<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000
FILE NO. 33-45671
FILE NO. 811-6557
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 35 /X/
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 37 /X/
STI CLASSIC FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
2 OLIVER STREET
BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (800) 342-5734
MARK NAGLE
C/O SEI INVESTMENTS COMPANY
ONE FREEDOM VALLEY DRIVE
OAKS, PENNSYLVANIA 19456
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
RICHARD W. GRANT, ESQ. JOHN MCGUIRE, ESQ.
MORGAN, LEWIS & BOCKIUS LLP MORGAN, LEWIS & BOCKIUS LLP
1701 MARKET STREET 1800 M STREET, N.W.
PHILADELPHIA, PA 19103 WASHINGTON, D.C. 20036
Title of Securities Being Registered................Units of Beneficial Interest
It is proposed that this filing will become effective (check appropriate box)
X Immediately upon filing pursuant to paragraph (b), or
---
___ On ____________ pursuant to paragraph (b), or
___ 60 days after filing pursuant to paragraph (a) or
___ 75 days after filing pursuant to paragraph (a) or
___ On _______ pursuant to paragraph (a) of Rule 485.
<PAGE>
STI CLASSIC FUNDS
FLEX SHARES
P R O S P E C T U S
March 28, 2000
[GRAPHIC]
HIGH INCOME FUND
INVESTMENT ADVISER
TO THE FUND:
TRUSCO CAPITAL MANAGEMENT, INC.
(THE "ADVISER")
STI Classic Funds
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
HOW TO READ THIS PROSPECTUS
Flex Shares
The STI Classic Funds is a mutual fund family that offers shares in separate
investment portfolios (Funds). The Funds have individual investment goals and
strategies. This prospectus gives you important information about the Flex
Shares of the High Income Fund that you should know before investing. Please
read this prospectus and keep it for future reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On the next page, there is some general
information you should know about risk and return. For more detailed information
about the Fund, please see:
<TABLE>
<CAPTION>
Page
PRINCIPAL INVESTMENT STRATEGIES, RISKS,
<S> <C>
PERFORMANCE INFORMATION AND EXPENSES ................................................... 3
MORE INFORMATION ABOUT RISK ............................................................. 6
THE FUND'S OTHER INVESTMENTS ............................................................ 6
THE INVESTMENT ADVISER AND PORTFOLIO MANAGER ............................................ 6
PURCHASING, SELLING AND EXCHANGING FUND SHARES .......................................... 7
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................................... 10
FINANCIAL HIGHLIGHTS .................................................................... 11
HOW TO OBTAIN MORE INFORMATION ABOUT THE STI CLASSIC FUNDS ...................... Back Cover
</TABLE>
<PAGE>
2
RISK/RETURN INFORMATION
The Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
The Fund has its own investment goal and strategies for reaching that goal. The
investment manager invests Fund assets in a way that she believes will help the
Fund achieve its goal. Still, investing in the Fund involves risk and there is
no guarantee that the Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and it is not insured or guaranteed by the FDIC or any government
agency.
The value of your investment in the Fund is based on the market value of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Fund owns and the markets in which they trade. The
effect on the Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.
<PAGE>
3
<TABLE>
<CAPTION>
HIGH INCOME FUND
- --------------------------------------------------------------------------------
Fund Summary
- --------------------------------------------------------------------------------
Investment Goals
<S> <C>
Primary High current income
Secondary Total return
- --------------------------------------------------------------------------------
Investment Focus High yield corporate, government, and other debt instruments
of U.S. and non U.S. issuers
- --------------------------------------------------------------------------------
Share Price Volatility High
- --------------------------------------------------------------------------------
Principal Investment Strategy Attempts to identify lower-rated securities
offering high current income of issuers
generating more than adequate cash flow to
meet their obligations
- --------------------------------------------------------------------------------
Investor Profile Investors who seek high current income and
who are willing to accept greater share
price volatility through investment in high
yield, below investment grade debt
instruments
- --------------------------------------------------------------------------------
</TABLE>
Investment Strategy
The High Income Fund invests primarily in a diversified portfolio of higher
yielding, lower rated income producing securities of U.S. and non-U.S. issuers.
The Fund will invest at least 65%, and may invest up to 100%, of its assets in
securities rated as "non-investment grade" by Moody's Investor Services,
Inc. ("Moody's") or by Standard & Poor's Rating Services ("S&P"), or in unrated
securities if, in the Adviser's opinion, they are of comparable quality. Such
securities are commonly known as "junk bonds" and offer greater risks than
investment grade bonds (i.e. rated BBB- or above by S&P or Baa3 or above by
Moody's). The primary basis for security selection is the potential income
offered by the security relative to the Adviser's assessment of the issuer's
ability to generate the cash flow required to meet its obligation. The Adviser
employs a "bottom-up" approach, identifying investment opportunities based on
the underlying financial and economic fundamentals of the specific issuer.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities.
What are the risks of investing in this Fund?
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa, and the volatility of lower rated securities is even
greater than that of higher rated securities. Also, longer-term securities are
generally more volatile, so the average maturity or duration of these securities
affects risk.
High yield securities involve greater risks of default or downgrade and are more
volatile than investment grade securities. High yield bonds involve greater risk
of default or price declines than investment grade securities due to actual or
perceived changes in an issuer's creditworthiness. In addition, issuers of high
yield bonds may be more susceptible than other issuers to economic downturns.
High yield bonds are subject to the risk that the issuer may not be able to pay
interest or dividends and ultimately to repay principal upon maturity.
Discontinuation of these payments could substantially adversely affect the
market value of the security.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily affect the U.S. economy or
similar issuers located in the United States. In addition, investments in
foreign countries are generally denominated in a foreign currency. As a result,
changes in the value of those currencies compared to the U.S. dollar may affect
(positively or negatively) the value of a Fund's investments. These currency
movements may happen separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country. These
various risks will be even greater for investments in emerging market countries
since political turmoil and rapid changes in economic conditions are more likely
to occur in these countries.
<PAGE>
4
- --------------------------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future. The
periods prior to March 28, 2000 represent the performance of Class A shares of
the ESC Strategic Income Fund, the Fund's predecessor.
This bar chart shows changes in the Fund's performance from year to year.
This chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.*
[BAR CHART]
14.91% 5.84% 5.05% 4.43% 1.28%
------ ----- ----- ----- -----
1995 1996 1997 1998 1999
Best Quarter Worst Quarter
6.79% -2.24%
(3/31/95) (9/30/99)
* The performance information shown above is based on a calendar year.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999, to those of the Lehman Brothers High Yield Bond Index.
Flex Shares 1 Year 5 Years Since Inception
- --------------------------------------------------------
High Income
Fund -0.58% 6.21% 5.20%*
- --------------------------------------------------------
Lehman Brothers
High Yield
Bond Index 2.41% 9.32% 8.48%**
- --------------------------------------------------------
* Since 5/4/94
** Since 5/31/94
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, it
performance would be lower. The Lehman Brothers High Yield Bond Index is a
widely-recognized, market value-weighted (bonds with a higher market value have
more influence than bonds with a lower market value) index which covers the
universe of fixed rate, non-investment grade debt.
Fund Fees and Expenses
This table describes the Fund's fees and expenses that you may pay if you buy
and hold Fund shares.
- --------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
- --------------------------------------------------------
Flex
Shares
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price) None
Maximum Deferred Sales Charge
(Load) (as a percentage of net
asset value)* 2.00%
- --------------------------------------------------------
* This sales charge is imposed if you sell Flex Shares within 1 year of your
purchase. See "Selling Fund Shares."
- --------------------------------------------------------
Annual Fund Operating Expenses (expenses deducted
from Fund assets)*
- --------------------------------------------------------
Flex
Shares
- --------------------------------------------------------
Investment Advisory Fees 0.80%
Distribution and Service (12b-1) Fees 1.00%
Other Expenses 0.35%
- --------------------------------------------------------
Total Annual Fund
Operating Expenses 2.15%
- --------------------------------------------------------
* Annual Fund operating expenses have been restated to reflect current fees
of the Fund as if they had been in effect for the Fund's predecessor during
the previous year.
<PAGE>
5
- --------------------------------------------------------------------------------
- --------------------------------------------------------
Example
- --------------------------------------------------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated.
The Example also assumes that each year your investment has a 5% return and Fund
expenses remain the same. Although your actual costs and returns might be
different, your approximate costs of investing $10,000 in the Fund would be:
If you sell your shares at the end of the period:
1 Year 3 Years 5 Years 10 Years
$424 $673 $1,154 $2,483
If you do not sell your shares at the end of the period:
1 Year 3 Years 5 Years 10 Years
$218 $673 $1,154 $2,483
Fund Expenses
Every mutual fund has operating expenses to pay for professional advisory,
shareholder, distribution, administration and custody services. The Fund's
restated expenses in the table are shown as a percentage of the Fund's net
assets. These expenses are deducted from Fund assets. The table shows the
highest expenses that could be currently charged to the Fund. Actual expenses
are expected to be lower because the Adviser and Distributor are voluntarily
waiving a portion of their fees. Actual Investment Advisory Fees, Distribution
Fees and Total Operating Expenses are expected to be 0.65%,0.40% and
1.40%, respectively. The Adviser and Distributor could discontinue these
voluntary waivers at any time. For more information about these fees, see
"Investment Adviser" and "Distribution of Fund Shares."
<PAGE>
6
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT RISK
Fixed Income Risk -- The market value of fixed income investments 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. Moreover, while securities with longer maturities tend to produce higher
yields, the prices of longer maturity securities are also subject to greater
market fluctuations as a result of changes in interest rates.
Foreign Security Risks -- Investments in securities of foreign companies or
governments can be more volatile than investments in U.S. companies or
governments. Diplomatic, political, or economic developments, including
nationalization or appropriation, could affect investments in foreign countries.
Foreign securities markets generally have less trading volume and less liquidity
than U.S. markets. In addition, the value of securities denominated in foreign
currencies, and of dividends from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
companies or governments generally are not subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic U.S. companies or governments. Transaction costs are generally higher
than those in the U.S. and expenses for custodial arrangements of foreign
securities may be somewhat greater than typical expenses for custodial
arrangements of similar U.S. securities. Some foreign governments levy
withholding taxes against dividend and interest income. Although in some
countries a portion of these taxes are recoverable, the non-recovered portion
will reduce the income received from the securities comprising the portfolio.
THE FUND'S OTHER INVESTMENTS
This prospectus describes the Fund's primary strategies, and the Fund will
normally invest in the types of securities described in this prospectus.
However, in addition to the investments and strategies described in this
prospectus, the Fund also may invest in other securities, use other strategies
and engage in other investment practices. These investments and strategies, as
well as those described in this prospectus, are described in detail in the
Statement of Additional Information (SAI).
The investments and strategies described in this prospectus are those that the
Fund uses under normal conditions. During unusual economic or market conditions,
or for temporary defensive or liquidity purposes, the Fund may invest up to 100%
of its assets in cash, money market instruments, repurchase agreements and
short-term obligations that would not ordinarily be consistent with the Fund's
objectives. The Fund will do so only if the Adviser believes that the risk of
loss outweighs the opportunity for higher income. Of course, a Fund cannot
guarantee that it will achieve its investment goal.
INVESTMENT ADVISER
The Investment Adviser makes investment decisions for the Fund and continuously
reviews, supervises and administers the Fund's investment program. The Board of
Trustees supervises the Adviser and establishes policies that the Adviser must
follow in its management activities.
Trusco Capital Management, Inc., (Trusco) 50 Hurt Plaza, Suite 1400, Atlanta,
Georgia 30303, serves as the Adviser to the High Income Fund. As of December 31,
1999, Trusco had approximately $30.7 billion in assets under management.
Prior to March 28, 2000, SunTrust Equitable Securities (STES) served as the
Adviser to the High Income Fund. For the fiscal period ended March 31, 1999,
STES received advisory fees of 1.00% of the average net assets from the
predecessor of the High Income Fund.
The Adviser may use its affiliates as brokers for Fund transactions.
PORTFOLIO MANAGER
Ms. Agnes G. Pampush, First Vice President, has served as a fixed income
portfolio manager at Trusco since 1988. She has managed the High Income Fund
since March 28, 2000. She is a Chartered Financial Analyst and has more than 16
years of investment experience.
<PAGE>
7
- --------------------------------------------------------------------------------
PURCHASING, SELLING AND
EXCHANGING FUND SHARES
This section tells you how to buy, sell (sometimes called "redeem") or exchange
shares of the Fund.
How to Purchase Fund Shares
A SunTrust Securities Investment Consultant can assist you in opening a
brokerage account which will be used for all transactions regarding the purchase
of STI Classic Funds. Once your account is established, you may buy shares of
the Fund by:
o Mail
o Telephone (1-800-874-4770)
o Wire
o Automated Clearing House (ACH)
You may also buy shares through investment representatives of certain
correspondent banks of SunTrust Banks, Inc. (SunTrust) and other financial
institutions that are authorized to place transactions in Fund shares for their
customers. Please contact your financial institution directly and follow its
procedures for Fund share transactions. Your institution may charge a fee for
its services, in addition to the fees charged by the Fund. You will also
generally have to address your correspondence or questions regarding the Fund to
your institution. The Fund may reject any purchase order if it is determined
that accepting the order would not be in the best interests of STI Classic Funds
or its shareholders.
When Can You Purchase Shares?
You may purchase shares on any day that the New York Stock Exchange is open for
business (a Business Day).
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after the Fund receives your purchase order. The Fund
calculates its NAV once each Business Day at the regularly scheduled close of
normal trading on the New York Stock Exchange (normally, 4:00 p.m. Eastern
time). So, for you to receive the current Business Day's NAV for the Fund,
generally the Fund must receive your purchase order before 4:00 p.m. Eastern
time.
For Customers Of SunTrust, Its Affiliates And Other Financial Institutions
You may have to transmit your purchase, sale and exchange requests to SunTrust
or other financial institutions at an earlier time for your transaction to
become effective that day. This allows the financial institution time to process
your request and transmit it to the administrator or transfer agent in time to
meet the above stated Fund cut-off times. For more information about how to
purchase, sell or exchange Fund shares, including specific SunTrust or other
financial institutions internal order entry cut-off times, please contact your
financial institution directly.
How the Fund Calculates NAV
In calculating NAV, the Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Fund thinks that they are
unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Trustees.
Net Asset Value
NAV for one Fund share is the value of that share's portion of the net assets in
the Fund.
Minimum Purchases
To purchase shares for the first time, you must invest at least:
Class Dollar Amount
Flex Shares $5,000 ($2,000 for retirement plans)
Your subsequent investment in the Fund must be made in amounts of at least
$1,000 or, if you pay by a statement coupon, $100. The Fund may accept
investments of smaller amounts at its discretion.
<PAGE>
8
- --------------------------------------------------------------------------------
FUNDLINK
FUNDLINK is a telephone activated service that allows you to transfer money
quickly and easily between the STI Classic Funds and your SunTrust bank
account(s). To use FUNDLINK, you must first contact your SunTrust Bank
Investment Consultant and complete the FUNDLINK application and authorization
agreements. Once you have signed up to use FUNDLINK, simply call SunTrust at
1-800-874-4770 to complete all of your purchase and redemption transactions.
Systematic Investment Plan
If you have a checking or savings account with a SunTrust affiliate bank, you
may purchase Flex Shares automatically through regular deductions from your
account. With a $500 minimum initial investment, you may begin
regularly-scheduled investments from $50 to $100,000 once or twice a month. If
you are buying Flex Shares, you should plan on investing at least $5,000 in the
Fund during the first two years. The Distributor may close your account if you
do not meet this minimum investment requirement at the end of two years.
Sales Charges
Contingent Deferred Sales Charges - Flex Shares
You do not pay a sales charge when you purchase Flex Shares. The offering price
of Flex Shares is simply the next calculated NAV. But if you sell your shares
within the first year after your purchase, you will pay a contingent deferred
sales charge equal to 2.00% for either (1) the NAV of the shares at the time of
purchase, or (2) NAV of the shares next calculated after the Fund receives your
sale request, whichever is less. The sales charge does not apply to shares you
purchase through reinvestment of dividends or distributions. So, you never pay a
deferred sales charge on any increase in your investment above the initial
offering price. This sales charge does not apply to exchanges of Flex Shares of
one Fund for Flex Shares of another Fund.
The contingent deferred sales charge will be waived if you sell your Flex Shares
for the following reasons:
o to make certain withdrawals from a retirement plan
(not including IRAs);
o because of death or disability; or
o for certain payments under the Systematic Withdrawal
Plan (which is discussed later).
Offering Price of Fund Shares
The offering price of Flex Shares is simply the next calculated NAV.
How to Sell Your Fund Shares
If you own your shares through a brokerage account with SunTrust, you may sell
(sometimes called "redeem") your shares on any Business Day by contacting
SunTrust Securities directly by mail or telephone at 1-800-874-4770. The minimum
amount for telephone redemptions is $1,000.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares.
If you would like to sell $25,000 or more of your shares, please notify the Fund
in writing and include a signature guarantee by a bank or other financial
institution (a notarized signature is not sufficient).
The sale price of each share will be the next NAV determined after the Fund
receives your request less, any applicable deferred sales charge.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals of at least $50 from the Fund. The proceeds of
each withdrawal will be mailed to you by check or, if you have a checking or
savings account with a SunTrust affiliates bank, electronically transferred to
your account.
<PAGE>
9
- --------------------------------------------------------------------------------
Receiving Your Money
Normally, the Fund will send your sale proceeds within five Business Days after
the Fund receives your request. Your proceeds can be wired to your bank account
(subject to a $7.00 fee) or sent to you by check. If you recently purchased your
shares by check or through ACH, redemption proceeds may not be available until
your check has cleared (which may take up to 15 days).
Redemptions in Kind
The Fund generally pays sale (redemption) proceeds in cash. However, under
unusual conditions that make the payment of cash unwise (and for the protection
of the Fund's remaining shareholders) the Fund might pay all or part of your
redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes on
any capital gains from the sale as with any redemption.
Involuntary Sales of Your Shares
If your account balance drops below the required minimum you may be required to
sell your shares. The account balance minimum is:
Class Dollar Amount
Flex Shares $5,000
But, the Fund will always give you at least 60 days written notice to give you
time to add to your account and avoid the sale of your shares.
Suspension of Your Right to Sell Your Shares
The Fund may suspend your right to sell your shares if the New York Stock
Exchange restricts trading, the SEC declares an emergency or for other reasons.
More information about this is in the SAI.
How to Exchange Your Fund Shares
You may exchange your shares on any Business Day by contacting SunTrust
Securities or your financial institution by mail or telephone. Exchange requests
must be for an amount of at least $1,000.
You may exchange your shares up to four times during a calendar year. If you
exchange your shares more than four times during a year, you may be charged a
$10.00 fee for each additional exchange. You will be notified before any fee is
charged.
If you recently purchased shares by check or through ACH, you may not be able to
exchange your shares until your check has cleared (which may take up to 15
days). This exchange privilege may be changed or canceled at any time upon 60
days notice.
Exchanges
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request.
Flex Shares
You may exchange Flex Shares of the Fund for Flex Shares of any other Fund.
Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Fund has certain safeguards and
procedures to confirm the identity of callers and the authenticity of
instructions, the Fund is not responsible for any losses or costs incurred by
following telephone instructions the Fund reasonably believes to be genuine. If
you or your financial institution transact with the Fund over the telephone, you
will generally bear the risk of any loss.
<PAGE>
10
- --------------------------------------------------------------------------------
Distribution of Fund Shares
The Fund has adopted a distribution plan that allows the Fund to pay
distribution and service fees for the sale and distribution of its shares, and
for services provided to shareholders. Because these fees are paid out of the
Fund's assets continuously, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
For Flex Shares, the maximum distribution fee is 1.00% of the average daily net
assets of the Fund.
The Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs for dealers, which will be paid for by the
Distributor from any sales charge it receives or from any other source available
to it. Under any such program, the Distributor may provide incentives, in the
form of cash or other compensation, including merchandise, airline vouchers,
trips and vacation packages, to dealers selling shares of the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares its income dividends daily and pays these dividends monthly.
The Fund makes distributions of capital gains, if any, at least annually. If you
own Fund shares on the Fund's record date, you will be entitled to receive the
distribution.
You will receive dividends and distributions in the form of additional Fund
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Fund in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the Fund
receives your written notice. To cancel your election, simply send the Fund
written notice.
TAXES
Please consult your tax adviser regarding your specific questions about
federal, state and local income taxes. Below the Fund has summarized some
important tax issues that affect the Fund and its shareholders. This summary is
based on current tax laws, which may change.
The Fund will distribute substantially all of its income and capital gains, if
any. The dividends and distributions you receive may be subject to federal,
state and local taxation, depending upon your tax situation. Distributions you
receive from the Fund may be taxable whether or not you reinvest them. Income
distributions are generally taxable at ordinary income tax rates. Capital gains
distributions are generally taxable at the rates applicable to long-term capital
gains. Each sale or exchange is a taxable event.
More information about taxes is in the SAI.
<PAGE>
11
- --------------------------------------------------------------------------------
Financial Highlights
The table that follows presents performance information about the Fund. This
information is intended to help you understand the Fund's financial performance
for the past five years. Some of this information reflects financial information
for a single Fund share. The total returns in the table represent the rate that
you would have earned (or lost) on an investment in the Fund, assuming you
reinvested all of your dividends and distributions. This information provided
below for periods ending prior to and including March 31, 1999, has been audited
by PricewaterhouseCoopers LLP, independent public accountants. Their report,
along with the Fund's financial statements, appears in the annual report and is
attached to the Statement of Additional Information. You can obtain the annual
report, which contains more performance information, at no charge by calling
1-800-428-6970.
<TABLE>
<CAPTION>
High Income Fund (Formerly ESC Strategic Income Fund)
------------------------------------------------------------
Flex Shares (Formerly Class A)
------------------------------------------------------------
Six Months Ended
September 30, 1999 Year Ended Year Ended
(unaudited) March 31, 1999 March 31, 1998
----------- -------------- --------------
<S> <C> <C> <C>
Net asset value per share,
beginning of period ........................ $ 9.77 $ 9.99 $ 9.73
------- ------- -------
Income from Investment Operations
Net investment income ...................... 0.41 0.51(a) 0.34
Net realized and unrealized gains/(losses)
on investments ........................... (0.71) 0.04 0.44
------- ------- -------
Total from investment operations ............. (0.30) 0.55 0.78
------- ------- -------
Less Dividends and
Distributions:
From net investment income ................... (0.41) (0.57) (0.52)
From realized gains ........................ -- (0.15) --
From tax return of capital ................. -- (0.05) --
------- ------- -------
Total Dividends and Distributions ............ (0.41) (0.77) (0.52)
Net asset value per share,
end of period .............................. $ 9.06 $ 9.77 $ 9.99
======= ======= =======
Total return (excludes sales charge) ........ (3.21) 5.64% 8.18%
Ratios/Supplemental Data:
Net assets end of period (in thousands) ..... $ 6,558 $ 7,230 $24,413
Net investment income ....................... 8.46% 5.09% 5.27%
Expenses net of waivers/reimbursements and
expenses paid by third parties ............. 1.66% 1.91% 1.87%
Expenses before waivers/reimbursements and
expenses paid by third parties ............. 2.66% 2.22% 1.87%
Portfolio Turnover Rate ..................... 13% 95% 130%
<CAPTION>
May 4,1994
(commencement
of operations)
Year Ended Year Ended through
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value per share,
beginning of period ....................... $ 9.89 $ 9.94 $ 10.00
------- ------- -------
Income from Investment Operations
Net investment income ..................... 0.60 0.59 0.55
Net realized and unrealized gains/(losses)
on investments .......................... (0.16) 0.16 (0.05)
------- ------- -------
Total from investment operations ............ 0.44 0.75 0.50
------- ------- -------
Less Dividends and
Distributions:
From net investment income .................. (0.60) (0.59) (0.55)
From realized gains ....................... -- (0.21) (0.01)
From tax return of capital ................ -- -- --
------- ------- -------
Total Dividends and Distributions ........... (0.60) (0.80) (0.56)
------- ------- -------
Net asset value per share,
end of period ............................. $ 9.73 $ 9.89 $ 9.94
======= ======= =======
Total return (excludes sales charge) ....... 3.91% 7.67% 5.30%
Ratios/Supplemental Data:
Net assets end of period (in thousands) .... $32,506 $36,891 $32,373
Net investment income ...................... 5.49% 5.87% 6.29%**
Expenses net of waivers/reimbursements and
expenses paid by third parties ............ 1.65% 1.70% 1.85%**
Expenses before waivers/reimbursements and
expenses paid by third parties ............ 1.70% 1.75% 1.86%**
Portfolio Turnover Rate .................... 123% 138% 92%
</TABLE>
(a) Calculated using the average share method.
** Annualized
<PAGE>
12
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Income Fund (Formerly ESC Strategic Income Fund)
-------------------------------------------------------
Flex Shares (Formerly Class D)
-------------------------------------------------------
Six Months Ended
September 30, 1999 Year Ended Year Ended
(unaudited) March 31, 1999 March 31, 1998
----------- -------------- --------------
<S> <C> <C> <C>
Net asset value per share,
beginning of period .................................. $ 9.84 $ 9.99 $ 9.73
---------- ---------- ----------
Income from Investment Operations:
Net investment income ................................ 0.38 0.50(a) 0.28
Net realized and unrealized gains/(losses)
on investments ..................................... (0.71) 0.01 0.45
---------- ---------- ----------
Total from investment operations ....................... (0.33) 0.51 0.73
---------- ---------- ----------
Less Dividends and Distributions:
From net investment income ........................... (0.38) (0.46) (0.47)
From realized gains .................................. -- (0.15) --
From tax return of capital ........................... -- (0.05) --
---------- ---------- ----------
Total Dividends and Distributions ...................... (0.38) (0.66) (0.47)
---------- ---------- ----------
Net asset value per share,
end of period ........................................ $ 9.13 $ 9.84 $ 9.99
========== ========== ==========
Total return (excludes sales charge) ................... (3.43) 5.23% 7.64%
Ratios/Supplemental Data:
Net assets end of period (in thousands) ............... $ 494 $ 548 $ 823
Net investment income .................................. 7.97% 5.03% 4.77%
Expenses net of waivers/reimbursements and
expenses paid by third parties ....................... 2.16% 2.44% 2.37%
Expenses before waivers/reimbursements and
expenses paid by third parties ....................... 3.16% 2.96% 2.37%
Portfolio Turnover Rate ................................ 13% 95% 130%
<CAPTION>
May 4, 1994
(commencement
of operations)
Year Ended Year Ended through
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value per share,
beginning of period .................................. $ 9.89 $ 9.94 $ 10.00
---------- ---------- ----------
Income from Investment Operations:
Net investment income ................................ 0.50 0.54 0.50
Net realized and unrealized gains/(losses)
on investments ..................................... (0.16) 0.16 (0.05)
---------- ---------- ----------
Total from investment operations ....................... 0.34 0.70 0.45
---------- ---------- ----------
Less Dividends and Distributions:
From net investment income ........................... (0.50) (0.54) (0.50)
From realized gains .................................. -- (0.21) (0.01)
From tax return of capital ........................... -- -- --
---------- ---------- ----------
Total Dividends and Distributions ...................... (0.50) (0.75) (0.51)
---------- ---------- ----------
Net asset value per share,
end of period ........................................ $ 9.73 $ 9.89 $ 9.94
========== ========== ==========
Total return (excludes sales charge) ................... 3.39% 7.11% 4.74%
Ratios/Supplemental Data:
Net assets end of period (in thousands) ............... $ 1,420 $ 1,446 $ 1,241
Net investment income ................................ 4.99% 5.37% 5.73%**
Expenses net of waivers/reimbursements and
expenses paid by third parties ..................... 2.15% 2.20% 2.29%**
Expenses before waivers/reimbursements and
expenses paid by third parties ..................... 2.21% 2.25% 2.31%**
Portfolio Turnover Rate .............................. 123% 138% 92%
</TABLE>
(a) Calculated using the average share method.
** Annualized
On March 28, 2000, the Income Fund, a series of the ESC Strategic Funds,
exchanged all of its assets and certain liabilities for shares of the STI
Classic High Income Fund. Because the ESC Strategic Income Fund is the
accounting survivor of that transaction, its basis of accounting for assets and
liabilities and its operating results for the periods prior to March 28, 2000
have been carried forward in these financial highlights.
<PAGE>
- --------------------------------------------------------------------------------
NOTES
<PAGE>
STI CLASSIC FUNDS
INVESTMENT ADVISER
Trusco Capital Management, Inc.
50 Hurt Plaza
Suite 1400
Atlanta, GA 30303
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, PA 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Funds is available without charge through the
following:
Statement of Additional Information (SAI)
The SAI dated March 28, 2000, includes detailed information about the STI
Classic High Income Fund. The SAI is on file with the SEC and is incorporated by
reference into this prospectus. This means that the SAI, for legal purposes, is
a part of this prospectus.
Annual and Semi-Annual Reports
These reports list the Fund's holdings and contain information from the Fund's
manager about strategies, and recent market conditions and trends. The reports
also contain detailed financial information about the Fund.
To Obtain More Information:
By Telephone: Call 1-800-428-6970
By Mail: Write to the Fund
c/o SEI Investments Distribution Co.
Oaks, PA 19456
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about the STI Classic Funds, from the EDGAR
Database on the SEC's website ("http://www.sec.gov"). You may review and copy
documents at the SEC Public Reference Room in Washington, DC (for information on
the operation of the Public Reference Room, call 1-202-942-8090). You may
request documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section,
Washington, DC 20549-0102. You may also obtain this information, upon payment of
a duplicating fee, by e-mailing the SEC at the following address:
[email protected]. The STI Classic Funds' Investment Company Act registration
number is 811-06557.
<PAGE>
STI CLASSIC FUNDS
High Income Fund
Investment Adviser:
Trusco Capital Management, Inc.
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of the
STI Classic Funds (the "Trust") and should be read in conjunction with the
Trust's High Income Fund (the "Fund") prospectus dated March 28, 2000.
Prospectuses may be obtained through the Distributor, SEI Investments
Distribution Co., One Freedom Valley Drive, Oaks, Pennsylvania 19456.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
THE TRUST................................................................ B-2
ADDITIONAL INFORMATION ABOUT THE FUND.................................... B-2
DESCRIPTION OF PERMITTED INVESTMENTS..................................... B-2
INVESTMENT LIMITATIONS................................................... B-19
INVESTMENT ADVISER....................................................... B-21
THE ADMINISTRATOR........................................................ B-23
THE DISTRIBUTOR.......................................................... B-24
THE TRANSFER AGENT....................................................... B-25
THE CUSTODIAN............................................................ B-25
INDEPENDENT PUBLIC ACCOUNTANTS........................................... B-25
LEGAL COUNSEL............................................................ B-25
TRUSTEES AND OFFICERS OF THE TRUST....................................... B-26
PERFORMANCE INFORMATION.................................................. B-28
COMPUTATION OF YIELD..................................................... B-28
CALCULATION OF TOTAL RETURN.............................................. B-29
PURCHASING SHARES........................................................ B-29
REDEEMING SHARES......................................................... B-29
DETERMINATION OF NET ASSET VALUE......................................... B-30
TAXES.................................................................... B-30
FUND TRANSACTIONS........................................................ B-31
TRADING PRACTICES AND BROKERAGE.......................................... B-31
DESCRIPTION OF SHARES.................................................... B-33
SHAREHOLDER LIABILITY.................................................... B-33
YEAR 2000................................................................ B-34
5% AND 25% SHAREHOLDERS.................................................. B-34
EXPERTS.................................................................. B-34
APPENDIX A: FINANCIAL STATEMENTS......................................... A-1
</TABLE>
March 28, 2000
<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 ("Funds") of units of beneficial
interest ("shares") and different classes of shares of the Fund. This Statement
of Additional Information relates to the Flex Shares of the STI High Income Fund
(the "Fund"). See "Description of Shares."
The Trust pays its expenses, including fees of its service providers, audit and
legal expenses, expenses of preparing prospectuses, proxy solicitation material
and reports to shareholders, costs of custodial services, and registering the
shares under federal and state securities laws, pricing, insurance expenses,
litigation, and other extraordinary expenses, brokerage costs, interest charges,
taxes, and organization expenses.
ADDITIONAL INFORMATION ABOUT THE FUND
The Fund's investment objective is a high level of current income, with a
secondary objective of total return.
The Fund invests primarily in corporate, government and other debt instruments
of U.S. and non-U.S. issuers. Under normal market conditions, at least 65% of
the Fund's total assets will be invested in income-producing debt securities.
Investments in foreign securities will be limited to 35% of its total assets.
Up to 100% of the Fund's assets may be invested in "junk bonds." Junk bonds are
securities that are rated below investment grade - i.e., that are rated below
BBB by Moody's or below Baa by S&P - or that, if unrated, are deemed of
comparable quality. Junk bonds also include securities that are in default
(rated D by S&P), although such holdings by the Fund are expected to be minimal.
In choosing the Fund's investments in a value-oriented approach, the Adviser
will seek out companies with good fundamentals and potentially strong future
prospects that are currently out of favor with investors. The Adviser employs a
bottom-up approach of research to identify investment opportunities that
represent the most attractive value and that have strong prospects for
consistent income and growth. Potential and current investments are also
subject to continual research, which includes regular vigorous analysis to
identify issues that are overvalued and those that should be sold to reinvest in
better opportunities. The Adviser strives to preserve capital in attempting to
achieve the Fund's investment objective. The Adviser's investing discipline
focuses on total return over a full market/economic cycle. The Adviser prefers
to invest in full-coupon, interest-paying securities for their cash flow
advantage and usually lower volatility than deferred interest or zero coupon
bonds.
DESCRIPTION OF PERMITTED INVESTMENTS
Asset-Backed Securities
Asset-backed securities are securities backed by non-mortgage assets such as
company receivables, truck and auto loans, leases and credit card receivables.
Other asset-backed securities may be created in the future. These securities
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. These securities are
generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pool of assets. Asset-backed
securities may also be debt obligations, which are known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning these assets and
issuing debt obligations.
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,
B-2
<PAGE>
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.
Bank Obligations
Bank obligations are short-term obligations issued by U.S. and foreign banks,
including bankers' acceptances, certificates of deposit, custodial receipts, and
time deposits. Eurodollar and Yankee Bank Obligations are U.S. dollar-
denominated certificates of deposit or time deposits issued outside the U.S. by
foreign branches of U.S. banks or by foreign banks.
Brady Bonds
In the event of a default on collateralized Brady Bonds for which obligations
are accelerated, the collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course.
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 securities issued by corporations that are
exchangeable for a set number of another security at a prestated price. 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 option
provisions.
Custodial Receipts
The custodian arranges for the issuance of the certificates or receipts
evidencing ownership and maintains the register. Receipts include Treasury
Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS"). TRs, TIGRs and CATS
are sold as zero coupon securities.
B-3
<PAGE>
Debt Securities
Debt securities represent money borrowed that obligates the issuer (e.g., a
corporation, municipality, government, government agency) to repay the borrowed
amount at maturity (when the obligation is due and payable) and usually to pay
the holder interest at specific times (e.g., bonds, notes, debentures).
The Euro
On January 1, 1999, the European Economic and Monetary Union (EMU) implemented a
new currency unit, the Euro, which is expected to reshape financial markets,
banking systems and monetary policies in Europe and other parts of the world.
The countries that converted or tied their currencies to the Euro include
Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal, and Spain. Financial transactions and market
information, including share quotations and company accounts, in participating
countries are denominated in Euros, although the bank notes used by
participating countries remain legal tender. Approximately 46% of the stock
exchange capitalization of the total European market may now be reflected in
Euros, and participating governments will issue their bonds in Euros. Monetary
policy for participating countries will be uniformly managed by a new central
bank, the European Central Bank (ECB).
Although it is not possible to predict the impact of the Euro implementation
plan on the Fund, the transition to the Euro may change the economic environment
and behavior of investors, particularly in European markets. For example,
investors may begin to view those countries participating in the EMU as a single
entity, and the Adviser may need to adapt investment strategies accordingly. The
process of implementing the Euro also may adversely affect financial markets
worldwide and may result in changes in the relative strength and value of the
U.S. dollar or other major currencies, as well as possible adverse tax
consequences. The transition to the Euro is likely to have a significant impact
on fiscal and monetary policy in the participating countries and may produce
unpredictable effects on trade and commerce generally. These resulting
uncertainties could create increased volatility in financial markets world-wide.
Eurodollar and Yankee Dollar Obligations
Eurodollar bank obligations are U.S. dollar denominated certificates of deposit
or time deposits issued outside the United States by foreign branches of U.S.
banks or by foreign banks. Yankee dollar obligations are U.S. dollar
denominated obligations issued in the United States by foreign banks.
Foreign Currency Options
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Fund to reduce foreign currency risk
using such options. Over-the-counter options differ from traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller and generally do not, have as much market liquidity as exchange-
traded options. Employing hedging strategies with options on currencies does
not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Furthermore, such hedging
transactions reduce or preclude the opportunity for gain if the value of the
hedged currency should change relative to the U.S. dollar. The Fund will not
speculate in options on foreign currencies. There is no assurance that a liquid
secondary market will exist for any particular foreign currency options, or at
any particular time. In the event no liquid secondary market exists, it might
not be possible to effect closing transactions in particular options. If the
Fund cannot close out an option which it holds, it would have to exercise its
option in order to realize any profit and would incur transactional costs on the
sale of the underlying assets.
B-4
<PAGE>
Equity-Linked Securities
The Fund may invest in equity-linked securities, including, among others, PERCS,
ELKS or LYONs, which are securities that are convertible into, or the value of
which is based upon the value of, equity securities upon certain terms and
conditions. The amount received by an investor at maturity of such securities is
not fixed but is based on the price of the underlying common stock. It is
impossible to predict whether the price of the underlying common stock will rise
or fall. Trading prices of the underlying common stock will be influenced by the
issuer's operational results, by complex, interrelated political, economic,
financial or other factors affecting the capital markets, the stock exchanges on
which the underlying common stock is traded and the market segment of which the
issuer is a part. In addition, it is not possible to predict how equity-linked
securities will trade in the secondary market. The market for such securities
may be shallow, and high volume trades may be possible only with discounting. In
addition to the foregoing risks, the return on such securities depends on the
creditworthiness of the issuer of the securities, which may be the issuer of the
underlying securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.
The following are three examples of equity-linked securities. The Fund may
invest in the securities described below or other similar equity-linked
securities.
PERCS
Preferred Equity Redemption Cumulative Stock ("PERCS") technically is
preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually
three years, during which the investors' capital gains are capped, usually
at 30%. Commonly, PERCS may be redeemed by the issuer at any time or if the
issuer's common stock is trading at a specified price level or better. The
redemption price starts at the beginning of the PERCS duration period at a
price that is above the cap by the amount of the extra dividends the PERCS
holder is entitled to receive relative to the common stock over the
duration of the PERCS and declines to the cap price shortly before maturity
of the PERCS. In exchange for having the cap on capital gains and giving
the issuer the option to redeem the PERCS at any time or at the specified
common stock price level, the Fund may be compensated with a substantially
higher dividend yield than that on the underlying common stock.
ELKS
Equity-Linked Securities ("ELKS") differ from ordinary debt securities, in
that the principal amount received at maturity is not fixed but is based on
the price of the issuer's common stock. ELKS are debt securities commonly
issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to
receive a principal amount equal to the lesser of a cap amount, commonly in
the range of 30% to 55% greater than the current price of the issuer's
common stock, or the average closing price per share of the issuer's common
stock, subject to adjustment as a result of certain dilution events, for
the 10 trading days immediately prior to maturity. Unlike PERCS, ELKS are
commonly not subject to redemption prior to maturity. ELKS usually bear
interest during the three-year term at a substantially higher rate than the
dividend yield on the underlying common stock. In exchange for having the
cap on the return that might have been received as capital gains on the
B-5
<PAGE>
underlying common stock, the Fund may be compensated with the higher yield,
contingent on how well the underlying common stock does.
LYONS
Liquid Yield Option Notes ("LYONS") differ from ordinary debt securities,
in that the amount received prior to maturity is not fixed but is based on
the price of the issuer's common stock. LYONs are zero-coupon notes that
sell at a large discount from face value. For an investment in LYONs, the
Fund will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par
value. The yield on LYONs, typically, is lower-than-market rate for debt
securities of the same maturity, due in part to the fact that the LYONs are
convertible into common stock of the issuer at any time at the option of
the holder of the LYONs. Commonly, the LYONs are redeemable by the issuer
at any time after an initial period or if the issuer's common stock is
trading at a specified price level or better, or, at the option of the
holder, upon certain fixed dates. The redemption price typically is the
purchase price of the LYONs plus accrued original issue discount to the
date of redemption, which amounts to the lower-than-market yield. The Fund
will receive only the lower-than-market yield unless the underlying common
stock increases in value at a substantial rate. LYONs are attractive to
investors, like the Fund, when it appears that they will increase in value
due to the rise in value of the underlying common stock.
Foreign Securities
Foreign securities include equity securities of foreign entities, obligations of
foreign branches of U.S. banks and of foreign banks, including, without
limitation, European Certificates of Deposit, European Time Deposits, European
Bankers' Acceptances, Canadian Time Deposits, Europaper and Yankee Certificates
of Deposit, and investments in Canadian Commercial Paper and foreign securities.
These instruments have investment risks that differ in some respects from those
related to investments in obligations of U.S. domestic issuers. Such risks
include future adverse political and economic developments, the possible
imposition of withholding taxes on interest or other income, possible seizure,
nationalization, or expropriation of foreign deposits, the possible
establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements than
those applicable to domestic branches of U.S. banks.
In making investment decisions for the Fund, the Adviser evaluates the risks
associated with investing Fund assets in a particular country, including risks
stemming from a country's financial infrastructure and settlement practices; the
likelihood of expropriation, nationalization or confiscation of invested assets;
prevailing or developing custodial practices in the country; the country's laws
and regulations regarding the safekeeping, maintenance and recovery of invested
assets, the likelihood of government-imposed exchange control restrictions which
could impair the liquidity of Fund assets maintained with custodians in that
country, as well as risks from political acts of foreign governments ("country
risks"). Of course, the Adviser cannot assure that the Fund will not suffer
losses resulting from investing in foreign countries.
Holding Fund assets in foreign countries through specific foreign custodians
presents additional risks, including but not limited to the risks that a
particular foreign custodian or depository will not exercise proper care with
respect to Fund assets or will not have the financial strength or adequate
practices and procedures to properly safeguard Fund assets.
B-6
<PAGE>
By investing in foreign securities, the Fund attempts 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
the 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.
Emerging countries are all countries that are considered to be developing or
emerging countries by the World Bank or the International Finance Corporation,
as well as countries classified by the United Nations or otherwise regarded by
the international financial community as developing. Currently, the countries
excluded from this category are Ireland, Spain, New Zealand, Australia, the
United Kingdom, Italy, the Netherlands, Belgium, Austria, France, Canada,
Germany, Denmark, the United States, Sweden, Finland, Norway, Japan, and
Switzerland.
Forward Foreign Currency Contracts
Forward foreign currency contracts involve obligations 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 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
purchase 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. They may also be used 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
and for which there appears to be a liquid secondary market.
Index futures are futures contracts for various indices that are traded on
registered securities exchanges. An index futures contract obligates the seller
to deliver (and the purchaser to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific index at the
close of the last trading day of the contract and the price at which the
agreement is made.
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 Fund would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to
B-7
<PAGE>
meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to make delivery of the instruments
underlying the futures contracts they hold. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge the underlying securities.
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 Adviser does not believe that the 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, they 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 has 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.
High Yield Securities
High yield securities, commonly referred to as junk bonds, are debt obligations
rated below investment grade, i.e., below BBB by S&P or Baa by Moody's, or their
unrated equivalents. The risks associated with investing in high yield
securities include:
(1) High yield, lower rated bonds involve greater risk of default or price
declines than investments in investment grade securities (e.g., securities
rated BBB or higher by S&P or Baa or higher by Moody's) due to changes in
the issuer's creditworthiness.
(2) 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 these
securities at their fair market values either to meet redemption requests,
or in response to changes in the economy or the financial markets.
(3) 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.
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(4) The market for high risk, high yield securities may be adversely
affected by legislative and regulatory developments.
Hedging Techniques
Hedging in an investment strategy designed to offset investment risks. Hedging
activities include, among other things, the use of options and futures. There
are risks associated with hedging activities, including: (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 option on
futures; (3) there may not be a liquid secondary market for a futures contract
or option; and (4) trading restrictions or limitations may be imposed by an
exchange, and government regulations may restrict trading in futures contracts
and options.
High Yield Foreign Sovereign Debt Securities
Investing in fixed and floating rate high yield foreign sovereign debt
securities will expose the Fund to the direct or indirect consequences of
political, social or economic changes in countries that issue the securities.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts.
Illiquid Securities
Illiquid securities are securities that cannot be disposed of within seven days
at approximately the price at which they are being carried on the Fund's books.
Investment Company Shares
The Fund may purchase shares of other mutual funds to the extent consistent with
applicable law. Investment companies typically incur fees that are separate
from those fees incurred directly by the Fund. The Fund's purchase of such
investment company securities results in the layering of expenses, such that you
would indirectly bear a proportionate share of investment company operating
expenses, such as advisory fees.
Investment Grade Obligations
Investment grade obligations are debt obligations rated BBB by S&P or Baa by
Moody's, or their unrated equivalents. These securities are deemed to have
speculative characteristics.
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Loan Participations
Loan participations are interest in loans to U.S. corporations which are
administered by the lending bank or agent for a syndicate of lending banks. In
a loan participation, the borrower corporation is the issuer of the
participation interest except to the extent the Fund derives its rights from the
intermediary bank. Because the intermediary bank does not guarantee a loan
participation, a loan participation is subject to the credit risks associated
with the underlying corporate borrower.
In the event of bankruptcy or insolvency of the corporate borrower, a loan
participation may be subject to certain defenses that can be asserted by the
borrower as a result of improper conduct by the intermediary bank. In addition,
in the event the underlying corporate borrower fails to pay principal and
interest when due, the Fund may be subject to delays, expenses, and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the borrower. Under the terms of a Loan Participation, the
Fund may be regarded as a creditor of the intermediary bank (rather than of the
underlying corporate borrower), so that the Fund may also be subject to the risk
that the intermediary bank may become insolvent.
The secondary market for loan participations is limited and any such
participation purchased by the Fund may be regarded as illiquid.
Leveraged Buyouts
The Fund may invest in leveraged buyout limited partnerships and funds that, in
turn, invest in leveraged buyout transactions ("LBOs"). An LBO, generally, is
an acquisition of an existing business by a newly formed corporation financed
largely with debt assumed by such newly formed corporation to be later repaid
with funds generated from the acquired company. Since most LBOs are by nature
highly leveraged (typically with debt to equity ratios of approximately 9 to 1),
equity investments in LBOs may appreciate substantially in value given only
modest growth in the earnings or cash flow of the acquired business.
Investments in LBO partnerships and funds, however, present a number of risks.
Investments in LBO limited partnerships and funds will normally lack liquidity
and may be subject to intense competition from other LBO limited partnerships
and funds. Additionally, if the cash flow of the acquired company is
insufficient to service the debt assumed in the LBO, the LBO limited partnership
or fund could lose all or part of its investment in such acquired company.
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, adjustable rate mortgages, and floating
mortgages.
Government Pass-Through Securities
These are securities that are issued or guaranteed by a U.S. Government
agency representing an interest in a pool of mortgage loans. The primary
issuers or guarantors of these mortgage-backed securities are the
Government National Mortgage Association ("GNMA"), Fannie Mae, and the
Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC
obligations are not backed by the full faith and credit of the U.S.
Government as GNMA certificates are, but Fannie Mae and FHLMC securities
are supported by the instrumentalities' right to borrow from the U.S.
Treasury. GNMA, Fannie Mae, and FHLMC each guarantees timely distributions
of interest to certificate holders. GNMA and Fannie Mae also guarantee
timely distributions of scheduled principal. In the past, FHLMC has only
guaranteed the ultimate collection of principal of the underlying mortgage
loan; however, FHLMC now issues
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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.
Obligations of GNMA are backed by the full faith and credit of the United
States Government. Obligations of Fannie Mae 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 early 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 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.
Private Pass-Through Securities
Private pass-through securities are mortgage-backed securities issued by a
non-governmental agency, such as a trust. While they are generally
structured with one or more types of credit enhancement, private pass-
through securities generally lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality. The two
principal types of private mortgage-backed securities are collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs").
CMOs
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). CMOs are rated in one of the two highest categories by S&P or
Moody's. 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.
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REMICs
REMICs 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 and are rated in
one of the two highest categories by S&P or Moody's.
Investors may purchase beneficial interests in REMICs, which are known as
"regular" interests, or "residual" interests. Guaranteed REMIC pass-
through certificates ("REMIC Certificates") issued by Fannie Mae or FHLMC
represent beneficial ownership interests in a REMIC trust consisting
principally of mortgage loans or Fannie Mae, FHLMC or GNMA-guaranteed
mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC
guarantees the timely payment of interest. GNMA REMIC Certificates are
backed by the full faith and credit of the U.S. Government.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities 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.
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 Adviser 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 the Fund, it will be deemed to have a remaining maturity
equal to its average life as estimated by the Fund's Adviser. 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 Adviser will be the actual average life.
Mortgage-Backed Security Rolls
The Fund may enter into "forward roll" transactions with respect to
mortgage-backed securities issued by GNMA, FNMA or FHLMC. In a forward
roll transaction, that is considered to be a borrowing by the Fund, the
Fund will sell a mortgage security to a bank or other permitted entity and
simultaneously agree to repurchase a similar security from the institution
at a later date at an agreed upon price. The mortgage securities that are
repurchased will bear the same interest rate as those sold, but generally
will be collateralized by different pools of mortgages with different
prepayment histories than those sold. Risks of mortgage-backed security
rolls include: (i) the risk of prepayment prior to maturity, (ii) the
possibility that the proceeds of the sale may have to be invested in money
market instruments (typically repurchase agreements) maturing not later
than the expiration of the and (iii) the possibility that the market value
of
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the securities sold by the Fund may decline below the price at which the
Fund is obligated to purchase the securities. Upon entering into a
mortgage-backed security roll, the Fund will be required to place cash,
U.S. Government Securities or other high-grade debt securities in a
segregated account with its Custodian in an amount equal to its obligation
under the roll.
Assumptions generally accepted by the industry concerning the probability
of early payment may be used in the calculation of maturities for debt
securities that contain put or call provisions, sometimes resulting in a
calculated maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above.
As new types of mortgage-related securities are developed and offered to
investors, the manager will, consistent with the Fund's investment
objectives, policies and quality standards, consider making investments in
such new types of mortgage-related securities.
Non-Publicly Traded Securities; Rule 144A Securities
The Fund may purchase securities that are not registered under the Securities
Act of 1933, as amended (the "1933 Act"), but that can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act ("Rule
144A Securities"). An investment in Rule 144A Securities will be considered
illiquid and therefore subject to the Fund's limitation on the purchase of
illiquid securities, unless the Fund's governing Board of Trustees determines on
an ongoing basis that an adequate trading market exists for the security. In
addition to an adequate trading market, the Board of Trustees will also consider
factors such as trading activity, availability of reliable price information and
other relevant information in determining whether a Rule 144A Security is
liquid. This investment practice could have the effect of increasing the level
of illiquidity in the Fund to the extent that qualified institutional buyers
become uninterested for a time in purchasing Rule 144A Securities. The Board of
Trustees will carefully monitor any investments by the Fund in Rule 144A
Securities. The Board of Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining and monitoring the liquidity of Rule
144A Securities, although the Board of Trustees will retain ultimate
responsibility for any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk and may result in substantial losses.
These securities may be less liquid than publicly traded securities, and the
Fund may take longer to liquidate these positions than would be the case for
publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized on such sales could be
less than those originally paid by the Fund. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements applicable to companies whose securities
are publicly traded. The Fund's investments in illiquid securities are subject
to the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that is deemed to be representative of
their value, the value of the Fund's net assets could be adversely affected.
Options
The Fund may write call options on a covered basis only, and will not engage in
option writing strategies for speculative purposes. A call option gives the
purchaser of such option the right to buy, and the writer, in this case the
Fund, the obligation to sell the underlying security at the exercise price
during the option period. The advantage to the Fund of writing covered calls is
that the Fund receives a premium which is additional income. However, if the
security rises in value, the Fund may not fully participate in the market
appreciation.
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<PAGE>
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 the Fund, when
obligated as a writer of an option, terminates its obligation by purchasing an
option of the same series as the option previously written.
A closing purchase transaction cannot be effected with respect to an option once
the option writer has received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. The Fund may realize a net gain or loss from
a closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security.
If a call option expires unexercised, the Fund will realize a short-term capital
gain in the amount of the premium on the option, less the commission paid. Such
a gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between the cost of the underlying security, and the
proceeds of the sale of the security plus the amount of the premium on the
option, less the commission paid.
The market value of a call option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security, and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means that the
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected,
the Fund would be required to continue to hold a security which it might
otherwise wish to sell, or deliver a security it would want to hold. Options
written by the Fund will normally have expiration dates between one and nine
months from the date written. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written.
Other Investments
The Fund is not prohibited from investing in bank obligations issued by clients
of SEI Investments Company ("SEI Investments"), the parent company of the
Administrator and the Distributor. The purchase of Fund shares by these banks
or their customers will not be a consideration in deciding which bank
obligations the Fund will purchase. The Fund will not purchase obligations
issued by the Adviser.
Pay-In-Kind Securities
Pay-In-Kind securities are debt obligations or preferred stock, that pay
interest or dividends in the form of additional debt obligations or preferred
stock.
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Parallel Pay Securities; PAC Bonds
Parallel pay CMOs and REMICs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which must be retired by its stated maturity date or final
distribution date, but may be retired earlier. Planned Amortization Class CMOs
("PAC Bonds") generally require payments of a specified amount of principal on
each payment date. PAC Bonds are always parallel pay CMOs with the required
principal payment on such securities having the highest priority after interest
has been paid to all classes.
Repurchase Agreements
Repurchase agreements are agreements by which a person (e.g., the 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 Fund for purposes of its
investment limitations. The repurchase agreements entered into by the Fund 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 Adviser monitors
compliance with this requirement). Under all repurchase agreements entered into
by the Fund, the appropriate Custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, the Fund could realize
a loss on the sale of the underlying security to the extent that the proceeds of
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 Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and required to return
the underlying security to the seller's estate.
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") or an exemption
from registration. Permitted investments for the Fund include restricted
securities, and the Fund may invest up to 15% of its net 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 the Fund's
Adviser pursuant to guidelines adopted by the Board of Trustees. Under these
guidelines, the particular Adviser 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, each Adviser intends to purchase securities that are
exempt from registration under Rule 144A under the 1933 Act.
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Securities Lending
The 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 the Fund exceed one-third of the value of the
Fund's total assets taken at fair market value. The 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,
the 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 appropriate Adviser to be of good standing and when, in the judgment of
that Adviser, the consideration which can be earned currently from such
securities loans justifies the attendant risk. Any loan may be terminated by
either party upon reasonable notice to the other party. The Fund may use the
Distributor or a broker-dealer affiliate of an Adviser as a broker in these
transactions.
Standby Commitments and Puts
The Fund may purchase securities at a price which would result in a yield to
maturity lower than that generally offered by the seller at the time of purchase
when they can simultaneously acquire the right to sell the securities back to
the seller, the issuer or a third party (the "writer") at an agreed-upon price
at any time during a stated period or on a certain date. Such a right is
generally denoted as a "standby commitment" or a "put." The purpose of engaging
in transactions involving puts is to maintain flexibility and liquidity to
permit the Fund to meet redemptions and remain as fully invested as possible in
municipal securities. The Fund reserves the right to engage in put
transactions. The right to put the securities depends on the writer's ability
to pay for the securities at the time the put is exercised. The Fund would
limit its put transactions to institutions which the Adviser believes present
minimal credit risks, and the Adviser would use its best efforts to initially
determine and continue to monitor the financial strength of the sellers of the
options by evaluating their financial statements and such other information as
is available in the marketplace. It may, however be difficult to monitor the
financial strength of the writers because adequate current financial information
may not be available. In the event that any writer is unable to honor a put for
financial reasons, the Fund would be a general creditor (i.e., on a parity with
all other unsecured creditors) of the writer. Furthermore, particular
provisions of the contract between the Fund and the writer may excuse the writer
from repurchasing the securities; for example, a change in the published rating
of the underlying securities or any similar event that has an adverse effect on
the issuer's credit or a provision in the contract that the put will not be
exercised except in certain special cases, for example, to maintain portfolio
liquidity. The Fund could, however, at any time sell the underlying portfolio
security in the open market or wait until the portfolio security matures, at
which time it should realize the full par value of the security.
The securities purchased subject to a put may be sold to third persons at any
time, even though the put is outstanding, but the put itself, unless it is an
integral part of the security as originally issued, may not be marketable or
otherwise assignable. Therefore, the put would have value only to the Fund.
Sale of the securities to third parties or lapse of time with the put
unexercised may terminate the right to put the securities. Prior to the
expiration of any put option, the Fund could seek to negotiate terms for the
extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Fund, the Fund could, of course, sell the portfolio
security. The maturity of the underlying security will generally be different
from that of the put. There will be no limit to the percentage of portfolio
securities that the Fund may purchase subject to a standby commitment or put,
but the amount paid directly or indirectly for all standby commitments or puts
which are not integral parts of the security as originally issued held in the
Fund will not exceed 1/2 of 1% of the value of the total assets of such
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<PAGE>
Fund calculated immediately after any such put is acquired.
Structured Investments
Structured Investments are derivatives in the form of a unit or units
representing an undivided interest(s) in assets held in a trust that is not an
investment company as defined in the Investment Company Act of 1940. A trust
unit pays a return based on the total return of securities and other investments
held by the trust and the trust may enter into one or more swaps to achieve its
objective. For example, a trust may purchase a basket of securities and agree
to exchange the return generated by those securities for the return generated by
another basket or index of securities. The Fund will purchase structured
investments in trusts that engage in such swaps only where the counterparties
are approved by the Adviser in accordance with credit-risk guidelines
established by the Board of Trustees.
Structured Notes
Notes are derivatives where the amount of principal repayment and or interest
payments is based upon the movement of one or more factors. These factors
include, but are not limited to, currency exchange rates, interest rates (such
as the prime lending rate and LIBOR) and stock indices such as the S&P 500
Index. In some cases, the impact of the movements of these factors may increase
or decrease through the use of multipliers or deflators. The use of structured
notes allows the Fund to tailor its investments to the specific risks and
returns the Adviser wishes to accept while avoiding or reducing certain other
risks.
Swaps, Caps, Floors, Collars
Swaps, caps, floors and collars are hedging tools designed to permit the
purchaser to preserve a return or spread on a particular investment or portion
of its portfolio. They are also used 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." This is done 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. This is 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. Meanwhile, 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 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.
Trade Claims
The Fund may invest in trade claims. Trade claims are interest in amounts owed
to suppliers of goods or services and are purchased from creditors of companies
in financial difficulty. For purchasers such as the Fund, trade claims offer
the potential for profits since they are often purchased at a significant
discount from face value and
B-17
<PAGE>
consequently, may generate capital appreciation in the event that the market
value of the claim increases as the debtor's financial position improves or the
claim is paid.
An investment in trade claims is speculative and carries a high degree of risk.
Trade claims are illiquid securities which generally do not pay interest and
there can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. The markets in trade claims are not regulated by
federal securities laws or the SEC. Because trade claims are unsecured, holders
of trade claims may have a lower priority in terms of payment than certain other
creditors in a bankruptcy proceeding.
Variable and Floating Rate Securities
Variable and floating rate instruments involve certain obligations that may
carry variable or floating rates of interest, and may involve a conditional or
unconditional demand feature. Such instruments bear interest at rates which are
not fixed, but which vary with changes in specified market rates or indices.
The interest rates on these securities may be reset daily, weekly, quarterly, or
some other reset period, and may have a set 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.
Variable Rate Master Demand Notes
Variable rate master demand notes permit the investment of fluctuating amounts
at varying market rates of interest pursuant to direct arrangements between the
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 appropriate Adviser, be equivalent to the
ratings applicable to permitted investments for the particular Fund. The
appropriate 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. Variable rate master demand notes may or may not be backed
by bank letters of credit.
Venture Capital
The Fund may invest in venture capital limited partnerships and venture capital
funds that, in turn, invest principally in securities of early stage, developing
companies. Investments in venture capital limited partnerships and venture
capital funds present a number of risks not found in investing in established
enterprises including the facts that such a partnership's or fund's portfolio
will be composed almost entirely of early-stage companies that may lack depth of
management and sufficient resources, that may be marketing a new product for
which there is no established market, and that may be subject to intense
competition from larger companies. Any investment in a venture capital limited
partnership or venture capital fund will lack liquidity, will be difficult to
value, and the Fund will not be entitled to participate in the management of the
partnership or fund. If for any reason the services of the general partners of
a venture capital limited partnership were to become unavailable, such limited
partnership could be adversely affected.
In addition to investing in venture capital limited partnerships and venture
capital funds, the Fund may directly invest in early-stage, developing
companies. The risks associated with investing in these securities are
substantially similar to the risks set forth above. The Fund will typically
purchase equity securities in these early-stage, developing companies; however
from time to time, the Fund may purchase non-investment grade
B-18
<PAGE>
debt securities in the form of convertible notes.
Such investments involve costs at the venture capital level which are in
addition to those of the Fund.
Warrants
Warrants give holders the right, but not the obligation, to buy shares of a
company at a given price, usually higher than the market price, during a
specified period.
When-Issued Securities and Municipal Forwards
When-issued securities are securities that are delivered and paid for normally
within 45 days after the date of commitment to purchase.
Although the Fund will only make commitments to purchase when-issued securities
with the intention of actually acquiring the securities, the Fund may sell them
before the settlement date. When-issued securities are subject to market
fluctuation, and accrue no interest to the purchaser during this pre-settlement
period. The payment obligation and the interest rate that will be received on
the securities are each fixed at the time the purchaser enters into the
commitment. Purchasing when-issued securities entails leveraging and can
involve a risk that the yields available in the market when the delivery takes
place may actually be higher than those obtained in the transaction itself. In
that case, there could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the appropriate custodian, and the
Fund will maintain high quality, liquid assets in an amount at least equal in
value to its commitments to purchase when-issued securities. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
Zero Coupon Obligations
Zero coupon obligations are debt obligations that do not bear any interest, but
instead are issued at a deep discount from face value or par. The value of a
zero coupon obligation increases over time to reflect the interest accumulated.
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
face value or par and pay interest periodically.
Investors will receive written notification at least thirty days prior to any
change in the Fund's investment objective. The phrase "principally invests" as
used in the prospectus means that the Fund invests at least 65% of its assets in
the securities as described in the sentence. Each tax-exempt fund invests at
least 80% of its total assets in securities with income exempt from federal
income and alternative minimum taxes.
INVESTMENT LIMITATIONS
The following are fundamental policies of the Fund and cannot be changed with
respect to the Fund without the consent of the holders of a majority of that
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.
The Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer.
B-19
<PAGE>
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 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 Prospectuses 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 Fund may purchase mortgage-backed
and other mortgage-related securities, including collateralized mortgage
obligations and REMICs). However, subject to their permitted investment
spectrum, the Fund 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 except for money market
funds and CMOs and REMICs deemed to be investment companies and then only
as 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 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.
11. Purchase securities of any issuer (except securities issued or guaranteed
by the United States, its agencies
B-20
<PAGE>
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
as permitted by applicable law.
12. 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
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 to 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.
13. Purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments either issued by companies
that invest in real estate, backed by real estate or securities of
companies engaged in the real estate business).
14. Purchase or sell physical commodities, unless acquired as a result of
ownership of securities or other instruments.
Non-Fundamental Policies
The Fund may not purchase or hold illiquid securities (i.e., securities that
cannot be disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in more
than seven days) if, in the aggregate, more than 15% of its net assets would be
invested in illiquid securities.
The Fund does not currently intend to purchase securities on margin, except that
the Fund may obtain such short-term credits as are necessary for the clearance
of transactions.
The Fund does not currently intend to sell securities short.
The Fund does not currently intend to purchase or sell futures contracts or put
or call options.
The Fund may not invest in shares of unaffiliated money market funds, except as
permitted by the SEC.
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 ADVISER
The Trust and Trusco Capital Management, Inc. (the "Adviser") have entered into
an advisory agreement (the "Advisory Agreement"). The Adviser is an indirect
wholly-owned subsidiary of SunTrust Banks, Inc. ("SunTrust"). SunTrust is a
southeastern regional bank holding company with assets of $90.7 billion as of
July 1, 1999. The Advisory Agreement provides that the Adviser shall not be
protected against any liability to the
B-21
<PAGE>
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 Fund (including amounts payable to the Adviser but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by certain states, the Adviser and/or the
Administrator will bear the amount of such excess. The Adviser will not be
required to bear expenses of the Trust to an extent which would result in the
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 the Fund, by a majority of the outstanding shares of the Fund, on not
less than 30 days' nor more than 60 days' written notice to the Adviser, or by
the Adviser on 90 days' written notice to the Trust.
The Adviser has agreed to waive its fees or reimburse expenses in order to limit
Fund expenses.
For the periods prior to March 28, 2000, SunTrust Equitable Securities ("STES")
served as the Adviser to the predecessor of the High Income Fund.
For the fiscal years ended March 31, 1999, March 31, 1998 and March 31, 1997,
the Fund paid the following advisory fees:
- ------------------------------------------------------------------------------
Fees Paid Fees Waived or Reimbursed
1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------
$120,275 $285,164 $380,147 $53,473 $0 $0
- ------------------------------------------------------------------------------
Banking Laws
Current interpretations of federal banking laws and regulations:
. prohibit SunTrust and the Adviser from sponsoring, organizing, controlling,
or distributing the Fund's shares; but
. do not prohibit SunTrust or the Adviser generally from acting as an
investment adviser, transfer agent, or custodian to the Fund or from
purchasing Fund shares as agent for and upon the order of a customer.
The Adviser believes that they may perform advisory and related services for the
Trust without violating applicable banking laws or regulations. However, the
legal requirements and interpretations about the permissible activities of banks
and their affiliates may change in the future. These changes could prevent the
Adviser from continuing to perform services for the Trust. If this happens, the
Board of Trustees would consider selecting other qualified firms. Shareholders
would approve any new investment advisory agreements would be subject to
Shareholder approval.
If current restrictions on bank activities with mutual funds were relaxed, the
Adviser, or its affiliates, would
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<PAGE>
consider performing additional services for the Trust. We cannot predict whether
these changes will be enacted. We also cannot predict the terms that the
Adviser, or its affiliates, might offer to provide additional services.
THE ADMINISTRATOR
The Trust and SEI Investments Mutual Funds Services (the "Administrator") are
parties to the Administration 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
ninety days' written notice to the other party.
The Administrator, a Delaware business trust, has its principal business offices
at Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a
wholly-owned subsidiary of SEI Investments, is the owner of all beneficial
interest in the Administrator. SEI Investments and its subsidiaries and
affiliates, including the Administrator, are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information
services to financial institutions, institutional investors, and money managers.
The Administrator and its affiliates also serve as administrator or sub-
administrator to the following other mutual funds: The Achievement Funds Trust,
The Advisors' Inner Circle Fund, Alpha Select Funds, Amerindo Funds, Inc., The
Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784 Funds(R),
CNI Charter Funds, CUFUND, The Expedition Funds, First American Funds, Inc.,
First American Investment Funds, Inc., First American Strategy Funds, Inc.,
Friends Ivory Funds, HighMark Funds, Huntington Funds, Huntington VA Fund, The
Nevis Fund, Inc., Oak Associates Funds, The Parkstone Advantage Fund, The
Parkstone Group of Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund,
Inc., The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI
Index Funds, SEI Institutional International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, STI Classic Variable Trust, TIP Funds, UAM Funds Trust, UAM
Funds, Inc. II and UAM Funds, Inc.
For its administrative services, the Administrator is entitled to a fee, which
is calculated daily and paid monthly, at an annual rate of: .12% of the first
$1 billion of average aggregate net assets, .09% on the next $4 billion of
average aggregate net assets, .07% of the next $3 billion of average aggregate
net assets, .065% of the next $2 billion of average aggregate net assets, and
.06% thereafter.
Prior to March 28, 2000, the predecessor of the Fund was subject to a separate
Administration Agreement between the ESC Strategic Funds, Inc. ("ESC Strategic
Funds") and the BISYS Fund Services Limited Partnership (the "Predecessor
Administration Agreement"). Under the Predecessor Agreement, BISYS Fund
Services Limited Partnership ("BISYS") was entitled to a fee, calculated daily
and paid monthly, at an annual rate of 0.15% of average daily net assets of the
Fund.
BISYS provided administrative services necessary for the operation of the Fund,
including among other things: (i) preparation of shareholder reports and
communications; (ii) regulatory compliance, such as reports to and filings with
the SEC and state securities commissions; and (iii) general supervision of the
operation of the Fund, including coordination of the services performed by the
Adviser, the Distributor, transfer agent, custodians, independent accountants,
legal counsel and others. In addition, BISYS furnished office space and
facilities required for the conducting the business of the Fund and paid the
compensation of the Fund's officers, employees and Trustees affiliated with
BISYS. For these services, BISYS received from the Fund a fee, payable monthly,
at the annual rate of 0.15% of the Fund's average daily net assets.
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<PAGE>
For the fiscal years ended March 31, 1999, 1998, and 1997, BISYS was compensated
for its services under the Predecessor Administration Agreement as follows:
- -------------------------------------------------
Fees Paid
1999 1998 1997*
- -------------------------------------------------
$25,100 $42,775 $13,550
- -------------------------------------------------
* For a portion of the fiscal year ended March 31, 1997, Furman Selz LLC served
as administrator for the predecessor of the Fund and received $43,472 as
compensation for its services during that period.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Investments, and the Trust have entered into a distribution agreement
(the "Distribution Agreement") dated May 29, 1992. Under the Distribution
Agreement, the Distributor must use all reasonable efforts, consistent with its
other business, in connection with the continuous offering of Shares of the
Trust. The Distributor will receive no compensation for distribution of Trust
Shares. In addition, the Flex Shares of the Fund has a distribution and service
plan (the "Flex Plan").
The Distribution Agreement is renewable annually and may be terminated by the
Distributor, the disinterested Trustees, or by a majority vote of the
outstanding securities of the Trust upon not more than 60 days' written notice
by either party.
Flex Shares Distribution Plans
The Distribution Agreement and the Flex Plan adopted by the Trust provide that
the Flex Shares of the Fund will pay the Distributor a fee of up to .75% of the
average daily net assets of the 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 Flex
Shares Shareholders or their customers who beneficially own 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 the 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
B-24
<PAGE>
shareholder services, the Trust may be required to alter materially or
discontinue its arrangements with such financial institutions.
The Trust has adopted the Flex Plan 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 Flex Plan must be approved
annually by a majority of the Trustees of the Trust and by a majority of the
disinterested Trustees. The Flex Plan require that quarterly written reports of
amounts spent under the Flex Plan, respectively, and the purposes of such
expenditures be furnished to and reviewed by the Trustees. 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 disinterested
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.
For periods prior to March 28, 2000, the predecessor of the Fund offered two
classes of shares: Class A and Class D. Each of those classes had adopted a
service and distribution plan.
For the fiscal years ended March 31, 1999, 1998, and 1997, the predecessor
distributors received the following amounts in accordance with each respective
plan:
Service and Distribution Fees
- ---------------------------------------------
Class 1999 1998 1997
----- ---- ---- ----
- ---------------------------------------------
Class A 40,024 69,082 42,069
- ---------------------------------------------
Class D 5,428 6,626 10,963
- ---------------------------------------------
THE TRANSFER AGENT
Federated Services Company, 1001 Liberty Avenue, Federated Investors Tower,
Pittsburgh, PA 15222-3779 serves as the Trust's transfer agent.
THE CUSTODIAN
SunTrust Bank, Atlanta, 303 Peachtree Street N.E., 14th Floor, Atlanta, GA 30308
serves as the custodian for the Fund.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP serves as independent public accountants for the Trust.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP serves as legal counsel to the Trust.
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<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and Executive Officers of the Trust, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during that
period. Unless otherwise noted, the business address of each Trustee and each
Executive Officer is SEI Investments Company, Oaks, Pennsylvania 19456. Certain
officers of the Trust also serve as officers of some or all of the following:
The Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select
Funds, The Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784
Funds(R), CNI Charter Funds, CUFUND, The Expedition Funds, First American Funds,
Inc., First American Investment Funds, Inc., First American Strategy Funds,
Inc., Friends Ivory Funds, HighMark Funds, Huntington Funds, Huntington VA Fund,
The Nevis Fund, Inc., Oak Associates Funds, The Parkstone Advantage Fund, The
Parkstone Group of Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund,
Inc., The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI
Index Funds, SEI Institutional International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, STI Classic Variable Trust, and TIP Funds, each of which is an
open-end management investment company managed by SEI Investments Mutual Funds
Services or its affiliates and distributed by SEI Investments Distribution Co.
DANIEL S. GOODRUM (7/11/26) - Trustee* - 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* - 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* - 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 - Retired. President, Orange County
Publishing Co., Inc., 1981-1997, publisher of the Paoli News and the Paoli
Republican and Editor of the Paoli Republican, 1981-1997, President, H & W
Distribution, Inc., 1984-1997. 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 - 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 - Director, Stavros Center for
Economic Education, Florida State University, 1991-present. 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.
JONATHAN T. WALTON (3/28/30) - Trustee - Retired. Executive Vice President, NBD
Bank, N.A. and NBD Bancorp, October 1956 to March 1995. Trustee, W.K. Kellogg
Trust.
B-26
<PAGE>
WILLIAM H. CAMMACK (11/24/29) - Trustee* - Chairman & Director, SunTrust
Equitable Securities Corporation, January, 1998-present. Chairman and CEO,
Equitable Asset Management, Inc., December 1993-present. Chairman & CEO,
Equitable Trust Company, June 1991-present. Chairman, Equitable Securities
Corporation, July 1972 - January 1998.
MARK NAGLE (10/20/59) - President, Controller, Treasurer and Chief Financial
Officer - President of the Administrator and Senior Vice President of SEI
Investments Mutual Funds Services Operations Group since 1998. Vice President
of the Administrator and Vice President of Fund Accounting and Administration of
SEI Investments Mutual Funds Services, 1996-1998. Vice President of the
Distributor since December 1997. Senior Vice President, Fund Administration,
BISYS Fund Services, September 1995-November 1996. Senior Vice President and
Site Manager, Fidelity Investments 1981- September 1995.
JAMES R. FOGGO (DOB 02/14/66) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI Investments since 1998. Vice President
and Assistant Secretary of the Administrator and the Distributor since May 1999.
Associate, Paul Weiss, Rifkind, Wharton & Garrison (law firm), 1998. Associate,
Baker & McKenzie (law firm), 1995-1998. Associate, Battle Fowler L.L.P. (law
firm), 1993-1995.
LYDIA A. GAVALIS (6/5/64) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of the Administrator and the Distributor since
1998. Assistant General Counsel and Director of Arbitration, Philadelphia Stock
Exchange, 1989-1998.
EDWARD T. SEARLE (4/03/54) - Vice President and Assistant Secretary of the
Administrator and Distributor since August 1999. Associate, Drinker Biddle &
Reath LLP (law firm), June 1998 to August 1999. Associate, Ballard Spahr Andrews
& Ingersoll LLP (law firm), September 1995 to June 1998.
TIMOTHY D. BARTO (3/28/68) - Vice President and Assistant Secretary --Employed
by SEI Investments since October 1999. Vice President and Assistant Secretary of
the Administrator and Distributor since December 1999. Associate at Dechert
Price & Rhoads (1997-1999). Associate, at Richter, Miller & Finn (1994-1997).
LYNDA J. STRIEGEL (10/30/48) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of the Administrator and the Distributor since
1998. Senior Asset Management Counsel, Barnett Banks, Inc., 1997-1998.
Partner, Groom and Nordberg, Chartered, 1996-1997. Associate General Counsel,
Riggs Bank, N.A., 1991-1995.
KEVIN P. ROBINS (4/15/61) - Vice President, Assistant Secretary - Senior Vice
President & General Counsel of SEI Investments, the Administrator and the
Distributor since 1994. Vice President of SEI, the Administrator and the
Distributor, 1992-1994.
RICHARD W. GRANT (10/25/45) - Secretary - 1701 Market Street, Philadelphia,
Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel
to the Trust, Administrator and Distributor, since 1989.
JOHN H. GRADY, JR. (6/1/61) - Assistant Secretary -1701 Market Street,
Philadelphia, Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law
firm), counsel to the Trust, Administrator and Distributor, since 1993.
_______________
* Messrs. Looney, Goodrum, McNair, and Cammack may be deemed to be
"interested persons" 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.
B-27
<PAGE>
For the fiscal year end May 31, 1999, the Trust paid the following amounts to
Trustees and Officers of the Trust:
<TABLE>
<CAPTION>
==========================================================================================================
Pension or Estimated
Retirement Annual Total Compensation
Aggregate Benefits Accrued Benefits from Fund and Fund
Compensation as Part of Fund Upon Complex Paid to
Name of Person, Position From Fund Expenses Retirement Trustees
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel S. Goodrum, Trustee $16,000 N/A N/A $18,000 for service on
two boards
- -----------------------------------------------------------------------------------------------------------
Wilton Looney, Trustee $18,000 N/A N/A $18,000 for service on
two boards
- -----------------------------------------------------------------------------------------------------------
Champney A. McNair, $16,000 N/A N/A $18,000 for service on
Trustee two boards
- -----------------------------------------------------------------------------------------------------------
F. Wendell Gooch, Trustee $16,000 N/A N/A $18,000 for service on
two boards
- -----------------------------------------------------------------------------------------------------------
T. Gordy Germany, $16,000 N/A N/A $18,000 for service on
Trustee two boards
- -----------------------------------------------------------------------------------------------------------
Dr. Bernard F. Sliger, $16,000 N/A N/A $18,000 for service on
Trustee two boards
- -----------------------------------------------------------------------------------------------------------
Jonathan T. Walton, Trustee $11,500 N/A N/A $13,000 for service on
two boards
- -----------------------------------------------------------------------------------------------------------
William H. Cammack, N/A N/A N/A $ 0 for service on
Trustee* two boards
===========================================================================================================
</TABLE>
* Messr. Cammack is an "interested person" of the Trust as defined in the
Investment Company Act of 1940.
The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act of 1940. In addition, the Investment
Adviser and Distributor have adopted Codes of Ethics pursuant to Rule 17j-1.
These Codes of Ethics apply to the personal investing activities of trustees,
officers and certain employees ("access persons"). Rule 17j-1 and the Codes
are designed to prevent unlawful practices in connection with the purchase or
sale of securities by access persons. Under each Code of Ethics, access persons
are permitted to engage in personal securities transactions, but are required to
report their personal securities transactions for monitoring purposes. In
addition, certain access persons are required to obtain approval before
investing in initial public offerings or private placements. Copies of these
Codes of Ethics are on file with the Securities and Exchange Commission, and are
available to the public.
PERFORMANCE INFORMATION
From time to time the Fund may advertise its performance. Performance figures
are based on historical earnings and are not intended to indicate future
performance.
Performance Comparisons
The 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. These comparisons may assume reinvestment of dividends
but generally do not reflect deductions for administrative and management costs.
COMPUTATION OF YIELD
Thirty-Day Yield
The High Income Fund 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
B-28
<PAGE>
the period (net of reimbursement); c = the average daily number of shares
outstanding during the period that were entitled to receive dividends; and d =
the maximum offering price per share on the last day of the period.
CALCULATION OF TOTAL RETURN
From time to time, the High Income Fund 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 Adviser 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. and Trusco
Capital Management, have been in the top 1% of the SEI Funds Evaluation database
for equity managers over the past ten years. SEI Investment's database includes
research data on over 1,000 investment managers responsible for over $450
billion in assets.
Based on the foregoing, the average annual total returns for the Fund from
inception through March 1999 and for the one year period ended March 31, 1999
were as follows:
<TABLE>
<CAPTION>
==============================================================
Class 1 year Since Inception
----- ------ ---------------
- --------------------------------------------------------------
<S> <C> <C>
Class A 5.64% 5.26*
- --------------------------------------------------------------
Class D 5.23% 5.40*
==============================================================
</TABLE>
* Since May 4, 1994.
PURCHASING 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: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
REDEEMING SHARES
A Shareholder will at all times be entitled to aggregate cash redemptions from
all Funds of the Trust during any 90-day period of up to the lesser of $250,000
or 1% of the Trust's net assets.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the 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
disposal or valuation of the Fund's securities is not reasonably practicable, or
for such other periods as the Securities and Exchange Commission has by order
permitted. The Trust also reserves the right to suspend sales of shares of the
Fund for any period during which the NYSE, an Adviser, the Administrator and/or,
the Custodian are not open for business.
B-29
<PAGE>
A number of Fund shareholders are institutions with significant share holdings
that may be redeemed at any time. If a substantial number or amount of
redemptions should occur within a relatively short period of time, the Fund may
have to sell portfolio securities it would otherwise hold and incur the
additional transaction costs. The sale of portfolio securities may result in
the recognition of capital gains, which will be distributed annually and
generally will be taxable to shareholders as ordinary income or capital gains.
Shareholders are notified annually regarding the federal tax status of
distributions they receive (see "Taxes").
DETERMINATION OF NET ASSET VALUE
The securities of the High Income Fund 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.
Although the methodology and procedures are identical, the net asset value per
share of Flex Shares of the Fund may differ because of variations in the
distribution and service fees and transfer agent fees charged to Investor
Shares.
TAXES
The following is a summary of certain Federal income tax considerations
generally affecting the Fund and its shareholders that are not described in the
Fund's prospectus. No attempt is made to present a detailed explanation of the
Federal tax treatment of the Fund or its Shareholders, and the discussion here
and in the Fund's prospectus is not intended as a substitute for careful tax
planning.
This discussion of Federal income tax consequences is based on the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations issued
thereunder, in effect on the date of this Statement of Additional Information.
New legislation, as well as administrative changes or court decisions, may
change the conclusions expressed herein, and may have a retroactive effect with
respect to the transactions contemplated herein.
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"), the Fund must
distribute annually to its Shareholders at least the sum of 90% of its net
investment 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
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of stock or securities, or certain other income; (ii) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RIC's and other securities, with such other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's assets and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (iii) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its assets may be invested in securities (other than U.S. Government
securities or the securities of other RIC's) of any one issuer, or of two or
more issuers engaged in same or similar businesses if the Fund owns at least 20%
of the voting power of such issuers.
B-30
<PAGE>
In addition, the Fund will 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. The Fund intends to make sufficient distributions prior to the end of
each calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Any gain or loss recognized on a sale or redemption of shares of the Fund by a
Shareholder who is not a dealer in securities will generally be treated as long-
term capital gain or loss if the shares have been held for more than eighteen
months, and short-term if for a year or less. If shares held for six months or
less are sold or redeemed for a loss, two special rules apply: First, 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 long-term capital loss to the extent of the long-
term capital gain distributions.
The Fund will make annual reports to Shareholders of the Federal income tax
status of all distributions.
Foreign Taxes
Dividends and interests received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on the Fund's stock or 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.
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 Adviser 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 Adviser 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 Fund invests are traded primarily in
the over-the-counter market. Bonds and debentures are usually traded over-the-
counter, but may be traded on an exchange. Where possible, the Adviser will
deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Trust will primarily consist of dealer spreads
and underwriting commissions.
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
B-31
<PAGE>
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 Adviser, brokerage business to
brokers or dealers who provide brokerage and research services. These research
services include advice, either directly or through publications or writings, as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities; furnishing of analyses and reports concerning issuers, securities
or industries; providing information on economic factors and trends, assisting
in determining portfolio strategy, providing computer software used in security
analyses, and providing portfolio performance evaluation and technical market
analyses. Such services are used by the Adviser in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used exclusively with respect to the fund
or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher
commissions may be paid to broker-dealers who provide brokerage and research
services than to broker-dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to broker-
dealers who provide such brokerage and research services, the Trust believes
that the commissions paid to such broker-dealers are not, in general, higher
than commissions that would be paid to broker-dealers not providing such
services and that such commissions are reasonable in relation to the value of
the brokerage and research services provided. In addition, portfolio
transactions which generate commissions or their equivalent are directed to
broker-dealers who provide daily portfolio pricing services to the Trust.
Subject to best price and execution, commissions used for pricing may or may not
be generated by the funds receiving the pricing service.
The Adviser may place a combined order for two or more accounts or funds engaged
in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in
a manner deemed equitable to each account or fund. It is believed that the
ability of the accounts to participate in volume transactions will generally be
beneficial to the accounts and funds. Although it is recognized that, in some
cases, the joint execution of orders could adversely affect the price or volume
of the security that a particular account or Fund may obtain, it is the opinion
of the Adviser and the Trust's Board of Trustees that the advantages of combined
orders outweigh the possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Fund, at the
request of the Distributor, gives 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 Adviser, 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 Adviser 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 Adviser 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 renumeration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a
B-32
<PAGE>
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 adopted procedures for evaluating the reasonableness of commissions
paid to the Distributor, and will review these procedures periodically.
Brokerage commissions paid by the Fund to Equitable Securities Corporation for
the fiscal years ended March 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
=====================================================
1999 1998 1997
- -----------------------------------------------------
<S> <C> <C>
$ 0 $ 309 $ 0
=====================================================
</TABLE>
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares and classes of shares of the Fund each of which represents an equal
proportionate interest in that 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 advisers, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with the Trust
unless it is determined in the manner provided in the Declaration of Trust that
they have not acted in good faith in the reasonable belief that their actions
were in the best interests of the Trust. However, nothing in the Declaration of
Trust shall protect or indemnify a Trustee against any liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
B-33
<PAGE>
YEAR 2000
The Trust depends on the smooth functioning of computer systems in almost every
aspect of its business. Like other mutual funds, businesses and individuals
around the world, the Trust could be adversely affected if the computer systems
used by its mission critical service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Trust has asked its service providers whether they expect to have
their computer systems adjusted for the year 2000 transition, and has sought and
received assurances from each from each that its system is expected to
accommodate the year 2000 without material adverse consequences to the Trust.
While such assurances have been received, the Trust and its shareholders may
experience losses if these assurances prove to be incorrect or as a result of
year 2000 computer difficulties experienced by issuers of portfolio securities
or third parties, such as custodians, banks, broker-dealers or others with which
the Trust does business.
As of March 9, 2000, the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25%
or more of the shares of the Fund. Persons who owned of record or beneficially
more than 25% of a Fund's outstanding shares may be deemed to control the
Fund within the meaning of the Act.
<TABLE>
<CAPTION>
Account Number Name and Address Share Balance %
- -------------- ---------------- ------------- ---
<S> <C> <C> <C>
000000106308 HOUVIS CO 14,385.017 5.57%
C O FIRST AMERICAN BANK
300 UNION STREET
NASHVILLE, TN 37237-
004094000008 DB ALEX BROWN LLC 15,022.449 5.82%
FBO 495-17167-13
PO BOX 1346
BALTIMORE, MD 21203-
004094000010 HOMESURE OF AMERICA INC 154,112.990 59.68%
PO BOX 551510
FT LAUDERDALE, FL 33355-1510
004094000035 DB ALEX BROWN LLC 16,599.186 6.43%
FBO 495-22883-16
PO BOX 1346
BALTIMORE, MD 21203-
000000044141 DB ALEX BROWN LLC 3,366.081 7.69%
FBO 495-17376-10
PO BOX 1346
BALTIMORE, MD 21203-
000000066744 DB ALEX BROWN LLC 10,332.350 23.60%
FBO 495-25434-13
PO BOX 1346
BALTIMORE, MD 21203-
000000121828 PAINEWEBBER FOR THE 2,577.952 5.89%
BENEFIT OF
MARY E MOORE
935 DAVIS DRIVE NW
ATLANTA, GA 30327-4533
004084000010 DB ALEX BROWN LLC 3,081.729 7.04%
FBO 495-17506-13
PO BOX 1346
BALTIMORE, MD 21203-
004084000011 DB ALEX BROWN LLC 3,808.677 8.70%
FBO 495-17667-18
PO BOX 1346
BALTIMORE, MD 21203-
004084000017 DB ALEX BROWN LLC 7,158.801 16.35%
FBO 495-18067-12
PO BOX 1346
BALTIMORE, MD 21203-
004084000020 DB ALEX BROWN LLC 3,654.407 8.35%
FBO 495-07153-10
PO BOX 1346
BALTIMORE, MD 21203-
</TABLE>
B-34
<PAGE>
EXPERTS
The financial statements as of March 31, 1999 have been audited by
PricewaterhouseCoopers LLP, Independent Public Accountants, as indicated in
their report dated May 14, 1999 with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving
said report.
APPENDIX A: FINANCIAL STATEMENTS
B-35
<PAGE>
APPENDIX A - FINANCIAL STATEMENTS
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments -- March 31, 1999
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
CORPORATE OBLIGATIONS -- 83.7%
BEVERAGES -- 1.7%
B1/B+ Canandaigua Brands,
Inc., 8.50%,
3/1/2009.......... $132,000 $ 134,640
-----------
CABLE -- 2.8%
B1/B+ Adelphia
Communications,
9.88%, 3/1/2007... 200,000 218,000
-----------
CONSUMER GOODS & SERVICES -- 2.5%
Ba3/B+ Finlay Fine Jewelry
Corp., 8.38%,
5/1/2008.......... 200,000 196,000
-----------
ENTERTAINMENT -- 3.7%
B2/B President Casinos,
Inc., 13.00%,
9/15/2001,
Callable 9/15/1999
@ 102............. 220,000 193,600
B3/B Regal Cinemas, Inc.,
9.50%, 6/1/2008,
Callable 6/1/2003
@ 104.75.......... 93,000 95,093
-----------
288,693
-----------
FOOD PRODUCTS -- 7.6%
B1/B+ Chiquita Brands,
9.63%,
1/15/2004......... 250,000 257,812
B3/B+ Fleming Co., 10.68%,
7/31/2007,
Callable 7/31/2002
@ 105.31.......... 200,000 184,500
B3/B Packaged Ice, Inc.,
9.75%, 2/1/2005,
Callable 2/1/2002
@ 104.875......... 148,000 148,000
-----------
590,312
-----------
GAMING -- 2.6%
B2/B Hollywood Park,
Inc., 9.50%,
8/1/2007.......... 200,000 205,000
-----------
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
GENERAL INDUSTRIES &
MANUFACTURING -- 9.9%
B3/B Envirosource, Inc.,
9.75%,
6/15/2003......... $260,000 $ 208,000
B3/B- International Wire
Group, 11.75%,
6/1/2005.......... 250,000 264,375
B1/B+ Nortek, Inc., 9.13%,
9/1/2007, Callable
9/1/2002
@ 104.56.......... 290,000 300,874
-----------
773,249
-----------
HEALTH CARE -- 2.4%
B1/B+ NBTY, Inc., 8.63%,
9/15/2007,
Callable 9/15/2002
@ 104.313......... 200,000 187,000
-----------
INDUSTRIAL GOODS & SERVICES -- 2.1%
Nr/Nr Premiere
Technologies,
5.75%, 7/1/2004... 250,000 164,375
-----------
MANUFACTURING -- CONSUMER
GOODS -- 3.8%
B2/B Applied Extrusion
Tech., 11.50%,
4/1/2002.......... 200,000 204,000
B2/B Polymer Group, Inc.,
9.00%, 7/1/2007... 91,000 92,138
-----------
296,138
-----------
MEDIA -- CABLE -- 7.0%
B1/B Helicon Group, Inc.,
11.00%,
11/1/2003......... 250,000 263,438
B2/B Intermedia Capital
Partners, 11.25%,
8/1/2006.......... 250,000 281,250
-----------
544,688
-----------
See accompanying notes to financial statements.
1
<PAGE>
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments (continued) -- March 31, 1999
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
CORPORATE OBLIGATIONS (CONTINUED)
MEDIA -- NON CABLE -- 5.3%
B3/B- Allbritton
Communications,
9.75%,
11/30/2007........ $185,000 $ 196,794
B3/B- Gray Communications
Systems, 10.63%,
10/1/2006,
Callable 10/1/2001
@ 105.31.......... 200,000 212,000
-----------
408,794
-----------
OIL & GAS -- 5.0%
B1/BB- Cliffs Drilling Co.,
10.25%,
5/15/2003......... 200,000 192,000
B2/B- Plains Resources,
Inc., 10.25%,
3/15/2006......... 200,000 198,000
-----------
390,000
-----------
PAPER PRODUCTS -- 2.5%
B2/B- Repap New Brunswick,
9.00%, 6/1/2004,
Callable 6/1/2002
@ 104.5........... 200,000 193,500
-----------
RETAIL -- 2.7%
B3/B- Tropical Sportswear
International,
11.00%,
6/15/2008......... 200,000 209,500
-----------
STEEL/IRON -- 2.5%
B2/B Weirton Steel Corp.,
11.38%, 7/1/2004,
Callable 7/1/2002
@ 105.69.......... 200,000 192,000
-----------
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
TELECOMMUNICATIONS -- 9.3%
B2/B Paging Network,
10.00%,
10/15/2008,
Callable
10/15/2001 @ 105.. $200,000 $ 170,000
Nr/Nr Pathnet, Inc.,
12.25%, 4/15/2008,
Callable 4/15/2003
@ 106.125......... 250,000 135,000
B3/B- Rural Cellular
Corp., 9.63%,
5/15/2008,
Callable 5/15/2003
@ 104.813......... 200,000 208,500
B3/B- USA Mobile
Communication,
9.50%, 2/1/2004,
Callable 2/1/1999
@ 104.75.......... 250,000 209,999
-----------
723,499
-----------
TEXTILES -- 6.0%
B3/B Hartmarx Corp.,
10.88%,
1/15/2002......... 250,000 257,500
B2/B+ Pillowtex Corp.,
10.00%,
11/15/2006........ 200,000 209,500
-----------
467,000
-----------
TRANSPORTATION -- 4.3%
Ba3/BBB Greyhound Lines,
11.50%,
4/15/2007......... 290,000 333,500
-----------
TOTAL CORPORATE
OBLIGATIONS....... 6,515,888
-----------
PREFERRED STOCKS -- 2.7%
PUBLISHING & PRINTING -- 2.7%
B2/B Primedia Corp.,..... 200,000 208,000
-----------
TOTAL PREFERRED
STOCKS............ 208,000
-----------
See accompanying notes to financial statements.
2
<PAGE>
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments (continued) -- March 31, 1999
PRINCIPAL
AMOUNT/ MARKET
SHARES VALUE
--------- ------
COMMON STOCKS -- 0.0%
OIL & GAS TRANSMISSION -- 0.0%
Star Gas Partner,
L.P. ............. 107 $ 856
-----------
TOTAL COMMON
STOCKS............ 856
-----------
RIGHTS & WARRANTS -- 0.0%
WARRANT -- 0.0%
Pathnet Warrants.... 250 3
-----------
TOTAL RIGHTS &
WARRANTS.......... 3
-----------
SHORT-TERM INVESTMENTS -- 12.1%
CASH SWEEP ACCOUNT -- 12.1%
Union Bank of
California........ $940,355 940,355
-----------
TOTAL SHORT-TERM
INVESTMENTS....... 940,355
-----------
TOTAL INVESTMENTS -- 98.5%
(COST $7,666,404)(1)........... 7,665,102
OTHER ASSETS AND LIABILITIES
(NET) -- 1.5%................ 113,344
-----------
NET ASSETS -- 100.0%.......... $ 7,778,446
===========
Percentages indicated are based on net assets of $7,778,446.
(1) Cost for book and federal income tax purposes were substantially the same as
of March 31, 1999. Gross unrealized appreciation and depreciation on
investment securities, based on cost for Federal income tax purposes is as
follows:
Unrealized appreciation................. $ 145,712
Unrealized depreciation................. (147,014)
---------
Net unrealized depreciation............. $ (1,302)
=========
# See page 17 for Credit Ratings.
See accompanying notes to financial statements.
3
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Assets and Liabilities
March 31, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II
FUND FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C>
ASSETS
Investments, at value (cost $7,666,404;
$7,791,483; $103,802,828; $21,614,113; and
$32,316,880 respectively)...................... $7,665,102 $9,236,750 $100,313,282 $23,643,498 $27,891,585
Repurchase Agreements, at cost................... -- -- 9,967,809 1,586,100 3,770,800
---------- ---------- ------------ ----------- -----------
Total Investments.......................... 7,665,102 9,236,750 110,281,091 25,229,598 31,662,385
---------- ---------- ------------ ----------- -----------
Foreign Currency (cost $0; $7,094; $0; $0; and $0
respectively).................................. -- 7,092 -- -- --
Interest and dividends receivable................ 191,515 22,986 33,484 40,325 8,036
Receivable for securities sold................... -- 622,767 205,343 245,618 --
Witholding tax reclaim receivable................ -- 17,293 -- -- --
Receivable for fund shares sold.................. -- -- 13,000 -- --
Unamortized organizational expense............... 739 934 657 2,093 --
Prepaid expenses................................. 5,459 6,445 144 4,356 8,643
---------- ---------- ------------ ----------- -----------
Total Assets............................... 7,862,815 9,914,267 110,533,719 25,521,990 31,679,064
---------- ---------- ------------ ----------- -----------
LIABILITIES
Payable for return of collateral received........ -- -- 12,467,809 1,586,100 3,770,800
Income distribution payable...................... 52,883 -- -- -- --
Payable for fund shares repurchased.............. -- -- 347,225 36,040 75,161
Payable for securities purchased................. -- 176,197 727,030 528,455 263,377
Payable for currency contract.................... -- 7 -- -- --
Advisory fee payable............................. 2,549 6,233 85,758 18,371 19,318
Administration fee payable....................... 161 194 1,992 475 564
12b-1 Distribution fee payable................... 1,890 2,761 31,024 6,956 9,167
Professional fees payable........................ 19,643 19,022 39,928 21,041 20,866
Other accrued expenses........................... 7,243 14,010 18,032 8,159 7,257
---------- ---------- ------------ ----------- -----------
Total Liabilities.......................... 84,369 218,424 13,718,798 2,205,597 4,166,510
---------- ---------- ------------ ----------- -----------
NET ASSETS................................. $7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554
========== ========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Assets and Liabilities -- (Continued)
March 31, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II
FUND FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C>
Net Assets Consist of:
Shares, at par ($0.001).......................... $ 796 $ 907 $ 5,862 $ 2,183 $ 2,872
Additional paid-in capital....................... 7,831,835 7,450,154 97,789,821 20,167,910 35,194,801
Undistributed (distributions in excess of) net
investment income.............................. (52,883) (26,128) -- -- --
Accumulated net realized gain/(loss) on
investments and foreign currency
transactions................................... -- 822,727 2,508,784 1,116,915 (3,259,824)
Net unrealized appreciation/(depreciation) on
investments and foreign currency
translations................................... (1,302) 1,448,183 (3,489,546) 2,029,385 (4,425,295)
---------- ---------- ------------ ----------- -----------
NET ASSETS....................................... $7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554
========== ========== ============ =========== ===========
Class A.......................................... $7,230,434 $7,815,990 $ 74,739,484 $18,916,483 $20,077,441
Class D.......................................... $ 548,012 $1,879,853 $ 22,075,437 $ 4,399,910 $ 7,435,113
---------- ---------- ------------ ----------- -----------
$7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554
========== ========== ============ =========== ===========
SHARES OF BENEFICIAL INTEREST
Class A
Shares of beneficial interest issued and
outstanding.................................. 740,072 727,019 4,504,805 1,762,710 2,090,287
========== ========== ============ =========== ===========
Net Asset Value and redemption price per share
outstanding.................................. $ 9.77 $ 10.75 $ 16.59 $ 10.73 $ 9.61
========== ========== ============ =========== ===========
Maximum Offering Price per share ($9.77/.955,
$10.75/.955, $16.59/.955, $10.73/.955,
$9.61/.955 respectively)..................... $ 10.23 $ 11.26 $ 17.37 $ 11.24 $ 10.06
========== ========== ============ =========== ===========
Class D
Shares of beneficial interest issued and
outstanding.................................. 55,694 179,858 1,357,437 420,184 781,351
========== ========== ============ =========== ===========
Net Asset Value and redemption price per share
outstanding.................................. $ 9.84 $ 10.45 $ 16.26 $ 10.47 $ 9.52
========== ========== ============ =========== ===========
Maximum Offering Price per share ($9.84/.985,
$10.45/.985, $16.26/.985, $10.47/.985,
$9.52/.985 respectively)..................... $ 9.99 $ 10.61 $ 16.51 $ 10.63 $ 9.66
========== ========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Operations
For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
INCOME INTERNATIONAL SMALL CAP APPRECIATION SMALL CAP II
FUND EQUITY FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C>
Investment Income
Interest............................... $1,149,476 $ 35,505 $ 763,213 $ 80,019 $ 220,516
Dividend (net of withholding tax of $0;
$13,441; $0; $4,748 and $0,
respectively)........................ 25,010 216,458 741,330 388,643 113,811
Income from Securities Lending
Activities........................... -- -- 63,322 10,606 13,279
---------- ----------- ------------ ----------- ------------
Total income........................... 1,174,486 251,963 1,567,865 479,268 347,606
---------- ----------- ------------ ----------- ------------
Expenses
Advisory............................... 167,336 125,548 1,252,991 318,584 382,702
Administration......................... 25,100 18,832 187,949 47,788 45,924
Fund accounting........................ 36,948 39,734 34,549 35,894 33,144
Professional fees...................... 21,824 16,107 57,254 25,149 21,886
Custodian.............................. 6,147 32,746 17,166 6,135 5,780
Transfer agent fees and expenses....... 24,911 26,408 197,205 41,052 81,518
12b-1 Distribution fees--Class A....... 40,024 25,557 241,928 64,288 54,274
12b-1 Distribution fees--Class D....... 5,428 17,490 213,957 46,073 66,798
Directors fees......................... 1,809 592 21,858 3,187 3,180
Amortization of organizational costs... 8,528 8,414 11,470 8,414 --
Miscellaneous.......................... 38,145 19,860 149,438 57,311 44,868
---------- ----------- ------------ ----------- ------------
Total expenses before waivers.......... 376,200 331,288 2,385,765 653,875 740,074
Less: expenses waived/reimbursed....... (53,473) (12,791) -- (2,255) (82,843)
---------- ----------- ------------ ----------- ------------
Net expenses........................... 322,727 318,497 2,385,765 651,620 657,231
---------- ----------- ------------ ----------- ------------
Net investment income/(loss)............. 851,759 (66,534) (817,900) (172,352) (309,625)
---------- ----------- ------------ ----------- ------------
Net realized gain/(loss) on investments
and foreign currency transactions...... 57,784 1,024,996 2,508,888 1,116,912 (2,810,903)
Net change unrealized
appreciation/(depreciation) of
investments and foreign currency
translations........................... (193,923) (1,842,011) (42,488,775) (9,813,011) (8,261,391)
---------- ----------- ------------ ----------- ------------
Net realized and unrealized
gain/(loss)............................ (136,139) (817,015) (39,979,887) (8,696,099) (11,072,294)
---------- ----------- ------------ ----------- ------------
Net increase/(decrease) in net assets
resulting from operations.............. $ 715,620 $ (883,549) $(40,797,787) $(8,868,451) $(11,381,919)
========== =========== ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
INCOME FUND INTERNATIONAL EQUITY FUND
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- -------------- --------------
<S> <C>
Operations:
Net investment income/(loss)......... $ 851,759 $ 1,494,331 $ (66,534) $ (115,193)
Net realized gain/(loss) on
investments and foreign currency
transactions....................... 57,784 315,559 1,024,996 2,620,302
Net change unrealized appreciation/
(depreciation) of investments and
foreign currency translations...... (193,923) 506,910 (1,842,011) 1,602,799
------------ ------------ ----------- ------------
Net increase in net assets resulting
from operations...................... 715,620 2,316,800 (883,549) 4,107,908
------------ ------------ ----------- ------------
Dividends and Distributions to
Shareholders:
From net investment income
Class A............................ (759,547) (1,452,325) -- --
Class D............................ (32,600) (42,035) -- --
------------ ------------ ----------- ------------
(792,147) (1,494,360) -- --
------------ ------------ ----------- ------------
From tax return of capital
Class A............................ (76,574) -- -- --
Class D............................ (3,289) -- -- --
------------ ------------ ----------- ------------
(79,863) -- -- --
------------ ------------ ----------- ------------
From net realized gains
Class A............................ (104,773) -- (712,147) (1,988,043)
Class D............................ (9,574) -- (192,848) (658,846)
------------ ------------ ----------- ------------
(114,347) -- (904,995) (2,646,889)
------------ ------------ ----------- ------------
Change in net assets resulting from
dividends and distributions to
shareholders....................... (986,357) (1,494,360) (904,995) (2,646,889)
------------ ------------ ----------- ------------
Capital Share Transactions:
Proceeds from sales of shares
Class A............................ 926,359 1,530,230 1,144,165 1,271,346
Class D............................ 155,831 172,805 124,302 162,830
------------ ------------ ----------- ------------
1,082,190 1,703,035 1,268,467 1,434,176
------------ ------------ ----------- ------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A............................ 894,208 1,298,541 582,876 1,337,906
Class D............................ 40,551 36,502 192,848 658,846
------------ ------------ ----------- ------------
934,759 1,335,043 775,724 1,996,752
------------ ------------ ----------- ------------
Net asset value of shares redeemed:
Class A............................ (18,743,090) (11,722,261) (5,735,950) (8,953,584)
Class D............................ (460,910) (827,987) (885,822) (2,362,618)
------------ ------------ ----------- ------------
(19,204,000) (12,550,248) (6,621,772) (11,316,202)
------------ ------------ ----------- ------------
Change in net assets from capital
share transactions................. (17,187,051) (9,512,170) (4,577,581) (7,885,274)
------------ ------------ ----------- ------------
Total change in net assets............. (17,457,788) (8,689,730) (6,366,125) (6,424,255)
Net Assets:
Beginning of Period.................. 25,236,234 33,925,964 16,061,968 22,486,223
------------ ------------ ----------- ------------
End of Period........................ $ 7,778,446 $ 25,236,234 $ 9,695,843 $ 16,061,968
============ ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND APPRECIATION FUND
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- -------------- --------------
<S> <C>
Operations:
Net investment income/(loss)......... $ (817,900) $ (409,168) $ (172,352) $ (219,043)
Net realized gain/(loss) on
investments and foreign currency
transactions....................... 2,508,888 13,586,328 1,116,912 12,458,936
Net change unrealized appreciation/
(depreciation) of investments and
foreign currency translations...... (42,488,775) 30,415,943 (9,813,011) 6,933,791
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations...................... (40,797,787) 43,593,103 (8,868,451) 19,173,684
------------ ------------ ------------ ------------
Dividends and Distributions to
Shareholders:
From net realized gains
Class A............................ (2,603,327) (8,972,632) (2,762,177) (9,402,699)
Class D............................ (765,335) (2,767,599) (692,033) (1,466,362)
------------ ------------ ------------ ------------
(3,368,662) (11,740,231) (3,454,210) (10,869,061)
------------ ------------ ------------ ------------
Capital Share Transactions:
Proceeds from sales of shares
Class A............................ 8,371,667 35,090,045 2,982,123 6,480,292
Class D............................ 1,473,645 8,450,667 1,227,616 2,468,392
------------ ------------ ------------ ------------
9,845,312 43,540,712 4,209,739 8,948,684
------------ ------------ ------------ ------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A............................ 2,359,265 8,110,200 2,596,704 8,381,574
Class D............................ 764,367 2,759,244 691,921 1,440,941
------------ ------------ ------------ ------------
3,123,632 10,869,444 3,288,625 9,822,515
------------ ------------ ------------ ------------
Net asset value of shares redeemed:
Class A............................ (28,936,985) (12,927,511) (10,175,152) (34,006,037)
Class D............................ (8,181,883) (3,084,106) (2,462,053) (1,113,196)
------------ ------------ ------------ ------------
(37,118,868) (16,011,617) (12,637,205) (35,119,233)
------------ ------------ ------------ ------------
Change in net assets from capital
share transactions................. (24,149,924) 38,398,539 (5,138,841) (16,348,034)
------------ ------------ ------------ ------------
Total change in net assets............. (68,316,373) 70,251,411 (17,461,502) (8,043,411)
Net Assets:
Beginning of Period.................. 165,131,294 94,879,883 40,777,895 48,821,306
------------ ------------ ------------ ------------
End of Period........................ $ 96,814,921 $165,131,294 $ 23,316,393 $ 40,777,895
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
SMALL CAP II FUND
--------------------------------
YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C>
Operations:
Net investment income/(loss).............................. $ (309,625) $ (83,519)
Net realized gain/(loss) on investments................... (2,810,903) 601,246
Net change unrealized appreciation/(depreciation) of
investments............................................. (8,261,391) 3,963,507
------------ -----------
Net increase/(decrease) in net assets resulting from
operations................................................ (11,381,919) 4,481,234
------------ -----------
Dividends and Distributions to Shareholders:
Distributions from net realized gains
Class A................................................. -- (388,459)
Class D................................................. -- (187,036)
------------ -----------
-- (575,495)
------------ -----------
Distributions in excess of realized gains
Class A................................................. -- (271,796)
Class D................................................. -- (130,865)
------------ -----------
-- (402,661)
------------ -----------
Change in net assets resulting from dividends and
distributions to shareholders........................... -- (978,156)
------------ -----------
Capital Share Transactions:
Proceeds from sales of shares
Class A................................................. 14,824,338 14,983,054
Class D................................................. 4,282,060 7,349,742
------------ -----------
19,106,398 22,332,796
------------ -----------
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. -- 610,656
Class D................................................. -- 312,261
------------ -----------
-- 922,917
------------ -----------
Net asset value of shares redeemed:
Class A................................................. (6,663,800) (934,557)
Class D................................................. (3,179,324) (348,585)
------------ -----------
(9,843,124) (1,283,142)
------------ -----------
Change in net assets from capital share transactions...... 9,263,274 21,972,571
------------ -----------
Total change in net assets.................................. (2,118,645) 25,475,649
Net Assets:
Beginning of Period....................................... 29,631,199 4,155,550
------------ -----------
End of Period............................................. $ 27,512,554 $29,631,199
============ ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights
<TABLE>
<CAPTION>
INCOME FUND
----------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------
MAY 4, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 10.00
------ ------- ------- ------- -------
Income from Investment
Operations
Net investment
income/(loss).............. 0.51(a) 0.34 0.60 0.59 0.55
Net realized and unrealized
gains/ (losses) on
investments................ 0.04 0.44 (0.16) 0.16 (0.05)
------ ------- ------- ------- -------
Total from investment
operations................... 0.55 0.78 0.44 0.75 0.50
------ ------- ------- ------- -------
Less Dividends and
Distributions:
From net investment income... (0.57) (0.52) (0.60) (0.59) (0.01)
From tax return of capital... (0.05) -- -- -- --
From realized gains.......... (0.15) -- -- (0.21) (0.55)
------ ------- ------- ------- -------
Total Dividends and
Distributions................ (0.77) (0.52) (0.60) (0.80) (0.56)
------ ------- ------- ------- -------
Net asset value per share,
end of period.............. $ 9.77 $ 9.99 $ 9.73 $ 9.89 $ 9.94
====== ======= ======= ======= =======
Total Return (excludes sales
charge).................... 5.64% 8.18% 3.91% 7.67% 5.30%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $7,230 $24,413 $32,506 $36,891 $32,373
Ratios to Average Net Assets
of:
Net investment
income/(loss)............ 5.09% 5.27% 5.49% 5.87% 6.29%*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 1.91% 1.87% 1.65% 1.70% 1.85%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 2.22% 1.87% 1.70% 1.75% 1.86%*
Portfolio Turnover Rate.... 95% 130% 123% 138% 92%
</TABLE>
(a) Calculated using the average share method.
* Annualized.
24
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INCOME FUND
----------------------------------------------------------------------------------
CLASS D
----------------------------------------------------------------------------------
MAY 4, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $ 9.99 $ 9.73 $ 9.89 $ 9.94 $10.00
------ ------ ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss).............. 0.50(a) 0.28 0.50 0.54 0.50
Net realized and unrealized
gains/ (losses) on
investments................ 0.01 0.45 (0.16) 0.16 (0.05)
------ ------ ------ ------ ------
Total from investment
operations................... 0.51 0.73 0.34 0.70 0.45
------ ------ ------ ------ ------
Less Dividends and
Distributions:
From net investment income... (0.46) (0.47) (0.50) (0.54) (0.01)
From tax return of capital... (0.05) -- -- -- --
From realized gains.......... (0.15) -- -- (0.21) (0.50)
------ ------ ------ ------ ------
Total Dividends and
Distributions................ (0.66) (0.47) (0.50) (0.75) (0.51)
------ ------ ------ ------ ------
Net asset value per share,
end of period.............. $ 9.84 $ 9.99 $ 9.73 $ 9.89 $ 9.94
====== ====== ====== ====== ======
Total Return (excludes sales
charge).................... 5.23% 7.64% 3.39% 7.11% 4.74%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $ 548 $ 823 $1,420 $1,446 $1,241
Ratios to Average Net Assets
of:
Net investment
income/(loss)............ 5.03% 4.77% 4.99% 5.37% 5.73%*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.44% 2.37% 2.15% 2.20% 2.29%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 2.96% 2.37% 2.21% 2.25% 2.31%*
Portfolio Turnover Rate.... 95% 130% 123% 138% 92%
</TABLE>
(a) Calculated using the average share method.
* Annualized.
25
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
----------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------
MAY 12, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $12.06 $ 11.66 $ 11.08 $ 9.90 $10.00
------ ------- ------- ------- ------
Income from Investment
Operations
Net investment
income/(loss).............. (0.06) -- (0.04) (0.04) (0.05)
Net realized and unrealized
gains/(losses) on
investments................ (0.31) 2.37 0.97 1.46 (0.03)
------ ------- ------- ------- ------
Total from investment
operations................... (0.37) 2.37 0.93 1.42 (0.08)
------ ------- ------- ------- ------
Less Dividends and
Distributions:
From realized gains.......... (0.94) (1.97) (0.35) (0.24) (0.02)(a)
------ ------- ------- ------- ------
Net asset value per share,
end of period.............. $10.75 $ 12.06 $ 11.66 $ 11.08 $ 9.90
====== ======= ======= ======= ======
Total Return (excludes sales
charge).................... (2.22%) 22.24% 8.44% 14.41% (0.84%)
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $7,816 $13,286 $18,282 $14,597 $9,213
Ratios to Average Net Assets
of:
Net investment
income/(loss)............ (0.44%) (0.50%) (0.40%) (0.36%) (0.65%)*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.45% 2.48% 2.25% 2.37% 2.50%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 2.55% 2.48% 2.25% 2.43% 3.22%*
Portfolio Turnover Rate.... 123% 79% 94% 92% 76%
</TABLE>
(a) Represents distribution in excess of net investment income.
* Annualized.
26
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
----------------------------------------------------------------------------------
CLASS D
----------------------------------------------------------------------------------
MAY 12, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $11.81 $11.47 $10.95 $ 9.82 $10.00
------ ------ ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss).............. (0.16) (0.13) (0.10) (0.09) (0.07)
Net realized and unrealized
gains/(losses) on
investments................ (0.26) 2.44 0.97 1.46 (0.10)
------ ------ ------ ------ ------
Total from investment
operations................... (0.42) 2.31 0.87 1.37 (0.17)
------ ------ ------ ------ ------
Less Dividends and
Distributions:
From realized gains.......... (0.94) (1.97) (0.35) (0.24) (0.01)(a)
------ ------ ------ ------ ------
Net asset value per share,
end of period.............. $10.45 $11.81 $11.47 $10.95 $ 9.82
====== ====== ====== ====== ======
Total Return (excludes sales
charge).................... (2.73%) 22.09% 7.99% 14.01% (1.72%)
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $1,880 $2,776 $4,204 $3,725 $3,322
Ratios to Average Net Assets
of:
Net investment
income/(loss)............ (0.94%) (1.00%) (0.90%) (0.83%) (1.51%)*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.95% 2.98% 2.78% 2.87% 2.98%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 3.05% 2.98% 2.79% 2.96% 3.69%*
Portfolio Turnover Rate.... 123% 79% 94% 92% 76%
</TABLE>
(a) Represents distribution in excess of net investment income.
* Annualized.
27
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND
----------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------
JUNE 8, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $ 22.81 $ 17.55 $ 15.88 $ 11.25 $10.00
------- -------- ------- ------- ------
Income from Investment
Operations
Net investment
income/(loss).............. (0.12) 0.02 (0.05) (0.08) (0.03)
Net realized and unrealized
gains/ (losses) on
investments................ (5.59) 6.97 2.46 5.19 1.52
------- -------- ------- ------- ------
Total from investment
operations................... (5.71) 6.99 2.41 5.11 1.49
------- -------- ------- ------- ------
Less Dividends and
Distributions:
From net investment income... -- -- -- -- (0.24)
From realized gains.......... (0.51) (1.73) (0.74) (0.48) --
------- -------- ------- ------- ------
Total Dividends and
Distributions................ (0.51) (1.73) (0.74) (0.48) (0.24)
------- -------- ------- ------- ------
Net asset value per share,
end of period.............. $ 16.59 $ 22.81 $ 17.55 $ 15.88 $11.25
======= ======== ======= ======= ======
Total Return (excludes sales
charge).................... (24.97%) 40.64% 14.99% 45.88% 15.03%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $74,740 $126,857 $72,488 $28,840 $8,785
Ratios to Average Net Assets
of:
Net investment
income/(loss)............ (0.54%) (0.18%) (0.44%) (0.80%) (0.43%)*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 1.79% 1.65% 1.66% 2.00% 2.00%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties**................ 1.79% 1.68% 1.74% 2.18% 3.28%*
Portfolio Turnover Rate.... 57% 67% 65% 102% 151%
</TABLE>
* Annualized.
** For the year ended March 31, 1999, there were no waivers or reimbursements.
28
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND
----------------------------------------------------------------------------------
CLASS D
----------------------------------------------------------------------------------
JUNE 8, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $ 22.50 $ 17.35 $ 15.76 $11.22 $10.00
------- ------- ------- ------ ------
Income from Investment
Operations
Net investment
income/(loss).............. (0.22) (0.07) (0.11) (0.16) (0.05)
Net realized and unrealized
gains/ (losses) on
investments................ (5.51) 6.95 2.44 5.18 1.51
------- ------- ------- ------ ------
Total from investment
operations................... (5.73) 6.88 2.33 5.02 1.46
------- ------- ------- ------ ------
Less Dividends and
Distributions:
From net investment income... -- -- -- -- (0.24)
From realized gains.......... (0.51) (1.73) (0.74) (0.48) --
------- ------- ------- ------ ------
Total Dividends and
Distributions................ (0.51) (1.73) (0.74) (0.48) (0.24)
------- ------- ------- ------ ------
Net asset value per share,
end of period.............. $ 16.26 $ 22.50 $ 17.35 $15.76 $11.22
======= ======= ======= ====== ======
Total Return (excludes sales
charge).................... (25.40%) 40.47% 14.59% 45.19% 14.72%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $22,075 $38,274 $22,392 $8,897 $3,367
Ratios to Average Net Assets
of:
Net investment
income/(loss)............ (1.04%) (0.68%) (0.96%) (1.30%) (0.93%)*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.29% 2.15% 2.19% 2.50% 2.50%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties**................ 2.29% 2.18% 2.29% 2.74% 3.68%*
Portfolio Turnover Rate.... 57% 67% 65% 102% 151%
</TABLE>
* Annualized.
** For the year ended March 31, 1999, there were no waivers or reimbursements.
29
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION FUND
----------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------
JULY 6, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $ 15.80 $ 14.03 $ 13.02 $ 10.67 $ 10.00
------- ------- ------- ------- -------
Income from Investment
Operations
Net investment
income/(loss).............. (0.06) 0.02 (0.04) (0.05) --
Net realized and unrealized
gains/ (losses) on
investments................ (3.50) 6.02 1.92 2.71 0.73
------- ------- ------- ------- -------
Total from investment
operations................... (3.56) 6.04 1.88 2.66 0.73
------- ------- ------- ------- -------
Less Dividends and
Distributions:
From realized gains.......... (1.51) (4.27) (0.87) (0.31) (0.06)
------- ------- ------- ------- -------
Net asset value per share,
end of period.............. $ 10.73 $ 15.80 $ 14.03 $ 13.02 $ 10.67
======= ======= ======= ======= =======
Total Return (excludes sales
charge).................... (22.43%) 46.73% 14.25% 25.07% 7.32%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $18,916 $33,394 $44,767 $25,561 $15,126
Ratios to Average Net Assets
of:
Net investment
income/(loss).............. (0.44%) (0.40%) (0.30%) (0.39%) (0.04%)*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 1.95% 1.80% 1.82% 2.00% 2.00%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 1.97% 1.80% 1.84% 2.10% 2.88%*
Portfolio turnover rate.... 96% 67% 71% 78% 58%
</TABLE>
* Annualized.
30
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION FUND
----------------------------------------------------------------------------------
CLASS D
----------------------------------------------------------------------------------
JULY 6, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $ 15.54 $13.85 $12.91 $10.63 $10.00
------- ------ ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss).............. (0.15) (0.08) (0.08) (0.09) (0.03)
Net realized and unrealized
gains/(losses) on
investments................ (3.41) 6.04 1.89 2.68 0.72
------- ------ ------ ------ ------
Total from investment
operations................... (3.56) 5.96 1.81 2.59 0.69
------- ------ ------ ------ ------
Less Dividends and
Distributions:
From realized gains.......... (1.51) (4.27) (0.87) (0.31) (0.06)
------- ------ ------ ------ ------
Net asset value per share,
end of period.............. $ 10.47 $15.54 $13.85 $12.91 $10.63
======= ====== ====== ====== ======
Total Return (excludes sales
charge).................... (22.82%) 46.76% 13.81% 24.50% 6.92%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $ 4,400 $7,384 $4,054 $2,482 $1,693
Ratios to Average Net Assets
of:
Net investment
income/(loss).............. (0.94%) (0.90%) (0.78%) (0.86%) (0.56%)*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.45% 2.30% 2.34% 2.50% 2.50%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 2.47% 2.30% 2.36% 2.64% 3.40%*
Portfolio turnover rate.... 96% 67% 71% 78% 58%
</TABLE>
* Annualized.
31
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP II FUND
-------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------- --------------------------------------
JANUARY 28, JANUARY 28,
1997 1997
YEAR YEAR (COMMENCEMENT) YEAR YEAR (COMMENCEMENT)
ENDED ENDED OF OPERATIONS) ENDED ENDED OF OPERATIONS)
MARCH 31, MARCH 31, THROUGH MARCH 31, MARCH 31, THROUGH
1999 1998 MARCH 31, 1997 1999 1998 MARCH 31, 1997
--------- --------- -------------- --------- --------- --------------
<S> <C>
Net asset value per share,
beginning of period.......... $ 13.68 $ 9.64 $10.00 $13.61 $ 9.63 $10.00
------- ------- ------ ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss).............. (0.09) 0.01 -- (0.16) (0.03) --
Net realized and unrealized
gains/(losses) on
investments................ (3.98) 4.65 (0.36) (3.93) 4.63 (0.37)
------- ------- ------ ------ ------ ------
Total from investment
operations................... (4.07) 4.66 (0.36) (4.09) 4.60 (0.37)
------- ------- ------ ------ ------ ------
Less Dividends and
Distributions:
From net investment income... -- (0.36) -- -- (0.36) --
From realized gains.......... -- (0.26) -- -- (0.26) --
------- ------- ------ ------ ------ ------
Total Dividends and
Distributions................ -- (0.62) -- -- (0.62) --
------- ------- ------ ------ ------ ------
Net asset value per share,
end of period.............. $ 9.61 $ 13.68 $ 9.64 $ 9.52 $13.61 $ 9.63
======= ======= ====== ====== ====== ======
Total Return (excludes sales
charge).................... (29.75%) 48.92% (3.60%) (30.05%) 48.33% (3.70%)
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................. $20,077 $19,942 $2,852 $7,435 $9,689 $1,304
Ratios to Average Net Assets
of:
Net investment
income/(loss)............ (0.87%) (0.36%) 0.25%* (1.37%) (0.86%) (0.23%)*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.00% 1.62% 2.00%* 2.50% 2.12% 2.50%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 2.27% 2.45% 5.51%* 2.77% 2.95% 6.91%*
Portfolio turnover rate.... 58% 86% 14% 58% 86% 14%
</TABLE>
* Annualized.
32
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- March 31, 1999
1. DESCRIPTION. ESC Strategic Funds, Inc. (the "Company") was
incorporated in Maryland on November 24, 1993. The Company currently comprises
five portfolios: ESC Strategic Income Fund, ESC Strategic International Equity
Fund (formerly ESC Strategic Global Equity Fund), ESC Strategic Small Cap Fund,
ESC Strategic Appreciation Fund, and ESC Strategic Small Cap II Fund (formerly
ESC Strategic Growth Fund), (individually a "Fund"; collectively the "Funds").
The Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. Each Fund, with
the exception of ESC Strategic Small Cap Fund, operates as a diversified fund.
ESC Strategic Small Cap Fund operates as a non-diversified fund. The Company's
Articles of Incorporation authorize the issuance of two classes of common stock
designated as Class A and Class D for each Fund. Class A shares are offered with
a maximum front-end sales charge of 4.50% which may be reduced or waived in
certain cases. Class A shares are also subject to a Service and Distribution Fee
calculated at an annual rate of up to 0.25% of the average daily net asset value
of Class A shares. Class D shares are offered with a front-end sales charge of
1.50% and are subject to a Service and Distribution Fee at an annual rate of up
to 0.75% based on the average daily net asset value of Class D shares. The
Company's Board of Directors may, in the future, authorize the issuance of
additional classes of capital stock for the Funds.
The Funds' investment objectives are as follows:
ESC Strategic Income Fund -- To seek a high level of current income,
with a secondary objective of total return. The Fund seeks to achieve its
investment objective by investing primarily in high yield debt instruments
of U.S. and foreign issuers that are rated below investment grade. (Prior
to September 30, 1998, this Fund primarily invested in a diversified
portfolio of corporate, government and other debt instruments of U.S.
issuers.)
ESC Strategic International Equity Fund -- To seek long-term capital
appreciation. The Fund seeks to achieve its investment objective by
primarily investing in a diversified portfolio of publicly traded common
stocks and securities convertible into or exchangeable for common stock of
non-U.S. issuers. (Prior to July 17, 1998, this Fund's investments were
diversified across both domestic and international markets.)
ESC Strategic Small Cap Fund -- To seek a high level of capital
appreciation. The Fund pursues its objective by investing primarily in
equity securities of domestic and foreign issuers.
ESC Strategic Appreciation Fund -- To seek long-term capital
appreciation. The Fund seeks to achieve its investment objective by
primarily investing in a diversified portfolio of U.S. based companies
publicly traded common stocks and securities convertible into or
exchangeable for common stock.
ESC Strategic Small Cap II Fund -- To seek a high level of capital
appreciation. The Fund pursues its objective by investing primarily in
equity securities of domestic and foreign issuers believed to offer
superior opportunities for growth.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies followed by the Funds in the preparation of
their financial statements. The policies are in conformity with generally
accepted accounting principles. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts and disclosures. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION. Investments in securities are valued at the
last sales price on the securities exchange or the NASDAQ National Market
System on which such securities are primarily traded or, if there are no
33
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
trades, at the current bid price, as of 4:00 p.m. eastern time.
Over-the-counter securities, or securities for which there were no
transactions, are valued at the closing bid price. Bid price is used when
no asked price is available. Bonds and other fixed income securities are
valued by using market quotations, and may be valued on the basis of prices
provided by a pricing service. Securities for which market quotations are
not readily available are valued at fair value as determined in good faith
by or at the direction of the Board of Directors. Short-term securities
which mature in 60 days or less are valued at amortized cost, if their
terms to maturity at purchase were 60 days or less, or by amortizing their
value on the 61st day prior to maturity, if their original term to maturity
at purchase exceeded 60 days.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities
transactions are recorded on a trade date basis. Realized gains and losses
from securities transactions are recorded on the identified cost basis.
Dividend income is recognized on the ex-dividend date and interest income,
including amortization of premium and accretion of discount on investments,
is accrued daily as earned.
C. DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS TO
SHAREHOLDERS. Distributions to shareholders are recorded on the
ex-dividend date. The amount of dividends and distributions are determined
in accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. These "book/tax" differences are
considered either temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within
the capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification. Dividends and distributions
which exceed net investment income and net realized capital gains for
financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of
net realized capital gains.
For the year ended March 31, 1999, the reclassification arising from
permanent book/tax differences resulted in increases (decreases) to the
components of net assets as follows:
<TABLE>
<CAPTION>
INTERNATIONAL SMALL
INCOME EQUITY CAP
-------- ------------- --------
<S> <C>
Undistributed net investment income/(loss) on
investments......................................... $142,222 $ 68,577 $817,900
Accumulated net realized gain/(loss) on investments... (57,616) (63,848) --
Additional paid-in capital............................ (84,606) (4,729) (817,900)
</TABLE>
<TABLE>
<CAPTION>
SMALL
APPRECIATION CAP II
------------ --------
<S> <C>
Undistributed net investment income/(loss) on investments... $ 172,580 $309,625
Accumulated net realized gain/(loss) on investments......... (228) --
Additional paid-in capital.................................. (172,352) (309,625)
</TABLE>
Permanent book/tax differences are primarily attributable to
non-deductible organization costs, foreign exchange gains/losses, realized
gains on passive foreign investment companies and net operating losses.
D. REPURCHASE AGREEMENTS. The Funds may purchase instruments from
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase them at an agreed upon time and price
("repurchase agreements"). The seller under a repurchase agreement is
required to maintain the value of the securities subject to the agreement
at not less than the repurchase price. Default by the seller would,
however, expose
34
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
the relevant Funds to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations.
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreements. Accordingly, the Funds could receive
less than the repurchase price upon the sale of collateral securities.
E. FEDERAL INCOME TAXES. It is the policy of each of the Funds to
continue to qualify as a Regulated Investment Company under Subchapter M of
the Internal Revenue Code of 1986, as amended. By so qualifying, the Funds
will not be subject to Federal income taxes to the extent that they
distribute all of their taxable and tax-exempt income for the fiscal year.
The Funds also intend to meet the distribution requirements to avoid the
payment of an excise tax. Accordingly, no provision for taxes is recorded.
F. ORGANIZATIONAL COSTS. Costs incurred in connection with the
organization and initial registration of the Funds, with the exception of
the Small Cap II Fund, have been deferred and are being amortized on a
straight-line basis over sixty months beginning with each Fund's
commencement of operations. In the event any of the initial shares of the
Funds are redeemed during the amortization period, the redemption proceeds
will be reduced by a pro rata portion of any unamortized organization
expenses in the proportion as the number of shares being redeemed bears to
the number of initial shares outstanding at the time of redemption.
G. DETERMINATION OF NET ASSET VALUE AND CALCULATION OF
EXPENSES. Expenses directly attributable to a Fund are charged to that
Fund. Other expenses of the Company are allocated proportionately among the
Funds in relation to the net assets of each Fund or on another reasonable
basis. In calculating net asset value per share of each class, investment
income, realized and unrealized gains and losses, and expenses other than
class specific expenses are allocated daily to each class of shares based
upon the proportion of net assets of each class at the beginning of each
day. Distribution expenses are solely borne by the class incurring the
expense.
H. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Funds
are maintained in U.S. dollars; non-U.S. dollar denominated amounts are
translated into U.S. dollars as follows with the resultant exchange gains
and losses recorded in the Statement of Operations:
(i) market value of investment securities and other assets and
liabilities: at the exchange rate on the valuation date,
(ii) purchases and sales of investment securities, income and
expenses, at the exchange rate prevailing on the respective date of such
transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities at period
end. Such fluctuations are included with the net realized and unrealized
gain or loss from investments. However, the Funds do isolate the effect of
fluctuations in foreign exchange rates when determining the gain or loss
upon the sale or maturity of foreign currency denominated debt obligations
pursuant to U.S. Federal income tax regulations. Such amounts are
categorized as foreign exchange gain or loss for financial reporting
purposes and ordinary gain or loss for income tax reporting purposes.
Reported net realized foreign exchange gains or losses arise from
sales and maturities of short-term securities, currency gains and losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Funds' books, and the
35
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the
value of the assets and liabilities, other than investments in securities
at period end, resulting from changes in the foreign exchange rate.
I. FORWARD FOREIGN EXCHANGE CONTRACTS. A forward foreign exchange
contract is a commitment to buy or sell a foreign currency at a future date
at a negotiated exchange rate. The Funds bear the market risk which arises
from possible changes in foreign exchange values. Risks may arise from the
potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of the foreign currency
relative to the U.S. dollar. The gain or loss from the difference between
the cost of original contracts and the amount realized upon the closing of
such contracts is included in net realized gains on foreign exchange
transactions.
J. OFF-BALANCE SHEET RISK. The Funds may invest in various financial
instruments with off-balance sheet risk. These financial instruments
include taking positions in forward foreign exchange contracts. During the
period the forward contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at
the end of the day's trading. When the forward contract is closed, the Fund
records a realized gain or loss between the proceeds from (or cost of) the
closing transaction and the Fund's basis in the contract. The Funds enter
into such contracts for the purpose of hedging exposure to change in
foreign currency exchange rates on their portfolio holdings. A lack of
correlation between the price of the security and the underlying contract
could result in a loss to the Funds. The amount of such loss could exceed
related amounts in the statements of assets and liabilities. At March 31,
1999, the International Equity Fund had the following open forward foreign
exchange contract:
LONG CONTRACT:
<TABLE>
<CAPTION>
SETTLEMENT MARKET UNREALIZED
AMOUNT/CURRENCY DATE COST VALUE GAIN
- --------------- ---------- ---- ------ ----------
<S> <C>
45,223/Japanese Yen............................... 4/1/99 $375 $382 $7
</TABLE>
K. CREDIT AND MARKET RISK. Funds that invest in high yield
instruments are subject to certain credit and market risks. The yields of
high yield debt obligations reflect, among other things, perceived credit
risk. The Funds' investment in securities rated below investment grade
typically involve risks not associated with higher rated securities
including, among others, greater risk of timely and ultimate payment of
interest and principal, greater market price volatility and less liquid
secondary market trading.
L. SECURITIES LENDING. To increase current income, each Fund may
lend its portfolio securities worth up to one-third of that Fund's total
assets to brokers, dealers and financial institutions, provided: (1) the
loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily
mark-to-market basis in an amount at least equal to the current market
value of the securities loaned; (2) the Funds may at any time call the loan
and obtain the return of the securities loaned within five business days,
therefore not considered to be illiquid investments; and (3) the Funds will
receive any interest or dividends paid on the loaned securities while
simultaneously seeking to earn interest on the investment of collateral.
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money
market instruments. The cash or subsequent short-term investments are
recorded as assets of the Funds, offset by a corresponding liability to
repay the cash at the termination of the loan. In addition,
36
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
the short-term securities purchased with the cash collateral are included
in the accompanying schedules of portfolio investments. In connection with
lending securities, the Funds may pay reasonable finders, administrative
and custodial fees. Loans of securities involve risk that the borrower may
fail to return the securities or may fail to provide additional collateral.
As of March 31, 1999, the following Funds had securities with the
following market values on loan:
MARKET VALUE MARKET VALUE
OF COLLATERAL OF LOANED SECURITIES
------------- --------------------
Small Cap....................... $12,467,809 $11,976,699
Appreciation.................... $ 1,586,100 $ 1,545,928
Small Cap II.................... $ 3,770,800 $ 3,687,688
The loaned securities were fully collateralized by cash which was
invested in floating rate securities and repurchase agreements at March 31,
1999.
As disclosed in the schedules of portfolio investments, the Small Cap,
Appreciation and Small Cap II Funds collectively invested cash collateral
in a Lehman Brothers Repurchase Agreement with an interest rate of 5.25%
and a maturity of 4/1/1999 which was collateralized by $15,855,000
Commercial Mortgage Asset Trust, Series 99-C1, Class A3, due 4/17/2003 with
a market value of $16,088,633.
3. RELATED PARTY TRANSACTIONS. The Company has entered into an investment
advisory agreement (the "Investment Advisory Agreement") with SunTrust Equitable
Securities Corporation ("STES" or the "Adviser"). The Investment Advisory
Agreement provides for the Adviser to be paid a fee calculated and accrued daily
and paid monthly at the annual rate of 1.25% of average daily net assets for ESC
Strategic Small Cap II Fund and 1.00% of such net assets for each of the other
Funds. The Adviser provides portfolio management supervision and certain
administrative, clerical and bookkeeping services for the Company. The Adviser
has entered into agreements with various portfolio managers (the "Managers") to
provide portfolio management services for the Funds. Equitable Asset Management,
a wholly-owned subsidiary of the Adviser, provides portfolio management services
for Small Cap and Small Cap II Funds and approximately one-third of the assets
of the Appreciation Fund. The Adviser has retained various other Managers to
advise the International Equity Fund, Income Fund and the remaining assets of
the Appreciation Fund. The Adviser pays any fees payable under these agreements
with the Managers. For the year ended March 31, 1999, the Adviser voluntarily
waived fees of $47,061, $12,791, $2,255, and $82,843, for the Income Fund,
International Equity Fund, Appreciation Fund and Small Cap II Fund,
respectively. The Adviser did not waive any fee for the Small Cap Fund.
BISYS Fund Services Limited Partnership d/b/a/ BISYS Fund Services
("BISYS") and BISYS Fund Services, Inc ("BFSI") are each a wholly-owned
subsidiary of the BISYS Group, Inc. BISYS serves as Administrator subject to the
supervision of the Company's Board of Directors and officers pursuant to the
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement include day-to-day administration of matters
related to the corporate existence of the Company, maintenance of its records,
preparation of reports, supervision of the Funds' arrangement with their
custodian and assistance in the preparation of the Company's Registration
Statement under federal and state laws. Pursuant to the Administration
Agreement, BISYS is entitled to a fee calculated and accrued daily and paid
monthly at the annual rate of 0.15% of the average daily net assets of each
Fund.
37
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
BFSI serves as transfer agent and fund accountant for the Company. Pursuant
to a Transfer Agent Agreement between the Company and BFSI, BFSI provides the
Company with transfer and dividend disbursing agent services, for which it
receives a fee of $15.00 per account per year subject to a required minimum fee
of $15,000 for each Fund, plus out-of-pocket expenses. Pursuant to the Fund
Accounting Agreement between the Company and BFSI, BFSI assists the Company in
calculating net asset values and provides certain other accounting services for
each Fund for an annual fee of $30,000 per Fund plus out-of-pocket expenses.
STES has voluntarily agreed to reimburse the Funds to the extent that their
ratios of expenses to average net assets exceed certain percentages as follows:
Income -- 2.00% (Class A), 2.50% (Class D); International Equity -- 2.50% (Class
A), 3.00% (Class D); Small Cap -- 2.00% (Class A), 2.50% (Class D);
Appreciation -- 2.00% (Class A), 2.50% (Class D), and Small Cap II -- 2.00%
(Class A), 2.50% (Class D). Accordingly, STES has reimbursed expenses of the
Income Fund in the amount of $6,412, under this voluntary agreement. No
reimbursements were necessary for the International Equity, Small Cap,
Appreciation or Small Cap II Funds.
BISYS acts as Distributor for the Funds pursuant to a Distribution
Contract. Each Fund has adopted a service and distribution plan ("Plan") with
respect to each class of its shares. The Plans provide that Class A shares will
pay the Distributor a fee up to an annual rate of 0.25% of the value of average
daily net assets of Class A shares in return for financing certain distribution
and shareholder service activities related to Class A shares. The Plans provide
that Class D shares will pay the Distributor amounts up to an annual rate of
0.75% of the average daily net assets of Class D shares to finance certain
distribution and shareholder services activities related to Class D shares. For
the year ended March 31, 1999 for the Small Cap Fund, Small Cap II Fund,
Appreciation Fund, Income Fund, International Equity Fund, BISYS received
$12,037, $21,039, $82,075, $83,309 and $351,653 respectively, in commissions
from sales of shares of the Funds of which $12,037, $21,039, $82,075, $83,300
and $335,688 respectively, was reallowed to other brokers and dealers.
During the year ended March 31, 1999, the International Equity, Small Cap,
Appreciation and Small Cap II Funds paid brokerage commissions of $1,185,
$13,662, $39,262, and $6,564 to the Adviser's subsidiary, SunTrust Equitable
Securities Corporation.
4. SECURITIES TRANSACTIONS.
A. PURCHASE AND SALE TRANSACTIONS. The aggregate amount of purchases
and sales of investment securities, other than short-term securities, for
the year ended March 31, 1999 were as follows:
PURCHASES SALES
----------- -----------
Income.................................... $12,433,508 $26,262,194
International Equity...................... $14,517,293 $19,576,274
Small Cap................................. $61,805,758 $68,684,662
Appreciation.............................. $28,968,161 $35,689,782
Small Cap II.............................. $26,210,433 $15,159,160
38
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
5. CAPITAL SHARE TRANSACTIONS. The Company is authorized to issue 650
million shares of capital stock with a par value $0.001 each. Transactions in
each class of shares of the Funds for the year ended March 31, 1999, and the
year ended March 31, 1998, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
---------------------------------------
INTERNATIONAL
INCOME EQUITY SMALL CAP
---------- ------------- ----------
<S> <C>
CLASS A
Beginning Balance.......................................... 2,443,891 1,101,884 5,561,203
---------- --------- ----------
Shares Sold................................................ 93,649 105,770 460,985
Shares issued in reinvestment of net dividends and
distributions............................................ 90,228 59,843 145,457
Shares redeemed............................................ (1,887,696) (540,478) (1,662,840)
---------- --------- ----------
Net increase/(decrease) in shares.......................... (1,703,819) (374,865) (1,056,398)
---------- --------- ----------
Ending Balance............................................. 740,072 727,019 4,504,805
========== ========= ==========
CLASS D
Beginning Balance.......................................... 82,351 234,924 1,701,274
---------- --------- ----------
Shares Sold................................................ 15,648 11,007 80,387
Shares issued in reinvestment of net dividends and
distributions............................................ 4,096 20,321 47,983
Shares redeemed............................................ (46,401) (86,394) (472,207)
---------- --------- ----------
Net increase/(decrease) in shares.......................... (26,657) (55,066) (343,837)
---------- --------- ----------
Ending Balance............................................. 55,694 179,858 1,357,437
========== ========= ==========
YEAR ENDED MARCH 31, 1999
---------------------------
APPRECIATION SMALL CAP II
------------ ------------
CLASS A
Beginning Balance........................................... 2,114,008 1,458,113
--------- ---------
Shares Sold................................................. 232,330 1,267,171
Shares issued in reinvestment of net dividends and
distributions............................................. 243,822 0
Shares redeemed............................................. (827,450) (634,997)
--------- ---------
Net increase/(decrease) in shares........................... (351,298) 632,174
--------- ---------
Ending Balance.............................................. 1,762,710 2,090,287
========= =========
CLASS D
Beginning Balance........................................... 475,250 711,840
--------- ---------
Shares Sold................................................. 86,439 374,754
Shares issued in reinvestment of net dividends and
distributions............................................. 66,467 0
Shares redeemed............................................. (207,972) (305,243)
--------- ---------
Net increase/(decrease) in shares........................... (55,066) 69,511
--------- ---------
Ending Balance.............................................. 420,184 781,351
========= =========
</TABLE>
39
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
--------------------------------------
INTERNATIONAL
INCOME EQUITY SMALL CAP
---------- ------------- ---------
<S> <C>
CLASS A
Beginning Balance........................................... 3,339,466 1,568,551 4,129,592
---------- --------- ---------
Shares Sold................................................. 155,058 102,868 1,661,014
Shares issued in reinvestment of net dividends and
distributions............................................. 131,084 122,744 384,551
Shares redeemed............................................. (1,181,717) (692,279) (613,954)
---------- --------- ---------
Net increase/(decrease) in shares........................... (895,575) (466,667) 1,431,611
---------- --------- ---------
Ending Balance.............................................. 2,443,891 1,101,884 5,561,203
========== ========= =========
CLASS D
Beginning Balance........................................... 145,898 366,560 1,290,948
---------- --------- ---------
Shares Sold................................................. 17,012 13,339 428,750
Shares issued in reinvestment of net dividends and
distributions............................................. 3,690 61,747 132,655
Shares redeemed............................................. (84,249) (206,722) (151,079)
---------- --------- ---------
Net increase/(decrease) in shares........................... (63,547) (131,636) 410,326
---------- --------- ---------
Ending Balance.............................................. 82,351 234,924 1,701,274
========== ========= =========
YEAR ENDED MARCH 31, 1998
----------------------------
APPRECIATION SMALL CAP II
------------ ------------
CLASS A
Beginning Balance........................................... 3,190,643 295,961
---------- ---------
Shares Sold................................................. 402,557 1,186,062
Shares issued in reinvestment of net dividends and
distributions............................................. 595,282 48,311
Shares redeemed............................................. (2,074,474) (72,221)
---------- ---------
Net increase/(decrease) in shares........................... (1,076,635) 1,162,152
---------- ---------
Ending Balance.............................................. 2,114,008 1,458,113
========== =========
CLASS D
Beginning Balance........................................... 292,678 135,392
---------- ---------
Shares Sold................................................. 154,004 579,982
Shares issued in reinvestment of net dividends and
distributions............................................. 104,039 24,782
Shares redeemed............................................. (75,471) (28,316)
---------- ---------
Net increase/(decrease) in shares........................... 182,572 576,448
---------- ---------
Ending Balance.............................................. 475,250 711,840
========== =========
</TABLE>
6. MULTIPLE MANAGER STRATEGY. The Adviser uses the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist Managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance of both the total Fund portfolio and of each
Manager. The Adviser will reallocate Fund assets among individual managers or
40
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
recommend to the Company that it employ or terminate particular managers to the
extent the Adviser deems appropriate to achieve the overall objectives of the
particular Fund.
Effective September 30, 1998, the Income Fund's sole Manager is Cincinnati
Asset Management, Inc. Llama Asset Management Company, L.P. and Murray Johnstone
International Limited are no longer Managers for the Income Fund. Effective July
17, 1998, the International Equity Fund's sole Manager is Murray Johnstone
International Limited; Globeflex Capital, L.P. is no longer a Manager for the
International Equity Fund.
As of March 31, 1999, the Managers are as follows:
ESC Strategic Income Fund -- Cincinnati Asset Management, Inc.
ESC Strategic International Equity Fund -- Murray Johnstone
International Limited.
ESC Strategic Small Cap Fund -- Equitable Asset Management, Inc.
ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.; Brandes
Investment Partners, L.P., and Atlantic Capital Management, LLC.
ESC Strategic Small Cap II Fund -- Equitable Asset Management, Inc.
Equitable Asset Management, Inc. is an affiliate of the Adviser.
Effective May 24, 1999, Westcap Investors, LLC has been appointed as a
Manager of the ESC Strategic Appreciation Fund and GlobeFlex Capital L.P. is no
longer a Manager.
7. FEDERAL INCOME TAXES (Unaudited). Capital losses and foreign currency
losses incurred after October 31, 1998 through March 31, 1999, are deemed to
arise on the first business day of the following fiscal year. Such losses may be
deferred and treated as occurring on the first day of the following fiscal year.
The Small Cap II Fund incurred and will elect to defer post October capital
losses of approximately $1,890,515. The International Fund incurred foreign
currency losses and will elect to defer these post October losses of
approximately $26,128.
For the taxable year ended March 31, 1999, 7.36% of the income dividend
paid by the Appreciation Fund qualifies for the dividends received deduction
available for corporations.
As of March 31, 1999, for federal income tax purposes, the following Fund
had a capital loss carry forward available to offset future capital gains, if
any:
AMOUNT EXPIRES
---------- -------
Small Cap II.......................................... $1,359,180 3/31/07
The carry forward will reduce the Fund's taxable income arising from future
net realized gain on investments, if any, to the extent permitted by the Code,
and thus will reduce the amount of the distributions to shareholders which would
otherwise be necessary to relieve the Fund of any liability for federal tax.
The following table presents capital gain dividend distributions from
long-term capital gains for the following Funds for the year ended March 31,
1999:
FUND AMOUNT
- ---- ----------
Income...................................................... $ 139,189
International Equity........................................ 904,995
Small Capital............................................... 3,368,662
Appreciation................................................ 2,386,021
41
<PAGE>
REPORT OF INDENPENDENT ACCOUNTANTS
To the Shareholders and Directors
ESC Strategic Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of SEC Strategic Income
Fund, ESC Strategic International Equity Fund, ESC Strategic Small Cap Fund, ESC
Strategic Appreciation Fund and ESC Strategic Small Cap II Fund (separate
portfolios constituting the ESC Strategic Funds, Inc., hereafter referred to as
the "Funds") at March 31, 1999, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods presents, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of theses financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which include correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
May 14, 1999
<PAGE>
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments -- September 30, 1999 (Unaudited)
SHARES
OR
MOODY'S/S&P PRINCIPAL MARKET
RATINGS # AMOUNT VALUE
- ----------- --------- ------
CORPORATE OBLIGATIONS -- 89.2%
BEVERAGES -- 1.7%
B1/B+ Canandaigua Brands,
Inc., 8.50%,
3/1/2009.......... $132,000 $ 122,760
-----------
CABLE -- 2.9%
B1/B+ Adelphia
Communications,
9.88%, 3/1/2007... 200,000 203,500
-----------
CHEMICALS -- 2.9%
B1/B NL Industries,
11.75%,
10/15/2003........ 200,000 207,500
-----------
CONSUMER GOODS & SERVICES -- 2.7%
Ba3/B+ Finlay Fine Jewelry
Corp., 8.38%,
5/1/2008.......... 200,000 187,500
-----------
ENTERTAINMENT -- 5.1%
Ba2/Bb+ Park Place
Entertainment,
7.875%,
12/15/2005........ 105,000 99,225
B2/B President Casinos,
Inc., 13.00%,
9/15/2001......... 220,000 198,000
B3/B Regal Cinemas, Inc.,
9.50%, 6/1/2008,
Callable 6/1/2003
@ 104.75.......... 95,000 64,600
-----------
361,825
-----------
FINANCIAL SERVICES -- 2.7%
B2/B Polymer Group, Inc.,
9.00%, 7/1/2007... 200,000 190,000
-----------
SHARES
OR
MOODY'S/S&P PRINCIPAL MARKET
RATINGS # AMOUNT VALUE
- ----------- --------- ------
FOOD PRODUCTS (7.6%)
B1/B+ Chiquita Brands,
9.63%,
1/15/2004......... $250,000 $ 219,375
B3/B+ Fleming Co., 10.68%,
7/31/2007,
Callable 7/31/2002
@ 105.31.......... 200,000 185,000
B3/B Packaged Ice, Inc.,
9.75%, 2/1/2005,
Callable 2/1/2002
@ 104.875......... 148,000 133,940
-----------
538,315
-----------
FOREST PRODUCTS & PAPERS -- 1.9%
B1/B+ Doman Industries
Ltd., 8.75%,
3/15/2004......... 186,000 133,920
-----------
GAMING -- 2.8%
B2/B Hollywood Park,
Inc., 9.50%,
8/1/2007.......... 200,000 195,000
-----------
GENERAL INDUSTRIES & MANUFACTURING -- 7.6%
B3/B- International Wire
Group, 11.75%,
6/1/2005.......... 250,000 256,875
B1/B+ Nortek, Inc., 9.13%,
9/1/2007, Callable
9/1/2002 @
104.56............ 290,000 278,400
-----------
535,275
-----------
HEALTH CARE -- 2.4%
B1/B+ NBTY, Inc., 8.63%,
9/15/2007,
Callable 9/15/2002
@ 104.313......... 200,000 167,000
-----------
MANUFACTURING - CONSUMER GOODS -- 2.9%
B2/B Applied Extrusion
Tech., 11.50%,
4/1/2002.......... 200,000 205,500
-----------
See accompanying notes to financial statements.
1
<PAGE>
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments (continued) -- September 30, 1999 (Unaudited)
SHARES
OR
MOODY'S/S&P PRINCIPAL MARKET
RATINGS # AMOUNT VALUE
- ----------- --------- ------
CORPORATE OBLIGATIONS (CONTINUED)
MEDIA - CABLE -- 6.4%
B1/B Helicon Group, Inc.,
11.00%,
11/1/2003......... $250,000 $ 257,813
B2/B Intermedia Capital
Partners, 11.25%,
8/1/2006.......... 174,000 194,880
-----------
452,693
-----------
MEDIA - NON CABLE -- 8.5%
B3/B- Allbritton
Communications,
9.75%,
11/30/2007........ 188,000 188,000
B3/B- Citadel Broadcasting
Corp., 10.25%,
7/1/2007.......... 200,000 205,000
B3/B- Gray Communications
Systems, 10.63%,
10/1/2006,
Callable 10/1/2001
@ 105.31.......... 200,000 207,499
-----------
600,499
-----------
OIL & GAS -- 5.7%
B1/BB- Cliffs Drilling Co.,
10.25%,
5/15/2003......... 200,000 199,000
B2/B- Plains Resources,
Inc., 10.25%,
3/15/2006......... 200,000 202,000
-----------
401,000
-----------
RETAIL -- 2.7%
B3/B- Tropical Sportswear
Int'l, 11.00%,
6/15/2008......... 200,000 189,000
-----------
SOFTWARE -- 1.7%
B3/B- Psinet, Inc.,
10.00%, 2/15/05... 126,000 120,488
-----------
STEEL/IRON -- 2.7%
B2/B Weirton Steel Corp.,
11.38%, 7/1/2004,
Callable 7/1/2002
@ 105.69.......... 200,000 192,000
-----------
SHARES
OR
MOODY'S/S&P PRINCIPAL MARKET
RATINGS # AMOUNT VALUE
- ----------- --------- ------
TELECOMMUNICATIONS -- 6.4%
B2/B Paging Network,
10.00%,
10/15/2008,
Callable
10/15/2001 @ 105.. $200,000 $ 56,000
B3/B- Rural Cellular
Corp., 9.63%,
5/15/2008,
Callable 5/15/2003
@ 104.813......... 200,000 205,000
B3/B- USA Mobile
Communication,
9.50%, 2/1/2004... 250,000 187,500
-----------
448,500
-----------
TEXTILES -- 7.3%
B3/B+ Delta Mills, Inc.,
9.63%, 9/1/2007... 200,000 156,000
B3/B Hartmarx Corp.,
10.88%,
1/15/2002......... 250,000 253,125
B2/B+ Pillowtex Corp.,
10.00%,
11/15/2006........ 151,000 103,435
-----------
512,560
-----------
TRANSPORTATION -- 4.6%
Ba3/BBB Greyhound Lines,
11.50%,
4/15/2007......... 290,000 326,513
-----------
TOTAL CORPORATE
OBLIGATIONS (COST
$6,772,192)....... 6,291,348
-----------
PREFERRED STOCKS -- 2.8%
PUBLISHING & PRINTING -- 2.8%
Primedia Corp....... 2,000 197,000
-----------
TOTAL PREFERRED
STOCKS (COST
$208,000)......... 197,000
-----------
See accompanying notes to financial statements.
2
<PAGE>
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments (continued) -- September 30, 1999 (Unaudited)
SHARES
OR
MOODY'S/S&P PRINCIPAL MARKET
RATINGS # AMOUNT VALUE
- ----------- --------- ------
SHORT-TERM INVESTMENTS -- 6.4%
CASH SWEEP ACCOUNT -- 6.4%
Union Bank of
California........ $448,919 $ 448,919
-----------
TOTAL SHORT-TERM
INVESTMENTS
(COST $448,919)... 448,919
-----------
TOTAL INVESTMENTS
(COST $7,429,112)
(a) -- 98.4%...... 6,937,267
OTHER ASSETS
IN EXCESS OF
LIABILITIES --
1.6%.............. 115,537
-----------
TOTAL NET ASSETS --
100.0%............ $ 7,052,804
===========
(a) Represents cost for federal income tax and financial
reporting purposes and differs from value by net
unrealized depreciation of securities as follows:
Unrealized appreciation.................. $ 45,209
Unrealized depreciation.................. (537,054)
-----------
Net unrealized depreciation.............. $ (491,845)
===========
# See page 18 for Credit Ratings.
See accompanying notes to financial statements.
3
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Assets and Liabilities
September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
INTERNATIONAL
INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II
FUND FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C>
ASSETS
Investments, at value (cost $7,429,112;
$7,547,092; $84,348,597; $14,905,351; and
$19,863,901 respectively)...................... $6,937,267 $8,406,229 $ 85,326,211 $16,798,825 $20,614,752
Repurchase agreements, at cost................... -- -- 6,421,600 1,069,268 2,641,100
---------- ---------- ------------ ----------- -----------
Total Investments.......................... 6,937,267 8,406,229 91,747,811 17,868,093 23,255,852
Foreign Currency (cost $0; $13,795; $0; $0;
$0)............................................ -- 13,951 -- -- --
Interest and dividends receivable................ 180,600 7,394 24,467 29,755 1,158
Receivable for securities sold................... -- 689,960 -- -- --
Prepaid expenses................................. 13,019 22,103 14,899 13,459 11,621
---------- ---------- ------------ ----------- -----------
Total Assets............................... 7,130,886 9,139,637 91,787,177 17,911,307 23,268,631
---------- ---------- ------------ ----------- -----------
LIABILITIES
Payable to custodian............................. -- -- -- -- 1,162,119
Payable for return of collateral received........ -- -- 13,421,600 1,069,268 2,641,100
Income distribution payable...................... 48,783 -- -- -- --
Payable for securities purchased................. -- 778,321 -- -- --
Payable for fund shares repurchased.............. -- -- 258,359 418 107,089
Advisory fee payable............................. -- 3,722 68,937 12,534 13,156
Administration fee payable....................... 117 135 1,280 273 320
12b-1 Distribution fee payable................... 1,666 2,355 24,522 5,093 6,987
Other accrued expenses........................... 27,516 24,975 109,615 29,294 30,742
---------- ---------- ------------ ----------- -----------
Total Liabilities.......................... 78,082 809,508 13,884,313 1,116,880 3,961,513
---------- ---------- ------------ ----------- -----------
NET ASSETS................................. $7,052,804 $8,330,129 $ 77,902,864 $16,794,427 $19,307,118
========== ========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Assets and Liabilities
September 30, 1999 -- (Continued)
(unaudited)
<TABLE>
<CAPTION>
INTERNATIONAL
INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II
FUND FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C>
Net Assets Consist of:
Shares, at par ($0.001).......................... 778 740 4,496 1,458 1,906
Additional paid-in capital....................... 7,657,679 5,603,511 73,350,931 11,645,602 25,262,012
Distributions in excess of net investment
income......................................... (51,225) (50,894) (622,095) (59,754) (212,493)
Accumulated net realized gain/(loss) on
investments and foreign currency
transactions................................... (62,583) 1,916,980 4,191,918 3,313,647 (6,495,158)
Net unrealized appreciation/(depreciation) on
investments and foreign currency
translations................................... (491,845) 859,792 977,614 1,893,474 750,851
---------- ---------- ------------ ----------- -----------
NET ASSETS....................................... $7,052,804 $8,330,129 $ 77,902,864 $16,794,427 $19,307,118
========== ========== ============ =========== ===========
Class A.......................................... $6,558,386 $6,788,232 $ 61,122,475 $13,143,084 $13,468,215
Class D.......................................... $ 494,418 $1,541,897 $ 16,780,389 $ 3,651,343 $ 5,838,903
---------- ---------- ------------ ----------- -----------
$7,052,804 $8,330,129 $ 77,902,864 $16,794,427 $19,307,118
========== ========== ============ =========== ===========
SHARES OF BENEFICIAL INTEREST
Class A
Shares of beneficial interest issued and
outstanding.................................. 723,744 599,553 3,511,544 1,134,349 1,325,016
========== ========== ============ =========== ===========
Net Asset Value and redemption price per share
outstanding.................................. $ 9.06 $ 11.32 $ 17.41 $ 11.59 $ 10.16
========== ========== ============ =========== ===========
Maximum Offering Price per share ($9.06/.955,
$11.32/.955, $17.41/.955, $11.59/.955,
$10.16/.955 respectively).................... $ 9.49 $ 11.85 $ 18.23 $ 12.14 $ 10.64
========== ========== ============ =========== ===========
Class D
Shares of beneficial interest issued and
outstanding.................................. 54,157 140,441 984,860 323,796 581,210
========== ========== ============ =========== ===========
Net Asset Value and redemption price per share
outstanding.................................. $ 9.13 $ 10.98 $ 17.04 $ 11.28 $ 10.05
========== ========== ============ =========== ===========
Maximum Offering Price per share ($9.13/.985,
$10.98/.985, $17.04/.985, $11.28/.985,
$10.05/.985 respectively).................... $ 9.27 $ 11.15 $ 17.30 $ 11.45 $ 10.20
========== ========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Operations
For the Six Months Ended September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
INTERNATIONAL
INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II
FUND FUND FUND FUND FUND
--------- ------------- ---------- ------------ ------------
<S> <C>
Investment Income
Interest................................... $ 366,705 $ 3,728 $ 104,424 $ 12,715 $ 4,044
Dividend (net of withholding tax of $0;
$7,777; $0; $50 and $0, respectively).... 10,124 89,113 149,478 140,245 35,068
Income from Securities Lending
Activities............................... -- -- 34,466 4,729 5,949
Total Income........................ 376,829 92,841 288,368 157,689 45,061
--------- --------- ---------- ---------- ------------
Expenses Advisory............................ 37,211 45,236 467,732 103,600 161,142
Administration............................. 5,582 6,785 70,160 15,540 19,337
12b-1 Distribution fees -- Class A......... 8,654 9,138 91,094 20,641 23,463
12b-1 Distribution fees -- Class D......... 1,948 6,513 77,515 15,778 26,295
Audit fees................................. 8,101 8,283 8,796 7,281 7,281
Custodian.................................. 48 14,571 12,045 1,213 723
Fund accounting............................ 15,327 15,752 16,793 18,553 16,721
Amortization of organizational costs....... 1,047 1,069 -- 2,073 --
Registration and filing fees............... 7,496 7,451 8,817 8,189 8,587
Transfer agent fees and expenses........... 10,806 11,520 88,220 18,159 42,483
Directors fees............................. 318 611 6,586 1,398 1,830
Miscellaneous.............................. 3,844 4,557 62,705 12,807 14,290
--------- --------- ---------- ---------- ------------
Total expenses before waivers....... 100,382 131,486 910,463 225,232 322,152
Less: expenses waived/ reimbursed.......... (37,216) (13,879) -- (7,789) (64,598)
Net expenses............................... 63,166 117,607 910,463 217,443 257,554
--------- --------- ---------- ---------- ------------
Net investment income/ (loss)................ 313,663 (24,766) (622,095) (59,754) (212,493)
--------- --------- ---------- ---------- ------------
Net realized gain/ (loss) on investments and
foreign currency transactions.............. (62,583) 1,094,253 1,682,809 2,196,732 (3,235,334)
Net change unrealized appreciation/
(depreciation) of investments and foreign
currency transactions...................... (490,543) (588,391) 4,467,160 (135,911) 5,176,146
--------- --------- ---------- ---------- ------------
Net realized and unrealized gain/ (loss)..... (553,126) 505,862 6,149,969 2,060,821 1,940,812
Net increase/ (decrease) in net assets
resulting from operations.................. $(239,463) $ 481,096 $5,527,874 $2,001,067 $ 1,728,319
========= ========= ========== ========== ============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
INCOME FUND INTERNATIONAL EQUITY FUND
----------------------------------- -----------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 MARCH 31, 1999 SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ -------------- ------------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C>
Operations:
Net investment income/(loss)....... $ 313,663 $ 851,759 $ (24,766) $ (66,534)
Net realized gain/(loss) on
investments and foreign currency
transactions..................... (62,583) 57,784 1,094,253 1,024,996
Net change unrealized depreciation
of investments and foreign
currency translations............ (490,543) (193,923) (588,391) (1,842,011)
------------ ------------ ----------- ------------
Net change in net assets resulting
from operations.................... (239,463) 715,620 481,096 (883,549)
------------ ------------ ----------- ------------
Dividends and Distributions to
Shareholders:
From net investment income
Class A.......................... (291,487) (759,547) -- --
Class D.......................... (20,518) (32,600) -- --
------------ ------------ ----------- ------------
(312,005) (792,147) -- --
------------ ------------ ----------- ------------
From net realized gains
Class A.......................... -- (104,773) -- (712,147)
Class D.......................... -- (9,574) -- (192,848)
------------ ------------ ----------- ------------
-- (114,347) -- (904,995)
------------ ------------ ----------- ------------
From tax return of capital
Class A.......................... -- (76,574) -- --
Class D.......................... -- (3,289) -- --
------------ ------------ ----------- ------------
-- (79,863) -- --
------------ ------------ ----------- ------------
Change in net assets resulting from
dividends and distributions to
shareholders..................... (312,005) (986,357) -- (904,995)
------------ ------------ ----------- ------------
Capital Share Transactions:
Proceeds from sales of shares:
Class A.......................... 153,064 926,359 209,909 1,144,165
Class D.......................... 3,588 155,831 (6,839) 124,302
------------ ------------ ----------- ------------
156,652 1,082,190 203,070 1,268,467
------------ ------------ ----------- ------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A.......................... 260,711 894,208 -- 582,876
Class D.......................... 20,420 40,551 -- 192,848
------------ ------------ ----------- ------------
281,131 934,759 -- 775,724
------------ ------------ ----------- ------------
Net asset value of shares redeemed:
Class A.......................... (572,756) (18,743,090) (1,625,217) (5,735,950)
Class D.......................... (39,201) (460,910) (424,663) (885,822)
------------ ------------ ----------- ------------
(611,957) (19,204,000) (2,049,880) (6,621,772)
------------ ------------ ----------- ------------
Change in net assets from capital
share transactions............... (174,174) (17,187,051) (1,846,810) (4,577,581)
------------ ------------ ----------- ------------
Total change in net assets........... (725,642) (17,457,788) (1,365,714) (6,366,125)
Net Assets:
Beginning of period................ 7,778,446 25,236,234 9,695,843 16,061,968
------------ ------------ ----------- ------------
End of period...................... $ 7,052,804 $ 7,778,446 $ 8,330,129 $ 9,695,843
============ ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND APPRECIATION FUND
------------------------------------ ------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 MARCH 31, 1999 SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ -------------- ------------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C>
Operations:
Net investment loss............ $ (622,095) $ (817,900) $ (59,754) $ (172,352)
Net realized gain on
investments.................. 1,682,809 2,508,888 2,196,732 1,116,912
Net change unrealized
appreciation/ (depreciation)
of investments............... 4,467,160 (42,488,775) (135,911) (9,813,011)
------------ ------------ ------------ ------------
Net change in net assets
resulting from operations...... 5,527,874 (40,797,787) 2,001,067 (8,868,451)
------------ ------------ ------------ ------------
Dividends and Distributions to
Shareholders:
From net realized gains
Class A...................... 325 (2,603,327) -- (2,762,177)
Class D...................... -- (765,335) -- (692,033)
------------ ------------ ------------ ------------
325 (3,368,662) -- (3,454,210)
------------ ------------ ------------ ------------
Change in net assets resulting
from dividends and
distributions to
shareholders................... 325 (3,368,662) -- (3,454,210)
------------ ------------ ------------ ------------
Capital Share Transactions:
Proceeds from sales of shares:
Class A...................... 2,107,780 8,371,667 299,555 2,982,123
Class D...................... 982,474 1,473,645 114,220 1,227,616
------------ ------------ ------------ ------------
3,090,254 9,845,312 413,775 4,209,739
------------ ------------ ------------ ------------
Net asset value of shares
issued to shareholders in
reinvestment of dividends and
distributions:
Class A...................... (325) 2,359,265 -- 2,596,704
Class D...................... -- 764,367 -- 691,921
------------ ------------ ------------ ------------
(325) 3,123,632 -- 3,288,625
------------ ------------ ------------ ------------
Net asset value of shares
redeemed:
Class A...................... (19,885,160) (28,936,985) (7,715,313) (10,175,152)
Class D...................... (7,645,025) (8,181,883) (1,221,495) (2,462,053)
------------ ------------ ------------ ------------
(27,530,185) (37,118,868) (8,936,808) (12,637,205)
------------ ------------ ------------ ------------
Change in net assets from
capital share transactions... (24,440,256) (24,149,924) (8,523,033) (5,138,841)
------------ ------------ ------------ ------------
Total change in net
assets................ (18,912,057) (68,316,373) (6,521,966) (17,461,502)
Net Assets:
Beginning of period............ 96,814,921 165,131,294 23,316,393 40,777,895
------------ ------------ ------------ ------------
End of period.................. $ 77,902,864 $ 96,814,921 $ 16,794,427 $ 23,316,393
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
SMALL CAP II FUND
------------------------------------
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
(UNAUDITED)
<S> <C>
Operations:
Net investment loss....................................... $ (212,493) $ (309,625)
Net realized loss on investments.......................... (3,235,334) (2,810,903)
Net change unrealized appreciation/ (depreciation) of
investments............................................. 5,176,146 (8,261,391)
----------- ------------
Net change in net assets resulting from operations.......... 1,728,319 (11,381,919)
----------- ------------
Capital Share Transactions:
Proceeds from sales of shares:
Class A................................................. 1,298,963 14,824,338
Class D................................................. 734,309 4,282,060
----------- ------------
2,033,272 19,106,398
----------- ------------
Net asset value of shares redeemed:
Class A................................................. (9,177,910) (6,663,800)
Class D................................................. (2,789,117) (3,179,324)
----------- ------------
(11,967,027) (9,843,124)
----------- ------------
Change in net assets from capital share transactions...... (9,933,755) 9,263,274
----------- ------------
Total change in net assets......................... (8,205,436) (2,118,645)
Net Assets:
Beginning of period....................................... 27,512,554 29,631,199
----------- ------------
End of period............................................. $19,307,118 $ 27,512,554
=========== ============
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
ESC STRATEGIC FUNDS, INC.
Statements of Cash Flows
September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP II
------------ ------------
<S> <C>
Cash Flows from Operating Activities:
Total investment income................................... $ 288,368 $ 45,061
Net expenses.............................................. (910,463) (257,554)
------------ -----------
Net investment income (loss).......................... (622,095) (212,493)
------------ -----------
Adjustments to reconcile net investment income to cash flows
from operating activities
Changes in receivables
Interest................................................ (9,017) (6,878)
Change in payables
Expenses................................................ (13,521) 8,946
------------ -----------
Total adjustments..................................... (22,538) 2,068
------------ -----------
Net cash provided (used) by operating activities... (599,556) (214,561)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments........................ 69,735,243 19,638,969
Purchases of investments.................................. (44,619,889) (10,684,700)
Net purchases of short-term investments with cash received
as collateral from securities lending................... (953,791) 1,129,700
------------ -----------
Net cash provided (used) by investing activities... 24,161,563 10,083,969
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued............................... 3,103,254 2,033,272
Cost of shares redeemed................................... (27,619,051) (11,935,099)
Distributions paid to shareholders........................ 325 --
Dividends reinvested...................................... (325) --
Net collateral received from securities lending........... 953,791 (1,129,700)
------------ -----------
Net cash provided (used) by financing activities... (23,562,006) (11,031,527)
Net increase (decrease) in cash............................. 0 (1,162,119)
Cash at beginning of period................................. -- --
------------ -----------
Cash at end of period....................................... $ 0 $(1,162,119)
============ ===========
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights
<TABLE>
<CAPTION>
INCOME FUND
----------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------
MAY 4, 1994
(COMMENCEMENT
SIX MONTHS OF OPERATIONS)
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1999 1998 1997 1996 1995
------------- ---------- ---------- ---------- ---------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period........... $ 9.77 $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 10.00
------ ------ ------- ------- ------- -------
Income from Investment
Operations
Net investment income....... 0.41 0.51(a) 0.34 0.60 0.59 0.55
Net realized and unrealized
gains/ (losses) on
investments............... (0.71) 0.04 0.44 (0.16) 0.16 (0.05)
------ ------ ------- ------- ------- -------
Total from investment
operations.................. (0.30) 0.55 0.78 0.44 0.75 0.50
------ ------ ------- ------- ------- -------
Less Dividends and
Distributions:.............. -- -- -- -- -- --
From net investment
income.................... (0.41) (0.57) (0.52) (0.60) (0.59) (0.01)
From realized gains......... -- (0.15) -- -- (0.21) (0.55)
From tax return of
capital................... -- (0.05) -- -- -- --
------ ------ ------- ------- ------- -------
Total Dividends and
Distributions............... (0.41) (0.77) (0.52) (0.60) (0.80) (0.56)
------ ------ ------- ------- ------- -------
Net asset value per share,
end of period............. $ 9.06 $ 9.77 $ 9.99 $ 9.73 $ 9.89 $ 9.94
====== ====== ======= ======= ======= =======
Total Return (excludes sales
charge)..................... (3.21%) 5.64% 8.18% 3.91% 7.67% 5.30%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................ $6,558 $7,230 $24,413 $32,506 $36,891 $32,373
Ratios to Average Net Assets
of:
Net investment income..... 8.46% 5.09% 5.27% 5.49% 5.87% 6.29%**
Expenses net of
waivers/reimbursements
and expenses paid by
third parties........... 1.66% 1.91% 1.87% 1.65% 1.70% 1.85%**
Expenses before
waivers/reimbursements
and expenses paid by
third parties........... 2.66% 2.22% 1.87% 1.70% 1.75% 1.86%**
Portfolio Turnover Rate... 13% 95% 130% 123% 138% 92%
</TABLE>
(a) Calculated using the average share method.
** Annualized.
26
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights
<TABLE>
<CAPTION>
INCOME FUND
------------------------------------------------------------------------------
CLASS D
------------------------------------------------------------------------------
MAY 4, 1994
(COMMENCEMENT
SIX MONTHS YEAR YEAR YEAR YEAR OF OPERATIONS)
ENDED ENDED ENDED ENDED ENDED THROUGH
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1999 1998 1997 1996 1995
------------- --------- --------- --------- --------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share, beginning
of period........................... $ 9.84 $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 10.00
------- ------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income............. 0.38 0.50(a) 0.28 0.50 0.54 0.50
Net realized and unrealized gains/
(losses) on investments......... (0.71) 0.01 0.45 (0.16) 0.16 (0.05)
------- ------- ------- ------- ------- -------
Total from investment operations.... (0.33) 0.51 0.73 0.34 0.70 0.45
------- ------- ------- ------- ------- -------
Less Dividends and Distributions:
From net investment income........ (0.38) (0.46) (0.47) (0.50) (0.54) (0.01)
From realized gains............... -- (0.15) -- -- (0.21) (0.50)
From tax return of capital........ -- (0.05) -- -- -- --
------- ------- ------- ------- ------- -------
Total Dividends and Distributions... (0.38) (0.66) (0.47) (0.50) (0.75) (0.51)
------- ------- ------- ------- ------- -------
Net asset value per share, end of
period.......................... $ 9.13 $ 9.84 $ 9.99 $ 9.73 $ 9.89 $ 9.94
======= ======= ======= ======= ======= =======
Total Return (excludes sales
charge)......................... (3.43%) 5.23% 7.64% 3.39% 7.11% 4.74%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)...................... $ 494 $ 548 $ 823 $ 1,420 $ 1,446 $ 1,241
Ratios to Average Net Assets of:
Net investment income........... 7.97% 5.03% 4.77% 4.99% 5.37% 5.73%**
Expenses net of
waivers/reimbursements and
expenses paid by third
parties....................... 2.16% 2.44% 2.37% 2.15% 2.20% 2.29%**
Expenses before
waivers/reimbursements and
expenses paid by third
parties....................... 3.16% 2.96% 2.37% 2.21% 2.25% 2.31%**
Portfolio Turnover Rate......... 13% 95% 130% 123% 138% 92%
</TABLE>
(a) Calculated using the average share method.
** Annualized.
See accompanying notes to financial statements.
27
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------
MAY 12, 1994
(COMMENCEMENT
SIX MONTHS YEAR YEAR YEAR YEAR OF OPERATIONS)
ENDED ENDED ENDED ENDED ENDED THROUGH
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1999 1998 1997 1996 1995
------------- --------- --------- --------- --------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period................ $10.75 $12.06 $ 11.66 $ 11.08 $ 9.90 $10.00
------ ------ ------- ------- ------- ------
Income from Investment Operations
Net investment loss.............. (0.03) (0.06) -- (0.04) (0.04) (0.05)
Net realized and unrealized
gains/(losses) on
investments.................... 0.60 (0.31) 2.37 0.97 1.46 (0.03)
------ ------ ------- ------- ------- ------
Total from investment operations... 0.57 (0.37) 2.37 0.93 1.42 (0.08)
------ ------ ------- ------- ------- ------
Less Dividends and Distributions:
From realized gains.............. -- (0.94) (1.97) (0.35) (0.24) (0.02)(a)
------ ------ ------- ------- ------- ------
Total Dividends and
Distributions.................... -- (0.94) (1.97) (0.35) (0.24) (0.02)
------ ------ ------- ------- ------- ------
Net asset value per share, end of
period......................... $11.32 $10.75 $ 12.06 $ 11.66 $ 11.08 $ 9.90
====== ====== ======= ======= ======= ======
Total Return (excludes sales
charge)........................ 5.20% (2.22%) 22.24% 8.44% 14.41% (0.84%)
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)..................... $6,788 $7,816 $13,286 $18,282 $14,597 $9,213
Ratios to Average Net Assets of:
Net investment loss............ (0.46%) (0.44%) (0.50%) (0.40%) (0.36%) (0.65%)**
Expenses net of
waivers/reimbursements and
expenses paid by third
parties...................... 2.50% 2.45% 2.48% 2.25% 2.37% 2.50%**
Expenses before
waivers/reimbursements and
expenses paid by third
parties...................... 2.81% 2.55% 2.48% 2.25% 2.43% 3.22%**
Portfolio Turnover Rate........ 37% 123% 79% 94% 92% 76%
</TABLE>
(a) Represents distribution in excess of net investment income.
** Annualized.
See accompanying notes to financial statements.
28
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
------------------------------------------------------------------------------
CLASS D
------------------------------------------------------------------------------
MAY 12, 1994
(COMMENCEMENT
SIX MONTHS YEAR YEAR YEAR YEAR OF OPERATIONS)
ENDED ENDED ENDED ENDED ENDED THROUGH
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1999 1998 1997 1996 1995
------------- --------- --------- --------- --------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period................ $10.45 $11.81 $ 11.47 $ 10.95 $ 9.82 $10.00
------ ------ ------- ------- ------- ------
Income from Investment Operations
Net investment loss.............. (0.06) (0.16) (0.13) (0.10) (0.09) (0.07)
Net realized and unrealized
gains/(losses) on
investments.................... 0.59 (0.26) 2.44 0.97 1.46 (0.10)
------ ------ ------- ------- ------- ------
Total from investment operations... 0.53 (0.42) 2.31 0.87 1.37 (0.17)
------ ------ ------- ------- ------- ------
Less Dividends and Distributions:
From realized gains.............. -- (0.94) (1.97) (0.35) (0.24) (0.01)(a)
------ ------ ------- ------- ------- ------
Total Dividends and
Distributions.................... -- (0.94) (1.97) (0.35) (0.24) (0.01)
------ ------ ------- ------- ------- ------
Net asset value per share, end of
period......................... $10.98 $10.45 $ 11.81 $ 11.47 $ 10.95 $ 9.82
====== ====== ======= ======= ======= ======
Total Return (excludes sales
charge)........................ 4.97% (2.73%) 22.09% 7.99% 14.01% (1.72%)
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)..................... $1,542 $1,880 $ 2,776 $ 4,204 $ 3,725 $3,322
Ratios to Average Net Assets of:
Net investment loss............ (0.92%) (0.94%) (1.00%) (0.90%) (0.83%) (1.51%)**
Expenses net of
waivers/reimbursements and
expenses paid by third
parties...................... 3.00% 2.95% 2.98% 2.78% 2.87% 2.98%**
Expenses before
waivers/reimbursements and
expenses paid by third
parties...................... 3.31% 3.05% 2.98% 2.79% 2.96% 3.69%**
Portfolio Turnover Rate........ 37% 123% 79% 94% 92% 76%
</TABLE>
(a) Represents distribution in excess of net investment income.
** Annualized.
See accompanying notes to financial statements.
29
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND
------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------
JUNE 8, 1994
SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT
ENDED ENDED ENDED ENDED ENDED OF OPERATIONS)
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH
1999 1999 1998 1997 1996 MARCH 31, 1995
------------- --------- --------- --------- --------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period........... $ 16.59 $ 22.81 $ 17.55 $ 15.88 $ 11.25 $10.00
------- ------- -------- ------- ------- ------
Income from Investment
Operations
Net investment
income/(loss)............. (0.13) (0.12) 0.02 (0.05) (0.08) (0.03)
Net realized and unrealized
gains/(losses) on
investments............... 0.95 (5.59) 6.97 2.46 5.19 1.52
------- ------- -------- ------- ------- ------
Total from investment
operations.................. 0.82 (5.71) 6.99 2.41 5.11 1.49
------- ------- -------- ------- ------- ------
Less Dividends and
Distributions:
From net investment
income.................... -- -- -- -- -- (0.24)
From realized gains......... --(a) (0.51) (1.73) (0.74) (0.48) --
------- ------- -------- ------- ------- ------
Total Dividends and
Distributions............... -- (0.51) (1.73) (0.74) (0.48) (0.24)
------- ------- -------- ------- ------- ------
Net asset value per share,
end of period............. $ 17.41 $ 16.59 $ 22.81 $ 17.55 $ 15.88 $11.25
======= ======= ======== ======= ======= ======
Total Return (excludes sales
charge)................... 4.94% (24.97%) 40.64% 14.99% 45.88% 15.03%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................ $61,122 $74,740 $126,857 $72,488 $28,840 $8,785
Ratios to Average Net Assets
of:
Net investment loss....... (1.22%) (0.54%) (0.18%) (0.44%) (0.80%) (0.43%)**
Expenses net of waivers/
reimbursements and
expenses paid by third
parties................. 1.84% 1.79% 1.65% 1.66% 2.00% 2.00%**
Expenses before waivers/
reimbursements and
expenses paid by third
parties................. 1.84% 1.79% 1.68% 1.74% 2.18% 3.28%**
Portfolio Turnover Rate... 19% 57% 67% 65% 102% 151%
</TABLE>
(a) Distribution per share was less than $.005.
** Annualized.
See accompanying notes to financial statements.
30
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND
------------------------------------------------------------------------------
CLASS D
------------------------------------------------------------------------------
JUNE 8, 1994
SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT
ENDED ENDED ENDED ENDED ENDED OF OPERATIONS)
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH
1999 1999 1998 1997 1996 MARCH 31, 1995
------------- --------- --------- --------- --------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period........... $ 16.26 $ 22.50 $ 17.35 $ 15.76 $11.22 $10.00
------- ------- ------- ------- ------ ------
Income from Investment
Operations
Net investment loss......... (0.18) (0.22) (0.07) (0.11) (0.16) (0.05)
Net realized and unrealized
gains/(losses) on
investments............... 0.96 (5.51) 6.95 2.44 5.18 1.51
------- ------- ------- ------- ------ ------
Total from investment
operations.................. 0.78 (5.73) 6.88 2.33 5.02 1.46
------- ------- ------- ------- ------ ------
Less Dividends and
Distributions:
From net investment
income.................... -- -- -- -- -- (0.24)
From realized gains......... -- (0.51) (1.73) (0.74) (0.48) --
------- ------- ------- ------- ------ ------
Total Dividends and
Distributions............... -- (0.51) (1.73) (0.74) (0.48) (0.24)
------- ------- ------- ------- ------ ------
Net asset value per share,
end of period............. $ 17.04 $ 16.26 $ 22.50 $ 17.35 $15.76 $11.22
======= ======= ======= ======= ====== ======
Total Return (excludes sales
charge)................... 4.80% (25.40%) 40.47% 14.59% 45.19% 14.72%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................ $16,780 $22,075 $38,274 $22,392 $8,897 $3,367
Ratios to Average Net Assets
of:
Net investment loss....... (1.73%) (1.04%) (0.68%) (0.96%) (1.30%) (0.93%)**
Expenses net of waivers/
reimbursements and
expenses paid by third
parties................. 2.34% 2.29% 2.15% 2.19% 2.50% 2.50%**
Expenses before waivers/
reimbursements and
expenses paid by third
parties................. 2.34% 2.29% 2.18% 2.29% 2.74% 3.68%**
Portfolio Turnover Rate... 19% 57% 67% 65% 102% 151%
</TABLE>
** Annualized.
See accompanying notes to financial statements.
31
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION FUND
------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------
JUNE 6, 1994
SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT
ENDED ENDED ENDED ENDED ENDED OF OPERATIONS)
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH
1999 1999 1998 1997 1996 MARCH 31, 1995
------------- --------- --------- --------- --------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period........... $ 10.73 $ 15.80 $ 14.03 $ 13.02 $ 10.67 $ 10.00
------- ------- ------- ------- ------- -------
Income from Investment
Operations
Net investment
income/(loss)............. (0.03) (0.06) 0.02 (0.04) (0.05) --
Net realized and unrealized
gains/(losses) on
investments............... 0.89 (3.50) 6.02 1.92 2.71 0.73
------- ------- ------- ------- ------- -------
Total from investment
operations.................. 0.86 (3.56) 6.04 1.88 2.66 0.73
------- ------- ------- ------- ------- -------
Less Dividends and
Distributions:
From realized gains......... -- (1.51) (4.27) (0.87) (0.31) (0.06)
------- ------- ------- ------- ------- -------
Total Dividends and
Distributions............... -- (1.51) (4.27) (0.87) (0.31) (0.06)
------- ------- ------- ------- ------- -------
Net asset value per share,
end of period............. $ 11.59 $ 10.73 $ 15.80 $ 14.03 $ 13.02 $ 10.67
======= ======= ======= ======= ======= =======
Total Return (excludes sales
charge)................... 8.01% (22.43%) 46.73% 14.25% 25.07% 7.32%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................ $13,143 $18,916 $33,394 $44,767 $25,561 $15,126
Ratios to Average Net Assets
of:
Net investment loss....... (0.47%) (0.44%) (0.40%) (0.30%) (0.39%) (0.04%)**
Expenses net of waivers/
reimbursements and
expenses paid by third
parties................. 2.00% 1.95% 1.80% 1.82% 2.00% 2.00%**
Expenses before waivers/
reimbursements and
expenses paid by third
parties................. 2.07% 1.97% 1.80% 1.84% 2.10% 2.88%**
Portfolio Turnover Rate... 62% 96% 67% 71% 78% 58%
</TABLE>
** Annualized.
See accompanying notes to financial statements.
32
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION FUND
------------------------------------------------------------------------------
CLASS D
------------------------------------------------------------------------------
JUNE 6, 1994
SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT
ENDED ENDED ENDED ENDED ENDED OF OPERATIONS)
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH
1999 1999 1998 1997 1996 MARCH 31, 1995
------------- --------- --------- --------- --------- --------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period........... $10.47 $15.54 $13.85 $12.91 $10.63 $10.00
------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment loss......... (0.06) (0.15) (0.08) (0.08) (0.09) (0.03)
------ ------ ------ ------ ------ ------
Total Dividends and
Distributions............... -- (1.51) (4.27) (0.87) (0.31) 0.06
------ ------ ------ ------ ------ ------
Net realized and unrealized
gains/(losses) on
investments............... 0.87 (3.41) 6.04 1.89 2.68 0.72
------ ------ ------ ------ ------ ------
Total from investment
operations.................. 0.81 (3.56) 5.96 1.81 2.59 0.69
------ ------ ------ ------ ------ ------
Less Dividends and
Distributions:
From realized gains......... -- (1.51) (4.27) (0.87) (0.31) (0.06)
------ ------ ------ ------ ------ ------
Total Dividends and
Distributions............... -- (1.51) (4.27) (0.87) (0.31) (0.06)
------ ------ ------ ------ ------ ------
Net asset value per share,
end of period............. $11.28 $10.47 $15.54 $13.85 $12.91 $10.63
====== ====== ====== ====== ====== ======
Total Return (excludes sales
charge)................... 7.74% (22.82%) 46.76% 13.81% 24.50% 6.92%
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)................ $3,651 $4,400 $7,384 $4,054 $2,482 $1,693
Ratios to Average Net Assets
of:
Net investment loss....... (0.99%) (0.94%) (0.90%) (0.78%) (0.86%) (0.56%)**
Expenses net of waivers/
reimbursements and
expenses paid by third
parties................. 2.50% 2.45% 2.30% 2.34% 2.50% 2.50%**
Expenses before waivers/
reimbursements and
expenses paid by third
parties................. 2.57% 2.47% 2.30% 2.36% 2.64% 3.40%**
Portfolio Turnover Rate... 62% 96% 67% 71% 78% 58%
</TABLE>
** Annualized.
See accompanying notes to financial statements.
33
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP II FUND
--------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------
JANUARY 28, 1997
(COMMENCEMENT
OF OPERATIONS)
SIX MONTHS ENDED YEAR ENDED YEAR ENDED THROUGH
SEPTEMBER 30, 1999 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
------------------ -------------- -------------- ----------------
(UNAUDITED)
<S> <C>
Net asset value per share, beginning
of period........................... $ 9.61 $ 13.68 $ 9.64 $10.00
------- ------- ------- ------
Income from Investment Operations
Net investment income/(loss)...... (0.11) (0.09) 0.01 --
Net realized and unrealized
gains/(losses) on investments... 0.66 (3.98) 4.65 (0.36)
------- ------- ------- ------
Total from investment operations.... 0.55 (4.07) 4.66 (0.36)
------- ------- ------- ------
Less Dividends and Distributions:
From net investment income........ -- -- (0.36) --
From realized gains............... -- -- (0.26) --
------- ------- ------- ------
Total Dividends and Distributions... -- -- (0.62) --
------- ------- ------- ------
Net asset value per share, end of
period.......................... $ 10.16 $ 9.61 $ 13.68 $ 9.64
======= ======= ======= ======
Total Return (excludes sales
charge)......................... 5.72% (29.75%) 48.92% (3.60%)
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)...................... $13,468 $20,077 $19,942 $2,852
Ratios to Average Net Assets of:
Net investment income/(loss).... (1.51%) (0.87%) (0.36%) 0.25%**
Expenses net of
waivers/reimbursements and
expenses paid by third
parties....................... 1.86% 2.00% 1.62% 2.00%**
Expenses before
waivers/reimbursements and
expenses paid by third
parties....................... 2.36% 2.27% 2.45% 5.51%**
Portfolio Turnover Rate......... 23% 58% 86% 14%
</TABLE>
** Annualized.
See accompanying notes to financial statements.
34
<PAGE>
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP II FUND
--------------------------------------------------------------------------
CLASS D
--------------------------------------------------------------------------
JANUARY 28, 1997
(COMMENCEMENT
OF OPERATIONS)
SIX MONTHS ENDED YEAR ENDED YEAR ENDED THROUGH
SEPTEMBER 30, 1999 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
------------------ -------------- -------------- ----------------
(UNAUDITED)
<S> <C>
Net asset value per share,
beginning of period................ $ 9.52 $13.61 $ 9.63 $10.00
------ ------ ------ ------
Income from Investment Operations
Net investment loss.............. (0.12) (0.16) (0.03) --
Net realized and unrealized
gains/(losses) on
investments.................... 0.65 (3.93) 4.63 (0.37)
------ ------ ------ ------
Total from investment operations... 0.53 (4.09) 4.60 (0.37)
------ ------ ------ ------
Less Dividends and Distributions:
From net investment income....... -- -- (0.36) --
From realized gains.............. -- -- (0.26) --
------ ------ ------ ------
Total Dividends and
Distributions.................... -- -- (0.62) --
------ ------ ------ ------
Net asset value per share, end of
period......................... $10.05 $ 9.52 $13.61 $ 9.63
====== ====== ====== ======
Total Return (excludes sales
charge).......................... 5.57% (30.05%) 48.33% (3.70%)
Ratios/Supplemental Data:
Net Assets End of Period (in
thousands)..................... $5,839 $7,435 $9,689 $1,304
Ratios to Average Net Assets of:
Net investment loss............ (2.01%) (1.37%) (0.86%) (0.23%)**
Expenses net of
waivers/reimbursements and
expenses paid by third
parties...................... 2.36% 2.50% 2.12% 2.50%**
Expenses before
waivers/reimbursements and
expenses paid by third
parties...................... 2.87% 2.77% 2.95% 6.91%**
Portfolio Turnover Rate........ 23% 58% 86% 14%
</TABLE>
** Annualized.
See accompanying notes to financial statements.
35
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
1. DESCRIPTION. ESC Strategic Funds, Inc. (the "Company") was incorporated
in Maryland on November 24, 1993. The Company currently comprises five
portfolios: ESC Strategic Income Fund, ESC Strategic International Equity Fund,
(formerly ESC Strategic Global Equity Fund), ESC Strategic Small Cap Fund, ESC
Strategic Appreciation Fund, and ESC Strategic Small Cap II Fund, (formerly ESC
Strategic Growth Fund),(individually a "Fund"; collectively the "Funds"). The
Company is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company. Each Fund, with the
exception of ESC Strategic Small Cap Fund, operates as a diversified fund. ESC
Strategic Small Cap Fund, operates as a non-diversified fund. The Company's
Articles of Incorporation authorize the issuance of two classes of common stock
designated as Class A and Class D for each Fund. Class A shares are offered with
a maximum front-end sales charge of 4.50% which may be reduced or waived in
certain cases. Class A shares are also subject to a Service and Distribution Fee
calculated at an annual rate of up to 0.25% of the average daily net asset value
of Class A shares. Class D shares are offered with a front-end sales charge of
1.50% and are subject to a Service and Distribution Fee at an annual rate of up
to 0.75% based on the average daily net asset value of Class D shares. The
Company's Board of Directors may, in the future, authorize the issuance of
additional classes of capital stock for the Funds.
The Funds' investment objectives are as follows:
ESC Strategic Income Fund - To seek a high level of current income,
with a secondary objective of total return. The Fund seeks to achieve its
investment objective by investing primarily in debt instruments of U.S. and
foreign issuers that are rated below investment grade. (Prior to September
30, 1998, this Fund primarily invested in a diversified portfolio of
corporate, government and other debt instruments of U.S. issuers.)
ESC Strategic International Equity Fund - To seek long-term capital
appreciation. The Fund seeks to achieve its investment objective by
primarily investing in a diversified portfolio of publicly traded common
stocks and securities convertible into or exchangeable for common stock of
non-U.S. issuers. (Prior to July 17, 1998, this Fund's investments were
diversified across both domestic and international markets.)
ESC Strategic Small Cap Fund -- To seek a high level of capital
appreciation. The Fund pursues its objective by investing primarily in
equity securities of domestic and foreign issuers.
ESC Strategic Appreciation Fund -- To seek long-term capital
appreciation. The Fund seeks to achieve its investment objective by
primarily investing in a diversified portfolio of U.S. based companies
publicly traded common stocks and securities convertible into or
exchangeable for common stock.
ESC Strategic Small Cap II Fund -- To seek a high level of capital
appreciation. The Fund pursues its objective by investing primarily in
equity securities of domestic and foreign issuers believed to offer
superior opportunities for growth.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies followed by the Funds in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles ("GAAP"). The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts and disclosures. Actual results could differ from those estimates.
36
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
A. PORTFOLIO VALUATION. Investments in securities are valued at the
last sales price on the securities exchange or the NASDAQ National Market
System on which such securities are primarily traded or, if there are no
trades, at the current bid price, as of 4:00 p.m. eastern time.
Over-the-counter securities, or securities for which there were no
transactions, are valued at the closing bid price. Bid price is used when
no asked price is available. Bonds and other fixed income securities are
valued by using market quotations, and may be valued on the basis of prices
provided by a pricing service. Securities for which market quotations are
not readily available are valued at fair value as determined in good faith
by or at the direction of the Board of Directors. Short-term securities
which mature in 60 days or less are valued at amortized cost, if their
terms to maturity at purchase were 60 days or less, or by amortizing their
value on the 61st day prior to maturity, if their original term to maturity
at purchase exceeded 60 days.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities
transactions are recorded on a trade date basis. Realized gains and losses
from securities transactions are recorded on the identified cost basis.
Dividend income is recognized on the ex-dividend date and interest income,
including amortization of premium and accretion of discount on investments,
is accrued daily as earned.
C. DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders are recorded on the ex-dividend date. The
amount of dividends and distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax" differences are considered either
temporary or permanent in nature. To the extent these differences are
permanent in nature, such amounts are reclassified within the capital
accounts based on their federal tax basis treatment; temporary differences
do not require reclassification. Dividends and distributions which exceed
net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in
excess of net investment income or distributions in excess of net realized
capital gains.
D. REPURCHASE AGREEMENTS. The Funds may purchase instruments from
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase them at an agreed upon time and price
("repurchase agreements"). The seller under a repurchase agreement is
required to maintain the value of the securities subject to the agreement
at not less than the repurchase price. Default by the seller would,
however, expose the relevant Funds to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreements. Accordingly, the Funds
could receive less than the repurchase price upon the sale of collateral
securities.
E. FEDERAL INCOME TAXES. It is the policy of each of the Funds to
continue to qualify as a "Regulated Investment Company" under Subchapter M
of the Internal Revenue Code of 1986, as amended. By so qualifying, the
Funds will not be subject to Federal income taxes to the extent that they
distribute all of their taxable and tax-exempt income for the fiscal year.
The Funds also intend to meet the distribution requirements to avoid the
payment of an excise tax. Accordingly, no provision for taxes is recorded.
F. ORGANIZATIONAL EXPENSES. Costs incurred in connection with the
organization and initial registration of the Funds, with the exception of
the Small Cap II Fund, have been deferred and are being amortized on a
straight-line basis over sixty months beginning with each Fund's
commencement of operations. In the event any of the initial
37
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
shares of the Funds are redeemed during the amortization period, the
redemption proceeds will be reduced by a pro rata portion of any
unamortized organization expenses in the proportion as the number of shares
being redeemed bears to the number of initial shares outstanding at the
time of redemption.
G. DETERMINATION OF NET ASSET VALUE AND CALCULATION OF EXPENSES.
Expenses directly attributable to a Fund are charged to that Fund. Other
expenses of the Company are allocated proportionately among the Funds in
relation to the net assets of each Fund or on another reasonable basis. In
calculating net asset value per share of each class, investment income,
realized and unrealized gains and losses, and expenses other than class
specific expenses are allocated daily to each class of shares based upon
the proportion of net assets of each class at the beginning of each day.
Distribution expenses are solely borne by the class incurring the expense.
H. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Funds
are maintained in U.S. dollars; non-U.S. dollar denominated amounts are
translated into U.S. dollars as follows with the resultant exchange gains
and losses recorded in the Statement of Operations:
(i) market value of investment securities and other assets and
liabilities: at the exchange rate on the valuation date,
(ii) purchases and sales of investment securities, income and
expenses, at the exchange rate prevailing on the respective date of such
transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities at period
end. Such fluctuations are included with the net realized and unrealized
gain or loss from investments. However, the Funds do isolate the effect of
fluctuations in foreign exchange rates when determining the gain or loss
upon the sale or maturity of foreign currency denominated debt obligations
pursuant to U.S. Federal income tax regulations. Such amounts are
categorized as foreign exchange gain or loss for both financial reporting
and income tax reporting purposes.
Reported net realized foreign exchange gains or losses arise from
sales and maturities of short-term securities, currency gains and losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Funds' books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of the assets and
liabilities, other than investments in securities at period end, resulting
from changes in the foreign exchange rate.
I. FORWARD FOREIGN EXCHANGE CONTRACTS. A forward foreign exchange
contract is a commitment to buy or sell a foreign currency at a future date
at a negotiated exchange rate. The Funds bear the market risk which arises
from possible changes in foreign exchange values. Risks may arise from the
potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of the foreign currency
relative to the U.S. dollar. The gain or loss from the difference between
the cost of original contracts and the amount realized upon the closing of
such contracts is included in net realized gains on foreign exchange
transactions.
38
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
J. OFF-BALANCE SHEET RISK. The Funds may invest in various financial
instruments with off-balance sheet risk. These financial instruments
include taking positions in foreign currency contracts. During the period
the forward contract is open, changes in the value of the contract are
recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at
the end of the day's trading. When the forward contract is closed, the Fund
records a realized gain or loss between the proceeds from (or cost of) the
closing transaction and the Fund's basis in the contract. The Funds enter
into such contracts for the purpose of hedging exposure to change in
foreign currency exchange rates on their portfolio holdings. A lack of
correlation between the price of the security and the underlying contract
could result in a loss to the Funds. At September 30, 1999, the
International Equity Fund had the following open forward foreign currency
contract:
INTERNATIONAL EQUITY FUND
LONG CONTRACT:
<TABLE>
<CAPTION>
SETTLEMENT MARKET UNREALIZED
AMOUNT/CURRENCY DATE COST VALUE GAIN
<S> <C> --------------- ---------- ------- ------- ----------
9,396,725/Japanese Yen.................... 10/1/99 $88,025 $88,259 $234
</TABLE>
K. CREDIT AND MARKET RISK. Funds that invest in high yield
instruments are subject to certain credit and market risks. The yields of
high yield debt obligations reflect, among other things, perceived credit
risk. The Funds' investment in securities rated below investment grade
typically involve risks not associated with higher rated securities
including, among others, greater risk of timely and ultimate payment of
interest and principal, greater market price volatility and less liquid
secondary market trading.
L. SECURITIES LENDING. To increase current income, each Fund may lend
its portfolio securities worth up to one-third of that Fund's total assets
to brokers, dealers and financial institutions, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities
or cash or letters of credit maintained on a daily mark-to-market basis in
an amount at least equal to the current market value of the securities
loaned; (2) the Funds may at any time call the loan and obtain the return
of the securities loaned within five business days, therefore not
considered to be illiquid investments; and (3) the Funds will receive any
interest or dividends paid on the loaned securities while simultaneously
seeking to earn interest on the investment of collateral.
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money
market instruments. The cash or subsequent short-term investments are
recorded as assets of the Funds, offset by a corresponding liability to
repay the cash at the termination of the loan. In addition, the short-term
securities purchased with the cash collateral are included in the
accompanying schedules of portfolio investments. In connection with lending
securities, the Funds may pay reasonable finders, administrative and
custodial fees. Loans of securities involve risk that the borrower may fail
to return the securities or may fail to provide additional collateral.
According to GAAP, a statement of cash flows is presented if the Fund lent
out and received cash as collateral, on average, more than 10% of net
assets during the year.
39
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
As of September 30, 1999, the following Funds had securities with the
following market values on loan:
MARKET VALUE MARKET VALUE
OF COLLATERAL OF LOANED SECURITIES
------------- --------------------
Small Cap...................... $13,421,600 $12,553,770
Appreciation................... $ 1,069,268 $ 1,027,733
Small Cap II................... $ 2,641,100 $ 2,339,440
The loaned securities were fully collateralized by cash which was invested
in short term corporate bonds and repurchase agreements at September 30, 1999.
As disclosed in the schedules of portfolio investments the Small Cap ,
Appreciation and Small Cap II Funds collectively invested cash collateral in a
Lehman Brothers Repurchase Agreement with an interest rate of 5.83% and a
maturity of 10/1/1999 which was collateral by $10,630,000 Collateralized
Mortgage Obligation, Series 99-BC2, due 6/25/29 with a market value of
$10,638,879.
3. RELATED PARTY TRANSACTIONS. The Company has entered into an investment
advisory agreement (the "Investment Advisory Agreement") with SunTrust Equitable
Securities Corporation ("STES" or the "Adviser"). The Investment Advisory
Agreement provides for the Adviser to be paid a fee calculated and accrued daily
and paid monthly at the annual rate of 1.25% of average daily net assets for ESC
Strategic Small Cap II Fund and 1.00% of such net assets for each of the other
Funds. The Adviser provides portfolio management supervision and certain
administrative, clerical and bookkeeping services for the Company. The Adviser
has entered into agreements with various portfolio managers (the "Managers") to
provide portfolio management services for the Funds. Equitable Asset Management,
a wholly-owned subsidiary of the Adviser, provides portfolio management services
for Small Cap and Small Cap II Funds and approximately one-third of the assets
of the Appreciation Fund. The Adviser has retained various other Managers to
advise the International Equity Fund, Income Fund and the remaining assets of
the Appreciation Fund. The Adviser pays any fees payable under these agreements
with the Managers. For the six months ended September 30, 1999, the Adviser
voluntarily waived fees of $37,216, $13,879, $7,789, and $64,598 for the Income
Fund, International Equity Fund, Appreciation Fund and Small Cap II Fund,
respectively. The Adviser did not waive any fee for the Small Cap Fund.
BISYS Fund Services Limited Partnership d/b/a/ BISYS Fund Services
("BISYS") and BISYS Fund Services, Inc ("BFSI") are each a wholly-owned
subsidiary of the BISYS Group, Inc. BISYS serves as Administrator subject to the
supervision of the Company's Board of Directors and officers pursuant to the
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement include day-to-day administration of matters
related to the corporate existence of the Company, maintenance of its records,
preparation of reports, supervision of the Funds' arrangement with their
custodian and assistance in the preparation of the Company's Registration
Statement under federal and state laws. Pursuant to the Administration
Agreement, BISYS is entitled to a fee calculated and accrued daily and paid
monthly at the annual rate of 0.15% of the average daily net assets of each
Fund.
BFSI serves as transfer agent and fund accountant for the Company. Pursuant
to a Transfer Agent Agreement between the Company and BFSI, BFSI provides the
Company with transfer and dividend disbursing agent services, for which it
receives a fee of $15.00 per account per year subject to a required minimum fee
of $15,000 for each Fund, plus
40
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
out-of-pocket expenses. Pursuant to the Fund Accounting Agreement between the
Company and BFSI, BFSI assists the Company in calculating net asset values and
provides certain other accounting services for each Fund for an annual fee of
$30,000 per Fund plus out-of-pocket expenses.
STES has voluntarily agreed to reimburse the Funds to the extent that their
ratios of expenses to average net assets exceed certain percentages as follows:
Income -- 2.00% (Class A), 2.50% (Class D); International Equity -- 2.50% (Class
A), 3.00% (Class D); Small Cap -- 2.00% (Class A), 2.50% (Class D);
Appreciation -- 2.00% (Class A), 2.50% (Class D), and Small Cap II -- 2.00%
(Class A), 2.50% (Class D).
BISYS acts as Distributor for the Funds pursuant to a Distribution
Contract. Each Fund has adopted a service and distribution plan ("Plan") with
respect to each class of its shares. The Plans provide that Class A shares will
pay the Distributor a fee up to an annual rate of 0.25% of the value of average
daily net assets of Class A shares in return for financing certain distribution
and shareholder service activities related to Class A shares. The Plans provide
that Class D shares will pay the Distributor amounts up to an annual rate of
0.75% of the average daily net assets of Class D shares to finance certain
distribution and shareholder services activities related to Class D shares.
4. SECURITIES TRANSACTIONS.
A. PURCHASE AND SALE TRANSACTIONS. The aggregate amount of purchases
and sales of investment securities, other than short-term securities, for
the six months ended September 30, 1999 were as follows:
PURCHASES SALES
----------- -----------
Income.................................... $ 1,081,680 $ 877,108
International Equity...................... $ 3,345,428 $ 4,980,016
Small Cap................................. $16,988,566 $40,820,200
Appreciation.............................. $12,247,385 $21,073,506
Small Cap II.............................. $ 5,819,284 $14,057,679
41
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
5. CAPITAL SHARE TRANSACTIONS. The Company is authorized to issue 650
million shares of capital stock with a par value $0.001 each. Transactions in
each class of shares of the Funds for the six months ended September 30, 1999,
were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------
INTERNATIONAL
INCOME EQUITY SMALL CAP
----------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C>
CLASS A
Beginning Balance.......................................... 740,072 727,019 4,504,805
---------- --------- ----------
Shares Sold................................................ 16,526 17,989 118,276
Shares issued in reinvestment of net dividends and
distributions............................................ 27,337 -- (20)
Shares redeemed............................................ (60,191) (145,455) (1,111,517)
---------- --------- ----------
Net change in shares....................................... (16,328) (127,466) (993,261)
---------- --------- ----------
Ending Balance............................................. 723,744 599,553 3,511,544
========== ========= ==========
CLASS D
Beginning Balance.......................................... 55,694 179,858 1,357,437
---------- --------- ----------
Shares Sold................................................ 363 (480) 54,922
Shares issued in reinvestment of net dividends and
distributions............................................ 2,126 -- --
Shares redeemed............................................ (4,026) (38,937) (427,499)
---------- --------- ----------
Net change in shares....................................... (1,537) (39,417) (372,577)
---------- --------- ----------
Ending Balance............................................. 54,157 140,441 984,860
========== ========= ==========
SIX MONTHS ENDED
SEPTEMBER 30, 1999
---------------------------
APPRECIATION SMALL CAP II
------------ ------------
(UNAUDITED) (UNAUDITED)
CLASS A
Beginning Balance........................................... 1,762,710 2,090,287
--------- ---------
Shares Sold................................................. 25,100 123,185
Shares issued in reinvestment of net dividends and
distributions............................................. -- --
Shares redeemed............................................. (653,461) (888,456)
--------- ---------
Net change in shares........................................ (628,361) (765,271)
--------- ---------
Ending Balance.............................................. 1,134,349 1,325,016
========= =========
CLASS D
Beginning Balance........................................... 420,184 781,351
--------- ---------
Shares Sold................................................. 10,621 70,575
Shares issued in reinvestment of net dividends and
distributions............................................. -- --
Shares redeemed............................................. (107,009) (270,716)
--------- ---------
Net change in shares........................................ (96,388) (200,141)
--------- ---------
Ending Balance.............................................. 323,796 581,210
========= =========
</TABLE>
42
<PAGE>
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1999
(unaudited)
6. MULTIPLE MANAGER STRATEGY. The Adviser uses the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist Managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance of both the total Fund portfolio and of each
Manager. The Adviser will reallocate Fund assets among individual Manager's or
recommend to the Company that it employ or terminate particular Manager's to the
extent the Adviser deems appropriate to achieve the overall objectives of the
particular Fund.
Effective May 24, 1999, Westcap Investors, LLC replaced Globe Flex Capital,
L.P. as a Manager of the ESC Stratagie Appreciation Fund.
The Managers are as follows:
ESC Strategic Income Fund-Cincinnati Asset Management, Inc.
ESC Strategic International Equity Fund-Murray Johnstone International
Limited.
ESC Strategic Small Cap Fund-Equitable Asset Management, Inc.
ESC Strategic Appreciation Fund-Westcap Investors, LLC; Brandes
Investment Partners, L.P., and Atlantic Capital Management, LLC.
ESC Strategic Small Cap II Fund-Equitable Asset Management, Inc.
Equitable Asset Management, Inc. is an affiliate of the Adviser.
43
<PAGE>
STI CLASSIC FUNDS
PART C: OTHER INFORMATION
Post-Effective Amendment No. 35
Item 23. Exhibits:
(a) Declaration of Trust - originally filed with Registrant's Registration
Statement on Form N-1A filed February 12, 1992 and incorporated by
reference to Exhibit 1 of Post-Effective Amendment No. 15 to the
Registrant's Registration Statement filed with the SEC via EDGAR
Accession No. 0000912057-96-015938 on July 31, 1996.
(b)(1) By-Laws - originally filed with Registrant's Pre-Effective Amendment
No. 1 filed April 23, 1992 and incorporated by reference to Exhibit 2
of Post-Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
(b)(2) Amended By-Laws - incorporated by reference to Exhibit (b)(2) of Post-
Effective Amendment No. 23 to the Registrant's Registration Statement
filed with the SEC via EDGAR Accession No. 0001047469-98-027407 on
July 15, 1998.
(c) Not applicable.
(d)(1) Revised Investment Advisory Agreement with Trusco Capital Management,
Inc. - as originally filed with Registrant's Post-Effective Amendment
No. 5 filed August 2, 1993 and incorporated by reference to Exhibit
5(c) of Post-Effective Amendment No. 15 to the Registrant's
Registration Statement filed with the SEC via EDGAR Accession No.
0000912057-96-015938 on July 31, 1996.
(d)(2) Investment Advisory Agreement with American National Bank and Trust
Company - as originally filed with Registrant's Post-Effective
Amendment No. 6 filed October 22, 1993 and as Exhibit 5(d) of Post-
Effective Amendment No. 15 to the Registrant's Registration Statement
filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on
July 31, 1996.
(d)(3) Investment Advisory Agreement with Sun Bank Capital Management,
National Association (now STI Capital Management, N.A.) - as
originally filed with Registrant's Post-Effective Amendment No. 6
filed October 22, 1993 and incorporated by reference to Exhibit 5(e)
of Post-Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
(d)(4) Investment Advisory Agreement with Trust Company Bank (now SunTrust
Bank, Atlanta) - as originally filed with Registrant's Post-Effective
Amendment No. 6 filed October 22, 1993 and incorporated by reference
to Exhibit D(4) of Post-Effective Amendment No. 24 to the Registrant's
Statement filed with the SEC via EDGAR Accession No. 0001047469-98-
028802 on July 30, 1998.
(d)(5) Revised Schedule A to the Revised Investment Advisory Agreement with
Trusco Capital Management, Inc.dated May 24, 1999 - incorporated by
reference to the Registrant's Post-Effective Amendment No. 32 to the
Registrant's Registration Statement filed the SEC via EDGAR Accession
No. 0001047469-99-037088 on September 28, 1999.
(d)(6) Revised Schedule A to the Revised Investment Advisory Agreement with
Trusco Capital Management, Inc. dated October 1, 1999 - incorporated
by reference to the Registrant's Post-Effective Amendment No. 33 to
the Registrant's Registration Statement filed the SEC via EDGAR
Accession No. 0001 0000912057-99-007899 on December 1, 1999.
(d)(7) Revised Schedule A to the Revised Investment Advisory Agreement with
Trusco Capital Management, Inc. dated March 27, 2000 is filed
herewith.
(e) Distribution Agreement - incorporated by reference to Exhibit 6 of
Post-Effective Amendment No. 16 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
021336 on September 27, 1996.
(f) Not applicable.
(g)(1) Custodian Agreement with Trust Company Bank dated February 1, 1994 -
originally filed with Registrant's Post-Effective Amendment No. 13
filed September 28, 1995 and incorporated by reference to Exhibit 8(b)
of Post-Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
(g)(2) Custodian Agreement with the Bank of California - incorporated by
reference to Exhibit 8(a) of Post-Effective Amendment No. 15 to the
Registrant's Registration Statement filed with the SEC via EDGAR
Accession No. 0000912057-96-015938 on July 31, 1996.
(g)(3) Fourth Amendment to Custodian Agreement by and between STI Trust &
Investment Operations, Inc. and The Bank of New York dated May 6, 1997
- incorporated by reference to Exhibit 8(d) of Post-Effective
Amendment No. 21 to the Registrant's Registration Statement filed with
the SEC via EDGAR Accession No. 0000912057-97-
C-1
<PAGE>
032207 on September 30, 1997.
(h)(1) Transfer Agent Agreement with Federated Services Company dated May 14,
1994 - originally filed with Post-Effective Amendment No. 9 filed
September 22, 1994 and incorporated by reference to Exhibit 8(c) of
Post-Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
(h)(2) Administration Agreement with SEI Financial Management Corporation
dated May 29, 1995 - incorporated by reference to the Registrant's
Post-Effective Amendment No. 32 to the Registrant's Registration
Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088
on September 28, 1999.
(h)(3) Consent to Assignment and Assumption of the Administration Agreement
between STI Classic Funds and SEI Financial Management Corporation -
incorporated by reference to Exhibit 9(b) of Post-Effective Amendment
No. 21 to the Registrant's Registration Statement filed with the SEC
via EDGAR Assession No. 0000912057-97-032207 on September 30, 1997.
(i) Opinion and Consent of Counsel - incorporated by reference to the
Registrant's Post-Effective Amendment No. 32 to the Registrant's
Registration Statement filed the SEC via EDGAR Accession No.
0001047469-99-037088 on September 28, 1999.
(j)(1) Consent of Arthur Andersen LLP, independent public accountants, is
filed herewith.
(j)(2) Consent of PricewaterhouseCoopers LLP, independent public accountants,
is filed herewith.
(k) Not applicable.
(l) Not applicable.
(m)(1) Distribution Plan - Investor Class - incorporated by reference to
Exhibit 15 of Post-Effective Amendment No. 16 to the Registrant's
Registration Statement filed with the SEC via EDGAR Accession No.
0000912057-96-021336 on September 27, 1996.
(m)(2) Distribution and Service Agreement relating to Flex Shares dated May
29, 1995 - originally filed with Post-Effective Amendment No. 12 filed
August 17, 1995 and incorporated by reference to Exhibit 15(a) of
Post-Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
(n) Not applicable.
(o) Rule 18f-3 Plan - incorporated by reference to Exhibit (o) of Post-
Effective Amendment No. 23 to the Registrant's Registration Statement
filed with the SEC via EDGAR Accession No. 0001047469-98-027407 on
July 15, 1998.
(o)(1) Certificate of Class Designation - incorporated by reference to
Exhibit (o)(1) of Post-Effective Amendment No. 27 to the Registrant's
Statement filed with the SEC via EDGAR Accession No. 0001047469-99-
009731 on April 15, 1999.
(p)(1) Code of Ethics for STI Classic Funds is filed herewith.
(p)(2) Code of SEI Investments Distribution Company is filed herewith.
(p)(3) To be filed by amendment.
(p)(4) Code of Ethics for Trusco Capital Management, Inc. is filed herewith.
(q) Powers of Attorney - incorporated by reference to the Registrant's
Post-Effective Amendment No. 32 to the Registrant's Registration
Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088
on September 28, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant:
See the Prospectuses and Statement of Additional Information regarding the
Trust's control relationships. The Administrator is a subsidiary of SEI
Investments which also controls the distributor of the Registrant, SEI
Investments Distribution Co., and other corporations engaged in providing
various financial and record keeping services, primarily to bank trust
departments, pension plan sponsors, and investment managers.
Item 25. Indemnification:
Article VIII of the Agreement of Declaration of Trust filed as Exhibit (a) to
the Registration Statement is incorporated by reference. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to trustees, directors, officers and controlling persons of the
Registrant by the Registrant pursuant to the Declaration of Trust or otherwise,
the Registrant is aware that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, directors, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such trustees, directors,
officers or controlling persons in connection with the shares being registered,
the Registrant will,
C-2
<PAGE>
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
Item 26. Business and Other Connections of Investment Advisors:
Other business, profession, vocation, or employment of a substantial nature in
which each director or principal officer of each Advisor is or has been, at any
time during the last two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner or trustee are as follows:
<TABLE>
<CAPTION>
Name of Connection with
Name Other Company Other Company
---- ------------- -------------
<S> <C> <C>
STI Capital Management, N.A.
E. Jenner Wood III SunTrust Banks, Inc. --
Director
Hunting F. Deutsch SunTrust Bank, Orlando --
Director
Anthony R. Gray -- --
Chairman & Chief Investment Officer
James R. Wood -- --
President
Elliott A. Perny -- --
Executive Vice President
Stuart F. Van Arsdale -- --
Senior Vice President
Jonathan D. Rich -- --
Director
Larry M. Cole -- --
Senior Vice President
L. Earl Denney -- --
Executive Vice President
Ronald Schwartz -- --
Senior Vice President
Andre B.Prawato -- --
Senior Vice President
Edward J. Dau -- --
Senior Vice President
James K. Wood -- --
Senior Vice President
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
Name of Connection with
Name Other Company Other Company
---- ------------- -------------
<S> <C> <C>
Mills A. Riddick -- --
Senior Vice President
Christopher A. Jones -- --
Senior Vice President
David E. West -- --
Vice President
Brett L. Barner -- --
Senior Vice President
Trusco Capital Management, Inc.
Douglas S. Phillips -- --
President
Paul L. Robertson, III -- --
Secretary/Treasurer
E. Jenner Wood SunTrust Banks, Inc. Director
Director
Donald W. Thurmond SunTrust Bank, Atlanta Director
Director
Bob M. Farmer -- --
Vice President
M. Elizabeth (Beth) Wines -- --
Vice President
Charles Arnold, Jr. -- --
Senior Vice President
James R. Dillon, Jr. -- --
First Vice President
James P. Foster -- --
Vice President
Mark D. Garfinkel -- --
Vice President
Robert (Bob) G. Goggin -- --
Vice President
Joe E. Ransom -- --
Vice President
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Name of Connection with
Name Other Company Other Company
---- ------------- -------------
<S> <C> <C>
George D. Smith, Jr. -- --
Vice President
Jonathan Mote -- --
Vice President
Charles B. Leonard -- --
First Vice President
Mary F. Cernilli -- --
Vice President
Garrett P. Smith -- --
Vice President
Gregory L. Watkins -- --
Vice President
David S. Yealy -- --
Vice President
Robert J. Rhoades -- --
Senior Vice President
Kar Ming Leong -- --
Vice President
Stephen M. Yarbrough -- --
Vice President
Celia S. Stanley -- --
Vice President
Rebekah R. Alley -- --
Vice President
SunTrust Bank, Atlanta
Robert R. Long SunTrust Banks of Chairman of the Board
Chairman of the Board and Georgia, Inc.
President
Ronald S. Crowding -- Executive Vice President
Executive Vice President
Charles B. Ginden -- --
Executive Vice President
William H. Rogers, Jr. -- --
Executive Vice President
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Name of Connection with
Name Other Company Other Company
---- ------------- -------------
<S> <C> <C>
Donald Wayne Thurmond -- --
Executive Vice President
Dr. William M. Chase Emory University President
Director
Gaylord O. Coan Gold Kist, Inc. CEO
Director
A.D. Correll Georgia-Pacific Corporation Chairman & CEO
Director
R.W. Courts, II Atlantic Realty Company President
Director
A.W. Dahlberg The Southern Company President, Chairman &
Director CEO
L. Phillip Humann SunTrust Banks, Inc. President, Chairman & CEO
Director Services Corporation
William B. Johnson The Ritz Carlton Hotel Chairman of the Board
Director
J. Hicks Lanier Oxford Industries, Inc. Chairman of the Board
Director Director & President
Pinehill Development Co. 30% owner
Joseph L. Lanier, Jr. Dan River, Inc. Chairman of the Board
Director Chairman
Larry L. Prince Genuine Parts Company Chairman of the Board
Director
R. Randall Rollins Rollins, Inc. Chairman of the Board
Director Lor, Inc. Director
Maran, Inc. Director
Gutterworld, Inc. Director
Dabora, Inc. Director & Secretary
Simpson, Nance & Graham Director
Auto Parts Wholesale, Inc. Director
Global Expanded Metal, Inc. Director
Rollins Holding Co. Director
Rol, Ltd. Partner
Rollins Investment Fund Partner
Energy Partners Partner
Petro Partnership Partner
The Piedmont Investment Group Director
WRG, Ltd. Partner
Rollins, Inc. Chairman
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
Name of Connection with
Name Other Company Other Company
---- ------------- -------------
<S> <C> <C>
RPC Energy Services, Inc. Chairman
The Mul Company Partner
Bugvac, Inc. Director
Omnitron Int'l, Inc. Director
MRG, Ltd. Partner
Gerald T. Adams -- --
Senior Vice President
James R. Albach -- --
Group Vice President
Gay Cash -- --
Vice President
Joseph B. Foley, Jr. -- --
Group Vice President
Thomas R. Frisbie -- --
Group Vice President
Mark Stancil -- --
Group Vice President
David E. Thompson -- --
Vice President
Charles C. Watson -- --
Group Vice President
Dr. Mary B. Bullock Agnes Scott College President
Director
Larry L. Gellerstedt, III Beers Construction Co. Chairman
Director
John T. Glover Post Properties, Inc. President
Director
M. Douglas Ivester The Coca-Cola Company Chairman of the Board & CEO
Director
Dennis M. Love Printpack, Inc. President & CEO
Director
Charles H. McTier Robert Woodruff Foundation President
Director
</TABLE>
C-7
<PAGE>
Item 27. Principal Underwriters:
(a) Furnish the name of each investment company (other than the Registrant) for
which each principal underwriter currently distributing the securities of
the Registrant also acts as a principal underwriter, distributor or
investment adviser.
Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor"), acts as distributor for:
SEI Daily Income Trust July 15, 1982
SEI Liquid Asset Trust November 29, 1982
SEI Tax Exempt Trust December 3, 1982
SEI Index Funds July 10, 1985
SEI Institutional Managed Trust January 22, 1987
SEI Institutional International Trust August 30, 1988
The Advisors' Inner Circle Fund November 14, 1991
The Pillar Funds February 28, 1992
CUFUND May 1, 1992
STI Classic Funds May 29, 1992
First American Funds, Inc. November 1, 1992
First American Investment Funds, Inc. November 1, 1992
The Arbor Fund January 28, 1993
Boston 1784 Funds/7/ June 1, 1993
The PBHG Funds, Inc. July 16, 1993
Morgan Grenfell Investment Trust January 3, 1994
The Achievement Funds Trust December 27, 1994
Bishop Street Funds January 27, 1995
CrestFunds, Inc. March 1, 1995
STI Classic Variable Trust August 18, 1995
ARK Funds November 1, 1995
Huntington Funds January 11, 1996
SEI Asset Allocation Trust April 1, 1996
TIP Funds April 28, 1996
SEI Institutional Investments Trust June 14, 1996
First American Strategy Funds, Inc. October 1, 1996
HighMark Funds February 15, 1997
Armada Funds March 8, 1997
PBHG Insurance Series Fund, Inc. April 1, 1997
The Expedition Funds June 9, 1997
Alpha Select Funds January 1, 1998
Oak Associates Funds February 27, 1998
The Nevis Fund, Inc. June 29, 1998
The Parkstone Group of Funds September 14, 1998
CNI Charter Funds April 1, 1999
The Parkstone Advantage Fund May 1, 1999
Amerindo Funds, Inc. July 13, 1999
Huntington VA Fund October 15, 1999
Friends Ivory Funds December 16, 1999
The Distributor provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments. These
services include portfolio evaluation, performance measurement and
consulting services ("Funds Evaluation") and automated execution, clearing
and settlement of securities transactions ("MarketLink").
C-8
<PAGE>
(b) Furnish the Information required by the following table with respect to
each director, officer or partner of each principal underwriter named in the
answer to Item 21 of Part B. Unless otherwise noted, the business address of
each director or officer is Oaks, PA 19456.
<TABLE>
<CAPTION>
Position and Office Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman of the Board of Directors --
Henry H. Greer Director --
Carmen V. Romeo Director --
Mark J. Held President & Chief Operating Officer --
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President --
Dennis J. McGonigle Executive Vice President --
Robert M. Silvestri Chief Financial Officer & Treasurer --
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Larry Hutchison Senior Vice President --
Jack May Senior Vice President --
Hartland J. McKeown Senior Vice President --
Barbara J. Moore Senior Vice President Vice President and
Assistant Secretary
Kevin P. Robins Senior Vice President & General Counsel --
Patrick K. Walsh Senior Vice President --
Robert Aller Vice President --
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Secretary --
S. Courtney E. Collier Vice President & Assistant Secretary --
Robert Crudup Vice President & Managing Director --
Barbara Doyne Vice President --
Jeff Drennen Vice President --
Vic Galef Vice President & Managing Director --
Lydia A. Gavalis Vice President & Assistant Secretary Vice President & Assistant
Secretary
Greg Gettinger Vice President & Assistant Secretary --
Kathy Heilig Vice President Vice President & Assistant
Secretary
Jeff Jacobs Vice President --
Samuel King Vice President --
Kim Kirk Vice President & Managing Director --
John Krzeminski Vice President & Managing Director --
Carolyn McLaurin Vice President & Managing Director --
W. Kelso Morrill Vice President --
Mark Nagle Vice President President, Controller,
Treasurer & Chief Financial
Officer
Joanne Nelson Vice President --
Cynthia M. Parrish Vice President & Assistant Secretary --
Kim Rainey Vice President --
Rob Redican Vice President --
Maria Rinehart Vice President --
Mark Samuels Vice President & Managing Director --
Steve Smith Vice President --
</TABLE>
C-9
<PAGE>
<TABLE>
<S> <C> <C>
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary --
Lynda J. Striegel Vice President & Assistant Secretary Vice President & Assistant
Secretary
Lori L. White Vice President & Assistant Secretary --
Wayne M. Withrow Vice President & Managing Director --
</TABLE>
Item 28. Location of Accounts and Records:
Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, and the rules promulgated thereunder, are
maintained as follows:
(a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3); (6); (8);
(12); and 31a-1(d), the required books and records are maintained at the
offices of Registrant's Custodians:
Trust Company Bank
Park Place
P.O. Box 105504
Atlanta, Georgia 30348
Bank of New York
One Wall Street
New York, New York
(International Equity Index Fund, International Equity Fund, Emerging
Markets Equity Fund)
(b)/(c) With respect to Rules 31a-1(a); 31a-1(b)(1),(4); (2)(C) and (D); (4);
(5); (6); (8); (9); (10); (11); and 31a-1(f), the required books and records are
maintained at the offices of Registrant's Administrator:
SEI Investments Mutual Funds Services
One Freedom Valley Road
Oaks, Pennsylvania 19456
(c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f), the
required books and records are maintained at the principal offices of the
Registrant's Advisors:
STI Capital Management, N.A.
P.O. Box 3808
Orlando, Florida 32802
Trusco Capital Management
50 Hurt Plaza, Suite 1400
Atlanta, Georgia 30303
SunTrust Bank, Atlanta
25 Park Place
Atlanta, Georgia 30303
Item 29. Management Services: None.
Item 30. Undertakings: None.
C-10
<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust for STI Classic Funds is on
file with the Secretary of State of The Commonwealth of Massachusetts and notice
is hereby given that this Registration Statement has been executed on behalf of
the Trust by an officer of the Trust as an officer and by its Trustees as
trustees and not individually and the obligations of or arising out of this
Registration Statement are not binding upon any of the Trustees, officers, or
Shareholders individually but are binding only upon the assets and property of
the Trust.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Securities
Act") and the Investment Company Act of 1940, as amended, the Registrant
certifies that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 35 to Registration
Statement No. 33-45671 to be signed on its behalf by the undersigned, duly
authorized, in the City of Oaks, Commonwealth of Pennsylvania on the 26th day of
March, 2000.
By: /s/ Mark Nagle
-------------------------------------------------
Mark Nagle, President, Chief Financial Officer,
and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacity on the
dates indicated.
<TABLE>
<S> <C> <C>
* Trustee March 26, 2000
- --------------------------
F. Wendell Gooch
* Trustee March 26, 2000
- --------------------------
Daniel S. Goodrum
* Trustee March 26, 2000
- --------------------------
Wilton Looney
* Trustee March 26, 2000
- --------------------------
Champney A. McNair
* Trustee March 26, 2000
- --------------------------
T. Gordy Germany
* Trustee March 26, 2000
- --------------------------
Bernard F. Sliger
* Trustee March 26, 2000
- --------------------------
Jonathan T. Walton
* Trustee March 26, 2000
- --------------------------
William H. Cammack
/s/ Mark Nagle President, March 26, 2000
- --------------------------
Mark Nagle Chief Financial Officer
& Chief Executive Officer
</TABLE>
* By: /s/ Kevin P. Robins
-------------------------------------------
Kevin P. Robins, With Power of Attorney
<PAGE>
EXHIBIT INDEX
Number Exhibit
- ------ -------
EX-99.A Declaration of Trust - originally filed with Registrant's
Registration Statement on Form N-1A filed February 12, 1992 and
incorporated by reference to Exhibit 1 of Post-Effective Amendment
No. 15 to the Registrant's Registration Statement filed with the SEC
via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996.
EX-99.B1 By-Laws - originally filed with Registrant's Pre-Effective Amendment
No. 1 filed April 23, 1992 and incorporated by reference to Exhibit
2 of Post-Effective Amendment No. 15 to the Registrant's
Registration Statement filed with the SEC via EDGAR Accession No.
0000912057-96-015938 on July 31, 1996.
EX-99.B2 Amended By-Laws - incorporated by reference to Exhibit (b)(2) of
Post-Effective Amendment No. 23 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0001047469-98-
027407 on July 15, 1998.
EX-99.C Not applicable.
EX-99.D1 Revised Investment Advisory Agreement with Trusco Capital
Management, Inc.-as originally filed with Registrant's Post-
Effective Amendment No. 5 filed August 2, 1993 and incorporated by
reference to Exhibit 5(c) of Post-Effective Amendment No. 15 to the
Registrant's Registration Statement filed with the SEC via EDGAR
Accession No. 0000912057-96-015938 on July 31, 1996.
EX-99.D2 Investment Advisory Agreement with American National Bank and Trust
Company - as originally filed with Registrant's Post-Effective
Amendment No. 6 filed October 22, 1993 and as Exhibit 5(d) of Post-
Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
EX-99.D3 Investment Advisory Agreement with Sun Bank Capital Management,
National Association (now STI Capital Management, N.A. - as
originally filed with Registrant's Post-Effective Amendment No. 6
filed October 22, 1993 and incorporated by reference to Exhibit 5(e)
of Post-Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
EX-99.D4 Investment Advisory Agreement with Trust Company Bank (now SunTrust
Bank, Atlanta) - as originally filed with Registrant's Post-
Effective Amendment No. 6 filed October 22, 1993 and filed herewith.
EX-99.D5 Revised Schedule A to the Revised Investment Advisory Agreement with
Trusco Capital Management, Inc. dated May 24, 1999 - incorporated by
reference to the Registrant's Post- Effective Amendment No. 32 to
the Registrant's Registration Statement filed the SEC via EDGAR
Accession No. 0001047469-99-037088 on September 28, 1999.
EX-99.D6 Revised Schedule A to the Revised Investment Advisory Agreement with
Trusco Capital Management, Inc. dated October 1, 1999 - incorporated
by reference to the Registrant's Post-Effective Amendment No. 32 to
the Registrant's Registration Statement filed the SEC via EDGAR
Accession No. 0001047469-99-037088 on September 28, 1999.
EX-99.D7 Revised Schedule A to the Revised Investment Advisory Agreement with
Trusco Capital Management, Inc. dated March 27, 2000 is filed
herewith.
EX-99.E Distribution Agreement - incorporated by reference to Exhibit 6 of
Post-Effective Amendment No. 16 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
021336 on September 27, 1996.
EX-99.F Not applicable.
EX-99.G1 Custodian Agreement with Trust Company Bank dated February 1, 1994 -
originally filed with Registrant's Post-Effective Amendment No. 13
filed September 28, 1995 and incorporated by reference to Exhibit
8(b) of Post-Effective Amendment No. 15 to the Registrant's
Registration Statement filed with the SEC via EDGAR Accession No.
C-13
<PAGE>
0000912057-96-015938 on July 31, 1996.
EX-99.G2 Custodian Agreement with the Bank of California - incorporated by
reference to Exhibit 8(a) of Post-Effective Amendment No. 15 to the
Registrant's Registration Statement filed with the SEC via EDGAR
Accession No. 0000912057-96-015938 on July 31, 1996.
EX-99.G3 Fourth Amendment to Custodian Agreement by and between STI Trust &
Investment Operations, Inc. and The Bank of New York dated May 6,
1997 - incorporated by reference to Exhibit 8(d) of Post-Effective
Amendment No. 21 to the Registrant's Registration Statement filed
with the SEC via EDGAR Accession No. 0000912057-97-032207 on
September 30, 1997.
EX-99.H1 Transfer Agent Agreement with Federated Services Company dated May
14, 1994 - originally filed with Post-Effective Amendment No. 9
filed September 22, 1994 and incorporated by reference to Exhibit
8(c) of Post-Effective Amendment No. 15 to the Registrant's
Registration Statement filed with the SEC via EDGAR Accession No.
0000912057-96-015938 on July 31, 1996.
EX-99.H2 Administration Agreement with SEI Financial Management Corporation
dated May 29, 1995 - incorporated by reference to the Registrant's
Post-Effective Amendment No. 32 to the Registrant's Registration
Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088
on September 28, 1999.
EX-99.H3 Consent to Assignment and Assumption of the Administration Agreement
between STI Classic Funds and SEI Financial Management Corporation -
incorporated by reference to Exhibit 9(b) of Post-Effective
Amendment No. 21 to the Registrant's Registration Statement filed
with the SEC via EDGAR Assession No. 0000912057-97-032207 on
September 30, 1997.
EX-99.I Opinion and Consent of Counsel - incorporated by reference to the
Registrant's Post-Effective Amendment No. 32 to the Registrant's
Registration Statement filed the SEC via EDGAR Accession No.
0001047469-99-037088 on September 28, 1999.
EX-99.J1 Consent of Arthur Andersen LLP, independent public accountants, is
filed herewith.
EX-99.J2 Consent of PricewaterhouseCoopers LLP, independent public
accountants, is filed herewith.
EX-99.K Not applicable.
EX-99.L Not applicable.
EX-99.M1 Distribution Plan - Investor Class - incorporated by reference to
Exhibit 15 of Post-Effective Amendment No. 16 to the Registrant's
Registration Statement filed with the SEC via EDGAR Accession No.
0000912057-96-021336 on September 27, 1996.
EX-99.M2 Distribution and Service Agreement relating to Flex Shares dated May
29, 1995 - originally filed with Post-Effective Amendment No. 12
filed August 17, 1995 and incorporated by reference to Exhibit 15(a)
of Post-Effective Amendment No. 15 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0000912057-96-
015938 on July 31, 1996.
EX-99.N Not applicable.
EX-99.O Rule 18f-3 Plan - incorporated by reference to Exhibit (i) of Post-
Effective Amendment No. 23 to the Registrant's Registration
Statement filed with the SEC via EDGAR Accession No. 0001047469-98-
027407 on July 15, 1998.
EX-99.O1 Certificate of Class Designation - incorporated by reference to
Exhibit (o)(1) of Post- Effective Amendment No. 27 to the
Registrant's Statement filed with the SEC via EDGAR Accession No.
0001047469-99-009731 on April 15, 1999.
EX-99.P1 Code of Ethics for STI Classic Funds is filed herewith.
EX-99.P2 Code of SEI Investments Distribution Company is filed herewith.
EX-99.P3 To be filed by amendment.
EX-99.P4 Code of Ethics for Trusco Capital Management, Inc. is filed
herewith.
EX-99.Q Powers of Attorney - incorporated by reference to the Registrant's
Post-Effective Amendment No. 32 to the Registrant's Registration
Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088
on September 28, 1999.
C-14
<PAGE>
Exhibit 99.d7
Revised Schedule A
Dated March 27, 2000
to the
Investment Advisory Agreement
between
STI Classic Funds
and
Trusco Capital Management
Pursuant to Article 3, the Trust shall pay the Adviser compensation at an annual
rate as follows:
Portfolio Fee
- ---------- ---
Prime Quality Money Market Fund .65%
U.S. Government Securities
Money Market Fund .65%
Tax -Exempt
Money Market Fund .55%
Short-Term Bond Fund .65%
Short-Term U.S. Treasury Securities Fund .65%
Sunbelt Equity Fund 1.15%
U.S. Government Securities Fund .74%
International Equity Index Fund .90%
Classic Institutional Cash Management
Money Market Fund .20%
1
<PAGE>
Classic Institutional U.S. Treasury Securities
Money Market Fund .20%
Small Cap Growth Stock Fund 1.15%
Tax Sensitive Growth Stock Fund 1.15%
Maryland Municipal Bond Fund .65%
Virginia Intermediate Municipal Bond Fund .65%
Virginia Municipal Bond Fund .65%
Tax-Free Money Market Fund .40%
U.S. Treasury Money Market Fund .65%
Growth and Income Fund .90%
Life Vision Maximum Growth Portfolio .25%
Life Vision Growth and Income Portfolio .25%
Life Vision Balanced Portfolio .25%
Classic Institutional U.S. Government Securities
Money Market Fund .20%
Core Equity Fund 1.10%
E-Commerce Opportunity Fund 1.10%
High Income Fund .80%
2
<PAGE>
Exhibit 99.j1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our firm name
included in the Post-Effective Amendment No. 35 to the Registration Statement on
Form N-1A of the STI Classic Funds (File No. 33-45671).
/s/ Arthur Andersen LLP
- -----------------------
Philadelphia, Pennsylvania
March 28, 2000
<PAGE>
Exhibit 99.j2
Consent of Independent Accountants
We consent to the inclusion in this Registration Statement on Form N-1A of STI
Classic Funds, of our report dated May 14, 1999 on our audits of the financial
statements and financial highlights of ESC Strategic Income Fund, ESC Strategic
International Equity Fund, ESC Strategic Small Cap Fund, ESC Strategic
Appreciation Fund and ESC Strategic Small Cap II Fund (separate portfolios
constituting ESC Strategic Funds, Inc.) which report is included in the Annual
Report to Shareholders for the year ended March 31, 1999. We also consent to
the reference to our Firm under the caption "Financial Statements" relating to
ESC Strategic Funds, Inc. in the Registration Statement on Form N-1A.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Columbus, Ohio
March 24, 2000
<PAGE>
Exhibit P.1
CODE OF ETHICS
--------------
Adopted Under Rule 17j-1
While affirming its confidence in the integrity and good faith of all of
its officers and trustees, STI Classic Funds and STI Classic Variable Trust
(collectively the "Trusts"), recognize that the knowledge of present or future
portfolio transactions and, in certain instances, the power to influence
portfolio transactions which may be possessed by certain of their officers,
employees and trustees could place such individuals, if they engage in personal
transactions in securities which are eligible for investment by a Trust, in a
position where their personal interest may conflict with that of a Trust.
In view of the foregoing and of the provisions of Rule 17j-1(b)(1) under
the Investment Company Act of 1940 (the "1940 Act"), each Trust has determined
to adopt this Code of Ethics to specify and prohibit certain types of
transactions deemed to create conflicts of interest (or at least the potential
for or the appearance of such a conflict), and to establish reporting
requirements and enforcement procedures.
I. Statement of General Principles.
In recognition of the trust and confidence placed in the Trusts by their
shareholders, and to give effect to the Trusts' belief that its operations
should be directed to the benefit of its shareholders, the Trusts hereby adopt
the following general principles to guide the actions of their trustees,
officers and employees.
(1) The interests of the Trusts' shareholders are paramount, and all of
the Trusts' personnel must conduct themselves and their operations to
give maximum effect to this tenet by assiduously placing the interests
of the shareholders before their own.
(2) All personal transactions in securities by the Trusts' personnel must
be accomplished so as to avoid even the appearance of a conflict of
interest on the part of such personnel with the interests of the
Trusts and their shareholders.
(3) All of the Trusts' personnel must avoid actions or activities that
allow (or appear to allow) a person to profit or benefit from his or
her position with respect to the Trusts, or that otherwise bring into
question the person's independence or judgment.
II. Definitions.
(1) "Access Person" shall mean (i) each trustee or officer of a Trust,
(ii) each employee of a Trust (or of any company in a control
relationship to a Trust) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by a
Trust or any series thereof (herein a "Fund"), or whose functions
<PAGE>
relate to the making of any recommendations with respect to such
purchases or sales, and (iii) each officer, director or general
partner of each adviser or sub-adviser to the Trusts and any
employee of any such adviser or sub-adviser who, in connection
with his or her regular functions or duties, makes participates
in, or obtains information regarding the purchase or sale of a
security by a Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; (iv) each
director, officer or general partner of any principal underwriter
for a Trust, but only where such person in the ordinary course
either makes, participates in, or obtains information regarding
the purchase or sale of securities by the Fund(s), or whose
functions relate to the making of recommendations regarding
securities to the Fund(s); and (v) any natural person in a control
relationship with a Fund or any of the Funds' advisers or sub-
advisers who obtains information concerning recommendations made
to the Funds with regard to the purchase or sale of a security.
(2) "Beneficial ownership" of a security is to be determined in the
same manner as it is for purposes of Section 16 of the Securities
Exchange Act of 1934 and Rule 16a-1(a)(2) thereunder. This means
that a person should generally consider himself the beneficial
owner of any securities in which he has a direct or indirect
pecuniary interest. In addition, a person should consider himself
the beneficial owner of securities held by his spouse, his minor
children, a relative who shares his home, or other persons by
reason of any contract, arrangement, understanding or relationship
that provides him with sole or shared voting or investment power.
(3) "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the 1940 Act. Section 2(a)(9) provides that "control"
means the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely
the result of an official position with such company. Ownership
of 25% or more of a company's outstanding voting security is
presumed to give the holder thereof control over the company.
Such presumption may be countered by the facts and circumstances
of a given situation.
(4) "Independent Trustee" means a Trustee of a Trust who is not an
"interested person" of the Trust within the meaning of Section
2(a)(19) of the 1940 Act.
(5) "Initial Public Offering" ("IPO") means an offering of Securities
registered under the Securities Act of 1933, the issuer of which,
immediately before registration, was not subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934.
(6) "Private Placement" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section
4(2) or Section 4(6) in the Securities Act of 1933.
-2-
<PAGE>
(7) "Special Purpose Investment Personnel" means each Access Person
who, in connection with his or her regular functions (including,
where appropriate, attendance at Board meetings and other meetings
at which the official business of a Trust or any Fund thereof is
discussed or carried on), obtains contemporaneous information
regarding the purchase or sale of a security by a Fund. Special
Purpose Investment Personnel shall occupy this status only with
respect to those securities as to which he or she obtains such
contemporaneous information.
(8) "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security.
(9) "Security" shall have the same meaning as that set forth in
Section 2(a)(36) of the 1940 Act, except that it shall not include
securities issued by the Government of the United States or an
agency thereof, bankers' acceptances, bank certificates of
deposit, commercial paper, shares of registered, open-end mutual
funds and high quality short-term debt instruments, including
repurchase agreements.
(10) A Security "held or to be acquired" by a Trust or any Fund means
(A) any Security which, within the most recent fifteen days, (i)
is or has been held by a Trust or any Fund thereof, or (ii) is
being or has been considered by a Fund's investment adviser for
purchase by the Fund; (B) and any option to purchase or sell and
any Security convertible into or exchangeable for any Security
described in (A) above.
(11) A Security is "being purchased or sold" by a Trust from the time
when a purchase or sale program has been communicated to the
person who places the buy and sell orders for such Trust until the
time when such program has been fully completed or terminated.
III. Prohibited Purchases and Sales of Securities.
(1) No Access Person shall, in connection with the purchase or sale,
directly or indirectly, by such person of a Security held or to be
acquired by any Fund of a Trust:
(A) employ any device, scheme or artifice to defraud such Fund;
(B) make to such Fund any untrue statement of a material fact
or omit to state to such Fund a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
-3-
<PAGE>
(C) engage in any act, practice or course of business which
would operate as a fraud or deceit upon such Fund; or
(D) engage in any manipulative practice with respect to such
Fund.
(2) No Special Purpose Investment Personnel may purchase or sell,
directly or indirectly, any Security as to which such person is a
Special Purpose Investment Personnel in which he had (or by reason
of such transaction acquires) any Beneficial Ownership at any time
within 7 calendar days before or after the time that the same (or
a related) Security is being purchased or sold by any Fund.
(3) No Special Purpose Investment Personnel may sell a Security as
which he or she is a Special Purpose Investment Personnel within
60 days of acquiring beneficial ownership of that Security.
IV. Additional Restrictions and Requirements
(1) Pre-approval of IPOs and Private Placements - Each Access Person
must obtain approval from the Review Officer before acquiring
beneficial ownership of any securities offered in connection with
an IPO or a Private Placement.
(2) No Access Person shall accept or receive any gift of more than de
--
minimis value from any person or entity that does business with or
-------
on behalf of a Trust.
(3) Each Access Person (other than each Trust's Independent Trustees
and its Trustees and officers who are not currently affiliated
with or employed by each Trust's investment adviser or principal
underwriter) who is not required to provide such information under
the terms of a code of ethics described in Section VII hereof must
provide to the Review Officer a complete listing of all securities
owned by such person as of December 31st of the previous year.
Thereafter, each such person shall submit a revised list of such
holdings to the Review Officer as of December 31st of each
subsequent year. The initial listing must be submitted within 10
days of the date upon which such person first becomes an Access
Person of the Trust, and each update thereafter must be provided
no later than 30 days after the start of the subsequent year.
V. Reporting Obligation.
(1) Each Access Person (other than each Trust's Independent Trustees)
shall report all transactions in Securities in which the person
has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership. Reports shall be filed with the
Review Officer quarterly. The Review Officer shall submit
confidential quarterly reports with respect to his or her own
personal securities transactions to an officer designated to
receive his or her reports ("Alternate
-4-
<PAGE>
Review Officer"), who shall act in all respects in the manner
prescribed herein for the Review Officer.
(2) Every report shall be made not later than 10 days after the end of
the calendar quarter in which the transaction to which the report
relates was effected, and shall contain the following information:
(A) The date of the transaction, the title and the number of
shares or the principal amount of each security involved;
(B) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(C) The price at which the transaction was effected;
(D) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(E) The date the report was submitted.
(3) In the event no reportable transactions occurred during the
quarter, the report should be so noted and returned signed and
dated
(4) An Access Person who would otherwise be required to report his or
her transactions under this Code shall not be required to file
reports pursuant to this Section V where such person is required
to file reports pursuant to a code of ethics described in Section
VII, hereof.
(5) An Independent Trustee shall report transactions in Securities
only if the Trustee knew at the time of the transaction or, in the
ordinary course of fulfilling his or her official duties as a
trustee, should have known, that during the 15 day period
immediately preceding or following the date of the transaction,
such security was purchased or sold, or was being considered for
purchase or sale, by any Fund of a Trust. (The "should have known"
standard implies no duty of inquiry, does not presume there should
have been any deduction or extrapolation from discussions or
memoranda dealing with tactics to be employed meeting the Fund's
investment objectives, or that any knowledge is to be imputed
because of prior knowledge of the Funds' portfolio holdings,
market considerations, or the Trust's investment policies,
objectives and restrictions.)
(6) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that
he has any direct or indirect beneficial ownership in the security
to which the report relates.
-5-
<PAGE>
(7) Each Independent Trustee shall report the name of any
publicly-owned company (or any company anticipating a public
offering of its equity securities) and the total number of its
shares beneficially owned by him or her if such total ownership is
more than 1/2 of 1% of the company's outstanding shares. Such
report shall be made promptly after the date on which the
Trustee's ownership interest equaled or exceeded 1/2 of 1%.
VI. Review and Enforcement.
(1) The Review Officer shall compare all reported personal securities
transactions with completed portfolio transactions of each Trust
and a list of securities being considered for purchase or sale by
each Trust's adviser(s) to determine whether a violation of this
Code may have occurred. Before making any determination that a
violation has been committed by any person, the Review Officer
shall give such person an opportunity to supply additional
explanatory material.
(2) If the Review Officer determines that a violation of this Code may
have occurred, he or she shall submit his or her written
determination, together with the confidential monthly report and
any additional explanatory material provided by the individual, to
the President of the appropriate Trusts and outside counsel, who
shall make an independent determination as to whether a violation
has occurred.
(3) If the President and outside counsel find that a violation has
occurred, the President shall impose upon the individual such
sanctions as he or she deems appropriate and shall report the
violation and the sanction imposed to the Board of Trustees of the
Trust(s).
(4) No person shall participate in a determination of whether he or
she has committed a violation of the Code or of the imposition of
any sanction against himself or herself. If a securities
transaction of a President is under consideration, any Vice
President shall act in all respects in the manner prescribed
herein for the President.
VII. Investment Adviser's, Administrator's or Principal Underwriter's Code of
Ethics.
Each investment adviser (including, where applicable, any sub-adviser),
administrator or manager (where applicable), and principal underwriter of the
Trust shall:
(1) Submit to the Board of Trustees of the Trust a copy of its code of
ethics adopted pursuant to Rule 17j-1, which code shall comply
with the recommendations of the Investment Company Institute's
Advisory Group on Personal Investing or be accompanied by a
written statement explaining any differences and supplying the
rationale therefor;
-6-
<PAGE>
(2) Promptly report to the appropriate Trust in writing any material
amendments to such code of ethics;
(3) Promptly furnish to the Trust upon request copies of any reports
made pursuant to such code of ethics by any person who is an
Access Person as to the Trust; and
(4) Shall immediately furnish to the appropriate Trust, without
request, all material information regarding any violation of such
Code by any person who is an Access Person as to the Trust.
VIII. Annual Written Report to the Board.
At least once a year, the Review Officer will provide the Board of
Trustees a written report that includes:
(1) Issues Arising Under the Code - The Report will describe any
issue(s) that arose during the previous year under the Code,
including any material Code violations, and any resulting
sanctions.
(2) Certification - The Report will certify to the Board of Trustees
that the each Trust has adopted measures reasonably necessary to
prevent its personnel from violating the Code currently and in the
future.
IX. Records.
Each Trust shall maintain records in the manner and to the extent set
forth below, which records may be maintained under the conditions described in
Rule 31a-2 under the Investment Company Act and shall be available for
examination by representatives of the Securities and Exchange Commission.
(1) A copy of this code of ethics and any other code which is, or at
any time within the past five years has been, in effect shall be
preserved in an easily accessible place;
(2) A record of any violation of this Code and of any action taken as
a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
(3) A copy of each report made by an officer or trustee pursuant to
this code of ethics shall be preserved for a period of not less
than five years from the end of the fiscal year in which it is
made, the first two years in an easily accessible place; and
-7-
<PAGE>
(4) A list of all persons who are, or within the past five years have
been, required to make reports pursuant to this Code shall be
maintained in an easily accessible place.
(5) A copy of each annual report to the Board of Trustees will be
maintained for at least five years from the end of the fiscal year
in which it is made, the first two years in an easily accessible
place; and
(6) A record of any decision, and the reasons supporting the decision,
to approve the acquisition of Securities in an IPO or a Private
Placement, shall be preserved for at least five years after the
end of the fiscal year in which the approval is granted.
X. Miscellaneous
(1) Confidentiality. All reports of securities transactions and any
---------------
other information filed with the Trusts pursuant to this Code
shall be treated as confidential.
(2) Interpretation of Provisions. The Boards of Trustees may from time
----------------------------
to time adopt such interpretations of this Code as it deems
appropriate.
(3) Periodic Review and Reporting. The President of each Trust shall
-----------------------------
report to the Board of Trustees at least annually as to the
operation of this Code and shall address in any such report the
need (if any) for further changes or modifications to this Code.
Adopted February 15, 2000.
-8-
<PAGE>
Exhibit 99.p2
SEI INVESTMENTS COMPANY
CODE OF ETHICS AND
INSIDER TRADING POLICY
January, 2000
<PAGE>
SEI INVESTMENTS COMPANY
CODE OF ETHICS AND INSIDER TRADING POLICY
TABLE OF CONTENTS
I. General Policy
II. Code of Ethics
A. Purpose of Code
B. Employee Categories
C. Restrictions on Personal Securities Transactions
D. Pre-clearance of Personal Securities Transactions
E. Reporting Requirements
F. Detection and Reporting of Code Violations
G. Violations of the Code of Ethics
H. Confidential Treatment
I. Definitions Applicable to the Code of Ethics
III. Insider Trading Policy
A. What is "Material" Information?
B. What is "Nonpublic Information"?
C. Who is an Insider?
D. What is Misappropriation?
E. What is Tipping?
F. Identifying Inside Information?
G. Trading in SEI Investments Company Securities
H. Violations of the Insider Trading Policy
2
<PAGE>
I. GENERAL POLICY
SEI Investments Company, through various subsidiaries (jointly "SEI"), is an
investment adviser, administrator, distributor, and/or trustee of investment
companies, collective investment trusts, investment partnerships, and asset
management accounts (jointly "Investment Vehicles"). As an investment adviser,
SEI is subject to various U.S. securities laws and regulations governing the use
of confidential information and personal securities transactions. This Code of
Ethics and Insider Trading Policy (jointly "Policy") was developed based on
those laws and regulations, and sets forth the procedures and restrictions
governing the personal securities transactions of all SEI employees.
SEI has a highly ethical business culture and expects that all employees will
conduct any personal securities transactions consistent with this Policy and in
such a manner as to avoid any actual or potential conflict of interest or abuse
of a position of trust and responsibility. When an employee invests for his or
her own account, conflicts of interest may arise between a client's and the
employee's interest. Such conflicts may include using an employee's advisory
position to take advantage of available investment opportunities, taking an
investment opportunity from a client for an employee's own portfolio, or
frontrunning, which occurs when an employee trades in his or her personal
account before making client transactions. As a fiduciary, SEI owes a duty of
loyalty to clients which requires that an employee must always place the
interests of clients first and foremost and shall not take inappropriate
advantage of his or her position. Thus, SEI employees must conduct themselves
and their personal securities transactions in a manner that does not create
conflicts of interest with the firm's clients.
Pursuant to this Policy, employees will be subject to various pre-clearance and
reporting standards, based on their responsibilities within SEI. As a result,
it is important that all employees pay special attention to the employee
category section within this Policy to determine what provisions of the Policy
applies to them, as well as to the sections on restrictions, pre-clearance, and
reporting of personal securities transactions.
Employees outside the United States are subject to this Policy and the
applicable laws of the jurisdictions in which they are located. These laws may
differ substantially from U.S. law and may subject employees to additional
requirements. To the extent any particular portion of the Policy is
inconsistent with foreign law not included herein or within the firm's
Compliance Manual, employees should consult their designated Compliance Officer
or the Compliance Department at SEI's Oaks facility.
Each employee subject to this Policy must read and retain a copy and agree to
abide by its terms. Failure to comply with the provisions of this Policy may
result in the imposition of serious sanctions, including, but not limited to
disgorgement of profits, dismissal, substantial personal liability and/or
referral to regulatory or law enforcement agencies.
Any questions regarding SEI's policy or procedures should be referred to the
Compliance Department, which currently includes Cyndi Parrish, the Compliance
Director. (x2807).
II. CODE OF ETHICS
A. Purpose of Code
This Code of Ethics ("Code") was adopted pursuant to the provisions of Section
17(j) of the Investment Company Act of 1940, as amended, and Rule 17j-1
thereunder, as amended. Those provisions of the
3
<PAGE>
U.S. securities laws were adopted to prevent persons who are actively engaged in
the management, portfolio selection or underwriting of registered investment
companies from participating in fraudulent, deceptive or manipulative acts,
practices or courses of conduct in connection with the purchase or sale of
securities held or to be acquired by such companies. Employees (including
contract employees) will be subject to various pre-clearance and reporting
standards based on their responsibilities within SEI and accessibility to
certain information. Those functions are set forth in the categories listed
below.
B. Employee Categories
1. Access Person - any director, officer or employee of SEI Investments
Mutual Fund Services who, in connection with his or her regular functions
or duties, makes, participates in, or obtains prior or contemporaneous
information regarding the purchase or sale of an Investment Vehicle's
portfolio securities for which SEI acts as distributor and/or
administrator.
2. Investment Person - any director, officer or employee of the Asset
Management Group who (1) directly oversees the performance of one or more
sub- advisers for any Investment Vehicle for which SEI acts as investment
adviser, (2) executes or helps execute portfolio transactions for any
such Investment Vehicle, or (3) obtains or is able to obtain prior or
contemporaneous information regarding the purchase or sale of an
Investment Vehicle's portfolio securities.
3. Portfolio Persons - any director, officer or employee entrusted with
direct responsibility and authority to make investment decisions
affecting one or more client portfolios.
4. Registered Representative - any director, officer or employee who is
registered with the National Association of Securities Dealers as a
registered representative (Series 6, 7 or 63), a registered principal
(Series 24 or 26) or an investment representative (Series 65), regardless
of job title or responsibilities.
5. Associate - any director, officer or employee who does not fall within
definitions 1, 2, 3 or 4 above.
C. Restrictions on Personal Securities Transactions
When buying or selling securities, SEI employees may not employ any device,
scheme or artifice to defraud, mislead, or manipulate any fund or investment
client. The following restrictions are applicable to an employee's personal
securities transactions.
1. Access Persons:
. may not purchase or sell, directly or indirectly, any Security
within 24 hours before or after the time that the same (or a
related) Security is being purchased or sold by any Investment
Vehicle for which SEI acts as advisor, distributor and/or
administrator.
. may not acquire Securities as part of an Initial Public
Offering("IPO") without obtaining the written approval of the
designated Compliance Officer at Mutual Fund Services before
directly or indirectly acquiring a beneficial ownership in such
securities.
4
<PAGE>
. may not acquire a beneficial ownership interest in Securities
issued in a private placement transaction without obtaining prior
written approval from the designated Compliance Officer at Mutual
Fund Services.
2. Investment Persons:
. may not purchase or sell, directly or indirectly, any Security
within 24 hours before or after the time that the same (or a
related) Security is being purchased or sold by any Investment
Vehicle for which SEI or one of its sub- advisers acts as
investment adviser or sub-adviser to the Investment Vehicle.
. may not profit from the purchase and sale or sale and purchase of
a Security within 60 days of acquiring or disposing of Beneficial
Ownership of that Security. This prohibition does not apply to
transactions resulting in a loss, or to futures or options on
futures on broad-based securities indexes or U.S. government
securities.
. may not acquire Securities as part of an Initial Public Offering
without obtaining the written approval of the Compliance
Department before directly or indirectly acquiring a beneficial
ownership in such securities.
. may not acquire a beneficial ownership interest in Securities
issued in a private placement transaction without obtaining prior
written approval from the Compliance Department.
. may not receive any gift of more than de minimus value (currently
$100.00 per year) from any person or entity that does business
with or on behalf of any Investment Vehicle.
. may not serve on the board of directors of any publicly traded
company.
3. Portfolio Persons:
. may not purchase or sell, directly or indirectly, any Security
within 7 days before or after a client portfolio has executed a
trade in that same (or an equivalent) Security, unless the order
is withdrawn.
. may not acquire Securities as part of an Initial Public Offering
without obtaining the written approval of the designated
Compliance Officer before directly or indirectly acquiring a
beneficial ownership in such securities.
. may not acquire a beneficial ownership interest in Securities
issued in a private placement transaction without obtaining prior
written approval from the Compliance Department.
. may not profit from the purchase and sale or sale and purchase of
a Security within 60 days of acquiring or disposing of Beneficial
Ownership of that Security. This prohibition does not apply to
transactions resulting in a loss, or to futures or options on
futures on broad-based securities indexes or U.S. government
securities.
5
<PAGE>
. may not receive any gift of more than de minimus value (currently
$100.00 per year) from any person or entity that does business
with or on behalf of any Investment Vehicle.
. may not serve on the board of directors of any publicly traded
company.
4. Registered Representatives:
. may not acquire Securities as part of an Initial Public Offering.
D. Pre-clearance of Personal Securities Transactions
1. Access, Investment and Portfolio Persons:
. must pre-clear each proposed securities transaction with the
Compliance Department or the designated Compliance Officer for
Accounts held in their names or in the names of others in which
they hold a Beneficial Ownership interest. No transaction in
Securities may be effected without the prior written approval of
the Compliance Department or the designated Compliance Officer,
except as set forth below in Section D.4 which sets forth the
securities transactions that do not require pre-clearance.
. the Compliance Department or the designated Compliance Officer
will keep a record of the approvals, and the rationale supporting,
investments in IPO and private placement transactions.
2. Registered Representatives/Associates:
. must pre-clear transactions with the Compliance Department or
designated Compliance Officer only if the Registered
-------
Representative or Associate knew or should have known at the time
of the transaction that, during the 24 hour period immediately
preceding or following the transaction, the Security was purchased
or sold or was being considered for purchase or sale by any
Investment Vehicle.
3. Transactions that do not have to be pre-cleared:
------
. Purchases or sales over which the employee pre-clearing the
transaction ( the "Pre-clearing Person") has no direct or indirect
influence or control;
. Purchases, sales or other acquisitions of Securities which are
non- volitional on the part of the Pre-clearing Person or any
Investment Vehicle, such as purchases or sales upon exercise of
puts or calls written by the Pre- clearing Person, sales from a
margin account pursuant to a bona fide margin call, stock
---------
dividends, stock splits, mergers, consolidations, spin-offs, or
other similar corporate reorganizations or distributions;
. Purchases which are part of an automatic dividend reinvestment
plan or automatic employee stock purchase plans;
. Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the
--- ----
extent such rights were acquired from such issuer;
6
<PAGE>
. Acquisitions of Securities through gifts or bequests; and
. Transactions in open-end mutual funds.
--------
4. Pre-clearance procedures:
. All requests for pre-clearance of securities transactions must be
submitted to the Compliance Department or the designated
Compliance Officer by completing a Pre-clearance Request Form
(attached as Exhibit 1). SEI Employees located in the U.S. with
access to the I drive may also complete an electronic version of
the form located at I:\register\preform.doc.
. The following information must be provided on the Form:
a. Name, date, extension, title;
b. Transaction detail, i.e., whether the transaction is a buy or
sell; the security name and security type; number of shares;
price; date acquired if a sale; and whether the security is held
in a portfolio or Investment Vehicle, part of an initial public
offering, or part of a private placement transaction; and
c. Signature and date; if electronically submitted, initial and
date.
. The Compliance Department or the designated Compliance Officer
will notify the employee whether the request is approved or denied
by telephone or email, and by sending a copy of the signed form to
the employee. An employee is not officially notified that the
transaction has been pre-cleared until he or she receives a copy
of the signed form. Employees should retain copies of the signed
form.
. Employees may not submit a Pre-clearance Request Form for a
transaction that he or she does not intend to execute.
. Pre-clearance authorization is valid for 3 business days only.
Transactions, which are not completed within this period, must be
resubmitted with an explanation why the previous pre-cleared
transaction was not completed.
. Investment persons must submit to the Compliance Department or the
designated Compliance Officer transaction reports showing the
transactions in all the Investment Vehicles for which SEI or a
sub-adviser serves as an investment adviser for the 24 hour period
before and after the date on which their securities transactions
were effected. Transaction reports need only be submitted for the
portfolios that hold or are eligible to purchase and sell the
types of securities proposed to be bought or sold by the
Investment Person. For example, if the Investment Person seeks to
obtain approval for a proposed equity trade, only the transaction
reports for the portfolios effecting transactions in equity
securities are required.
. The Compliance Department or the designated Compliance Officer
will maintain pre-clearance records for 5 years.
7
<PAGE>
E. Reporting Requirements
1. Duplicate Brokerage Statements [All Employees]
-------------
. All SEI Employees are required to instruct their brokers/dealers
to file duplicate brokerage statements with the Compliance
Department at SEI Oaks. Employees in SEI's global offices are
required to have their duplicate statements sent to the offices in
which they are located. Statements must be filed for all Accounts
(including those in which employees have a Beneficial Ownership
interest), except those that trade exclusively in open-end mutual
funds, government securities, or SEI stock through the employee
stock/stock option plan. Failure of a broker-dealer to send
duplicate statements will not excuse an Employee's violation of
this Section, unless the Employee demonstrates that he or she took
every reasonable step to monitor the broker's or dealer's
compliance.
. Sample letters instructing the brokers/dealers to send the
statements to SEI are attached as Exhibit 2, and may be found at
I:\register\407pers.doc and I:\register\permltr.doc. If the broker
or dealer requires a letter authorizing a SEI employee to open an
account, the permission letter may used and may be found at
I:\register\permltr.doc. Please complete the necessary information
in the letter and forward a signature ready copy to the Compliance
Department.
. If no such duplicate statement can be supplied, the Employee
should contact the Compliance Department or the designated
Compliance Officer.
2. Initial Holdings Report [Access, Investment and Portfolio Persons]
----------------------------------------
. Access, Investment and Portfolio Persons must submit an Initial
Holdings Report to the Compliance Department or designated
Compliance Officer disclosing every security beneficially owned
directly or indirectly by such person within 10 days of becoming
an Access, Investment or Portfolio Person.
. The Initial Holdings Report must include the following
information: (1) the title of the security; (2) the number of
shares held; (3) the principal amount of the security; and (4) the
name of the broker, dealer or bank where the security is held. The
information disclosed in the report must be current as of a date
no more than 30 days before the report is submitted.
. The Initial Holdings Report is attached as Exhibit 3 to this Code
and can be found on the I drive at I:register\inhold.doc.
3. Quarterly Report of Securities Transactions [Access, Investment and
-----------------------
Portfolio Persons]
-----------------
. Access, Investment and Portfolio Persons must submit quarterly
transaction reports of the purchases and/or sales of securities in
which such persons have a direct or indirect Beneficial Ownership
interest (See Exhibit 4- Quarterly Transaction Report). The report
---
8
<PAGE>
will be provided to all Investment Persons before the end of each
quarter by the Compliance Department or the designated Compliance
Officer and must be completed and returned no later than 10 days
-------------
after the end of each calendar quarter. Quarterly Transaction
Reports that are not returned by the date they are due will be
considered late and will be reported as violations of the Code of
Ethics. Investment and Portfolio Persons who repeatedly return the
reports late (5 late filings) will be subject to a monetary fine
for their Code of Ethics violations.
. The following information must be provided on the report:
a. The date of the transaction, the description and number of
shares, and the principal amount of each security involved;
b. Whether the transaction is a purchase, sale or other
acquisition or disposition;
c. The transaction price; and
d. The name of the broker, dealer or bank through whom the
transaction was effected.
4. Annual Report of Securities Holdings [Access, Investment and
----------------------
Portfolio Persons]
-----------------
. On an annual basis, Investment and Portfolio Persons must submit
to the Compliance Department or the designated Compliance Officer
an Annual Report of Securities Holdings that contains a list of
all securities subject to this Code in which they have any direct
or indirect Beneficial Ownership interest (See Exhibit 5 - Annual
Securities Holdings Report). The information disclosed in the
report must be current as of a date no more than 30 days before
the report is submitted.
. Annual reports must be returned to the Compliance Department or
the designated Compliance Officer within 30 days after the end of
the calendar year- end.
9
<PAGE>
4. Annual Certification of Compliance [All Employees]
-------------
. All employees will be required to certify annually that they:
- have read the Code of Ethics;
- understand the Code of Ethics; and
- have complied with the provisions of the Code of Ethics.
. The Compliance Department or the designated Compliance Officer
will send out annual forms (attached as Exhibit 6) to all
employees that must be completed and returned no later than 30
-------------
days after the end of the calendar year.
----
F. Detection and Reporting of Code Violations
The Compliance Department or the designated Compliance Officer will:
. review the trading activity reports or duplicate statements filed
by Employees, focusing on patterns of personal trading;
. review the trading activity of Investment Vehicles;
. review the holdings reports submitted by Access, Investment and
Portfolio Persons;
. prepare an Annual Issues and Certification Report to the Board of
Trustees or Directors of the Investment Vehicles that, (1)
describes the issues that arose during the year under this Code,
including, but not limited to, material violations of and
sanctions under the Code, and (2) certifies that SEI has adopted
procedures reasonably necessary to prevent its access, investment
and portfolio personnel from violating this Code; and
. prepare a written report to SEI management personnel outlining any
violations of the Code together with recommendations for the
appropriate penalties.
G. Violations of the Code of Ethics
1. Penalties:
. Employees who violate the Code of Ethics may be subject to serious
penalties which may include:
- written warning;
- reversal of securities transaction;
- restriction on trading privileges;
- disgorgement of trading profits;
- fine;
- suspension or termination of employment; and/or
- referral to regulatory or law enforcement agencies.
2. Penalty Factors:
10
<PAGE>
. Factors which may be considered in determining an appropriate
penalty include, but are not limited to:
- the harm to clients;
- the frequency of occurrence;
- the degree of personal benefit to the employee;
- the degree of conflict of interest;
- the extent of unjust enrichment;
- evidence of fraud, violation of law, or reckless disregard of a
regulatory requirement; and/or
- the level of accurate, honest and timely cooperation from the
employee.
H. Confidential Treatment
. The Compliance Department or the designated Compliance Officer
will use their best efforts to assure that all requests for
pre-clearance, all personal securities transaction reports and all
reports for securities holding are treated as "Personal and
Confidential." However, such documents will be available for
inspection by appropriate regulatory agencies and other parties
within and outside SEI as are necessary to evaluate compliance
with or sanctions under this Code.
I. Definitions Applicable to the Code of Ethics
1. Account - a securities trading account held by an Employee and by any such
person's spouse, minor children and adults residing in his or her household
(each such person, an "immediate family member"); any trust for which the person
is a trustee or from which the Employee benefits directly or indirectly; any
partnership (general, limited or otherwise) of which the Employee is a general
partner or a principal of the general partner; and any other account over which
the Employee exercises investment discretion.
2. Beneficial Ownership - Security ownership in which a person has a direct or
indirect financial interest. Generally, an employee will be regarded as a
beneficial owner of Securities that are held in the name of:
a. a spouse or domestic partner;
b. a minor child;
c. a relative who resides in the employee's household; or
d. any other person IF: (a) the employee obtains from the
--
securities benefits substantially similar to those of ownership
(for example, income from securities that are held by a spouse); or
(b) the employee can obtain title to the securities now or in the
future.
3. Initial Public Offering - an offering of securities for which a registration
statement has not been previously filed with the U.S. SEC and for which there is
no active public market in the shares.
4. Purchase or sale of a Security - includes the writing of an option to
purchase or sell a security.
5. Security - includes notes, bonds, stocks (including closed-end funds),
convertibles, preferred stock, options on securities, futures on broad-based
market indices, warrants and rights. A "Security" does not include direct
----------------
obligations of the U.S. Government ; bankers' acceptances, bank certificates
11
<PAGE>
of deposit, commercial paper and high quality short-term debt instruments,
including repurchase agreements; and, shares issued by open-end mutual funds.
III. INSIDER TRADING POLICY
All Employees are required to refrain from investing in Securities based on
material nonpublic inside information. This policy is based on the U.S. federal
securities laws that prohibit any person from:
1. trading on the basis of material, nonpublic information;
2. tipping such information to others;
3. recommending the purchase or sale of securities on the basis of such
information;
4. assisting someone who is engaged in any of the above activities; and
5. trading a security, which is the subject of an actual or impending tender
offer when in possession of material nonpublic information relating to
the offer.
This includes any confidential information that may be obtained by Access,
Investment and Portfolio Persons regarding the advisability of purchasing or
selling specific securities for any Investment Vehicles or on behalf of clients.
Additionally, this policy includes any confidential information that may be
obtained about SEI Investments Company or any of its affiliated entities. This
Section outlines basic definitions and provides guidance to Employees with
respect to this Policy.
12
<PAGE>
A. What is "Material" Information?
-------------------------------
Information is material when there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions.
Generally, if disclosing certain information will have a substantial effect on
the price of a company's securities, or on the perceived value of the company or
of a controlling interest in the company, the information is material, but
information may be material even if it does not have any immediate direct effect
on price or value. There is no simple "bright line" test to determine when
information is material; assessments of materiality involve a highly fact-
specific inquiry. For this reason, any question as to whether information is
material should be directed to the Compliance Department.
B. What is "Nonpublic" Information?
--------------------------------
Information about a publicly traded security or issuer is "public" when it has
been disseminated broadly to investors in the marketplace. Tangible evidence of
such dissemination is the best indication that the information is public. For
example, information is public after it has become available to the general
public through a public filing with the SEC or some other governmental agency,
the Dow Jones "tape" or the Wall Street Journal or some other publication of
general circulation, and after sufficient time has passed so that the
information has been disseminated widely.
Information about securities that are not publicly traded, or about the issuers
of such securities, is not ordinarily disseminated broadly to the public.
However, for purposes of this Policy, such private information may be considered
"public" private information to the extent that the information has been
disclosed generally to the issuer's security holders and creditors. For
example, information contained in a private placement memorandum to potential
investors may be considered "public" private information with respect to the
class of persons who received the memorandum, but may still be considered
---------------------------
"nonpublic" information with respect to creditors who were not entitled to
- --------------------------------------------------------------------------
receive the memorandum. As another example, a controlling shareholder may have
- ----------------------
access to internal projections that are not disclosed to minority shareholders;
such information would be considered "nonpublic" information.
C. Who Is an Insider?
------------------
Unlawful insider trading occurs when a person, who is considered an insider,
with a duty not to take advantage of material nonpublic information violates
that duty. Whether a duty exists is a complex legal question. This portion of
the Policy is intended to provide an overview only, and should not be read as an
exhaustive discussion of ways in which persons may become subject to insider
trading prohibitions.
Insiders of a company include its officers, directors (or partners), and
employees, and may also include a controlling shareholder or other controlling
person. A person who has access to information about the company because of
some special position of trust or has some other confidential relationship with
a company is considered a temporary insider of that company. Investment
advisers, lawyers, auditors, financial institutions, and certain consultants and
all of their officers, directors or partners, and employees are all likely to be
temporary insiders of their clients.
Officers, directors or partners, and employees of a controlling shareholder may
be temporary insiders of the controlled company, or may otherwise be subject to
a duty not to take advantage of inside information.
D. What is Misappropriation?
-------------------------
13
<PAGE>
Misappropriation usually occurs when a person acquires inside information about
Company A in violation of a duty owed to Company B. For example, an employee of
Company B may know that Company B is negotiating a merger with Company A; the
employee has material nonpublic information about Company A and must not trade
in Company A's shares.
For another example, Employees who, because of their association with SEI,
receive inside information as to the identity of the companies being considered
for investment by SEI Investment Vehicles or by other clients, have a duty not
to take advantage of that information and must refrain from trading in the
securities of those companies.
E. What is Tipping?
----------------
Tipping is passing along inside information; the recipient of a tip (the
"tippee") becomes subject to a duty not to trade while in possession of that
information. A tip occurs when an insider or misappropriator (the "tipper")
discloses inside information to another person, who knows or should know that
the tipper was breaching a duty by disclosing the information and that the
tipper was providing the information for an improper purpose. Both tippees and
tippers are subject to liability for insider trading.
F. Identifying Inside Information
- ---------------------------------
Before executing any securities transaction for your personal account or for
others, you must consider and determine whether you have access to material,
nonpublic information. If you think that you might have access to material,
-----
nonpublic information, you must take the following steps:
----
1. Report the information and proposed trade immediately to the Compliance
Department or designated Compliance Officer;
2. Do not purchase or sell the securities on behalf of yourself or others; and
3. Do not communicate the information inside or outside SEI, other than to the
Compliance Department or designated Compliance Officer.
These prohibitions remain in effect until the information becomes public.
Employees managing the work of consultants and temporary employees who have
access to material nonpublic information are responsible for ensuring that
consultants and temporary employees are aware of this Policy and the
consequences of non-compliance.
G. Trading in SEI Investments Company Securities
---------------------------------------------
This Policy applies to all employees with respect to trading in the securities
-------------
of SEI Investments Company, including shares held directly or indirectly in the
Company's 401(k) plan. Employees, particularly "officers" (as defined in Rule
16(a)-1(f) in the Securities Exchange Act of 1934, as amended), of the company
should be aware of their fiduciary duties to SEI and should be sensitive to the
appearance of impropriety with respect to any of their personal transactions in
SEI's publicly traded securities. Thus, the following restrictions apply to all
transactions in SEI's publicly traded securities occurring in an employee's
Account and in all other accounts in which the employee benefits directly or
indirectly, or over which the employee exercises investment discretion.
14
<PAGE>
. Blackout Period - Directors and Officers are prohibited from buying or
selling SEI's publicly traded securities during the blackout period. The
blackout periods are as follows:
. for the first, second and third quarterly financial reports -
begins at the close of the prior quarter and ends after SEI
publicly announces the financial results for that quarter.
. for the annual and fourth quarter financial reports - begins on
the 6th business day of the first month following the end of the
calendar year-end and ends after SEI publicly announces its
financial results.
All securities trading during this period may only be conducted with the
approval of SEI's General Counsel or the Compliance Director. In no event
may securities trading in SEI's stock be conducted while an Director or
Officer of the company is in possession of material nonpublic information
regarding SEI.
. Major Events - Employees who have knowledge of any SEI events or
developments that may have a "material" impact on SEI's stock that have
not been publicly announced are prohibited from buying or selling SEI's
publicly traded securities before such announcements. (See definition of
---
"material information" contained in III. A. above.)
. Short Selling and Derivatives Trading Prohibition - All employees are
prohibited from engaging in short sales and options trading of SEI's
common stock.
Section 16(a) directors and officers are subject to the following additional
trading restriction.
. Short Swing Profits - Directors and Officers may not profit from the
purchase and sale or sale and purchase of SEI's securities within 6
months of acquiring or disposing of Beneficial Ownership of that
Security.
H. Violations of the Insider Trading Policy
- --------------------------------------------
Unlawful trading of securities while in possession of material nonpublic
information, or improperly communicating that information to others, is a
violation of the federal securities laws and may expose violators to stringent
penalties. Criminal sanctions may include a fine of up to $1,000,000 and/or ten
years imprisonment. The SEC can recover the profits gained or losses avoided
through the violative trading, a penalty of up to three times the illicit
windfall or loss avoided, and an order permanently enjoining violators from such
activities. Violators may be sued by investors seeking to recover damages for
insider trading violations. In addition, violations by an employee of SEI may
expose SEI to liability. SEI views seriously any violation of this Policy, even
if the conduct does not, by itself, constitute a violation of the federal
securities laws. Violations of this Policy constitute grounds for disciplinary
sanctions, including dismissal.
15
<PAGE>
SEI INVESTMENTS COMPANY
CODE OF ETHICS AND INSIDER TRADING POLICY
EXHIBITS
Exhibit 1 Pre-clearance Request Form
Exhibit 2 Account Opening Letters to Brokers/Dealers
Exhibit 3 Initial Holdings Report
Exhibit 4 Quarterly Transaction Report
Exhibit 5 Annual Securities Holdings Report
Exhibit 6 Annual Compliance Certification
16
<PAGE>
EXHIBIT 1
17
<PAGE>
PRECLEARANCE REQUEST FORM
Name: Date:
Ext #: Title/Position:
- --------------------------------------------------------------------------------
Transaction Detail: I request prior written approval to execute the following
trade:
- --------------------------------------------------------------------------------
Buy:[_] Sell: [_] Security Name: Security type:
No. of Shares: Price: If sale, date acquired:
Held in an SEI Portfolio: Yes [_] No[_] If yes, provide: (a) the Portfolio's
name:
(b) the date Portfolio bought or sold the security:
Initial Public Offering: Private Placement:
[_] Yes [_] No [_] Yes [_] No
- --------------------------------------------------------------------------------
Disclosure Statements
- --------------------------------------------------------------------------------
I hereby represent that, to the best of my knowledge, neither I nor the
registered account holder: (1) have knowledge of a possible or pending purchase
or sale of the above security in any of the portfolios for which SEI acts as an
investment adviser, distributor, administrator, or for which SEI oversees the
performance of one or more it sub-advisers; (2) is in possession of any
material nonpublic information concerning the security to which this request
relates; and (3) is engaging in any manipulative or deceptive trading activity.
I acknowledge that if the Compliance Officer to whom I submit this written
request determines that the above trade would contravene SEI Investments
Company's Code of Ethics and Insider Trading Policy ("the Policy"), the
Compliance Officer in his or her sole discretion has the right not to approve
the trade, and I undertake to abide by his or her decision.
I acknowledge that this authorization is valid for a period of three (3)
business days.
- --------------------------------------------------------------------------------
Signature: Date:
- --------------------------------------------------------------------------------
Compliance Officer's Use Only
- --------------------------------------------------------------------------------
Approved: [_] Disapproved: [_] Date:
By: Comments:
Transaction Report Received: Yes [_] No [_]
- --------------------------------------------------------------------------------
Note: This preclearance will lapse at the end of the day on , 20 . If
you decide not to effect the trade, please notify the Compliance Department or
designated Compliance Officer immediately.
18
<PAGE>
EXHIBIT 2
19
<PAGE>
Date:
Your Broker
street address
city, state zip code
Re: Your Name
your S.S. number or account number
Dear Sir or Madam:
Please be advised that I am an employee of SEI Investments Distribution, Co., a
registered broker/dealer an/or SEI Investments Management Corporation, a
registered investment adviser. Please send duplicate statements only of this
brokerage account to the attention of:
SEI Investments Company
Attn: The Compliance Department
One Freedom Valley Drive
Oaks, PA 19456
This request is made pursuant to SEI's Code of Ethics and Insider Trading Policy
and Rule 3050 of the NASD's Code of Conduct.
Thank you for your cooperation.
Sincerely,
Your name
20
<PAGE>
Date:
[Address]
Re: Employee Name
Account #
SS#
Dear Sir or Madam:
Please be advised that the above referenced person is an employee of SEI
Investments Distribution, Co., a registered broker/dealer and/or SEI Investments
Management Corporation, a registered investment adviser. We grant permission
for him/her to open a brokerage account with your firm and request that you send
duplicate statements only of this employee's brokerage account to:
SEI Investments Company
Attn: The Compliance Department
One Freedom Valley Drive
Oaks, PA 19456
This request is made pursuant to SEI's Code of Ethics and Insider Trading Policy
and Rule 3050 of the NASD's Code of Conduct.
Thank you for your cooperation.
Sincerely,
Cynthia M. Parrish
Compliance Director
21
<PAGE>
EXHIBIT 3
<PAGE>
SEI INVESTMENTS MANAGEMENT CORPORATION
INITIAL HOLDINGS REPORT
Name:_____________________________________________________________
Signature:__________________
Submission Date:_____________________
Number of Name of Broker, Dealer or
Title of Security Shares Held Principal Amount Bank Where Security is Held
================================================================================
================================================================================
This report must be submitted within 10 days of becoming an Access, Investment
or Portfolio Person under SEI Investments Company's Code of Ethics. All
securities holdings must be reported on this form.
I confirm that the above list is an accurate and complete listing of all
securities in which I have a direct or indirect beneficial interest.
_________________
Signature
_________
Date
_________________
Received by:
<PAGE>
EXHIBIT 4
2
<PAGE>
SEI INVESTMENTS MANAGEMENT CORPORATION
QUARTERLY TRANSACTION REPORT
Transaction Record of Securities Directly or Indirectly Beneficially Owned
________________, 2000 to ____________, 2000
Name:___________________________________________________________________________
Signature:______________________________________________________________________
Submission Date:________________________________________________________________
Number of Shares and Issuer & Broker/Dealer
Type of Title of Principal or
Date Transaction Security Price Amount Bank
================================================================================
================================================================================
This report is required of all officers, directors and certain other persons
under Section 204 of the Investment Advisers Act of 1940 and Rule 17j-1 of the
Investment Company Act of 1940 and is subject to examination. Transactions in
direct obligations of the U.S. Government need not be reported. In addition,
persons need not report transactions in bankers' acceptances, certificates of
deposit, commercial paper or open-end investment companies. The report must be
returned within 10 days of the applicable calendar quarter end. The reporting
of transactions on this record shall not be construed as an admission that the
reporting person has any direct or indirect beneficial ownership in the security
listed.
By signing this document, I represent that all reported transactions were pre-
cleared through the Compliance Department or the designated Compliance Officer
in compliance with the SEI Investments Company Code of Ethics and Insider
Trading Policy.
3
<PAGE>
EXHIBIT 5
4
<PAGE>
SEI INVESTMENTS
ANNUAL SECURITIES HOLDINGS REPORT
As of December 31, 19__
Employee Name: __________________
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
0 Security 1 Number of Shares Type of Ownership (direct Account Number and Name of
-------- ---------------- or indirect) Brokerage Firm Where
Securities are Held
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
I confirm that the above list is an accurate and complete listing of all
securities in which I have a direct or indirect beneficial interest.
________________________ _________________________
Name Received by
_________
Date
Note: Do not report holdings of U.S. Government securities, bankers'
------
acceptances, certificates of deposit, commercial paper and mutual funds.
5
<PAGE>
EXHIBIT 6
<PAGE>
SEI INVESTMENTS
CODE OF ETHICS
ANNUAL COMPLIANCE CERTIFICATION
TO: Compliance Department
FROM:
DATE:
1. I hereby acknowledge receipt of a copy of the Code of Ethics and Insider
Trading Policy.
2. I have read and understand the Code of Ethics and Insider Trading Policy
and recognize that I am subject thereto.
3. I hereby declare that I have complied with the terms of the Code of
Ethics and Insider Trading Policy.
Signature: __________________
Date:_________
Received by: ________________
7
<PAGE>
CODE OF ETHICS
FOR STI CLASSIC FUNDS
Trusco Capital Management (the "Adviser") has confidence in the
integrity and good faith of all of its directors, officers and
employees. However, the Adviser recognizes those individuals may have
knowledge of present or future portfolio transactions and, in certain
instances, the power to influence portfolio transactions made on behalf
of or for one or more of the separately managed series (the "Funds") of
the STI Classic Funds (the "Trust"). Such knowledge could place those
individuals, if they engage in personal transactions in securities
which are eligible for investment by the Trust, in a position where
their personal interest may conflict with that of the Trust.
In view of the foregoing and of the provisions of Rule
17j-1(b)(1) under the Investment Company Act of 1940 (the "1940 Act"),
the Adviser has determined to adopt this Code of Ethics. This Code
prohibits certain types of personal transactions deemed to create
conflicts of interest, or at least the potential for or the appearance
of such a conflict, and establishes reporting requirements and
enforcement procedures.
I. Definitions.
-----------
(1) "Access Person" shall mean each employee, director and
officer of the Adviser and the Executive Vice President of
SunTrust Banks, Inc. charged with responsibility for the
Trust and Investment Services area.
(2) "Beneficial ownership" of a security generally is to be
determined in the same manner as it is for purposes of
Section 16 of the Securities Exchange Act of 1934. A
person should consider himself or herself the beneficial
owner of any securities in which that person has a direct
or indirect pecuniary interest. In addition, a person
should consider himself or herself the beneficial owner of
securities held by his or her spouse, minor children, a
relative who shares his or her home, or other persons by
reason of any contract, arrangement, understanding or
relationship that provides him or her with sole or shared
voting or investment power in a capacity outside the scope
of his or her employment.
(3) "Investment Personnel" means all Access Persons who occupy
the position of portfolio manager or who serve on an
investment committee that carries out the portfolio
management function with respect to any Fund of the Trust
and all Access Persons who provide or supply information
and/or advice to any portfolio manager or investment
committee, or who execute or help execute any portfolio
manager's or investment committee's decisions.
(4) "Purchase or sale of a security" includes the writing of
an option to purchase or sell a security.
(5) "Security" shall have the same meaning as set forth in
Section 2(a)(36) of the 1940 Act, including private
placements thereof, except that it shall not include
securities issued by the Government of the United States
or an agency thereof, bankers' acceptances, bank
certificates of deposit, commercial paper and registered,
open-end mutual funds.
(6) A "Security held or to be acquired" by the Trust or any
Fund means any Security which, within the most recent
fifteen days, (I) is or has been held by any Fund of the
Trust advised by the Adviser, or (ii) is being or has been
considered by the Adviser for purchase by the Trust or any
Fund.
(7) A Security is "being purchased or sold" by the Trust or
<PAGE>
any Fund from the time a purchase or sale program has been
communicated to the person who places the buy and sell
orders for the Trust or any Fund until the time when such
program has been fully completed or terminated.
(8) A "Related Security" includes a security of any class not
exempt under Section II(5) of this Code issued by the same
company whose securities are being purchased or sold,
including rights, warrants, preferred shares, bonds or
common shares of different classes. A "Related Security"
also includes any security not exempt under Section II(5)
of this Code which is issued by a subsidiary, parent or an
affiliated company of the company whose securities are
being purchased or sold.
II. Statement of General Principles.
-------------------------------
In recognition of the trust and confidence placed in the Adviser
by the Trust and its shareholders and to give effect to the
Adviser's belief that its operations with respect to the Trust
should be directed to the benefit of the Trust's shareholders,
the Adviser hereby adopts the following general principles to
guide the actions of its directors, officers and employees.
(1) The interests of the Trust's shareholders are paramount to
the personal interests of the Advisers Access Persons, all
of whom must conduct themselves and their operations to
give maximum effect to this principle by assiduously
placing the interests of the shareholders before their
own.
(2) All personal transactions in securities by the Adviser's
Access Persons must be accomplished so as to avoid even
the appearance of a conflict of interest on the part of
such persons with the interests of the Trust and its
shareholders.
(3) All of the Adviser's Access Persons must avoid actions or
activities that allow, or appear to allow, any such person
to profit or benefit from his or her position with respect
to the Trust, or that otherwise bring into question the
person's independence or judgment.
III. Prohibited Purchases and Sales of Securities.
--------------------------------------------
(1) No Access Person shall, in connection with the purchase or
sale, directly or indirectly, by such person of a Security
held or to be acquired by any Fund advised by the Adviser:
(A) Employ any device, scheme or artifice to defraud
such Fund;
(B) Make to such Fund any untrue statement of a
material fact or omit to state to such Fund a
material fact necessary in order to make the
statements made, in light of the circumstances
under which they are made, not misleading;
(C) Engage in any act, practice or course of business
which would operate as a fraud or deceit upon such
Fund; or
(D) Engage in any manipulative practice with respect to
such Fund.
<PAGE>
(2) Subject only to Section IV(2) of this Code, no Access
Person shall purchase or sell, directly or indirectly, any
Security in which he or she had or by reason of such
transaction acquires any Beneficial Ownership, within 24
hours before or after the time that the same (or a
related) Security is being purchased or sold by any Fund
advised by the Adviser. Subject only to Section IV(2) of
this Code, no Portfolio Manager shall purchase or sell,
directly or indirectly, any Security in which he or she
had or by reason of such transaction acquires any
Beneficial Ownership, within seven calendar days before or
after the time that the same (or a related) Security is
being purchased or sold by any Fund managed by him or her.
(3) Subject to Sections IV(2) and IV(3)(B) and (C) of this
Code, no Investment Personnel shall sell a Security at a
profit or cover a short sale at a profit within 60 days of
acquiring beneficial ownership of that security.
(4) No Investment Personnel may acquire beneficial ownership
of securities as part of an initial public offering by
the issuer.
IV. Preclearance of Personal Transactions.
--------------------------------------
(1) Except as provided in Section IV(2) of this Code, each
Access Person must preclear each proposed personal
transaction in Securities with the Adviser's designated
Review Officer prior to proceeding with the transaction.
No such transaction in Securities may be effected without
the prior written approval of the Review Officer. In
determining whether to grant such approval, the Review
Officer shall refer to all relevant Sections of this Code,
including Section IV(3), below.
(2) The requirements of Section IV(1) shall not apply to
the following personal transactions:
(A) Purchases or sales over which the Access Person
has no direct or indirect control or influence;
(B) Purchases or sales which are non-volitional on the
part of either the Access Person or any Fund,
including purchases or sales upon exercise of puts
or calls written by the Access Person and sales
from a margin account pursuant to a bona fide
margin call;
(C) Purchases which are part of an automatic dividend
reinvestment plan;
(D) Purchases effected upon the exercise of rights
issued by an issuer pro rata to all holders of a
class of its Securities, to the extent such rights
were acquired from such issuer.
(3) The following personal transactions shall be precleared
by the Review Officer:
(A) Transactions which do not violate the provisions of
Section III(1) of this Code, are not subject to
Section III(2), (3) or (4) of this Code and which
appear upon reasonable inquiry and investigation to
present no reasonable likelihood of harm to any
Fund advised by the Adviser;
(B) Transactions otherwise not permitted under
Section III(3) of this Code in Securities which
are:
<PAGE>
I. Not included on a guidance list of
Securities eligible for investment by any
Fund of the Trust advised by the Adviser (if
such a list is maintained by the Adviser); or
ii. Securities which are not eligible for purchase
or sale by any Fund of the Trust advised by the
Adviser, as determined by reference to the 1940
Act and blue sky laws and regulations
thereunder, the investment objectives and
policies and investment restrictions of the
Trust and its series, and undertakings made to
regulatory authorities; or
iii Securities of an issuer which is one of the 100
largest-capitalized public companies in the
United States, as reflected in the Standard &
Poors 100 list of companies with the largest
market capitalization.
(C) Transactions not permitted under Section III(3) of
this Code which the Review Officer, after
consideration of such facts and circumstances as
significant changes in the personal circumstances
of the person whose transaction is under
consideration or unanticipated market or corporate
events affecting the security, determines to not
violate Section III(1) of this Code and present no
reasonable likelihood of harm to the Trust or to
any Fund.
V. Additional Restrictions and Requirements.
----------------------------------------
(1) No Access Person shall accept any gift or other thing of
more than de minimis value from any person or entity that
does business with or on behalf of the Adviser or any Fund
advised by the Adviser.
(2) No Access Person may accept a position as a director or
trustee of a publicly-traded company without prior
approval of such position by the Adviser and by the
Trust's Board of Trustees, as consistent with the
interests of the Trust and its shareholders.
(3) Each Access Person must direct each brokerage firm or bank
at which such person maintains a securities account to
send duplicate copies of such person's confirmations and
statements to the Review Officer. Compliance with this
provision can also be effected by the Access Person
providing duplicate copies of all such confirmations and
statements directly to the Review Officer within seven
business days of receipt by the Access Person.
VI. Reporting Obligations.
---------------------
(1) The Adviser shall create and maintain a list of all Access
Persons.
(2) Each Access Person shall provide to the Review Officer a
complete listing of all securities beneficially owned by
such person as of the later of the date when such person
became an Access Person with respect to the Trust or
January 1, 1995, and thereafter shall submit an updated
listing of such holdings to the Review Officer as of
January 1 of each subsequent year. The initial listing
shall be submitted on or before the later of January 1,
1995 or ten days after such person first became an Access
Person and each updated listing shall be submitted on or
before the last business day of January in each subsequent
year.
<PAGE>
(3) Each Access Person shall report, in the manner and form
set out in Section VII of this Code, all transactions in
Securities which are not reflected on bank or brokerage
firm statements required to be sent under Section V(3) of
this Code in which the person has, or by reason of such
transaction acquires, any direct or indirect beneficial
ownership.
VII. Reports.
-------
(1) The quarterly reports for transactions described in
Section VI(3) of this Code shall be filed by all Access
Persons with the Review Officer. The Review Officer shall
file quarterly reports with respect to his or her own
personal securities transactions with the President of the
Adviser, who shall act in all respects in the manner
prescribed herein for the Review Officer.
(2) Any such report may contain a statement that the report
shall not be construed as an admission by the person
making such report that he or she has any direct or
indirect beneficial ownership in the security or
securities to which the report relates.
(3) Every Access Person shall include in such report the name
of any publicly-owned company or any company anticipating
a public offering of its equity securities and the total
number of its shares beneficially owned by him or her if
such total ownership is more than 1/2 of 1% of the
company's outstanding shares.
(4) Each report shall be filed not later than 10 days after
the end of each calendar quarter and shall contain the
following information:
(A) The date of each transaction required to be
reported, the title and number of shares or
principal amount of each security involved;
(B) The nature of each transaction required to be
reported (whether purchase, sale or any other type
of acquisition or disposition);
(C) The price at which each such transaction was
effected;
(D) The name of the broker, dealer or bank with or
through whom each such transaction was effected;
and
(E) The date of the report and the signature of the
person making the report.
(5) If no reportable transactions occurred during a quarter,
the Access Person shall file a signed and dated timely
report so stating.
VIII. Review and Enforcement.
----------------------
(1) The Review Officer shall compare all personal securities
transactions reported pursuant to Sections V(3) and VI(3)
of this Code with completed portfolio transactions of the
Funds advised by the Adviser during the relevant time to
determine whether a violation of this Code may have
occurred. Before determining that a violation has been
committed by any person, the Review Officer shall give
such person the opportunity to supply additional
explanatory material.
<PAGE>
(2) If the Review Officer determines that a violation of this
Code may have occurred, the Review Officer shall submit
such written determination, together with the information
upon which the Review Officer made the determination and
any additional explanatory material provided by the
person, to the President of the Adviser, who shall make an
independent determination as to whether a violation has
occurred.
(3) If the President finds that a violation has occurred, the
President shall impose upon the person such sanctions as
he or she deems appropriate and shall report the violation
and the sanctions imposed to the Board of Trustees of the
Trust.
(4) No person shall participate in a determination of whether
he or she has committed a violation of this Code or of the
imposition of any sanction against himself or herself. If
a securities transaction of the President is under
consideration, the Chairman of the Board of Directors of
the Adviser shall act in all respects in the manner
prescribed herein for the President.
