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STI CLASSIC FUNDS
EMERGING MARKETS EQUITY FUND
SMALL CAP EQUITY FUND
TRUST SHARES
INVESTMENT ADVISOR TO THE FUNDS:
STI CAPITAL MANAGEMENT, N.A.
(THE "ADVISOR")
The STI Classic Funds (the "Trust") is a mutual fund that offers shares in a
number of separate investment portfolios. This Prospectus sets forth concisely
the information about the Trust Shares of the Emerging Markets Equity Fund and
Small Cap Equity Fund (each a "Fund" and collectively, the "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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT
CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISOR OR ANY OF ITS 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.
DECEMBER 31, 1996
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2
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
Expense Summary........................................................... 3
Performance Information for the Predecessor Collective Funds.............. 4
The Trust................................................................. 4
Funds and Investment Objectives........................................... 4
Investment Policies and Strategies........................................ 5
General Investment Policies and Strategies................................ 7
Investment Risks.......................................................... 7
Investment Limitations.................................................... 9
Performance Information................................................... 10
Purchase of Fund Shares................................................... 10
Redemption of Fund Shares................................................. 11
Dividends and Distributions............................................... 12
Tax Information........................................................... 12
STI Classic Funds Information............................................. 13
The Trust................................................................. 13
Board of Trustees......................................................... 13
Investment Advisor........................................................ 13
Portfolio Managers........................................................ 14
Banking Laws.............................................................. 15
Distribution.............................................................. 15
Administration............................................................ 15
Transfer Agent and Dividend Disbursing Agent.............................. 16
Custodian................................................................. 16
Legal Counsel............................................................. 16
Independent Public Accountants............................................ 16
Other Information......................................................... 16
Voting Rights............................................................. 16
Reporting................................................................. 16
Shareholder Inquiries..................................................... 17
Description of Permitted Investments...................................... 17
Appendix.................................................................. A-1
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.
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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)
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<CAPTION>
EMERGING
MARKETS EQUITY SMALL CAP
FUND EQUITY FUND
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<S> <C> <C>
Management Fees (after fee waivers & reimbursements)(1)............................... 1.15% 1.00%
Other Fund Expenses................................................................... .40% .20%
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Total Fund Operating Expenses (after fee waivers & reimbursements)(2)(3).............. 1.55% 1.20%
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(1) The Advisor is waiving, on a voluntary basis, a portion of its fee from the
Fund. The Advisor reserves the right to terminate its waiver at any time in
its sole discretion. Absent such waivers, Management Fees would be 1.30% for
the Emerging Markets Fund and 1.15% for the Small Cap Equity Fund. See
"Investment Advisor."
(2) Other Fund Expenses are based on estimated amounts for the current year.
(3) Absent the voluntary waivers described above, the estimated Total Fund
Operating Expenses would be 1.80% for the Emerging Markets Fund and 1.35%
for the Small Cap Equity Fund.
ONE THREE
EXAMPLES YEAR YEARS
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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.
Emerging Markets Equity Fund...................... $16 $ 49
Small Cap Equity Fund............................. $12 $ 37
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THE EXAMPLES ARE BASED UPON ESTIMATED TOTAL OPERATING EXPENSES OF EACH FUND AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. INFORMATION ABOUT THE ACTUAL
PERFORMANCE OF THE FUNDS WILL BE CONTAINED IN THE TRUST'S ANNUAL REPORT TO
SHAREHOLDERS, WHICH MAY BE OBTAINED WITHOUT CHARGE WHEN AVAILABLE.
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4
PERFORMANCE INFORMATION FOR PREDECESSOR COLLECTIVE FUNDS
The Emerging Markets Equity and the Small Cap Equity Funds are each the
successor to collective investment funds previously managed by STI Capital
Management, Inc. A substantial portion of the assets of those collective
investment funds was transferred to the Funds in connection with the 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 ratio 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 Fund expenses, net
of voluntary waivers and reimbursements) for the following periods ended
December 31, 1996:
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SINCE INCEPTION
(3/29/96 - 12/31/96)
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Emerging Markets Equity Collective Fund 13.71%
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ONE TWO SINCE
YEAR YEARS INCEPTION
(ENDING (ENDING (9/1/94-
12/31/96) 12/31/96) 12/31/96)
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Small Cap Equity
Collective Fund.... 34.20% 32.57% 27.81%
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 Investment
portfolios (together with the Fund, the "Funds"), Shareholders may purchase
shares in three separate classes (Trust Shares, Investor Shares and Flex Shares)
which provide for variations in distribution and service fees, transfer agent
fees, voting rights and dividends. Except for differences between classes, each
share represents an undivided, proportionate interest in the Fund. This
Prospectus relates to the Trust Shares of the Emerging Markets Equity Fund and
the Small Cap Equity Fund.
FUNDS AND INVESTMENT OBJECTIVES
THE EMERGING MARKETS EQUITY FUND seeks to provide long term capital appreciation
by investing primarily in equity securities of companies located in emerging
markets that appear undervalued relative to their global peers.
THE SMALL CAP EQUITY FUND seeks to provide capital appreciation with a secondary
goal of achieving current income.
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5
The investment objective of each Fund is nonfundamental and may be changed
without shareholder approval. Further, there can be no assurance that a Fund
will achieve its investment objective.
INVESTMENT POLICIES AND STRATEGIES
EMERGING MARKETS EQUITY FUND
The Fund, under normal market conditions will invest at least 65% of its assets
in publicly traded and privately placed equity securities of foreign issuers
located in emerging market countries consisting of: common and preferred stocks,
warrants, options and securities convertible into common stock. As used in this
Prospectus, the term 'emerging market country' applies to any country that, in
the Adviser's opinion, is generally considered to be an emerging or developing
country in the international financial community, which includes the
International Bank for Reconstruction and Development (the "World Bank"), the
International Finance Corporation, and the United Nations. There are currently
130 countries that are emerging or developing countries under this standard,
such as China, Singapore, Argentina, Hungary, Egypt and Nigeria.
Securities of foreign issuers purchased by the Fund may be purchased in foreign
markets, on United States registered exchanges, the over-the-counter market or
in the form of sponsored or unsponsored ADRs traded on registered exchanges or
NASDAQ.
The Fund may enter into forward foreign currency contracts as a hedge against
possible variations in foreign exchange rates. A forward foreign currency
contract is a commitment to purchase or sell a specified currency, at a
specified future date, at a specified price. The Fund may enter into forward
foreign currency contracts to hedge a specific security transaction or to hedge
a portfolio position. The Fund also may purchase and write put and call options
on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter
markets) to manage the Fund's exposure to changes in dollar exchange rates.
The Fund may invest in futures contracts, including options on futures. The Fund
may also purchase shares of closed-end investment companies. The Fund may write
or purchase put or call options.
The Fund expects to be fully invested in the investments described above, but
may invest up to 35% of its total assets in bonds and debentures issued by
non-U.S. or U.S. companies, securities issued or guaranteed by foreign or U.S.
governments, including U.S. Treasury obligations, U.S. Treasury STRIPs and
Canadian government obligations, and foreign and U.S. Commercial paper. The
bonds that the Fund may purchase may be rated in any rating category or may be
unrated provided that no more than 20% of the Fund's total assets will be rated
below BBB by S&P or below Baa by Moody's, Inc. or securities not rated by S&P or
Moody's (see "Investment Risks -- High Yield, Lower Rated Bonds"). When
investing in bonds, the Fund may seek capital gains by taking advantage of price
appreciation caused by interest rate and credit quality changes. The Fund is
also permitted to acquire floating and variable rate securities. The Fund may
invest in mortgage-backed securities and collateralized mortgage obligations
("CMOs") with a rating no lower than "O" and asset-backed securities with a
rating no lower than "P". The Fund is also permitted to invest in the short-term
obligations of U.S. and foreign banks, such as commercial banks and savings and
loan institutions, with assets of at least $500 million.
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6
For temporary defensive purposes, during periods when the Advisor determines
that market conditions warrant, the 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; 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. The Fund may not be pursuing its investment objective when it is
engaged in temporary defensive investing.
The Fund may purchase restricted securities, including Rule 144A securities,
that the Advisor determines are liquid pursuant to guidelines established by the
Trust's Board of Trustees.
The Fund's annual turnover rate may exceed 100%. This rate of turnover, if
continued, will likely result in higher brokerage commissions, higher levels of
realized capital gains and additional taxes than if the turnover rate was lower.
See "Taxes."
SMALL CAP EQUITY FUND
The Small Cap Equity Fund invests substantially all, and under normal market
conditions at least 65%, of its assets in the equity securities of smaller
companies (I.E., companies with market capitalizations of less than $1 billion)
which, in the Advisor's opinion, are undervalued for above-average capital
growth. Any remaining assets may be invested in the equity securities of
companies with larger market capitalizations which the Advisor believes are also
undervalued. The Fund may also invest in U.S. dollar denominated equity
securities of foreign issuers (including American Depositary Receipts). Equity
securities include common stock, preferred stock, warrants and rights to
subscribe to common stock and, in general, any security that is convertible into
or exchangeable for common stock.
In order to meet liquidity needs, or for temporary defensive purposes, the Fund
may invest all or a portion of its assets in common stocks of larger, more
established companies, fixed income securities, repurchase agreements, cash or
money market securities. Fixed income securities will only be purchased if they
are rated investment grade or better by one or more nationally recognized
statistical ratings organizations ("NRSROs"). Investment grade bonds include
securities rated at least BBB by Standard & Poor's Corporation ("S&P") or Baa by
Moody's Investor's Services, Inc. ("Moodys"). Money market securities will only
be purchased if they have been given one of the two top ratings by two or more
NRSROs, or if not rated, determined to be of comparable quality by the Fund's
Advisor. To the extent the Fund is engaged in temporary defensive investing, the
Fund may not be pursuing its investment objective.
The Fund may engage in options transactions for hedging purposes only. The Fund
will not invest more than 20% of its total assets in unsponsored ADR facilities.
The Fund's annual turnover rate may exceed 100%. This rate of turnover, if
continued, will likely result in higher brokerage commissions, higher levels of
realized capital gains and additional taxes than if the turnover rate was lower.
See "Taxes."
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7
GENERAL INVESTMENT POLICIES AND STRATEGIES
In the event that a security owned by the Fund is downgraded below the stated
rating categories, the Advisor will review and take appropriate action with
regard to the security.
Each Fund may borrow money for temporary or emergency purposes in an amount not
to exceed one-third of the value of its total assets. A Fund may not purchase
additional securities while its outstanding borrowings exceed 5% of its assets.
Each Fund may purchase securities issued by money market mutual funds. A Fund's
purchase of shares of other investment companies 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 Fund may engage in securities lending and will limit such practice to 33
1/3% of its total assets.
Each Fund may purchase securities on a "when-issued" basis and reserves the
right to engage in standby commitments.
It is a non-fundamental policy of each Fund to invest no more than 15% of its
net assets in illiquid securities. 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
AMERICAN DEPOSITARY RECEIPTS
American Depositary Receipts ("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.
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.
Investments in small capitalization companies involve greater risk than is
customarily associated with larger, more established companies due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and the frequent lack of depth of management. The
securities of small companies are often traded over-the-counter and may not be
traded in volumes typical on a national securities exchange. Consequently, the
securities of smaller companies may have limited market stability and may be
subject to more abrupt or erratic market movements than securities of larger,
more established growth companies or the market averages in general.
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8
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.
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.
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, limited publicly
available information regarding foreign issuers, less liquidity of securities,
possible seizure, nationalization and expropriation of the foreign issuer or
foreign deposits, 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 the Emerging Markets Equity
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.
By entering into forward foreign currency contracts, the Emerging Markets Equity
Fund will seek to protect the value of its respective investment securities
against a decline in the value of a currency. However, these forward foreign
currency contracts will not eliminate fluctuations in the underlying prices of
the securities. Rather, they simply establish a rate of exchange which one can
obtain at some future point in time. Although such contracts tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result should the value of such currency
increase.
HIGH YIELD, LOWER RATED BONDS
The Emerging Markets Equity Fund's investments in high yield, lower rated bonds
("junk bonds") involve greater risk of default or
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9
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 the 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. When the
mortgage-backed securities held by the Emerging Markets Equity Fund are prepaid,
the Fund generally will reinvest the proceeds in securities with a yield that
reflects prevailing interest rates, which may be lower than the prepaid
security.
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.
The Emerging Markets Equity Fund will be required to include the imputed
interest in zero coupon obligations in its current income. Because the Fund
distributes all of its net investment income to investors, the Fund may have to
sell portfolio securities to distribute the income attributable to these
obligations and securities at a time when the Advisor would not have chosen to
sell such obligations or securities.
INVESTMENT LIMITATIONS
The following investment limitations constitute fundamental policies of the
Funds. 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 the
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 the
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
the Fund would be invested in the securities of such issuer; provided, however,
that the Fund may invest up to 25% of its total assets without regard to this
restriction.
2. Purchase any securities which would cause more than 25% of the total assets
of the Fund to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in obligations issued or guaranteed by
the U.S. Government or its agencies and
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10
instrumentalities, repurchase agreements involving such securities or tax-exempt
securities issued by governments or political subdivisions of governments. 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
From time to time, the Funds may advertise performance (total return and yield).
These figures will be historical and are not intended to indicate future
performance.
The yield of a Fund refers to the annualized income generated by an investment
in the 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 a Fund refers to the average compounded rate of return on a
hypothetical investment, including any sales charge imposed, for designated time
periods (including but not limited to, the period from which the 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 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 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.
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
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11
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").
A purchase order for a Fund 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 plus any applicable sales charge (the "offering
price"). 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 the 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.
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. Redemption proceeds
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. 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
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12
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
Dividends from net investment income (exclusive of capital gains) are declared
and paid annually by the Emerging Markets Equity Fund and quarterly by the Small
Cap Equity Fund. Each 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 a 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 a Fund and the general expenses of the Trust prorated to the
Fund on the basis of its relative net assets. Shareholders of record on the
record date will be entitled to receive dividends.
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 Funds 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 the 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 a 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 intends to qualify for the special tax treatment afforded 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.
The Funds intend 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:
Each 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. Dividends from net investment income will qualify for the dividends
received deduction for
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13
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. The Funds will make annual reports to Shareholders of
the federal income tax status of all distributions. Dividends declared by the
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 derived by the Funds from obligations of foreign issuers may be subject
to foreign withholding taxes. The Funds expect to elect to treat Shareholders as
having paid their proportionate share of such foreign taxes.
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 the 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.
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, state filing fees and
registering the shares under federal 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 ADVISOR
STI Capital Management, N.A. ("STI Capital") serves as the Advisor to the
Emerging Markets Equity Fund and Small Cap Equity Fund. As of December 31, 1996,
STI Capital had discretionary management authority with
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14
respect to assets of approximately $11.6 billion. The principal business address
of STI Capital is P.O. Box 3808, Orlando, Florida 32802.
The Advisor is an indirect wholly-owned subsidiary of SunTrust Banks, Inc.
("SunTrust"), a southeastern regional bank holding company with assets of $79.8
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 $55.1 billion as of December 31, 1996.
The Trust and the Investment Advisor have entered into an advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Advisor makes the
investment decisions for the assets of the Funds and continuously reviews,
supervises and administers Fund's investment program. The Advisor discharges the
responsibilities subject to the supervision of, 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 the Funds, the Advisor may execute brokerage or other agency
transactions through affiliates of the Advisor.
For the services provided and expenses incurred pursuant to the Advisory
Agreement, STI Capital is entitled to receive advisory fees computed daily and
paid monthly at the annual rate of 1.30% of the average daily net assets of the
Emerging Markets Equity Fund and 1.15% of the average daily net assets of the
Small Cap Equity Fund.
Although the advisory fees for the Funds are higher than advisory fees paid by
other mutual funds, the Trust believes that the fee is comparable to the
advisory fee paid by many other mutual funds with similar investment objectives
and policies. From time to time, the Advisor may waive (either voluntarily or
pursuant to applicable regulatory limitations) advisory fees payable by a Fund.
Currently, the Advisor has agreed to voluntary reductions in its 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.
PORTFOLIO MANAGERS
Mr. Pablo Salas has been responsible for the day-to-day management of the
Emerging Markets Equity Fund since its inception. Mr. Salas joined STI Capital
in 1996. Prior to joining STI Capital, Mr. Salas managed an emerging markets
portfolio at Lazard Freres Asset Management from 1994 to 1996 and was a
securities analyst at The Principal Group/ Invista Capital Management from 1992
to 1994.
Mr. Brett Barner, CFA, has been responsible for the day-to-day management of the
Small Cap Equity Fund since commencement of operations. Mr. Barner has been a
portfolio manager with STI Capital since 1990.
<PAGE>
15
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
Advisor believes that it may perform the services for STI Classic Funds
contemplated by its Advisory Agreement 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 Advisor from continuing to perform services for STI Classic Funds.
If the Advisor was prohibited from providing services to STI Classic Funds, the
Board of Trustees would consider selecting other qualified firms. Any new
investment advisory agreement 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 Advisor, or its 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 Advisor, 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 the Fund. Trust
Shares of the Funds 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.
The Funds may execute brokerage or other agency transactions through the
Distributor for which the Distributor receives compensation.
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.
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16
The Administrator is entitled to a fee from the Trust, which is calculated daily
and paid monthly, at an annual rate as follows:
AVERAGE AGGREGATE DAILY NET ASSETS FEE
- ------------------------------------------ -----------
$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 %
From time to time, the Administrator may waive (either voluntarily or pursuant
to applicable state limitations) 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
The Bank of New York, One Wall Street, New York, New York 10286, serves as
custodian for the Emerging Markets Equity Fund. SunTrust Bank, Atlanta, c/o STI
Trust & Investment Operations, Inc., 303 Peachtree Street N.E., 14th Floor,
Atlanta, Georgia 30308, serves as custodian of the assets of the Small Cap
Equity Fund. The custodians hold 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 of the
Funds 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.
SHAREHOLDER INQUIRIES
Shareholders may contact their financial institution's representative in order
to obtain information on account statements, procedures and other related
information.
<PAGE>
17
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 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
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18
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.
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.
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. The 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. The 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. The 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
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19
(and the purchaser to take) an amount of cash equal to a specific dollar amount
times the 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.
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.
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"), the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA and FHLMC obligations are not backed by the
full faith and credit of the U.S. Government as GNMA certificates are, but FNMA
and FHLMC securities are supported by the instrumentalities' right to borrow
from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely
distributions of interest to certificate holders. GNMA and FNMA 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.
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20
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 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.
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.
OPTIONS ON CURRENCIES -- A Fund may purchase and write put and call options on
foreign currencies (traded on U.S. and foreign exchanges or over-the-counter
markets) to manage the portfolio's exposure to changes in dollar exchange rates.
Call options on foreign currency written by the Fund will be "covered," which
means that the Fund will own an equal amount of the underlying foreign currency.
With respect to put options on foreign currency written by the Fund, the Fund
will establish a segregated account with its custodian bank consisting of cash,
U.S. Government securities or other high grade liquid debt securities in an
amount equal to the amount the Fund would be required to pay upon exercise of
the put.
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. The 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
<PAGE>
21
based on established guidelines. Repurchase agreements are considered loans
under the Investment Company Act of 1940.
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, the 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. The 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.
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 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
<PAGE>
22
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 with a withdrawal penalty 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., FNMA 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 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.
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>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
STI CLASSIC FUNDS ORGANIZATIONAL OVERVIEW
* INVESTMENT ADVISOR
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
* CUSTODIANS
The Bank of New York One Wall Street
New York, NY 10286
SunTrust Bank, Atlanta 303 Peachtree Street, N.E.
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
<PAGE>
100093/10-95
DISTRIBUTOR
SEI Financial Services
Company
-- - - - - - - - - - - - - - -
PROSPECTUS
TRUST SHARES
EMERGING MARKETS
EQUITY FUND
SMALL CAP
EQUITY FUND
INVESTMENT ADVISOR
STI CAPITAL MANAGEMENT, N.A.
[LOGO]
<PAGE>
STI CLASSIC FUNDS
EMERGING MARKETS EQUITY FUND
SMALL CAP EQUITY FUND
INVESTMENT ADVISOR:
STI CAPITAL MANAGEMENT, N.A.
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of the
Trust and the above-referenced Funds and should be read in conjunction with the
Funds' prospectus dated December 31, 1996. A prospectus may be obtained through
the Distributor, SEI Financial Services Company, Oaks, Pennsylvania 19456.
TABLE OF CONTENTS
PAGE
THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
DESCRIPTION OF PERMITTED INVESTMENTS . . . . . . . . . . . . . . . . . . . . B-2
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .B-10
INVESTMENT ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-12
THE ADMINISTRATOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-13
THE DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-13
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . . . . . . . . . . . . . . . .B-15
COMPUTATION OF YIELD . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-17
CALCULATION OF TOTAL RETURN. . . . . . . . . . . . . . . . . . . . . . . . .B-18
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . .B-18
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . .B-19
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-19
FUND TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-21
TRADING PRACTICES AND BROKERAGE. . . . . . . . . . . . . . . . . . . . . . .B-21
DESCRIPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . .B-23
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .B-23
LIMITATION OF TRUSTEES' LIABILITY. . . . . . . . . . . . . . . . . . . . . .B-23
December 31, 1996
<PAGE>
THE TRUST
STI Classic Funds (the "Trust") is a diversified, open-end management investment
company established under Massachusetts law as a Massachusetts business trust
under a Declaration of Trust dated January 15, 1992. The Declaration of Trust
permits the Trust to offer separate series of units of beneficial interest
("shares") and different classes of shares. The Trust currently offers Trust
Shares and Investor Shares of the Prime Quality Money Market Fund, U.S.
Government Securities Money Market Fund and Tax-Exempt Money Market Fund and
Trust Shares, Investor Shares and Flex Shares of the Investment Grade Bond Fund,
Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund, U.S. Government
Securities Fund, Limited-Tem Federal Mortgage Securities Fund, Investment Grade
Tax-Exempt Bond Fund, Florida Tax-Exempt Bond Fund, Georgia Tax-Exempt Bond
Fund, Tennessee Tax-Exempt Bond Fund, Capital Growth Fund, Emerging Markets
Equity Fund, Value Income Stock Fund, Mid-Cap Equity Fund, Small Cap Equity
Fund, Sunbelt Equity Fund, International Equity Index Fund, International Equity
Fund and Balanced Fund. This Statement of Additional Information relates to the
Emerging Markets Equity Fund (the "Emerging Markets Fund") and the Small Cap
Equity Fund (the "Small Cap Fund") (each a "Fund" and collectively, the
"Funds"). The Trust offers Trust Shares, Investor Shares and Flex Shares of
each Fund, however, at present, investors may only purchase Trust Shares of each
Fund. Each share represents an equal proportionate interest in the Fund. See
"Description of Shares."
DESCRIPTION OF PERMITTED INVESTMENTS
VARIABLE RATE MASTER DEMAND NOTES
Each Fund may invest in variable rate master demand notes which may or may not
be backed by bank letters of credit. These notes permit the investment of
fluctuating amounts at varying market rates of interest pursuant to direct
arrangements between a Fund, as lender, and a borrower. Such notes provide that
the interest rate on the amount outstanding varies on a daily, weekly or monthly
basis depending upon a stated short-term interest rate index. Both the lender
and the borrower have the right to reduce the amount of outstanding indebtedness
at any time. There is no secondary market for the notes and it is not generally
contemplated that such instruments will be traded. The quality of the note or
the underlying credit must, in the opinion of the Advisor, be equivalent to the
ratings applicable to permitted investments for a Fund. The Advisor will
monitor on an ongoing basis the earning power, cash flow and liquidity ratios of
the issuers of such instruments and will similarly monitor the ability of an
issuer of a demand instrument to pay principal and interest on demand.
U.S. TREASURY OBLIGATIONS
Each Fund may invest in obligations including bills, notes and bonds issued by
the U.S. Treasury.
STRIPS
Each Fund may invest in Separately Traded Interest and Principal Securities
("STRIPS"), which are component parts of U.S. Treasury Securities traded through
the Federal Book-Entry System. The
B-2
<PAGE>
Advisor will only purchase STRIPS that it determines are liquid or, if illiquid,
do not violate each Fund's investment policy concerning investments in illiquid
securities. While there is no limitation on the percentage of a Fund's assets
that may be comprised of STRIPS, the Advisor will monitor the level of such
holdings to avoid the risk of impairing shareholders' redemption rights and of
deviations in the value of shares of a Fund.
U.S. GOVERNMENT AGENCY SECURITIES
Certain investments of the Funds may include U.S. Government Agency Securities.
Agencies of the United States Government which issue such obligations consist
of, among others, the Export Import Bank of the United States, Farmers Home
Administration, Federal Farm Credit Bank, Federal Housing Administration,
Government National Mortgage Association ("GNMA"), Maritime Administration,
Small Business Administration and The Tennessee Valley Authority. Obligations
of instrumentalities of the United States Government include securities issued
by, among others, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks,
Federal National Mortgage Association ("FNMA") and the United States Postal
Service as well as government trust certificates. Some of these securities are
supported by the full faith and credit of the United States Treasury (E.G., GNMA
securities); others are supported by the right of the issuer to borrow from the
Treasury and still others are supported only by the credit of the
instrumentality (E.G., FNMA 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 the value of the
obligation prior to maturity.
MORTGAGE-BACKED SECURITIES
The Funds may invest in mortgage-backed securities issued or guaranteed by U.S.
Government agencies or instrumentalities such as GNMA, FNMA and FHLMC.
Obligations of GNMA are backed by the full faith and credit of the United States
Government. Obligations of FNMA and FHLMC are not backed by the full faith and
credit of the United States Government but are considered to be of high quality
since they are considered to be instrumentalities of the United States. The
market value and interest yield of these mortgage-backed securities can vary due
to market interest rate fluctuations and prepayments of underlying mortgages.
These securities represent ownership in a pool of federally insured mortgage
loans with a maximum maturity of 30 years. However, due to scheduled and
unscheduled principal payments on the underlying loans, these securities have a
shorter average maturity and, therefore, less principal volatility than a
comparable 30-year bond. Since prepayment rates vary widely, it is not possible
to accurately predict the average maturity of a particular mortgage-backed
security. The scheduled monthly interest and principal payments relating to
mortgages in the pool will be "passed through" to investors. Government
mortgage-backed securities differ from conventional bonds in that principal is
paid back to the certificate holders over the life of the loan rather than at
maturity. As a result, there will be monthly scheduled payments of principal
and interest. In addition, there may be unscheduled principal payments
representing prepayments on the underlying mortgages. Although these securities
may offer yields higher than those available from other types of U.S. Government
securities, mortgage-backed securities may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because
B-3
<PAGE>
of the prepayment feature. For instance, when interest rates decline, the value
of these securities likely will not rise as much as comparable debt securities
due to the prepayment feature. In addition, these prepayments can cause the
price of a mortgage-backed security originally purchased at a premium to
decline in price to its par value, which may result in a loss.
The Emerging Markets Fund may also invest in privately issued mortgage-backed
securities. Two principal types of mortgage-backed securities are
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"), which are rated in one of the two highest categories by
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different expected maturities. Investors purchasing such CMOs are credited with
their portion of the scheduled payments of interest and principal on the
underlying mortgages plus all unscheduled prepayments of principal based on a
predetermined priority schedule. Accordingly, the CMOs in the longer maturity
series are less likely than other mortgage pass-throughs to be prepaid prior to
their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance and some CMOs may be backed by GNMA
certificates or other mortgage pass-throughs issued or guaranteed by U.S.
Government agencies or instrumentalities, the CMOs themselves are not generally
guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
DETERMINING MATURITIES OF MORTGAGE-BACKED SECURITIES
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
Advisor believes that the estimated average life is the most appropriate measure
of the maturity of a mortgage-backed security. Accordingly, in order to
determine whether such security is a permissible investment for a Fund, it will
be deemed to have a remaining maturity equal to its average life as estimated by
the Fund's Advisor. An average life estimate is a function of an assumption
regarding anticipated prepayment patterns. The assumption is 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 could produce somewhat different average life estimates with regard
to the same security. There can be no assurance that the average life as
estimated by the Advisor will be the actual average life.
B-4
<PAGE>
STRIPPED MORTGAGE-BACKED SECURITIES
The Emerging Markets Fund may also invest in stripped mortgage-backed
securities, which are securities that are created when a U.S. Government agency
or a financial institution separates the interest and principal components of a
mortgage-backed security and sells them as individual securities. The holder of
the "principal-only" security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security (IO) receives interest payments from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly affected
by changes in interest rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices of POs.
Rising interest rates can have the opposite effect.
ASSET-BACKED SECURITIES
In addition to mortgage-backed securities, the Emerging Markets Funds may invest
in asset-backed securities rated in one of the two highest rating categories by
S&P or Moody's, including company receivables, truck and auto loans, leases and
credit card receivables. The Funds may invest in other asset-backed securities
that may be created in the future if the Advisor determines they are suitable.
These issues may be traded over-the-counter and typically have a
short-intermediate maturity structure depending on the paydown characteristics
of the underlying financial assets which are passed through to the security
holder.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. Repurchase agreements are
agreements by which a person (e.g., a Fund) obtains a security and
simultaneously commits to return the security to the seller (a primary
securities dealer as recognized by the Federal Reserve Bank of New York or a
national member bank as defined in Section 3(d)(1) of the Federal Deposit
Insurance Act, as amended) at an agreed upon price (including principal and
interest) on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the underlying security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation is,
in effect, secured by the value of the underlying security.
Repurchase agreements are considered to be loans by the Funds for purposes of
its investment limitations. The repurchase agreements entered into by the Funds
will provide that the underlying security at all times shall have a value at
least equal to 102% of the resale price stated in the agreement (the Advisor
monitors compliance with this requirement). Under all repurchase agreements
entered into by the Funds, the Custodian or its agent must take possession of
the underlying collateral. However, if the seller defaults, a Fund could
realize a loss on the sale of the underlying security to the extent that the
proceeds of the sale including accrued interest are less than the resale price
provided in the agreement including interest. In addition, even though the
Bankruptcy Code provides protection for most repurchase agreements, if the
seller should be involved in bankruptcy or insolvency proceedings, the Funds may
incur delay and costs in
B-5
<PAGE>
selling the underlying security or may suffer a loss of principal and interest
if the Funds are treated as unsecured creditors and required to return the
underlying security to the seller's estate.
FOREIGN SECURITIES
The Emerging Markets Fund may invest in U.S. dollar denominated obligations or
securities of foreign issuers. The Funds will invest primarily in certain
obligations or securities of foreign issuers. Possible investments include
equity securities of foreign entities and obligations of foreign branches of
U.S. banks and of foreign banks. In addition, each Fund may invest in American
Depositary Receipts. These instruments may subject a Fund to investment risks
that differ in some respects from those related to investments in obligations of
U.S. domestic issuers. Such risks include future adverse political and economic
developments, the possible imposition of withholding taxes on interest or other
income, possible seizure, nationalization, or expropriation of foreign deposits,
the possible establishment of exchange controls or taxation at the source,
greater fluctuations in value due to changes in exchange rates, or the adoption
of other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Such investments may
also entail higher custodial fees and sales commissions than domestic
investments. Foreign issuers of securities or obligations are often subject to
accounting treatment and engage in business practices different from those
respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
By investing in foreign securities, the Funds attempt to take advantage of
differences between both economic trends and the performance of securities
markets in the various countries, regions and geographic areas as prescribed by
a Fund's investment objective and policies. During certain periods the
investment return on securities in some or all countries may exceed the return
on similar investments in the United States, while at other times the investment
return may be less than that on similar U.S. securities. Shares of a Fund, when
included in amounts in a portfolio otherwise consisting of domestic securities,
may provide a source of increased diversification. The Emerging Markets Fund
seeks increased diversification by combining securities from various emerging
markets countries and geographic areas that offer different investment
opportunities and are affected by different economic trends. The international
investments of a Fund may reduce the effect that events in any one country or
geographic area will have on its investment holdings. Of course, negative
movement by the Emerging Markets Fund's investments in one foreign market
represented in its portfolio may offset potential gains from the Fund's
investments in another country's markets.
RESTRICTED SECURITIES
Restricted Securities are securities that may not be sold to the public without
registration under the Securities Act of 1933 (the "1933 Act") absent an
exemption from registration. Permitted investments for the Funds include
restricted securities, and each Fund may invest up to 15% of its total assets in
illiquid securities, subject to the Fund's investment limitations on the
purchase of illiquid securities. Restricted Securities, including securities
eligible for re-sale under 1933 Act Rule 144A, that are determined to be liquid
are not subject to this limitation. This determination is to be made by a
Fund's
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<PAGE>
Advisor pursuant to guidelines adopted by the Board of Trustees. Under these
guidelines, the Advisor will consider the frequency of trades and quotes for the
security, the number of dealers in, and potential purchasers for, the
securities, dealer undertakings to make a market in the security, and the nature
of the security and of the marketplace trades. In purchasing such Restricted
Securities, the Advisor intends to purchase securities that are exempt from
registration under Rule 144A under the 1933 Act.
SECURITIES LENDING
Each Fund may lend securities pursuant to agreements which require that the
loans be continuously secured by collateral at all times equal to 100% of the
market value of the loaned securities which consists of: cash, securities of
the U.S. Government or its agencies, or any combination of cash and such
securities. Such loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans for a Fund exceed one-third of the value of
a Fund's total assets taken at fair market value. A Fund will continue to
receive interest on the securities lent while simultaneously earning interest on
the investment of the cash collateral in U.S. Government securities. However, a
Fund will normally pay lending fees to such broker-dealers and related expenses
from the interest earned on invested collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. However, loans are made only to borrowers deemed by the
Advisor to be of good standing and when, in the judgment of that Advisor, the
consideration which can be earned currently from such securities loans justifies
the attendant risk. Any loan may be terminated by either party upon reasonable
notice to the other party. The Funds may use the Distributor or a broker-dealer
affiliate of the Advisor as a broker in these transactions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
Each Fund may invest in futures contracts and options on futures. Although
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery. Closing out an open
futures position is done by taking an opposite position ("buying" a contract
which has previously been "sold" or "selling" a contract which has previously
been "purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with or for the account of a broker or custodian to
initiate and maintain open secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, the a Fund would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Fund has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, a Fund may be required to make
delivery of the instruments underlying the futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge the underlying securities.
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<PAGE>
The Emerging Markets Fund will minimize the risk that it will be unable to close
out a futures contract by entering into futures contracts that are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts can be substantial, due both to
the low margin deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small price movement in
a futures contract may result in immediate and substantial loss (or gain) to the
Fund. For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract
may result in losses in excess of the amount invested in the contract. However,
because the Fund will be engaged in futures transactions only for hedging
purposes, the Advisor does not believe that the Emerging Markets Fund will
generally be subject to the risks of loss frequently associated with futures
transactions. The Fund presumably would have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline. The risk of loss from the purchase of
options is less as compared with the purchase or sale of futures contracts
because the maximum amount at risk is the premium paid for the option.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the fund securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and experience
a decline in value of its fund securities. There is also the risk of loss by
the Fund of margin deposits in the event of the bankruptcy of a broker with whom
the Fund have an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
OPTIONS
Each Fund may write put and call options on a covered basis only, and will not
engage in option writing strategies for speculative purposes. A put option
gives the purchaser of such option the right to sell, and the writer, in this
case a Fund, the obligation to buy the underlying security at the exercise price
during the option period. A call option gives the purchaser of such option the
right to buy, and the writer, in this case a Fund, the obligation to sell the
underlying security at the exercise price during the option period.
B-8
<PAGE>
The advantage to a Fund of writing covered calls is that a Fund receives a
premium which is additional income. However, if the security rises in value, a
Fund may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction is one in which a Fund, when
obligated as a writer of an option, terminates its obligation by purchasing an
option of the same series as the option previously written.
A closing purchase transaction cannot be effected with respect to an option once
the option writer has received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable a Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. A Fund may realize a net gain or loss from a
closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term capital
gain in the amount of the premium on the option, less the commission paid. Such
a gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised, a
Fund will realize a gain or loss from the sale of the underlying security equal
to the difference between the cost of the underlying security, and the proceeds
of the sale of the security plus the amount of the premium on the option, less
the commission paid.
The market value of a call option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.
Each Fund will write call options only on a covered basis, which means that a
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, a
Fund would be required to continue to hold a security which it might otherwise
wish to sell, or deliver a security it would want to hold. Options written by
the Funds will normally have expiration dates between one and nine months from
the date written. The exercise price of a call option may be below, equal to or
above the current market value of the underlying security at the time the option
is written.
B-9
<PAGE>
OBLIGATIONS OF SUPRANATIONAL AGENCIES
The Funds may purchase obligations of supranational agencies. Currently, each
Fund intends to invest only in obligations issued or guaranteed by the Asian
Development Bank, Inter-American Development Bank, International Bank for
Reconstruction and Development (World Bank), African Development Bank, European
Coal and Steel Community, European Economic Community, European Investment Bank,
and the Nordic Investment Bank.
INVESTMENT COMPANY SHARES
Investment companies typically incur fees that are separate from those fees
incurred directly by a Fund. A Fund's purchase of such investment company
securities results in the layering of expenses, such that Shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees.
OTHER INVESTMENTS
The Trust is not prohibited from investing in obligations of banks which are
clients of SEI Investments Company ("SEI"), the parent company of the
Administrator and the Distributor. However, the purchase of shares of a Fund by
such banks or by their customers will not be a consideration in determining
which bank obligations a Fund will purchase. The Funds will not purchase
obligations issued by the Advisors.
Investors will receive written notification at least thirty days prior to any
change in the Fund's investment objective.
INVESTMENT LIMITATIONS
The following are fundamental policies of the Funds and cannot be changed
without the consent of the holders of a majority of the Fund's outstanding
shares.
No Fund may:
1. Acquire more than 10% of the voting securities of any one issuer.
2. Invest in companies for the purpose of exercising control.
3. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding one-third of the value of total assets. Any borrowing
will be done from a bank and, to the extent that such borrowing exceeds 5%
of the value of the Fund's assets, asset coverage of at least 300% is
required. In the event that such asset coverage shall at any time fall
below 300%, the Fund shall, within three days thereafter or such longer
period as the Securities and Exchange Commission may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. This borrowing
provision is included solely to facilitate the orderly sale of portfolio
securities to accommodate
B-10
<PAGE>
heavy redemption requests if they should occur and is not for investment
purposes. All borrowings in excess of 5% of the value of the Fund's total
assets will be repaid before making additional investments and any interest
paid on such borrowings will reduce income.
4. Make loans, except that (a) the Fund may purchase or hold debt instruments
in accordance with its investment objective and policies; (b) the Fund may
enter into repurchase agreements, and (c) the Fund may engage in securities
lending as described in the Prospectus and in this Statement of Additional
Information.
5. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed 10% of
the Fund's total assets, taken at current value at the time of the
incurrence of such loan, except as permitted with respect to securities
lending.
6. Purchase or sell real estate, real estate limited partnership interests,
commodities or commodities contracts (except for financial futures
contracts) and interests in a pool of securities that are secured by
interests in real estate (except that the Emerging Markets Fund may
purchase mortgage-backed and other mortgage-related securities, including
collateralized mortgage obligations and REMICs). However, subject to their
permitted investment spectrum, the Funds may invest in companies which
invest in real estate commodities or commodities contracts.
7. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Trust may obtain short-term credits
as necessary for the clearance of security transactions.
8. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a security.
9. Purchase securities of other investment companies unless permitted by the
Investment Company Act of 1940 (the "1940 Act") and the rules and
regulations thereunder. Under these rules and regulations, the Fund is
generally prohibited from acquiring the securities of other investment
companies if, as a result of such acquisition, the Fund owns more than 3%
of the total voting stock of the company; securities issued by any one
investment company represent more than 5% of the total assets of the Fund;
or securities (other than treasury stock) issued by all investment
companies represent more than 10% of the total assets of the Fund.
10. Issue senior securities (as defined in the 1940 Act) except in connection
with permitted borrowings as described above or as permitted by rule,
regulation or order of the SEC.
NON-FUNDAMENTAL POLICIES
The Funds may not purchase or retain securities of an issuer if, to the
knowledge of the Trust, an officer, trustee, partner or director of the Trust or
the Advisor of the Trust owns beneficially more than 1/2 of 1% of the shares or
securities of such issuer and all such officers, trustees, partners and
directors owning more than 1/2 of 1% of such shares or securities together own
more than 5% of such shares or securities.
B-11
<PAGE>
The Funds may not invest in warrants in an amount exceeding 5% of its net assets
as valued at the lower of cost or market value. Included in that amount, but
not to exceed 2% of a Fund's net assets, may be warrants not listed on the New
York Stock Exchange or American Stock Exchange.
The Funds may not invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of a Fund's assets. An illiquid security is a security which
cannot be disposed of promptly (within seven days), and in the usual course of
business without a loss, and includes repurchase agreements maturing in excess
of seven days, time deposits with a withdrawal penalty, non-negotiable
instruments and instruments for which no market exists.
The Funds may not invest in interests in oil, gas or other mineral exploration
or development programs and oil, gas or mineral leases.
The Small Cap Fund may not invest in securities of issuers which together with
predecessors have a record of less than three years continuous operation or
equity securities of issuers which are not readily marketable if such
investments will exceed 5% of the Fund's total assets.
With the exception of the limitations on liquidity standards, the foregoing
percentages will apply at the time of the purchase of a security and shall not
be considered violated unless an excess occurs or exists immediately after and
as a result of a purchase of such security.
INVESTMENT ADVISOR
The Trust and STI Capital Management, N.A. (the "Advisor") have entered into an
advisory agreement (the "Advisory Agreement"). The Advisory Agreement provides
that the Advisor shall not be protected against any liability to the Trust or
its Shareholders by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of the Funds (including amounts payable to the Advisor but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by certain states, the Advisor and/or the
Administrator will bear the amount of such excess. The Advisor will not be
required to bear expenses of the Trust to an extent which would result in a
Fund's inability to qualify as a regulated investment company under provisions
of the Internal Revenue Code.
The continuance of the Advisory Agreement, after the first two years, must be
specifically approved at least annually (i) by the vote of the Trustees, and
(ii) by the vote of a majority of the Trustees who are not parties to each
Agreement or "interested persons" of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement will terminate automatically in the event of its assignment, and is
terminable at any time without penalty by the Trustees of the Trust or, with
respect to a Fund, by a majority of the outstanding shares of a Fund, on not
less than 30 days' nor more than 60 days' written notice to the Advisor, or by
the Advisor on 90 days' written notice to the Trust.
B-12
<PAGE>
THE ADMINISTRATOR
The Trust and SEI Fund Resources (the "Administrator") are parties to an
Administrative Agreement. The Administration Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with the matters to which the
Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Administrator in
the performance of its duties or from reckless disregard by it of its duties and
obligations thereunder. The Administration Agreement shall remain in effect for
a period of five years after the date of the Agreement and shall continue in
effect for successive periods of two years subject to review at least annually
by the Trustees of the Trust unless terminated by either party on not less than
90 days' written notice to the other party.
The Administrator, a Delaware business trust, has its principal business offices
at Oaks, Pennsylvania 19456. SFM, a wholly-owned subsidiary of SEI Investments
Company ("SEI"), is the owner of all beneficial interest in the Administrator,
SEI, its subsidiaries and the Administrator are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information
services to financial institutions, institutional investors and money managers.
The Administrator and its affiliates also serve as administrator to the
following other mutual funds: The Achievement Funds Trust; The Advisors' Inner
Circle Fund; The Arbor Fund; ARK Funds; Bishop Street Funds; CoreFunds, Inc.;
CrestFunds, Inc.; CUFUND; FMB Funds, Inc.; First American Funds, Inc.; First
American Investment Funds, Inc.; First American Strategy Funds, Inc.; Marquis
Funds-Registered Trademark-; Monitor Funds; Morgan Grenfell Investment Trust;
The PBHG Funds, Inc.; The Pillar Funds; The Profit Funds Investment Trust;
Rembrandt Funds-Registered Trademark-; Santa Barbara Group of Mutual Funds,
Inc.; 1784 Funds-Registered Trademark-; SEI Asset Allocation Trust; SEI Daily
Income Trust; SEI Index Funds; SEI Institutional Investments Trust; SEI
Institutional Managed Trust; SEI International Trust; SEI Liquid Asset Trust;
SEI Tax Exempt Trust; Stepstone Funds; STI Classic Variable Trust and Turner
Funds.
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust have entered into a distribution agreement (the "Distribution
Agreement") dated May 29, 1992. The Distributor will receive no compensation
for distribution of Trust Shares. In addition, the Investor Shares of the Funds
have a distribution plan ("Investor Plan"), and the Flex Shares of the Funds
have a distribution plan ("Flex Plan").
The Distribution Agreement is renewable annually and may be terminated by the
Distributor, the Qualified Trustees (as defined in the Distribution Agreement),
or by a majority vote of the outstanding securities of the Trust upon not more
than 60 days' written notice by either party.
INVESTOR SHARES AND FLEX SHARES DISTRIBUTION PLANS
The Distribution Agreement and the Investor Plan adopted by the Trust provide
that Investor Shares of each Fund will pay the Distributor fees of up to .30% of
the average daily net assets of the Fund.
B-13
<PAGE>
The Distribution Agreement and the Flex Plan adopted by the Trust provide that
each Flex Shares Fund will pay the Distributor a fee of up to .75% of the
average daily net assets of that Fund. The Distributor can use these fees to
compensate broker-dealers and service providers, including SunTrust and its
affiliates, which provide administrative and/or distribution services to
Investor Shares or Flex Shares Shareholders or their customers who beneficially
own Investor Shares or Flex Shares. In addition, Flex Shares are subject to a
service fee of up to .25% of the average daily net assets of the Flex Shares of
each Fund. This service fee will be used for services provided and expenses
incurred in maintaining shareholder accounts, responding to shareholder
inquiries and providing information on their investments.
Services for which broker-dealers and service providers may be compensated
include establishing and maintaining customer accounts and records; aggregating
and processing purchase and redemption requests from customers; placing net
purchase and redemption orders with the Distributor; automatically investing
customer account cash balances; providing periodic statements to customers;
arranging for wires; answering customer inquiries concerning their investments;
assisting customers in changing dividend options, account designations, and
addresses; performing sub-accounting functions; processing dividend payments
from the Trust on behalf of customers; and forwarding Shareholder communications
from the Trust (such as proxies, Shareholder reports, and dividend distribution
and tax notices) to these customers with respect to investments in the Trust.
Certain state securities laws may require those financial institutions providing
such distribution services to register as dealers pursuant to state law.
Although banking laws and regulations prohibit banks from distributing shares of
open-end investment companies such as the Trust, according to an opinion issued
to the staff of the SEC by the Office of the Comptroller of the Currency,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as providing shareholder services. Should future
legislative, judicial or administrative action prohibit or restrict the
activities of financial institutions in connection with providing shareholder
services, the Trust may be required to alter materially or discontinue its
arrangements with such financial institutions.
The Trust has adopted the Investor Plan and the Flex Plan in each case in
accordance with the provisions of Rule 12b-1 under the 1940 Act, which Rule
regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of its shares.
Continuance of the Investor Plan and the Flex Plan must be approved annually by
a majority of the Trustees of the Trust and by a majority of the Qualified
Trustees. The Investor Plan and the Flex Plan require that quarterly written
reports of amounts spent under the Investor Plan and the Flex Plan,
respectively, and the purposes of such expenditures be furnished to and reviewed
by the Trustees. The Investor Plan and the Flex Plan may not be amended to
increase materially the amount which may be spent thereunder without approval by
a majority of the outstanding shares of the affected class of shares of the
Trust. All material amendments of the Plans will require approval by a majority
of the Trustees of the Trust and of the Qualified Trustees.
There is no sales charge on purchases of Flex Shares, but Flex Shares are
subject to a contingent deferred sales charge if they are redeemed within one
year of purchase. Pursuant to the Distribution Agreement and the Flex Plan,
Flex Shares are subject to an ongoing distribution and service fee calculated on
each of the Fund's, aggregate average daily net assets attributable to its Flex
Shares.
B-14
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees and executive officers of the Trust and their dates of birth and their
principal occupations for the last five years are set forth below. Unless
otherwise noted, the principal business address for each officer listed below is
Oaks, Pennsylvania 19456.
DANIEL S. GOODRUM (7/11/26) - Trustee - 48 Cayuga Road, Fort Lauderdale, Florida
33308. Chairman & CEO, SunBank/South Florida, N.A., 1985-1991; Chairman Audit
Committee and Director, Holy Cross Hospital; Executive Committee Member and
Director, Honda Classic Foundation; Director, Broward Community College
Foundation.
WILTON LOONEY (4/18/19) - Trustee - 2999 Circle 75 Parkway, Atlanta, Georgia
30339. President of Genuine Parts Company, 1961-1964; Chairman of the Board,
1964-1990; Honorary Chairman of the Board, 1990 to present; Director, Rollins,
Inc.; Director, RPC Energy Services, Inc.
CHAMPNEY A. MCNAIR (10/30/24) - Trustee - 1405 Trust Co. of Georgia Building,
Atlanta, Georgia 30303. Director and Chairman of Investment Committee and
member of Executive Committee, Cotton States Life and Health Insurance Company;
Director and Chairman of Investment Committee and member of Executive Committee,
Cotton States Mutual Insurance Company; Chairman, Trust Company of Georgia
Advisory Council.
F. WENDELL GOOCH (12/3/32) - Trustee - P.O. Box 190, Paoli, Indiana 47454.
President, Orange County Publishing Co., Inc., since October 1981; Publisher of
the Paoli News and the Paoli Republican and Editor of the Paoli Republican since
January 1981; President, H & W Distribution, Inc. since July 1984; Current
Trustee on the Board of Trustees for the SEI Family of Funds and The Capitol
Mutual Funds; Executive Vice President, Trust Department, Harris Trust and
Savings Bank and Chairman of the Board of Directors of The Harris Trust Company
of Arizona before January 1981.
T. GORDY GERMANY (11/28/25) -Trustee - 17 Windy Point, Alexander City, Alabama
35010. Retired President, Chairman, and CEO of Crawford & Company; held these
positions, 1973-1987; member of the Board of Directors, 1970-1990, joined
company in 1948; spent entire career at Crawford, currently serves on Boards of
Norrell Corporation and Mercy Health Services, the latter being the holding
company of St. Joseph's Hospitals.
DR. BERNARD F. SLIGER (9/30/24) - Trustee - Florida State University, The Gus A.
Stavros Center, 250 South Woodward Avenue, Tallahassee, Florida 32306-4035.
Currently on sabbatical leave from Florida State University (1991-92); now
serves as visiting professor at the University of New Orleans; President of
Florida State University, 1976-91; previous four years EVP and Chief Academic
Officer; during educational career, taught at Florida State, Michigan State,
Louisiana State and Southern University; spent 19 years as faculty member and
administrator at Louisiana State University and served as Head of Economics
Department, member and Chairman of the Graduate Council, Dean of Academic
Affairs and Vice Chancellor; Member of Board of Directors of Federal Reserve
Bank of Atlanta, 1983-1988.
B-15
<PAGE>
JESSE HALL (9/26/29) - Trustee* - 988 Winall Down Road, NE, Atlanta, Georgia
30318. Executive Vice President, SunTrust Banks, Inc., 1985-1994; Director of
Crawford & Company since 1979; Member, Atlanta Estate Planning Council, 1988-
1993.
DAVID G. LEE (4/16/52) - President, Chief Executive Officer - Senior Vice
President of the Administrator and Distributor since 1993; Vice President of the
Administrator and Distributor, 1991-1993.
STEPHEN G. MEYER (7/12/65) - Controller, Chief Financial Officer - Vice
President & Controller of SEI, the Administrator and Distributor since 1994;
Director, Internal Audit and Risk Management, SEI Investments Company, 1992-
1994; Senior Associate, Coopers & Lybrand, 1990-1992.
RICHARD W. GRANT (10/25/45) - Secretary - 2000 One Logan Square, Philadelphia,
Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law firm); Counsel
to the Trust, Administrator and Distributor.
SANDRA K. ORLOW (10/18/53) - Vice President, Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor
since 1983.
KEVIN P. ROBINS (4/15/61) - Vice President, Assistant Secretary - Senior Vice
President & General Counsel of SEI, the Administrator and the Distributor since
1994; Vice President of SEI, the Administrator and the Distributor, 1992-1994.
KATHRYN L. STANTON (11/19/58) - Vice President, Assistant Secretary - Vice
President, Assistant Secretary of SEI, the Administrator and Distributor since
1994; Associate, Morgan, Lewis & Bockius LLP (law firm), 1989-1994.
JOSEPH M. LYDON (9/27/59) - Vice President - Director of Business Administration
of Fund Resources, SEI since 1995; Vice President of Fund Group and Vice
President of the Adviser, Dremen Value Management and President of Dremen
Financial Services, Inc. prior to 1995.
TODD CIPPERMAN (2/14/66) - Vice President, Assistant Secretary - Vice President
and Assistant Secretary of SEI, the Administrator and the Distributor since
1995; Associate, Dewey Ballantine (law firm), 1994-1995; Associate, Winston &
Strawn (law firm), 1991-1994.
BARBARA A. NUGENT (6/18/56) - Vice President, Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor;
Associate, Drinker Biddle & Reath (law firm), 1994-1996; Assistant Vice
President/Administration, Delaware Service Company, Inc., 1981-1994.
MARC H. CAHN (6/19/57) - Vice President, Assistant Secretary - Vice President
and Assistant Secretary of SEI, the Administrator and Distributor; Associate
General Counsel, Barclays Bank PLC, 1995-1996; Counsel for First Fidelity
Bancorporation prior to 1995.
JOHN H. GRADY, JR. (6/1/61) - Assistant Secretary - 1800 M Street, N.W.
Washington, DC 20036. Partner, Morgan, Lewis & Bockius LLP (law firm) since
1995; Associate, Morgan, Lewis & Bockius LLP, 1993-1995; Associate, Ropes & Gray
(law firm), 1988-1993.
B-16
<PAGE>
- --------------------
* Jesse S. Hall may be deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
The Trustees and officers of the Trust own, in the aggregate, less than 1% of
the outstanding shares of the Trust.
For the fiscal year end May 31, 1996, the Trust paid the following amounts to
Trustees and Officers of the Trust:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Pension or Total Compensation from
Compensation Retirement Registrant and Fund
From Registrant Benefits Accrued Estimated Annual Complex Paid to Directors
for Fiscal Year as Part of Fund Benefits Upon for Fiscal Year Ended
Name of Person, Position Ended 1996 Expenses Retirement 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel S. Goodrum, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- --------------------------------------------------------------------------------------------------------------------------------
Wilton Looney, Trustee $16,000 N/A N/A $16,000 for service on two
boards
- --------------------------------------------------------------------------------------------------------------------------------
Champney A. McNair, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- --------------------------------------------------------------------------------------------------------------------------------
F. Wendell Gooch, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- --------------------------------------------------------------------------------------------------------------------------------
T. Gordy Germany, $13,500 N/A N/A $13,500 for service on two
Trustee boards
- --------------------------------------------------------------------------------------------------------------------------------
Dr. Bernard F. Sliger, $13,500 N/A N/A $13,500 for service on two
Trustee boards
- --------------------------------------------------------------------------------------------------------------------------------
Jesse S. Hall, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPUTATION OF YIELD
The current yield of the Funds will be calculated daily based upon the thirty
days ending on the date of calculation ("base period"). The yield is computed
by determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing shareholder account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing such net change by the value
of the account at the beginning of the same period to obtain the base period
return and multiplying the result by (365/7). Realized and unrealized gains and
losses are not included in the calculation of the yield. The effective
compound yield of the Funds is determined by computing the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return
B-17
<PAGE>
by adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result, according to the following formula: Effective
Yield = [Base Period Return + 1) 365/7] - 1. The current and the effective
yields reflect the reinvestment of net income earned daily on portfolio assets.
The Funds may advertise a 30-day yield. In particular, yield will be calculated
according to the following formula:
Yield = (2 (a-b/cd + 1)6 - 1) where a = dividends and interest earned during the
period; b = expenses accrued for the period (net of reimbursement); c = the
current daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
CALCULATION OF TOTAL RETURN
From time to time, the Funds may advertise total return. In particular, total
return will be calculated according to the following formula: P (1 + T)n = ERV,
where P = a hypothetical initial payment of $1,000; T = average annual total
return; n = number of years; and ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the designated time period as of the end
of such period.
From time to time, the Trust may include the names of clients of the Advisor in
advertisements and/or sales literature for the Trust. The SEI Funds Evaluation
database tracks the total return of numerous tax-exempt pension accounts. The
range of returns in these accounts determines the percentile rankings. SunTrust
Bank's investment advisory affiliates, STI Capital Management, N.A. acting as
the portfolio manager for the Value Income Stock Fund and the International
Equity Fund, has been in the top 1% of the SEI Funds Evaluation database for
equity managers over the past ten years. SEI's database includes research data
on over 1,000 investment managers responsible for over $450 billion in assets.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Fund may be made on any day the New
York Stock Exchange ("NYSE") is open for business. Currently, the NYSE is
closed on the days the following holidays are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
It is currently the Trust's policy to pay for all redemptions in cash. The
Trust retains the right, however, to alter this policy to provide for
redemptions in whole or in part by a distribution in-kind of readily marketable
securities held by the Fund in lieu of cash. Shareholders may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. A Shareholder will at all times be entitled to aggregate cash
redemptions from the Fund during any 90-day period of up to the lesser of
$250,000 or 1% of the Trust's net assets.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the NYSE is restricted, or during the existence of an emergency (as determined
by the Securities and Exchange Commission by rule or regulation) as a result of
B-18
<PAGE>
disposal or valuation of a Fund's securities is not reasonably practicable, or
for such other periods as the Securities and Exchange Commission has by order
permitted. The Trust also reserves the right to suspend sales of shares of a
Fund for any period during which the NYSE, an Advisor, the Administrator and/or,
the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
The securities of the Funds are valued by the Administrator pursuant to
valuations provided by an independent pricing service. The pricing service
relies primarily on prices of actual market transactions as well as trader
quotations. However, the service may also use a matrix system to determine
valuations of fixed income securities, which system considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at valuations. The procedures of
the pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
TAXES
FEDERAL INCOME TAX
In order to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended ("Code"), a Fund must
distribute annually to its Shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
a Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of stock or securities, or certain other income, (ii) a Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of stocks or securities held for less than three months; (iii)
at the close of each quarter of a Fund's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RIC's and other securities, with such other
securities limited, in respect to any one issuer, to an amount that does not
exceed 5% of the value of a Fund's assets and that does not represent more than
10% of the outstanding voting securities of such issuer; and (iv) at the close
of each quarter of a Fund's taxable year, not more than 25% of the value of its
assets may be invested in securities (other than U.S. Government securities or
the securities of other RIC's) of any one issuer, or of two or more issuers
engaged in same or similar businesses if a Fund owns at least 20% of the voting
power of such issuers.
Notwithstanding the Distribution Requirement described above, which only
requires a Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital
gains (the excess of net long-term capital gains over net short-term capital
loss), a Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year 98% of its ordinary income
for that year and 98% of its capital gain net income for the one-year period
ending on October 31 of that calendar year, plus certain other amounts.
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Any gain or loss recognized on a sale or redemption of Shares of a Fund by a
Shareholder who is not a dealer in securities will generally be treated as a
long-term capital gain or loss if the shares have been held for more than twelve
months and otherwise will be generally treated as a short-term capital gain or
loss. If shares on which a net capital gain distribution has been received are
subsequently sold or redeemed and such shares have been held for six months or
less, any loss recognized will be treated as a long-term capital loss to the
extent of the long-term capital gain distribution.
STATE TAXES
The Funds are not liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by the Funds
to Shareholders and the ownership of shares may be subject to state and local
taxes.
FOREIGN TAXES
Dividends and interests received by the Funds may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on the Fund's securities. Tax conventions between
certain countries and the United States may reduce or eliminate these taxes.
Foreign countries generally do not impose taxes on capital gains with respect to
investments by foreign investors.
If a Fund meets the Distribution Requirement and if more than 50% of the value
of a Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, a Fund will be eligible to, and may, file an election
with the Internal Revenue Service that will enable Shareholders, in effect, to
receive the benefit of the foreign tax paid with respect to any foreign and U.S.
possessions income taxes paid by a Fund. Pursuant to the election, a Fund will
treat those taxes as dividends paid to its Shareholders. Each Shareholder will
be required to include a proportionate share of those taxes in gross income as
income received from a foreign source and must treat the amount so included as
if the Shareholder had paid the foreign tax directly. The Shareholder may then
either deduct the taxes deemed paid by him or her in computing his or her
taxable income or, alternatively, use the foregoing information in calculating
the foreign tax credit against the Shareholders' federal income tax. If a Fund
makes the election, the Fund will report annually to its Shareholders the
respective amounts per share of the Fund's income from sources within, and taxes
paid to, foreign countries and U.S. possessions.
A Fund's transactions in foreign currencies and forward foreign currency
contracts will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by a Fund (I.E.,
may effect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to
Shareholders. These provisions also may require a Fund to mark-to-market
certain types of the positions in its portfolio (I.E., treat them as if they
were closed out) which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the 90%
and 98% distribution requirements for avoiding income and excise taxes. A Fund
will monitor its transactions, will make the tax elections, and will make the
necessary entries in the books and records when it acquires any foreign currency
or forward foreign currency contract in order to mitigate the effect of these
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rules, prevent disqualification of a Fund as a regulated investment company and
minimize the imposition of income and excise taxes.
FUND TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Trustees, the Advisor is responsible for placing the orders
to execute transactions for the Fund. In placing orders, it is the policy of
the Trust to seek to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved. While the Advisor generally seeks reasonably competitive spreads or
commissions, the Trust will not necessarily be paying the lowest spread or
commission available.
The money market securities in which the Funds invest are traded primarily in
the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, the Advisor
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Trust will primarily consist of dealer spreads
and underwriting commissions.
TRADING PRACTICES AND BROKERAGE
The Trust selects brokers or dealers to execute transactions for the purchase or
sale of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have brokers
or dealers provide transactions at best price and execution for the Trust. Best
price and execution includes many factors, including the price paid or received
for a security, the commission charged, the promptness and reliability of
execution, the confidentiality and placement accorded the order and other
factors affecting the overall benefit obtained by the account on the
transaction. The Trust's determination of what are reasonably competitive rates
is based upon the professional knowledge of its trading department as to rates
paid and charged for similar transactions throughout the securities industry.
In some instances, the Trust pays a minimal share transaction cost when the
transaction presents no difficulty. Some trades are made on a net basis where
the Trust either buys securities directly from the dealer or sells them to the
dealer. In these instances, there is no direct commission charged but there is
a spread (the difference between the buy and sell price) which is the equivalent
of a commission.
The Trust may allocate, out of all commission business generated by all of the
funds and accounts under management by the Advisor, brokerage business to
brokers or dealers who provide brokerage and research services. These research
services include rendering advice, either directly or through publications or
writings, about the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, securities or industries; providing information on economic factors and
trends; assisting in
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determining portfolio strategy; providing computer software used in security
analyses; and providing portfolio performance evaluation and technical market
analyses. Such services are used by the Advisor in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used exclusively with respect to the fund
or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher
commissions may be paid to broker-dealers who provide brokerage and research
services than to broker-dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to broker-
dealers who provide such brokerage and research services, the Trust believes
that the commissions paid to such broker-dealers are not, in general, higher
than commissions that would be paid to broker-dealers not providing such
services and that such commissions are reasonable in relation to the value of
the brokerage and research services provided. In addition, portfolio
transactions which generate commissions or their equivalent are directed to
broker-dealers who provide daily portfolio pricing services to the Trust.
Subject to best price and execution, commissions used for pricing may or may not
be generated by the funds receiving the pricing service.
The Advisor may place a combined order for two or more accounts or funds engaged
in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in
a manner deemed equitable to each account or fund. It is believed that the
ability of the accounts to participate in volume transactions will generally be
beneficial to the accounts and funds. Although it is recognized that, in some
cases, the joint execution of orders could adversely affect the price or volume
of the security that a particular account or the Fund may obtain, it is the
opinion of the Advisor and the Trust's Board of Trustees that the advantages of
combined orders outweigh the possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Funds, at
the request of the Distributor, give consideration to sales of shares of the
Trust as a factor in the selection of brokers and dealers to execute Trust
portfolio transactions.
It is expected that the Trust may execute brokerage or other agency transactions
through the Distributor or an affiliate of the Advisor, both of which are
registered broker-dealers, for a commission in conformity with the 1940 Act, the
1934 Act and rules promulgated by the SEC. Under these provisions, the
Distributor or an affiliate of the Advisor is permitted to receive and retain
compensation for effecting portfolio transactions for the Trust on an exchange
if a written contract is in effect between the Distributor and the Trust
expressly permitting the Distributor or an affiliate of an Advisor to receive
and retain such compensation. These rules further require that commissions paid
to the Distributor by the Trust for exchange transactions not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." In addition, the Trust may direct commission business to one or more
designated broker-dealers in connection with such broker/dealer's provision of
services to the Trust or payment of certain Trust expenses (E.G., custody,
pricing and professional fees). The Trustees, including those who are not
"interested persons" of the Trust, have
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adopted procedures for evaluating the reasonableness of commissions paid to the
Distributor, and will review these procedures periodically.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares and classes of shares of each Fund, each of which represents an equal
proportionate interest in the Fund with each other share. Shares are entitled
upon liquidation to a PRO RATA share in the net assets of the Fund. Shareholders
have no preemptive rights. The Declaration of Trust provides that the Trustees
of the Trust may create additional series of shares or classes of series. All
consideration received by the Trust for shares of any additional series and all
assets in which such consideration is invested would belong to that series and
would be subject to the liabilities related thereto. Share certificates
representing shares will not be issued.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. Even if, however, the Trust were held to be a partnership, the
possibility of the Shareholders' incurring financial loss for that reason
appears remote because the Trust's Declaration of Trust contains an express
disclaimer of Shareholder liability for obligations of the Trust and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by or on behalf of the Trust or the
Trustees, and because the Declaration of Trust provides for indemnification out
of the Trust property for any Shareholder held personally liable for the
obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisors, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with the
Trust unless it is determined in the manner provided in the Declaration of Trust
that they have not acted in good faith in the reasonable belief that their
actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his willful misfeasance, bad faith, gross negligence or reckless disregard
of his duties.
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