within seven days at a price approximating
its carrying value.
For additional information regarding permitted investments, see "Description of
Permitted Investments" in this Prospectus and in the Statement of Additional
Information.
INVESTMENT RISKS
EQUITY SECURITIES
Investments in equity securities are generally subject to market risks that may
cause their prices to fluctuate over time. The values of convertible equity
securities are also affected by prevailing interest rates, the credit quality of
the issuer and any call provision. Fluctuations in the value of equity
securities in which a Fund invests will cause the net asset value of the Fund to
fluctuate.
FIXED INCOME SECURITIES
The market value of a Fund's fixed income investments will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Securities with longer maturities are subject to
greater fluctuations in value than securities with shorter maturities. Changes
by a nationally recognized statistical rating organization ("NRSRO") to the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal also affect the value of these investments.
Changes in the value of a Fund's securities will not affect cash income derived
from these securities but will affect the Fund's net asset value.
There is a risk that the current interest rate on floating and variable rate
instruments may not accurately reflect existing market interest rates.
Guarantees of a Fund's portfolio securities by the U.S. Government, its agencies
or instrumentalities guarantee only the payment of principal and interest on the
guaranteed securities, and do not guarantee the securities' yield or value or
the yield or value of a Fund's shares.
Fixed income securities rated BBB by S&P or Baa by Moody's (the lowest ratings
of investment grade bonds) are deemed by these rating services to have
speculative characteristics.
<PAGE>
14
FOREIGN SECURITIES AND FOREIGN CURRENCY CONTRACTS
Investing in the securities of foreign companies and the utilization of forward
foreign currency contracts involve special risks and considerations not
typically associated with investing in U.S. companies. These risks and
considerations include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation or confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability
which could affect U.S. investment in foreign countries and potential
restrictions of the flow of international capital and currencies. Foreign
companies may also be subject to less government regulation than U.S. companies.
Moreover, the dividends payable on the foreign securities may be subject to
foreign withholding taxes, thus reducing the net amount of income available for
distribution to a Fund's Shareholders. Further, foreign securities often trade
with less frequency and volume than domestic securities and, therefore, may
exhibit greater price volatility. Changes in foreign exchange rates will affect,
favorably or unfavorably, the value of those securities which are denominated or
quoted in currencies other than the U.S. dollar.
HIGH YIELD, LOWER RATED BONDS
A Fund's investments in high yield, lower rated bonds ("junk bonds") involve
greater risk of default or price declines than investments in investment grade
securities (E.G., securities rated BBB or higher by S&P or Baa or higher by
Moody's) due to changes in the issuer's creditworthiness. The market for high
risk, high yield securities may be thinner and less active, causing market price
volatility and limited liquidity in the secondary market. This may limit the
ability of a Fund to sell such securities at their fair market value either to
meet redemption requests or in response to changes in the economy or the
financial markets. Market prices for high risk, high yield securities may also
be affected by investors' perception of the issuer's credit quality and the
outlook for economic growth. Thus, prices for high risk, high yield securities
may move independently of interest rates and the overall bond market. In
addition, the market for high risk, high yield securities may be adversely
affected by legislative and regulatory developments.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are subject to the risk of prepayment of the
underlying mortgages. During periods of declining interest rates, prepayment of
mortgages underlying these securities can be expected to accelerate.
ZERO COUPON OBLIGATIONS
Zero coupon obligations are sold at original issue discount and do not make
periodic payments. Zero coupon obligations may be subject to great fluctuations
in value due to interest rate changes.
A Fund will be required to include the imputed interest in zero coupon
obligations in its current income. Because each Fund distributes all of its net
investment income to investors, a Fund may have to sell portfolio securities to
distribute the income attributable to these obligations and securities at a time
when its Advisor would not have chosen to sell such obligations or securities.
<PAGE>
15
INVESTMENT LIMITATIONS
The following investment limitations constitute fundamental policies of each
Fund. Fundamental policies cannot be changed with respect to a Fund without the
consent of the holders of a majority of the Fund's outstanding shares. The term
"majority of the outstanding shares" means the vote of (i) 67% or more of a
Fund's shares present at a meeting, if more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of a
Fund's outstanding shares, whichever is less.
Each Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the United States, its agencies or instrumentalities and repurchase agreements
involving such securities) if as a result more than 5% of the total assets of a
Fund would be invested in the securities of such issuer; provided, however, that
a Fund may invest up to 25% of its total assets without regard to this
restriction as permitted by applicable law.
2. Purchase any securities which would cause more than 25% of the total assets
of a Fund to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities, repurchase agreements
involving such securities or tax-exempt securities issued by governments or
political subdivisions of governments and, with respect to only the Prime
Quality Money Market Fund, obligations issued by domestic branches of U.S. banks
or U.S. branches of foreign banks subject to the same regulations as U.S. banks.
For purposes of this limitation, (i) utility companies will be divided according
to their services, for example, gas, gas transmission, electric and telephone
will each be considered a separate industry; (ii) financial service companies
will be classified according to the end users of their services, for example,
automobile finance, bank finance and diversified finance will each be considered
a separate industry; and (iii) supranational entities will be considered to be a
separate industry.
The foregoing percentages will apply at the time of the purchase of a security.
Additional investment limitations are set forth in the Statement of Additional
Information.
PERFORMANCE INFORMATION
EQUITY AND BOND FUNDS
From time to time, the Equity and Bond Funds may advertise performance (total
return and yield). These figures will be historical and are not intended to
indicate future performance. The yield of an Equity or Bond Fund refers to the
annualized income generated by an investment in that Fund over a specified
30-day period. The yield is calculated by assuming that the income generated by
the investment during that period is generated over one year and is shown as a
percentage of the investment.
The total return of an Equity or Bond Fund refers to the average compounded rate
of return on a hypothetical investment for designated time periods (including
but not limited to, the period from which an Equity or Bond Fund commenced
operations through the specified date), assuming that the entire investment is
redeemed at the end of each period and assuming the reinvestment of all dividend
and capital gains distributions.
The performance of the Trust Shares of the Trust will normally be higher than
for Investor Shares and Flex Shares because Investor Shares and Flex Shares are
subject to
<PAGE>
16
distribution, service and certain transfer agent fees not charged to Trust
Shares. The performance of Flex Shares in comparison to Investor Shares will
vary depending upon the investment time horizon.
Each Equity and Bond Fund may periodically compare its performance to other
mutual funds tracked by mutual fund rating services, to broad groups of
comparable mutual funds or to unmanaged indices which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
MONEY MARKET FUND
From time to time, the Prime Quality Money Market Fund may advertise its current
yield and effective compound yield. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The current yield
refers to the income generated by an investment in the Money Market Fund over a
seven-day period (which period will be stated in the advertisement). This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Money
Market Fund is assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect of this assumed
reinvestment.
PURCHASE OF FUND SHARES
Trust Shares of the Trust are sold primarily to financial institutions or
intermediaries, including subsidiaries of SunTrust Banks, Inc. ("SunTrust"), for
the investment of funds for which they act in a fiduciary, agency, investment
advisory or custodial capacity. Individuals generally may not purchase Trust
Shares directly, although individuals may be able to purchase Trust Shares
through accounts maintained with financial institutions and potentially through
the Preferred Portfolio Account (an asset allocation account available through
SunTrust Securities, Inc.) Trust Shares are sold without a sales charge,
although financial institutions may charge their customer accounts for services
provided in connection with the purchase of shares. Financial institutions may
impose an earlier cut-off time for receipt of purchase orders directed through
them to allow for processing and transmittal of these orders to the Trust's
transfer agent, Federated Services Company (the "Transfer Agent"), for
effectiveness the same day. Information concerning these services and any
charges will be provided to customers by the financial institutions. Trust
Shares will be held of record by the financial institutions, although customers
may have or be given the right to vote the shares depending upon the terms of
their relationship with the financial institution. Confirmations of share
purchases and redemptions will be sent to the financial institution as the
shareholder of record.
Shares may be purchased on days on which the New York Stock Exchange is open for
business (a "Business Day").
MONEY MARKET FUND
A purchase order for the Money Market Fund will be effective as of the Business
Day it is received by the Transfer Agent and eligible to receive dividends
declared the same day if the Transfer Agent receives the order before 1:00 p.m.
Eastern time and the Custodian receives federal funds before 4:00 p.m. Eastern
time on such day. Otherwise, purchase orders
<PAGE>
17
for the Money Market Fund will be effective the next Business Day provided the
Custodian receives readily available funds before 4:00 p.m. Eastern time on the
next such Business Day. The purchase price is the net asset value per share next
computed after the order is received and accepted by the Trust. The net asset
value per share of the Money Market Fund is determined by dividing the total
value of its investments and other assets, less any liabilities, by its total
outstanding shares. The net asset value per share is calculated as of the close
of business of the New York Stock Exchange (currently 4:00 p.m. Eastern time)
each Business Day based on the amortized cost method described in the Statement
of Additional Information and is expected to remain constant at $1.00 per share.
EQUITY AND BOND FUNDS
A purchase order for any of the Equity or Bond Funds will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent receives the
order before 4:00 p.m. Eastern time and payment is received within one day.
Purchases will be made in full and fractional shares of the Trust calculated to
three decimal places. The purchase price of shares of a Fund is the net asset
value next determined after a purchase order is effective. The net asset value
per share of a Fund is determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities, by the total
outstanding shares of the Fund. Net asset value per share is determined daily as
of the close of business of the New York Stock Exchange (currently 4:00 p.m.
Eastern time) on any Business Day. Pursuant to guidelines established by the
Trustees, the Trust may use a pricing service to provide market quotations or
valuations for securities owned by each Fund.
The Trust reserves the right to reject a purchase order when the Distributor
determines that it is not in the best interest of the Trust and/or
Shareholder(s).
The Trust maintains procedures, including identification methods and other
means, for ascertaining the identity of callers and authenticity of
instructions. If reasonable procedures are not employed, the Trust and/or the
Transfer Agent may be liable for any losses due to unauthorized or fraudulent
telephone transactions. Neither the Transfer Agent nor the Trust will be
responsible for any loss, liability, cost or expense for acting upon telephone
or wire instructions reasonably believed to be genuine.
<PAGE>
18
Although the methodology and procedures for calculating the net asset value for
Trust Shares are identical to those of Investor Shares and Flex Shares, the net
asset value per share of the classes of the Funds may differ because of the
distribution, service, and certain transfer agent expenses charged to Investor
Shares and Flex Shares.
REDEMPTION OF FUND SHARES
An order to redeem Trust shares must be transmitted to the Transfer Agent by the
financial institution as the record owner. Financial institutions may establish
procedures for their customers to request redemption of Trust Shares held in
their account with the financial institution. Customers should contact their
financial institution for information concerning these procedures.
Redemption orders must be received by the Transfer Agent before 4:00 p.m.
Eastern time on any Business Day to be effective that day. With respect to the
Money Market Fund, redemption orders must be received by the Transfer Agent on a
Business Day before 1:00 p.m. Eastern time. Redemption orders received after the
times noted above will normally be executed the following day. STI Classic Funds
reserves the right to wire redemption proceeds within five Business Days after
receiving the redemption orders if, in the judgment of the Advisor, an earlier
payment could adversely impact the Fund. Redemption proceeds from Equity Funds
are normally remitted in federal funds wired to the record owner of the shares
within one Business Day, but in no event more than seven days following the
effective date of the order. Redemption proceeds from Bond Funds are normally
remitted within 5 Business Days following receipt of order. No charge for wiring
redemption payments is imposed by the Trust. Redemption orders are effected at
the net asset value per share next determined after an order is effective.
The Trust intends to pay cash for all shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in liquid portfolio securities with a market value equal to the
redemption price. In such circumstances, an investor may incur brokerage costs
in converting such securities to cash.
DIVIDENDS AND DISTRIBUTIONS
MONEY MARKET FUNDS
Dividends from net investment income (exclusive of capital gains) of the Money
Market Funds are declared on each Business Day to Shareholders at the close of
business on the day of declaration. Net income for dividend purposes consists of
(i) interest accrued and original issue discount earned on the Fund's assets,
(ii) plus the amortization of market discount and minus the amortization of
market premium on such assets, (iii) less accrued expenses directly attributable
to the Fund and the general expenses of the Trust prorated to the Fund on the
basis of its relative net assets. Trust Shares begin earning dividends on the
Business Day the purchase order is effective and continue earning dividends
through and including the Business Day before the redemption order is effective.
Dividends are paid within ten Business Days after the end of each month in the
form of additional Trust Shares of the same Fund unless the Shareholder has
elected prior to the date of distribution to receive payment in cash. Such
election, or any revocation thereof, must be made in writing at least 15 days
prior to the date of distribution to the Transfer Agent and will become
effective with respect to dividends paid after its receipt. Dividends are paid
within
<PAGE>
19
ten Business Days after a Shareholder's complete redemption of its Trust Shares
in the Fund.
BOND FUNDS
Dividends from net investment income (exclusive of capital gains) are declared
on each Business Day and paid monthly by each of the Bond Funds. Each Bond
Fund's net realized capital gains (including net short-term capital gains) are
distributed at least annually. Net income for dividend purposes consists of (i)
interest accrued and original issue discount earned on the Bond Fund's assets,
(ii) plus the amortization of and minus the amortization of market premium on
such assets, (iii) plus dividend or distribution income on such assets, (iv)
less accrued expenses directly attributable to the Fund and the general expenses
of the Trust prorated to the Bond Fund on the basis of its relative net assets.
Investor Shares and Flex Shares invested in the Bond Funds are eligible to begin
earning dividends that are declared on the Business Day after the purchase order
is effective and continue to be eligible for dividends through and including the
day the redemption order is effective.
EQUITY FUNDS
Dividends from net investment income (exclusive of capital gains) are declared
and paid quarterly by each of the Funds. Each Equity Fund's net realized capital
gains (including net short-term capital gains) are distributed at least
annually. Net income for dividend purposes consists of (i) interest accrued and
original issue discount earned on an Equity Fund's assets, (ii) plus the
amortization of market discount and minus the amortization of market premium on
such assets, (iii) plus dividend or distribution income on such assets, (iv)
less accrued expenses directly attributable to the Equity Fund and the general
expenses of the Trust prorated to the Equity Fund on the basis of its relative
net assets. Shareholders of record on the record date will be entitled to
receive dividends.
Except for the Money Market Fund, the net asset value of Trust Shares of the
Funds will be reduced by the amount of any dividend or distribution. Dividends
and distributions are paid in the form of additional Trust Shares of the same
Fund unless the customer has elected prior to the date of distribution to
receive payment in cash. Such election, or any revocation thereof, must be made
in writing prior to the date of distribution to the Transfer Agent and will
become effective with respect to dividends paid after its receipt. Dividends and
distributions are paid within ten days of the end of the time period to which
the dividend relates. Dividends and distributions payable to a Shareholder are
paid in cash within ten Business Days after a Shareholder's complete redemption
of its Trust Shares in a Fund.
TAX INFORMATION
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state or local income tax treatment of each Fund or
its Shareholders. Shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
TAX STATUS OF EACH FUND:
Each Fund is treated as a separate entity for federal tax purposes, and is not
combined with the Trust's other Funds. Each Fund intends to qualify for the
special tax treatment afforded
<PAGE>
20
regulated investment companies by the Internal Revenue Code of 1986, as amended
(the "Code"), so that it will be relieved of federal income tax on that part of
its net investment income and net capital gains (the excess of long-term capital
gains over net short-term capital loss) which is distributed to Shareholders.
Each Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
TAX STATUS OF DISTRIBUTIONS:
MONEY MARKET FUND
The Money Market Fund will distribute all of its net investment income
(including, for this purpose, net short-term capital gains) to Shareholders.
Dividends from net investment income will be taxable to Shareholders as ordinary
income whether received in cash or in additional shares.
BOND FUNDS
Each Bond Fund will distribute substantially all of its net investment income
(including, for this purpose, net short-term capital gains) to Shareholders.
Dividends from net investment income paid by the Funds will be taxable to
Shareholders as ordinary income whether received in cash or in additional
shares.
EQUITY FUNDS
Each Equity Fund will distribute substantially all of its net investment income
(including, for this purpose, net short-term capital gains) to Shareholders.
Dividends from net investment income paid by the Funds will be taxable to
Shareholders as ordinary income whether received in cash or in additional
shares.
ALL FUNDS
Dividends from net investment income will qualify for the dividends received
deduction for corporate Shareholders only to the extent such distributions are
derived from dividends paid by domestic corporations. Any net capital gains will
be distributed annually and will be taxed to Shareholders as long-term capital
gains, regardless of how long the Shareholder has held shares and regardless of
whether distributions are received in cash or in additional shares. For certain
individual Shareholders, net long-term capital gains may be taxed at a lower
rate than ordinary income. Each Fund will make annual reports to Shareholders of
the federal income tax status of all distributions. Dividends declared by a Fund
in October, November or December of any year and payable to Shareholders of
record on a date in that month will be deemed to have been paid by the Fund and
received by the Shareholder on December 31 of that year, if paid by the Fund at
any time during the following January.
Income received on direct U.S. obligations is exempt from tax at the state level
when received directly by a Fund and may be exempt, depending on the state, when
received by the Shareholder as income dividends from a Fund, provided certain
state-specific conditions are satisfied. Not all states permit such income
dividends to be tax exempt and some require that a certain minimum percentage of
an investment company's income be derived from state tax-exempt interest. The
Funds will inform Shareholders annually of the percentage of income and
distributions derived from direct U.S. obligations. Shareholders should consult
their tax advisors to determine whether any portion of the income dividends
received from a Fund is considered tax-exempt in their particular state.
<PAGE>
21
Income derived by a Fund from obligations of foreign issuers may be subject to
foreign withholding taxes. No Fund will be able to treat Shareholders as having
paid their proportionate share of such foreign taxes.
A sale, exchange or redemption of Fund shares is a taxable event to the
Shareholder.
STI CLASSIC FUNDS INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated January 15, 1992. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different classes of each Fund. All
consideration received by the Trust for shares of any Fund and all assets of
such Fund belong to that Fund and would be subject to liabilities related
thereto.
The Trust pays its expenses, including fees of its service providers, audit and
legal expenses, expenses of preparing prospectuses, proxy solicitation material
and reports to Shareholders, costs of custodial services and registering the
shares under federal and state securities laws, pricing, insurance expenses,
litigation and other extraordinary expenses, brokerage costs, interest charges,
taxes and organization expenses.
BOARD OF TRUSTEES
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described below, certain
companies provide essential management services to the Trust.
INVESTMENT ADVISORS
The Advisors are indirect wholly-owned subsidiaries of SunTrust Banks, Inc.
("SunTrust"), a southeastern regional bank holding company with assets of $52.5
billion as of December 31, 1996. SunTrust ranks among the twenty largest U.S.
banking companies. Its three principal subsidiaries -- SunTrust Banks of
Florida, Inc. SunTrust Banks of Georgia, Inc. and SunTrust Banks of Tennessee,
Inc. -- provide a wide range of personal and corporate banking, trust, and
investment services through more than 600 locations in the three-state area.
Total discretionary assets under management with SunTrust Banks, Inc. equalled
approximately $53.4 billion as of December 31, 1996.
STI Capital Management, N.A. ("STI Capital") serves as the Advisor to the
Capital Growth Fund, the Value Income Stock Fund and the Investment Grade Bond
Fund. As of June 30, 1996, STI Capital had discretionary management authority
with respect to assets of approximately $11 billion. The principal business
address of STI Capital is P.O. Box 3808, Orlando, Florida 32802.
Trusco Capital Management, Inc. ("Trusco") serves as the Advisor to the Sunbelt
Equity Fund, the Short-Term Bond Fund and the Prime Quality Money Market Fund.
As of June 30, 1996, Trusco had approximately $13.7 billion in assets under
management. The principal business address of Trusco is 50 Hurt Plaza, Suite
1400, Atlanta, Georgia 30303.
The Trust and the above Investment Advisors have entered into advisory
agreements (the "Advisory Agreements"). Under the Advisory Agreements, the
Advisors make the investment decisions for the assets of the Funds they advise
and continuously review, supervise, and administer their Fund's respective
investment programs. The Advisors discharge their responsibilities subject to
the supervision of,
<PAGE>
22
and policies established by, the Trustees of the Trust. STI CLASSIC FUNDS ARE
NOT DEPOSITS, ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT ENDORSED OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS
OF SUNTRUST BANKS, INC. OR ANY OF ITS AFFILIATES. INVESTMENTS IN THE FUNDS
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL
VALUES WILL FLUCTUATE AND SHARES AT REDEMPTION MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. THERE IS NO GUARANTEE THAT ANY STI CLASSIC FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to all Funds, the Advisors may
execute brokerage or other agency transactions through affiliates of the
Advisors.
For the services provided and expenses incurred pursuant to the applicable
Advisory Agreements, STI Capital is entitled to receive advisory fees computed
daily and paid monthly at the annual rate of 1.15% of the Capital Growth Fund's
average daily net assets, 1.15% of the Value Income Stock Fund's average daily
net assets and .74% of the Investment Grade Bond Fund's average daily net
assets.
For the services provided and expenses incurred pursuant to the applicable
Advisory Agreement, Trusco is entitled to receive advisory fees computed daily
and paid monthly at the annual rate of 1.15% of the Sunbelt Equity Fund's
average daily net assets, .65% of the Short-Term Bond Fund's average daily net
assets, and .65% of the Prime Quality Money Market Fund's average daily net
assets.
Although the advisory fee for each Fund is higher than advisory fees paid by
other mutual funds, the Trust believes that each such fee is comparable to the
advisory fee paid by many other mutual funds with similar investment objectives
and policies. From time to time, an Advisor may waive (either voluntarily or
pursuant to applicable state limitations) advisory fees payable by a Fund.
Currently, the Advisors have agreed to voluntary reductions in their respective
fees in amounts necessary to maintain the total operating expenses at the
amounts set forth in the Expense Summary. Voluntary reductions of fees may be
terminated at any time.
For the fiscal year ended May 31, 1996, STI Capital received advisory fees
computed daily and paid monthly at the annual rate of 1.03%, 0.80%, and 0.63% of
the average daily net assets of the Capital Growth, Value Income Stock,
Investment Grade Bond Funds, respectively. Trusco received advisory fees
computed daily and paid monthly at the annual rates of 1.02%, 0.46%, and 0.50%
of the average daily net assets of Sunbelt Equity, Short-Term Bond and Prime
Quality Money Market Funds, respectively.
PORTFOLIO MANAGERS
Mr. Anthony Gray has been responsible for the day-to-day management of the
Capital Growth Fund since it commenced operations. Mr. Gray has served as Chief
Executive Officer and Chief Investment Officer of STI Capital since 1979.
Mr. Mills Riddick, CFA, has been responsible for the day-to-day management of
the Value Income Stock Fund since April, 1995. Mr. Riddick has been a value
portfolio manager at STI Capital since 1989.
Mr. L. Earl Denney has been responsible for the day-to-day management of the
Investment Grade Bond Fund since its inception. Mr. Denney has served as Senior
Vice President of STI Capital since 1983.
Mr. James Foster has been responsible for the day-to-day management of the
Sunbelt Equity Fund since its inception. Mr. Foster has served as a Vice
President of Trusco since 1989.
<PAGE>
23
Mr. David Yealy has been responsible for the day-to-day management of the
Short-Term Bond Fund since July, 1996 and the Prime Quality Money Market Fund
since it commenced operations. Mr. Yealy joined Trusco in 1991 and currently
serves as a Vice President.
BANKING LAWS
Banking laws and regulations, including the Glass-Steagall Act as presently
interpreted by the Board of Governors of the Federal Reserve System, currently
(a) prohibit a bank holding company registered under the Federal Bank Holding
Company Act of 1956 or its affiliates from sponsoring, organizing, controlling,
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and generally prohibit banks
from underwriting securities, but (b) do not prohibit such a bank holding
company or affiliate or banks generally from acting as an investment advisor,
transfer agent, or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of a customer. The
Advisors believe that each may perform the services for STI Classic Funds
contemplated by their respective Advisory Agreements described in this
Prospectus without violation of applicable banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Advisors from continuing to perform services for
STI Classic Funds. If the Advisors were prohibited from providing services to
STI Classic Funds, the Board of Trustees would consider selecting other
qualified firms. Any new investment advisory agreements would be subject to
Shareholder approval.
If current restrictions preventing a bank or its affiliates from legally
sponsoring, organizing, controlling, or distributing shares of an investment
company were relaxed, the Advisors, or their affiliates, would consider the
possibility of offering to perform additional services for STI Classic Funds. It
is not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which the Advisors, or such affiliates, might
offer to provide such services.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI Investments Company ("SEI"), and the Trust are parties to a distribution
agreement (the "Distribution Agreement"). No compensation is paid to the
Distributor for distribution services for the Trust Shares of each Fund. Trust
Shares of the Fund are offered primarily to institutional investors, including
affiliates and correspondents for the investment of funds in which they act in a
fiduciary, agency or custodial capacity. An investor may call 1-800-874-4770 to
receive more information regarding Investor Shares or Flex Shares. It is
possible that a financial institution may offer different classes of shares to
its customers and thus receive different compensation with respect to different
classes of shares.
Each Fund may execute brokerage or other agency transactions through the
Distributor for which the Distributor receives compensation.
<PAGE>
24
ADMINISTRATION
SEI Fund Resources (the "Administrator") serves as the Administrator of the
Trust. The Administrator provides the Trust with certain administrative
services, other than investment advisory services, including regulatory
reporting, all necessary office space, equipment, personnel and facilities.
The Administrator is entitled to a fee from the Trust, which is calculated daily
and paid monthly, at an annual rate as follows:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS FEE
- ------------------------------------------ -----------
<S> <C>
$1 - $1 billion 0.10 %
over $1 billion to $5 billion 0.07 %
over $5 billion to $8 billion 0.05 %
over $8 billion to $10 billion 0.045%
over $10 billion 0.04 %
</TABLE>
From time to time, the Administrator may waive voluntarily all or a portion of
the administration fee payable by the Trust.
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Federated Services Company, Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779 is the Transfer Agent for the shares of the Trust and dividend
disbursing agent for the Trust.
CUSTODIAN
SunTrust Bank, Atlanta, c/o STI Trust & Investment Operations, Inc., 303
Peacetree Street N.E., 14th Floor, Atlanta, Georgia 30308, serves as custodian
of the assets of each Fund. The custodian holds cash, securities and other
assets of the Trust as required by the 1940 Act.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, serves as legal counsel
to the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants to the Trust are Arthur Andersen LLP,
Philadelphia, Pennsylvania.
OTHER INFORMATION
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. Each Fund or
class of a Fund will vote separately on matters relating solely to that Fund or
class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings of Shareholders but approval will be sought for certain changes
in the operation of the Trust and for the election of Trustees under certain
circumstances. In addition, a Trustee may be removed by the remaining Trustees
or by Shareholders at a special meeting called upon written request of
Shareholders owning at least 10% of the outstanding shares of the Trust. In the
event that such a meeting is requested the Trust will provide appropriate
assistance and information to the Shareholders requesting the meeting.
REPORTING
The Trust issues unaudited financial information and audited financial
statements annually. The Trust furnishes proxy statements and other reports to
Shareholders of record.
<PAGE>
25
SHAREHOLDER INQUIRIES
Shareholders may contact their financial institution's representative in order
to obtain information on account statements, procedures and other related
information.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Funds.
Further discussion is contained in the Statement of Additional Information.
AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued
by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer and
deposited with the depositary. ADRs 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, whereas an
unsponsored facility may be established by a depositary without participation by
the issuer of the underlying security. Holders of unsponsored depositary
receipts generally bear all the costs of the unsponsored facility. The
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through, to the holders of the receipts, voting rights with
respect to the deposited securities.
ASSET-BACKED SECURITIES -- Asset-backed securities are securities secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; however, the payment of principal and interest on
such obligations may be guaranteed up to certain amounts and for a certain
period by a letter of credit issued by a financial institution (such as a bank
or insurance company) unaffiliated with the issuers of such securities. The
purchase of asset-backed securities raises risk considerations peculiar to the
financing of the instruments underlying such securities. For example, there is a
risk that another party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. There also is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on those securities. Asset-backed securities
entail prepayment risk, which may vary depending on the type of asset, but is
generally less than the prepayment risk associated with mortgage-backed
securities. In addition, credit card receivables are unsecured obligations of
the card holder.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time
drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used
by corporations to finance the shipment and
<PAGE>
26
storage of goods. Maturities are generally six months or less.
CERTIFICATES OF DEPOSIT-- Certificates of deposit are interest bearing
instruments with a specific maturity. They are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity. Certificates of deposit with
penalties for early withdrawal will be considered illiquid.
COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured
short-term promissory notes issued by banks, municipalities, corporations and
other entities. Maturities on these issues vary from a few to 270 days.
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics similar to both fixed
income and equity securities. Because of the conversion feature, the market
value of a convertible security tends to move with the market value of the
underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
CORPORATE DEBT OBLIGATIONS -- Debt instruments issued by corporations with
maturities exceeding 270 days. Such instruments may include putable corporate
bonds and zero coupon bonds.
CUSTODIAL RECEIPTS -- Interests in separately traded interest and principal
component parts of U. S. Treasury obligations that are issued by banks or
brokerage firms and are created by depositing U. S. Treasury obligations into a
special account at custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts" ("TIGRs"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TRs, TIGRs and
CATS are sold as zero coupon securities. See "Zero Coupon Obligations."
Receipts are sold as zero coupon securities which means that they are sold at a
substantial discount and redeemed at face value at their maturity date without
interim cash payments of interest or principal. This discount is accreted over
the life of the security, and such accretion will constitute the income earned
on the security for both accounting and tax purposes. Because of these features,
such securities may be subject to greater interest rate volatility than interest
paying investments. See "Zero Coupon Obligations."
DERIVATIVES -- Derivatives are securities whose value is derived from an
underlying contract, index or security, or any combination thereof. This
includes: futures, swap agreements, and some mortgage-back securities (CMOs,
REMICs and SMBs). See elsewhere in this "Description of Permitted Investments"
for discussions of these various instruments, and see "Investment Policies and
Strategies" for more information about any investment policies and limitations
applicable to their use.
DOLLAR ROLLS -- Dollar rolls are transactions in which securities are sold for
delivery in the current month and the seller simultaneously contracts to
repurchase substantially similar securities on a specified future date. Any
difference between the sale price and the purchase price is netted against the
interest income foregone on the securities sold to arrive at an implied
borrowing rate. Alternatively, the
<PAGE>
27
sale and purchase transactions can be executed at the same price, with the Fund
being paid a fee as consideration for entering into the commitment to purchase.
Dollar rolls may be renewed prior to cash settlement and initially may involve
only a firm commitment agreement by the Fund to buy a security. If the
broker-dealer to whom the Fund sells the security becomes insolvent, the Fund's
right to repurchase the security may be restricted. Other risks involved in
entering into dollar rolls include the risk that the value of the security may
change adversely over the term of the dollar roll and that the security the Fund
is required to repurchase may be worth less than the security that the Fund
originally held.
To avoid any leveraging concerns, the Fund will place U.S. Government or other
liquid, high grade assets in a segregated account in an amount sufficient to
cover its repurchase obligation.
EURODOLLAR AND YANKEE BANK OBLIGATIONS -- Eurodollar bank obligations are U.S.
dollar-denominated certificates of deposit or time deposits issued outside the
United States by foreign branches of U.S. banks or by foreign banks. Yankee bank
obligations are U.S. dollar denominated obligations issued in the United States
by foreign banks.
EUROPEAN DEPOSITARY RECEIPTS ("EDRs") -- EDRs are securities, typically issued
by a non-U.S. financial institution, that evidence ownership interests in a
security or a pool of securities issued by either a U.S. or foreign issuer. EDRs
may be available for investment through "sponsored" or "unsponsored" facilities.
See "ADRs."
FORWARD FOREIGN CURRENCY CONTRACTS -- A forward foreign currency contract
involves an obligation to purchase or sell a specific currency amount at a
future date, agreed upon by the parties, at a price set at the time of the
contract. A Fund may also enter into a contract to sell, for a fixed amount of
U.S. dollars or other appropriate currency, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency.
At the maturity of a forward contract, the Fund may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader,
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. A Fund may use futures
contracts and related options for bona fide hedging purposes, to offset changes
in the value of securities held or expected to be acquired, to minimize
fluctuations in foreign currencies, or to gain exposure to a particular market
or instrument. A Fund will minimize the risk that it will be unable to close out
a futures contract by only entering into futures contracts which are traded on
national futures exchanges.
Stock index futures are futures contracts for various stock indices that are
traded on registered securities exchanges. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the
<PAGE>
28
difference between the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement is made.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates, (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures, (3) there may not be a liquid secondary market
for a futures contract or option, (4) trading restrictions or limitations may be
imposed by an exchange, and (5) government regulations may restrict trading in
futures contracts and futures options.
GUARANTEED INVESTMENT CONTRACTS ("GICs") -- GICs are contracts issued by U.S.
insurance companies. Pursuant to such contracts, the Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Fund on a monthly basis guaranteed
interest at either a fixed, variable or floating rate. A GIC provides that this
guaranteed interest will not be less than a certain minimum rate. A GIC is a
general obligation of the issuing insurance company and not a separate account.
The purchase price paid for a GIC becomes part of the general assets of the
issuer, and the contract is paid at maturity from the general assets of the
issuer.
Generally, GICs are not assignable or
transferable without the permission of the issuing insurance company. For this
reason, an active secondary market in GICs does not currently exist and GICs are
considered to be illiquid investments.
ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be
disposed of within seven business days at approximately the price at which they
are being carried on the Fund's books. An illiquid security includes a demand
instrument with a demand notice period exceeding seven days, where there is no
secondary market for such security, and repurchase agreements with durations (or
maturities) over seven days in length.
LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S.
corporations which are administered by the lending bank or agent for a syndicate
of lending banks, and sold by the lending bank or syndicate member
("intermediary bank"). In a loan participation, the borrower corporation will be
deemed to be the issuer of the participation interest except to the extent the
Fund derives its rights from the intermediary bank. Because the intermediary
bank does not guarantee a loan participation, a loan participation is subject to
the credit risks associated with the underlying corporate borrower. In the event
of bankruptcy or insolvency of the corporate borrower, a loan participation may
be subject to certain defenses that can be asserted by such borrower as a result
of improper conduct by the intermediary bank. In addition, in the event the
underlying corporate borrower fails to pay principal and interest when due, the
Fund may be subject to delays, expenses and risks that are greater than those
that would have been involved if the Fund had purchased a direct obligation of
such borrower. Under the terms of a Loan Participation, the Fund may be regarded
as a creditor of the intermediary bank
<PAGE>
29
(rather than of the underlying corporate borrower), so that the Fund may also be
subject to the risk that the intermediary bank may become insolvent.
The secondary market for loan participations is limited and any such
participation purchased by the Fund may be regarded as illiquid.
MEDIUM TERM NOTES -- Medium term notes are periodically or continuously offered
corporate or agency debt that differs from traditionally underwritten corporate
bonds only in the process by which they are issued.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional thirty-year fixed rate mortgages, graduated payment
mortgages, and adjustable rate mortgages. During periods of declining interest
rates, prepayment of mortgages underlying mortgage-backed securities can be
expected to accelerate. Prepayment of mortgages which underlie securities
purchased at a premium often results in capital losses, while prepayment of
mortgages purchased at a discount often results in capital gains. Because of
these unpredictable prepayment characteristics, it is often not possible to
predict accurately the average life or realized yield of a particular issue.
GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Fannie Mae
and the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC
obligations are not backed by the full faith and credit of the U.S. Government
as GNMA certificates are, but Fannie Mae and FHLMC securities are supported by
the instrumentalities' right to borrow from the U.S. Treasury. GNMA, Fannie Mae
and FHLMC each guarantees timely distributions of interest to certificate
holders. GNMA and Fannie Mae also each guarantees timely distributions of
scheduled principal. FHLMC has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan; however, FHLMC now
issues mortgage-backed securities (FHLMC Gold PCs) which also guarantee timely
payment of monthly principal reductions. Government and private guarantees do
not extend to the securities' value, which is likely to vary inversely with
fluctuations in interest rates.
PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by
a non-governmental entity, such as a trust. These securities include
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs") that are rated in one of the top two rating categories.
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.
COLLATERALIZED MORTGAGE OBLIGATIONS: CMOs are debt obligations or multiclass
pass-through certificates issued by agencies or instrumentalities of the U.S.
Government or by private originators or investors in mortgage loans. In a CMO,
series of bonds or certificates are usually issued in multiple classes.
Principal and interest paid on the underlying mortgage assets may be allocated
among the several classes of a series of a CMO in a variety of ways. Each class
of a CMO, often referred to as a "tranche," is issued with a specific fixed or
floating coupon rate and has a stated
<PAGE>
30
maturity or final distribution date. Principal payments on the underlying
mortgage assets may cause CMOs to be retired substantially earlier then their
stated maturities or final distribution dates, resulting in a loss of all or
part of any premium paid.
REMICS: A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code and invests in certain mortgages principally secured by
interests in real property. Investors may purchase beneficial interests in
REMICs, which are known as "regular" interests, or "residual" interests.
Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by
Fannie Mae or FHLMC represent beneficial ownership interests in a REMIC trust
consisting principally of mortgage loans or Fannie Mae, FHLMC or GNMA-guaranteed
mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC
guarantees the timely payment of interest, and also guarantees the payment of
principal as payments are required to be made on the underlying mortgage
participation certificates. Fannie Mae REMIC Certificates are issued and
guaranteed as to timely distribution of principal and interest by Fannie Mae.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments and is thus termed an interest-only class ("IO"), while
the other class may receive all of the principal payments and is thus termed the
principal-only class ("PO"). The value of IOs tends to increase as rates rise
and decrease as rates fall; the opposite is true of POs. SMBs are extremely
sensitive to changes in interest rates because of the impact thereon of
prepayment of principal on the underlying mortgage securities. The market for
SMBs is not as fully developed as other markets; SMBs therefore may be illiquid.
RISK FACTORS: Due to the possibility of prepayments of the underlying mortgage
instruments, mortgage-backed securities generally do not have a known maturity.
In the absence of a known maturity, market participants generally refer to an
estimated average life. An average life estimate is a function of an assumption
regarding anticipated prepayment patterns, based upon current interest rates,
current conditions in the relevant housing markets and other factors. The
assumption is necessarily subjective, and thus different market participants can
produce different average life estimates with regard to the same security. There
can be no assurance that estimated average life will be a security's actual
average life.
MUNICIPAL FORWARDS -- Municipal forwards are forward commitments for the
purchase of tax-exempt bonds with a specified coupon to be delivered by an
issuer at a future date, typically exceeding 45 days but normally less than one
year after the commitment date. Municipal forwards are normally used as a
refunding mechanism for bonds that may only be redeemed on a designated future
date. A Fund will enter into municipal forwards when the price and yield of the
underlying bonds are believed to be favorable when compared to current prices
and yields. As with forward commitments, municipal forwards are subject to
market fluctuations due to changes in market interest rates between the
commitment date and the settlement date. Municipal forwards may be considered to
be illiquid investments.
To avoid any leveraging concerns, a Fund will maintain liquid, high grade
securities in a segregated account at least equal to the purchase price of the
municipal forward.
<PAGE>
31
MUNICIPAL LEASE OBLIGATIONS -- Municipal lease obligations are securities issued
by state and local governments and authorities to finance the acquisition of
equipment and facilities. They may take the form of a lease, an installment
purchase contract, a conditional sales contract, or a participation interest in
any of the above. Depending upon the market for such securities, municipal lease
obligations may be illiquid.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses, and for lending such funds to other public institutions and
facilities, and (ii) certain private activity and industrial development bonds
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated facilities.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
(tolls from a bridge, for example). Certificates of participation represent an
interest in an underlying obligation or commitment, such as an obligation issued
in connection with a leasing arrangement. The payment of principal and interest
on private activity and industrial development bonds generally is dependent
solely on the ability of a facility's user to meet its financial obligations and
the pledge, if any, of real and personal property as security for such payment.
Municipal securities include both municipal notes and municipal bonds. Municipal
notes include general obligation notes, tax anticipation notes, revenue
anticipation notes, bond anticipation notes, certificates of indebtedness,
demand notes and construction loan notes and participation interests in
municipal notes. Municipal bonds include general obligation bonds, revenue or
special obligation bonds, private activity and industrial development bonds and
participation interests in municipal bonds.
OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities
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.
PAY-IN-KIND SECURITIES -- Pay-in-kind securities are bonds or preferred stock
that pay interest or dividends in the form of additional bonds or preferred
stock.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price on an agreed upon date within a number of days
from the date of purchase. The custodian will hold the security as collateral
for the repurchase agreement. A Fund bears a risk of loss in the event the other
party defaults on its obligations and the Fund is delayed or prevented from
exercising its right to dispose of the collateral or if the Fund realizes a loss
on the sale of the collateral. A Fund will enter into repurchase agreements only
with financial institutions deemed to present minimal risk of bankruptcy during
the term of the agreement based on established guidelines. Repurchase agreements
are considered loans under the Investment Company Act of 1940.
RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS -- Investments by a money market
fund are subject to limitations imposed
<PAGE>
32
under regulations adopted by the Securities and Exchange Commission. Under these
regulations, money market funds may only acquire obligations that present
minimal credit risk and that are "eligible securities," which means they are (i)
rated, at the time of investment, by at least two nationally recognized security
rating organizations (one if it is the only organization rating such obligation)
in the highest rating category or, if unrated, determined to be of comparable
quality (a "first tier security"), or (ii) rated according to the foregoing
criteria in the second highest rating category or, if unrated, determined to be
of comparable quality ("second tier security"). A security is not considered to
be unrated if its issuer has outstanding obligations of comparable priority and
security that have a short-term rating. In the case of taxable money market
funds, investments in second tier securities are subject to the further
constraints in that (i) no more than 5% of a Fund's assets may be invested in
second tier securities and (ii) any investment in securities of any one such
issuer is limited to the greater of 1% of the Fund's total assets or $1 million.
A taxable money market fund may also hold more than 5% of its assets in first
tier securities of a single issuer for three "business days" (that is, any day
other than a Saturday, Sunday or customary business holiday).
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933
or an exemption from registration. Rule 144A securities are securities that have
not been registered under the Securities Act of 1933, but which may be traded
between certain institutional investors, including investment companies. The
Trust's Board of Trustees is responsible for developing guidelines and
procedures for determining the liquidity of restricted securities and monitoring
the Advisors' implementation of the guidelines and procedures.
SECURITIES LENDING -- In order to generate additional income, a Fund may lend
securities which it owns pursuant to agreements requiring that the loan be
continuously secured by collateral consisting of cash, securities of the U.S.
Government or its agencies equal to at least 100% of the market value of the
securities lent. A Fund continues to receive interest on the securities lent
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
STANDBY COMMITMENTS AND PUTS -- Standby commitments and puts are securities
subject to standby commitments or puts permit the holder thereof to sell the
securities 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; therefore, the
standby commitment or put would only have value to the Fund owning the security
to which it relates. In certain cases, a premium may be paid for a standby
commitment or put, which premium will have the effect of reducing the yield
otherwise payable on the underlying security. The Fund will limit standby
commitment or put transactions to institutions believed to present minimal
credit risk.
SWAPS, CAPS, FLOORS and COLLARS -- Interest rate swaps, mortgage swaps, currency
swaps and other types of swap agreements such as caps, floors and collars are
designed to permit the purchaser to preserve a return or spread on a particular
investment or portion of
<PAGE>
33
its portfolio, and to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date. In a typical interest rate
swap, one party agrees to make regular payments equal to a floating interest
rate times a "notional principal amount," in return for payments equal to a
fixed rate times the same amount, for a specific period of time. If a swap
agreement provides for payment in different currencies, the parties might agree
to exchange the notional principal amount as well. Swaps may also depend on
other prices or rates, such as the value of an index or mortgage prepayment
rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specific interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risk assumed. As a result,
swaps can be highly volatile and have a considerable impact on the Fund's
performance. Swap agreements are subject to risks related to the counterparty's
ability to perform, and may decline in value if the counterparty's
creditworthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. Any obligation the Fund may have under these types of
arrangements will be covered by setting aside liquid high grade securities in a
segregated account. The Fund will enter into swaps only with counterparties
believed to be creditworthy.
TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market. Time deposits are considered to be illiquid
securities.
U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the
U.S. Government, including, among others, the Federal Farm Credit Bank, the
Federal Housing Administration and the Small Business Administration, and
obligations issued or guaranteed by instrumentalities of the U.S. Government,
including, among others, FHLMC, the Federal Land Banks and the U.S. Postal
Service. Some of these securities are supported by the full faith and credit of
the U.S. Treasury (e.g., GNMA securities), others are supported by the right of
the issuer to borrow from the Treasury (e.g., Federal Farm Credit Bank
securities), while still others are supported only by the credit of the
instrumentality (e.g., Fannie Mae securities). Guarantees of principal by
agencies or instrumentalities of the U.S. Government may be a guarantee of
payment at the maturity of the obligation so that in the event of a default
prior to maturity there might not be a market and thus no means of realizing on
the obligation prior to maturity. Guarantees as to the timely payment of
principal and interest do not extend to the value or yield of these securities
nor to the value of the Fund's shares.
U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes
and bonds issued by the U.S. Treasury and separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book-entry system known as Separately
<PAGE>
34
Traded Registered Interest and Principal Securities ("STRIPS").
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations 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. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
WARRANTS -- Instruments giving holders the right, but not the obligation, to buy
shares of a company at a given price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery
basis transactions involve the purchase of an instrument with payment and
delivery taking place in the future. Delivery of and payment for these
securities may occur a month or more after the date of the purchase commitment.
The Fund will segregate liquid high grade debt securities or cash in an amount
at least equal to these commitments. The interest rate realized on these
securities is fixed as of the purchase date and no interest accrues to the Fund
before settlement. These securities are subject to market fluctuation due to
changes in market interest rates and it is possible that the market value at the
time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. Although a Fund generally purchases
securities on a when-issued or forward commitment basis with the intention of
actually acquiring securities for its portfolio, a Fund may dispose of a
when-issued security or forward commitment prior to settlement if it deems
appropriate.
ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do
not bear any interest, but instead are issued at a deep discount from par. The
value of a zero coupon obligation increases over time to reflect the interest
accreted. Such obligations will not result in the payment of interest until
maturity, and will have greater price volatility than similar securities that
are issued at par and pay interest periodically.
<PAGE>
A-1
APPENDIX
I. BOND RATINGS
CORPORATE BONDS
The following are descriptions of Standard & Poor's Corporation ("S&P's") and
Moody's Investors Service, Inc. ("Moody's") corporate bond ratings.
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree. Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories.
Bonds which are rated BBB are considered to be medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Debt rated BB, B, CCC, CC or C is regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
Bonds which are rated Aaa by Moody's are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Bonds rated Aa by
Moody's are judged by Moody's to be of high quality by all standards. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Together with
bonds rated Aaa, they comprise what are generally known as high-grade bonds.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Debt rated Baa is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times
<PAGE>
A-2
over the future. Uncertainty of position characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Bonds
which are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal and interest. Bonds
which are rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings. Bonds which
are rated C are the lowest rated class of bonds and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
II. COMMERCIAL PAPER AND SHORT-TERM RATINGS
The following descriptions of commercial paper ratings have been published by
S&P, Moody's, Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps ("Duff")
and IBCA Limited ("IBCA"), respectively.
Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+ and 1. Issues rated A-1+ are those with an "overwhelming degree" of
credit protection. Those rated A-1 reflect a "very strong" degree of safety
regarding timely payment. Those rated A-2 reflect a safety regarding timely
payment but not as high as A-1.
Commercial paper issues rated Prime-1 and Prime-2 by Moody's are judged by
Moody's to have superior ability and strong ability for repayment, respectively.
The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by
Fitch. Paper rated Fitch-1 is regarded as having the strongest degree of
assurance for timely payment. The rating Fitch-2 (Very Good Grade) is the second
highest commercial paper rating assigned by Fitch which reflects an assurance of
timely payment only slightly less in degree than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper
rated Duff-1 is regarded as having very high certainty of timely payment with
excellent liquidity factors which are supported by ample asset protection. Risk
factors are minor. Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound liquidity factors and
company fundamentals. Risk factors are small.
The designation A1 by IBCA indicates that the obligation is supported by a very
strong capacity for timely repayment. Those obligations rated A1+ are supported
by the highest capacity for timely repayment. Obligations rated A2 are supported
by a strong capacity for timely repayment, although such capacity may be
susceptible to adverse changes in business, economic or financial conditions.
<PAGE>
<TABLE>
<S> <C> <C>
STI CLASSIC FUNDS ORGANIZATIONAL OVERVIEW
* INVESTMENT ADVISORS
Trusco Capital Management, Inc. 50 Hurt Plaza
Suite 1400
Atlanta, GA 30303
STI Capital Management, N.A. P.O. Box 3808
Orlando, FL 32802
* DISTRIBUTOR
SEI Financial Services Company Oaks, PA 19456
* ADMINISTRATOR
SEI Fund Resources Oaks, PA 19456
* TRANSFER AGENT
Federated Services Company Federated Investors Tower
Pittsburgh, PA 15222-3779
* CUSTODIAN
SunTrust Bank, Atlanta c/o STI Trust & Investment
Operations, Inc.
303 Peachtree Street N.E.
14th Floor
Atlanta, GA 30308
* LEGAL COUNSEL
Morgan, Lewis & Bockius LLP 2000 One Logan Square
Philadelphia, PA 19103
* INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP 1601 Market Street
Philadelphia, PA 19103
</TABLE>
<PAGE>
100093/10-95
DISTRIBUTOR
SEI Financial Services
Company
-- - - - - - - - - - - - - - -
PROSPECTUS
TRUST SHARES
CAPITAL GROWTH FUND
VALUE INCOME STOCK FUND
SUNBELT EQUITY FUND
INVESTMENT GRADE BOND FUND
SHORT-TERM BOND FUND
PRIME QUALITY MONEY
MARKET FUND
INVESTMENT ADVISORS
STI CAPITAL MANAGEMENT, N.A.
TRUSCO CAPITAL MANAGEMENT, INC.
OCTOBER 1, 1996
AS SUPPLEMENTED APRIL 15, 1997
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