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STI CLASSIC VARIABLE TRUST
INTERNATIONAL EQUITY FUND
INVESTMENT ADVISOR TO THE FUND:
STI CAPITAL MANAGEMENT, N.A.
The STI Classic Variable Trust (the "Trust") is a mutual fund that offers shares
in a number of separate investment portfolios. This Prospectus sets forth
concisely the information about the shares of the International Equity Fund (the
"Fund"). The Fund is available to the public only through the purchase of
certain variable annuity and variable life insurance contracts ("Contracts")
issued by various life insurance companies ("Insurers").
A Statement of Additional Information relating to the Fund dated the same date
as this Prospectus has been filed with the Securities and Exchange Commission
and is available without charge by writing to the Trust at 680 East Swedesford
Road, Wayne, Pennsylvania 19087 or by calling 1-800-453-6038. The Statement of
Additional Information is incorporated into this Prospectus by reference.
The purchaser of a Contract should read this Prospectus in conjunction with the
prospectus for his or her Contract.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT
CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISORS OR ANY OF THEIR AFFILIATES
OR CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
NOVEMBER 4, 1996
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2
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Trust's Statement of
Additional Information relating to the Fund incorporated herein by reference, in
connection with the offering made by this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Trust or SEI Financial Services Company (the "Distributor"). This
Prospectus does not constitute an offering by the Trust or by the Distributor in
any jurisdiction in which such offering may not lawfully be made.
TABLE OF CONTENTS
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Expense Summary........................................................... 3
The Trust................................................................. 4
Investment Objective...................................................... 4
Investment Policies and Strategies........................................ 4
General Investment Policies and Strategies................................ 5
Investment Risks.......................................................... 6
Investment Limitations.................................................... 7
Performance Information................................................... 8
Purchase and Redemption of Fund Shares.................................... 8
Net Asset Value........................................................... 9
Dividends And Distributions............................................... 9
Tax Information........................................................... 9
STI Classic Variable Trust Information.................................... 10
The Trust................................................................. 10
Board of Trustees......................................................... 11
Investment Advisor........................................................ 11
Portfolio Manager......................................................... 12
Banking Laws.............................................................. 12
Distribution.............................................................. 13
Administration............................................................ 13
Transfer Agent and Dividend Disbursing Agent.............................. 13
Custodian................................................................. 13
Legal Counsel............................................................. 13
Independent Public Accountants............................................ 13
Other Information......................................................... 13
Voting Rights............................................................. 13
Reporting................................................................. 14
Shareholder Inquiries..................................................... 14
Description of Permitted Investments...................................... 14
Appendix.................................................................. A-1
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3
EXPENSE SUMMARY
Below is a summary of the Fund's annual operating expenses. The purpose of this
table is to assist the investor in understanding the various costs and expenses
that may be directly or indirectly borne by investors in the Trust. "Other
Expenses" for the Fund are based on estimated amounts for the current fiscal
year. Actual expenses may vary.
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
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<CAPTION>
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Advisory Fees (after fee waivers)(1).............. 0.00%
All Other Expenses (after reimbursements)(1)...... 1.60%
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Total Fund Operating Expenses (after fee
waivers)(1)...................................... 1.60%
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</TABLE>
(1) Absent voluntary reductions and reimbursements, it is estimated that
advisory fees, other expenses and total fund operating expenses, expressed
as a percentage of average net assets for the Fund would be: 1.25%, 4.88%
and 6.13%. Fee reductions are voluntary and may be terminated at any time.
Additional information may be found under "Investment Advisor" and
"Administration." A person that purchases shares through an account with a
financial institution may be charged separate fees by the financial
institution.
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<CAPTION>
ONE THREE
EXAMPLES YEAR YEARS
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An investor would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return and (2) redemption at the end of each time
period.
INTERNATIONAL EQUITY FUND.................................................. $16 $50
- --------------------------------------------------------------------------------------
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</TABLE>
The example is based upon the estimated total operating expenses of the Fund and
should not be considered a representation of past or future expenses. Actual
expenses may be greater or less than those shown.
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4
THE TRUST
STI CLASSIC VARIABLE TRUST (the "Trust") is a diversified, open-end management
investment company that provides a convenient and economical means of investing
in several professionally managed portfolios of securities. The Trust currently
offers units of beneficial interest ("shares") in a number of separate Funds.
The Trust is intended exclusively as an investment vehicle for variable annuity
or variable life insurance contracts offered by the separate accounts of various
insurance companies. Each share of the Fund represents an undivided,
proportionate interest in the Fund. This Prospectus relates solely to the
International Equity Fund (the "Fund").
INVESTMENT OBJECTIVE
THE INTERNATIONAL EQUITY FUND seeks to provide long term capital appreciation by
investing primarily in a diversified portfolio of equity securities of foreign
issuers.
There can be no assurance that the Fund will achieve its investment objective.
The investment objective of the Fund is nonfundamental and may be changed
without shareholder approval.
INVESTMENT POLICIES AND STRATEGIES
The Fund, under normal market conditions will invest at least 65% of its assets
in equity securities of foreign issuers consisting of common and preferred
stocks, warrants, options and securities convertible into common stock.
Securities of foreign issuers purchased by the Fund may be purchased in foreign
markets, on United States registered exchanges, the over-the-counter market or
in the form of sponsored or unsponsored American Depositary Receipts ("ADRs")
traded on registered exchanges or listed on National Association of Securities
Dealers Automated Quotations ("NASDAQ"), or sponsored or unsponsored European
Depositary Receipts ("EDRs").
The Fund may enter into forward foreign currency contracts as a hedge against
possible variations in foreign exchange rates. A forward foreign currency
contract is a commitment to purchase or sell a specified currency, at a
specified future date, at a specified price. The Fund may enter into forward
foreign currency contracts to hedge a specific security transaction or to hedge
a portfolio position. The Fund also may purchase and write put and call options
on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter
markets) to manage the portfolios exposure to changes in dollar exchange rates.
The Fund expects to be fully invested in the investments described above, but
may invest up to 35% of its total assets in bonds and debentures issued by
non-U.S. or U.S. companies, securities issued or guaranteed by foreign or U.S.
governments and foreign and U.S. commercial paper. The Fund may invest in
futures contracts, including stock index futures contracts, and options on
futures contracts. The bonds that the Fund may purchase may be rated in any
rating category or may be unrated provided that no more than 10% of the Fund's
total assets will be rated below BBB by Standard & Poor's Corporation ("S&P") or
below Baa by Moody's Investor Service, Inc. ("Moody's") or securities not rated
by S&P or Moody's of comparable quality (see "Investment Risks -- High Yield,
Lower Rated Bonds"). When investing in bonds, the Fund may seek capital gains by
taking advantage of price appreciation caused by interest rate and credit
quality changes. The Fund may also purchase shares of closed-end investment
companies that invest in the securities of
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5
issuers in a single country or region. The Fund is also permitted to acquire
floating and variable rate securities, purchase securities on a when-issued
basis and purchase illiquid securities.
The Fund will invest in the foreign issues of at least three different countries
outside the United States. A foreign issue is one the issuer of which (1) is
organized under the laws of a specific country, (2) for which the principal
securities trading market is in a specific country or (3) derives a significant
proportion (at least 50 percent) of its revenues or profits from goods produced
or sold, investments made, or services performed in a specific country or which
have at least 50 percent of its assets situated in that country. The Fund will
invest primarily in developed countries (for example Japan, Canada and the
United Kingdom). In addition, the Fund may invest in securities of issuers whose
principal activities are in countries with emerging markets. The Fund defines an
emerging market country as any country the economy and market of which the World
Bank or the United Nations considers to be emerging or developing.
The annual portfolio turnover rate for the Fund is not expected to exceed 100%.
GENERAL INVESTMENT POLICIES AND STRATEGIES
For temporary defensive purposes during periods when the Advisor determines that
market conditions warrant, the Fund may invest up to 100% of its assets in money
market instruments consisting of securities issued or guaranteed as to principal
and interest by the U.S. Government, its agencies or instrumentalities,
custodial receipts involving U.S. Treasury obligations, repurchase agreements,
certificates of deposit, bankers' acceptances, and time deposits issued by banks
or savings and loan associations and commercial paper rated in the highest
rating category, and may hold a portion of its assets in cash. The Fund may not
be pursuing its investment objective when it is engaged in temporary defensive
investing. The Fund may also invest in money market instruments for liquidity
purposes.
The Fund may purchase restricted securities, including Rule 144A securities,
that the Advisor determines are liquid pursuant to guidelines established by the
Trust's Board of Trustees.
In the event that a security owned by the Fund is downgraded below the stated
rating categories, the Advisor will review and take appropriate action with
regard to the security.
The Fund may borrow money for temporary or emergency purposes in an amount not
to exceed one-third of the value of its total assets. The Fund may not purchase
additional securities while its outstanding borrowings exceed 5% of its assets.
The Fund's purchase of shares of other investment companies is limited by the
Investment Company Act of 1940 (the "1940 Act") and will ordinarily result in an
additional layer of charges and expenses.
The Fund may engage in securities lending and will limit such practice to 33
1/3% of its total assets.
It is a non-fundamental policy of the Fund to invest no more than 15% of its net
assets in illiquid securities. An illiquid security is a security which cannot
be disposed of within seven days in the usual course of business at a price
approximating its carrying value.
For additional information regarding permitted investments, see "Description of
Permitted Investments" in this Prospectus and in the Statement of Additional
Information.
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6
INVESTMENT RISKS
FOREIGN SECURITIES AND FOREIGN CURRENCY CONTRACTS
Investing in the securities of foreign companies and the utilization of forward
foreign currency contracts involve special risks and considerations not
typically associated with investing in U.S. companies. These risks and
considerations include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation or confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability
which could affect U.S. investment in foreign countries and potential
restrictions of the flow of international capital and currencies. Foreign
companies may also be subject to less government regulation than U.S. companies.
Moreover, the dividends payable on the foreign securities may be subject to
foreign withholding taxes, thus reducing the net amount of income available for
distribution to the Fund's Shareholders. Further, foreign securities often trade
with less frequency and volume than domestic securities and, therefore, may
exhibit greater price volatility. Changes in foreign exchange rates will affect,
favorably or unfavorably, the value of those securities which are denominated or
quoted in currencies other than the U.S. dollar.
By entering into forward foreign currency contracts, the Fund will seek to
protect the value of its investment securities against a decline in the value of
a currency. However, these forward foreign currency contracts will not eliminate
fluctuations in the underlying prices of the securities. Rather, they simply
establish a rate of exchange which one can obtain at some future point in time.
Although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, also, they tend to limit any potential gain
which might result should the value of such currency increase.
The Fund's investments in emerging markets can be considered speculative, and
therefore may offer higher potential for gains and losses than investments in
developed markets of the world. With respect to any emerging country, there is
the greater potential for nationalization, expropriation or confiscatory
taxation, political changes, government regulation, social instability or
diplomatic developments (including war) which could affect adversely the
economies of such countries or investments in such countries. In addition, it
may be difficult to obtain and enforce a judgment in the courts of such
countries. The economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. Investment in Eastern European countries
and the countries which made up the former Soviet Union may be affected by
political decisions that could cause such countries to revert to a prior system
of government.
EQUITY SECURITIES
Investments in equity securities in general are subject to market risks that may
cause their prices to fluctuate over time. The value of convertible equity
securities is also affected by prevailing interest rates, the credit quality of
the issuer and any call provision. Fluctuations in the value of equity
securities in which the Fund invests will cause the net asset value of the Fund
to fluctuate.
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7
FIXED INCOME SECURITIES
The market value of the Fund's fixed income investments will change in response
to interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Securities with longer maturities are subject to
greater fluctuations in value than securities with shorter maturities. Changes
by a nationally recognized statistical rating organization ("NRSRO") in the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal also affect the value of these investments.
Changes in the value of the Fund's securities will not affect cash income
derived from these securities but will affect the Fund's net asset value.
Securities rated BBB by S&P or Baa by Moody's (the lowest respective ratings of
investment grade bonds) are deemed to have speculative characteristics.
Guarantees of the Fund's securities by the U.S. Government, its agencies or
instrumentalities guarantee only the payment of principal and interest on the
guaranteed securities, and do not guarantee the securities' yield or value of
the yield or value of the Fund's shares.
There is a risk that the current interest rate on floating and variable rate
instruments may not accurately reflect existing market interest rates.
HIGH YIELD, LOWER RATED BONDS
The Fund's investments in high yield, lower rated bonds ("junk bonds") involve
greater risk of default or price declines than investments in investment grade
securities (i.e., securities rated BBB or higher by S&P or Baa or higher by
Moody's) due to changes in the issuer's creditworthiness. The market for high
risk, high yield securities may be thinner and less active, causing market price
volatility and limited liquidity in the secondary market. This may limit the
ability of the Fund to sell such securities at their fair market value either to
meet redemption requests or in response to changes in the economy or the
financial markets. Market prices for high risk, high yield securities may also
be affected by investors' perception of credit quality and the outlook for
economic growth. Thus, prices for high risk, high yield securities may move
independently of interest rates and the overall bond market. In addition, the
market for high risk, high yield securities may be adversely affected by
legislative and regulatory developments.
ZERO COUPON OBLIGATIONS
Zero coupon obligations are sold at original issue discount and do not make
periodic payments. Zero coupon obligations may be subject to greater
fluctuations in value due to interest rate changes. The Fund will be required to
include the imputed interest in zero coupon obligations in its current income.
Because the Fund distributes all of its net investment income to Shareholders,
the Fund may have to sell portfolio securities to distribute the income
attributable to these obligations and securities at a time when its Advisor
would not have chosen to sell such obligations or securities and which may
result in a taxable gain or loss.
INVESTMENT LIMITATIONS
The following investment limitations constitute fundamental policies of the
Fund. Fundamental policies cannot be changed with respect to the Fund without
the consent of the holders of a majority of the Fund's outstanding shares. The
term "majority of the outstanding shares" means the vote of (i) 67% or more of
the
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8
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. Purchase securities of any issuer (except securities issued or
guaranteed by the United States, its agencies or instrumentalities and
repurchase agreements involving such securities) if as a result more than 5% of
the total assets of the Fund would be invested in the securities of such issuer;
provided, however, that the Fund may invest up to 25% of its total assets
without regard to this restriction as permitted by applicable law.
2. Purchase any securities which would cause more than 25% of the total
assets of the Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry, provided
that this limitation does not apply to investments in obligations issued or
guaranteed by the U.S. Government, 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 according to their services,
for example, gas, gas transmission, electric and telephone will each be
considered a separate industry; (ii) financial service companies will be
classified according to the end users of their services, for example, automobile
finance, bank finance and diversified finance will each be considered a separate
industry; and (iii) supranational entities will be considered to be a separate
industry.
The foregoing percentages will apply at the time of the purchase of a security.
Additional investment limitations are set forth in the Statement of Additional
Information.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise total return and yield. These figures
will be based on historical earnings and are not intended to indicate future
performance. The yield of the Fund refers to the annualized income generated by
an investment in the Fund over a specified 30-day period. The yield is
calculated by assuming that the income generated by the investment during that
period is generated over one year and is shown as a percentage of the
investment.
The total return of the Fund refers to the average compounded rate of return on
a hypothetical investment, including any sales charge imposed, for designated
time periods (including but not limited to, the period from which the Fund
commenced operations through the specified date), assuming that the entire
investment is redeemed at the end of each period and assuming the reinvestment
of all dividend and capital gains distributions.
The Fund may periodically compare its performance to other mutual funds tracked
by mutual fund rating services, to broad groups of comparable mutual funds or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund cannot be purchased directly, but only through a Contract
offered through an insurance company separate account. Please refer to the
prospectus for the Contract for information on how to make investments and
redemptions. Shares of the
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9
Fund are sold in a continuous offering to separate accounts of insurance
companies to fund Contracts.
The separate accounts purchase and redeem Shares of the Fund based on, among
other things, the amount of net Contract premiums or purchase payments
transferred to the separate accounts, transfers to or from a separate account
investment division, policy loans, loan repayments, and benefit payments to the
terms of the Contracts, at the Fund's net asset value per share calculated as of
that same day.
All redemption requests will be processed and payment with respect thereto will
be made within seven days after tender. The Trust may suspend redemption, if
permitted by the 1940 Act, for any period during which the New York Stock
Exchange ("NYSE") is closed or during which trading is restricted by the
Securities and Exchange Commission ("SEC") or the SEC declares that an emergency
exists. Redemptions may also be suspended during other periods permitted by the
SEC for the protection of the Trust's investors.
NET ASSET VALUE
The net value of the Fund's Shares is determined at the close of regular trading
on the NYSE (currently 4:00 p.m., Eastern Time), each business day. Net asset
value per share is calculated for purchases and redemptions of Shares of the
Fund by dividing the value of total Fund assets, less liabilities (including
Trust expenses, which are accrued daily), by the total number of Shares of the
Fund outstanding. Values of assets in the Fund's portfolio are determined on the
basis of market value or by means of valuation methods approved by the Board of
Trustees and described in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid annually by the Fund. The Fund's net realized
capital gains (including net short-term capital gains) are distributed at least
annually. Net income for dividend purposes consists of (i) interest accrued and
original issue discount earned on the Fund's assets, (ii) plus the amortization
of market discount and minus the amortization of market premium on such assets,
(iii) plus dividend or distribution income on such assets, (iv) less accrued
expenses directly attributable to the Fund and the general expenses of the Trust
prorated to the Fund on the basis of its relative net assets. Shareholders of
record on the record date will be entitled to receive dividends.
TAX INFORMATION
For more information about the tax consequences of an investment in a Contract,
see the attached prospectus for that Contract. The following discussion is only
a brief summary of the federal income tax consequences to the Fund and its
insurance company shareholders based on current tax laws and regulations, which
may be changed by subsequent legislative, judicial or administrative action.
The Fund intends to qualify separately each year as a "regulated investment
company" ("RIC") as defined under Subchapter M of the Code. The requirements for
qualification may cause a Fund to restrict the extent of its short-term trading
or its transactions in options or futures contracts.
As a RIC, the Fund will not be subject to federal income tax on its net
investment income and net realized capital gains which are timely distributed to
its insurance company shareholders. Accordingly, the Fund intends to
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10
distribute all or substantially all of its net investment income and net
realized capital gains to its shareholders. Very generally, an insurance company
which is a shareholder of the Fund will determine its federal income tax
liability with respect to distributions from the Fund pursuant to the special
rules of Subchapter L of the Code.
Although the Trust intends that it and the Fund will be operated so that they
will have no federal income tax liability, if any such liability is nevertheless
incurred, the investment performance of the Fund incurring such liability will
be adversely affected. In addition, the Fund investing in foreign securities may
be subject to foreign taxes. These taxes would reduce the investment performance
of the Fund.
The Fund intends to comply with the diversification requirements imposed by
Section 817(h) of the Code and the regulations thereunder. These requirements
are in addition to the diversification requirements imposed on the Fund by
Subchapter M of the Code and the 1940 Act. These requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer, and, because Section 817(h) and the regulations
thereunder treat the Fund's assets as assets of the related separate account,
these limitations also apply to the Fund's assets that may be invested in
securities of a single issuer. Generally, the regulations provide that, as of
the end of each calendar quarter, or within 30 days thereafter, no more than 55%
of the Fund's total assets may be represented by any one investment, no more
than 70% by any two investments, no more than 80% by any three investments, and
no more than 90% by any four investments. Failure of the Fund to satisfy the
Section 817(h) requirements could result in adverse tax consequences to the
Insurers and holders of Contracts.
Certain additional tax information appears in the Statement of Additional
Information.
Income derived by the Fund from obligations of foreign issuers may be subject to
foreign withholding taxes. The Fund expects to elect to treat Shareholders as
having paid their proportionate share of such foreign taxes.
Income received on direct U.S. obligations is exempt from tax at the state level
when received directly by the Fund and may be exempt, depending on the state,
when received by the Shareholder as income dividends from the Fund, provided
certain state-specific conditions are satisfied. Not all states permit such
income dividends to be tax exempt and some require that a certain minimum
percentage of an investment company's income be derived from state tax-exempt
interest. The Fund will inform Shareholders annually of the percentage of income
and distributions derived from direct U.S. obligations. Shareholders should
consult their tax advisors to determine whether any portion of the income
dividends received from the Fund is considered tax-exempt in their particular
state.
STI CLASSIC VARIABLE TRUST INFORMATION
THE TRUST
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated April 18, 1995. The Declaration of Trust permits the Trust to offer
separate portfolios of shares. All consideration received by the Trust for
Shares of any Fund and all assets of such Fund belong to that Fund and would be
subject to liabilities related thereto.
The Trust's Board of Trustees will monitor potential conflicts between variable
life insurance policies and variable annuity
<PAGE>
11
contracts or among insurance company shareholders and will determine what, if
any, action should be taken to resolve any conflicts. Such action could include
the redemption of shares by one or more of the separate accounts, which could
have adverse consequences. Material conflicts could result from, for example:
(1) changes in state insurance laws; (2) changes in federal income tax laws; or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. In
such circumstances, if the Trustees of the Trust were to conclude that separate
funds should be established for variable life and variable annuity separate
accounts, variable life insurance policyowners and variable annuity
contractowners would no longer have the economies of scale resulting from a
larger combined fund. The Trust pays its expenses, including fees of its service
providers, audit and legal expenses, expenses of preparing prospectuses, proxy
solicitation material and reports to shareholders, costs of custodial services
and registering the Shares under federal and state securities laws, pricing,
insurance expenses, litigation and other extraordinary expenses, brokerage
costs, interest charges, taxes and organization expenses.
BOARD OF TRUSTEES
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described below, certain
companies provide essential management services to the Trust.
INVESTMENT ADVISOR
The Advisor is an indirect wholly-owned subsidiary of SunTrust Banks, Inc.
("SunTrust"), a southeastern regional bank holding company with assets of $46.5
billion as of December 31, 1995. SunTrust ranks among the twenty largest U.S.
banking companies. Its three principal subsidiaries -- SunTrust Banks of
Florida, Inc., Suntrust Banks of Georgia, Inc. and SunTrust Banks of Tennessee
- -- provide a wide range of personal and corporate banking, trust and investment
services through more than 600 locations in the three-state area. Total
discretionary assets under management with SunTrust equalled approximately $47.0
billion as of December 31, 1995.
STI Capital Management, N.A. ("STI Capital") serves as the Advisor to the Fund.
As of December 31, 1995, STI Capital had discretionary management authority with
respect to assets of approximately $11.0 billion. The principal business address
of STI Capital is P.O. Box 3808, Orlando, Florida 32802.
The Trust and the Advisor have entered into an advisory agreement (the "Advisory
Agreement"). Under the Advisory Agreement, the Advisor makes the investment
decisions for the assets of the Fund and continuously reviews, supervises and
administers the Fund's investment program. The Advisor discharges its
responsibilities subject to the supervision of, and policies established by, the
Trustees of the Trust. INVESTMENTS IN THE FUND ARE NOT DEPOSITS, ARE NOT INSURED
OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND ARE NOT ENDORSED
OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS OF SUNTRUST BANKS, INC. OR
ANY OF ITS AFFILIATES. INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE AND
SHARES AT REDEMPTION MAY BE WORTH
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12
MORE OR LESS THAN THEIR ORIGINAL COST. THERE IS NO GUARANTEE THAT THE FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to the Fund, the Advisor may
execute brokerage or other agency transactions through affiliates of the
Advisor.
For the services provided and expenses incurred pursuant to the Investment
Advisory Agreement, STI Capital is entitled to receive advisory fees computed
daily and paid monthly at the annual rate of 1.25% of the average daily net
assets of the Fund.
From time to time, the Advisor may waive (either voluntarily or pursuant to
applicable state limitations) the advisory fee payable by the Fund. Currently,
the Advisor has agreed to voluntary reductions in its fees in amounts necessary
to maintain the total operating expenses at the amounts set forth in the Expense
Summary. Voluntary reductions of fees may be terminated at any time.
PORTFOLIO MANAGER
Mr. Dan Jaworski has been responsible for the day-to-day management of the Fund
since its inception. Mr. Jaworski joined STI Capital in 1995. Prior to joining
STI Capital, he managed international portfolios at Lazard Freres Asset
Management from 1993 through 1994 and the Principal Financial Group from 1988
through 1993.
BANKING LAWS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, presently
(a) prohibit a bank holding company registered under the Federal Bank Holding
Company Act of 1956 or its affiliates from sponsoring, organizing, controlling,
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and generally prohibit banks
from underwriting securities, but (b) do not prohibit such a bank holding
company or affiliate or banks generally from acting as an investment advisor,
transfer agent, or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of a customer. The
Advisor believes that it may perform the services for the Fund contemplated by
its agreement described in this Prospectus without violation of applicable
banking laws or regulations. However, future changes in legal requirements
relating to the permissible activities of banks and their affiliates, as well as
future interpretations of present requirements, could prevent the Advisor from
continuing to perform services for the Fund. If the Advisor was prohibited from
providing services to the Fund, the Board of Trustees would consider selecting
other qualified firms. Any new investment advisory agreements would be subject
to Shareholder approval.
If current restrictions preventing a bank or its affiliates from legally
sponsoring, organizing, controlling or distributing shares of an investment
company were relaxed, the Advisor, or its affiliates, would consider the
possibility of offering to perform additional services for the Fund. It is not
possible, of course, to predict whether or in what form such legislation might
be enacted or the terms upon which the Advisor, or such affiliates, might offer
to provide such services.
In addition, state securities laws on that issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
<PAGE>
13
DISTRIBUTION
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI Corporation ("SEI") distributes the Fund's Shares to the separate accounts,
which purchase and redeem these shares at net asset value without sales or
redemption charges.
The Trust reserves the right to reject a purchase order when the Fund determines
that it is not in the best interest of the Trust to accept such order.
ADMINISTRATION
SEI Fund Resources (the "Administrator") serves as Administrator of the Trust
The Administrator provides the Trust with certain administrative services, other
than investment advisory services, including regulatory reporting, all necessary
office space, equipment, personnel and facilities.
The Administrator is entitled to a fee from the Trust, which is calculated daily
and paid monthly, at an annual rate as follows:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS FEE
- -------------------------------------------- ----------
<S> <C>
$1 - $1 billion 0.10 %
over $1 billion to $5 billion 0.07 %
over $5 billion to $8 billion 0.05 %
over $8 billion to $10 billion 0.045%
over $10 billion 0.04 %
</TABLE>
From time to time, the Administrator may waive (either voluntarily or pursuant
to applicable state limitations) all or a portion of the administration fee
payable with respect to the Trust.
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Federated Services Company, Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779 is the transfer agent for the shares of the Trust and dividend
disbursing agent for the Trust.
CUSTODIAN
The Bank of New York, One Wall Street, New York, NY serves as Custodian of the
assets of the Fund. The Custodian holds cash, securities and other assets of the
Trust as required by the 1940 Act.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, serves as legal counsel
to the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants to the Trust are Arthur Andersen LLP,
Philadelphia, Pennsylvania.
OTHER INFORMATION
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote. The Fund will
vote separately on matters relating solely to the Fund. As a Massachusetts
Business Trust, the Trust is not required to hold annual meetings of
Shareholders but approval will be sought for certain changes in the operation of
the Trust and for the election of Trustees under certain circumstances. In
addition, a Trustee may be removed by the remaining Trustees or by Shareholders
at a special meeting called upon written request of Shareholders owning at least
10% of the outstanding shares of the Trust. In the event that such a meeting is
requested the
<PAGE>
14
Trust will provide appropriate assistance and information to the Shareholders
requesting the meeting.
The Insurers have advised the Trust that, whenever an investor vote is taken,
the Insurer will give Contract owners and annuitants the opportunity to instruct
them how to vote the number of Shares attributable to such Contracts. The
Insurers have also stated that they will vote any Shares that they are entitled
to vote directly, because of their attributable interests in the Trust, and any
Shares attributable to Contracts for which instructions are not received, in the
same proportion that Contract owners vote.
REPORTING
The Trust issues unaudited financial information and audited financial
statements annually. The Trust furnishes proxy statements and other reports to
Shareholders of record.
SHAREHOLDER INQUIRIES
Investors may contact the respective Insurers in order to obtain information on
account statements, procedures and other related information.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of the permitted investments for the Fund.
Further discussion is contained in the Statement of Additional Information.
AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued
by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer and
deposited with the depositary. ADRs may be available through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the security underlying the receipt and a depositary, whereas an
unsponsored facility may be established by a depositary without participation by
the issuer of the underlying security. Holders of unsponsored depositary
receipts generally bear all the costs of the unsponsored facility. The
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through, to the holders of the receipts, voting rights with
respect to the deposited securities.
BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time
drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used
by corporations to finance the shipment and storage of goods. Maturities are
generally six months or less.
CERTIFICATES OF DEPOSIT-- Certificates of deposit are interest bearing
instruments with a specific maturity. They are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity. Certificates of deposit with
penalties for early withdrawal will be considered illiquid.
COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured
short-term promissory notes issued by banks, municipalities, corporations and
other entities. Maturities on these issues vary from a few to 270 days.
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics similar
<PAGE>
15
to both fixed income and equity securities. Because of the conversion feature,
the market value of a convertible security tends to move with the market value
of the underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
CORPORATE DEBT OBLIGATIONS -- Debt instruments issued by corporations with
maturities exceeding 270 days. Such instruments may include putable corporate
bonds and zero coupon bonds.
CUSTODIAL RECEIPTS -- Interests in separately traded interest and principal
component parts of U. S. Treasury obligations that are issued by banks or
brokerage firms and are created by depositing U. S. Treasury obligations into a
special account at custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). TR's, TIGR's and
CATS are sold as zero coupon securities. See "Zero Coupon Obligations."
EUROPEAN DEPOSITARY RECEIPTS ("EDRs") -- EDRs are securities, typically issued
by a non-U.S. financial institution, that evidence ownership interests in a
security or a pool of securities issued by either a U.S. or foreign issuer. EDRs
may be available for investment through "sponsored" or "unsponsored" facilities.
See "ADRs."
FORWARD FOREIGN CURRENCY CONTRACTS -- A forward foreign currency contract
involves an obligation to purchase or sell a specific currency amount at a
future date, agreed upon by the parties, at a price set at the time of the
contract. The Fund may also enter into a contract to sell, for a fixed amount of
U.S. dollars or other appropriate currency, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency.
At the maturity of a forward contract, the Fund may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader,
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. The Fund may use futures
contracts and related options for bona fide hedging purposes, to offset changes
in the value of securities held or expected to be acquired, to minimize
fluctuations in foreign currencies, or to gain exposure to a particular market
or instrument. The Fund will minimize the risk that it will be unable to close
out a futures contract by only entering into futures contracts which are traded
on national futures exchanges.
Stock index futures are futures contracts for various stock indices that are
traded on registered securities exchanges. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
<PAGE>
16
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to accurately predict
movements in the prices of individual securities, fluctuations in markets and
movements in interest rates, (2) there may be an imperfect or no correlation
between the changes in market value of the securities held by the Fund and the
prices of futures and options on futures, (3) there may not be a liquid
secondary market for a futures contract or option, (4) trading restrictions or
limitations may be imposed by an exchange, and (5) government regulations may
restrict trading in futures contracts and futures options.
ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be
disposed of within seven business days at approximately the price at which they
are being carried on the Fund's books. An illiquid security includes a demand
instrument with a demand notice period exceeding seven days, where there is no
secondary market for such security, and repurchase agreements with durations (or
maturities) over seven days in length.
OPTIONS ON CURRENCIES -- The Fund may purchase and write put and call options on
foreign currencies (traded on U.S. and foreign exchanges or over-the-counter
markets) to manage the portfolio's exposure to changes in dollar exchange rates.
Call options on foreign currency written by the Fund will be "covered," which
means that the Fund will own an equal amount of the underlying foreign currency.
With respect to put options on foreign currency written by the Fund, the Fund
will establish a segregated account with its custodian bank consisting of cash,
U.S. Government securities or other high grade liquid debt securities in an
amount equal to the amount the Fund would be required to pay upon exercise of
the put.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which the Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price on an agreed upon date within a number of days
from the date of purchase. The custodian will hold the security as collateral
for the repurchase agreement. The Fund bears a risk of loss in the event the
other party defaults on its obligations and the Fund is delayed or prevented
from exercising its right to dispose of the collateral or if the Fund realizes a
loss on the sale of the collateral. The Fund will enter into repurchase
agreements only with financial institutions deemed to present minimal risk of
bankruptcy during the term of the agreement based on established guidelines.
Repurchase agreements are considered loans under the Investment Company Act of
1940.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933
or an exemption from registration. Rule 144A securities are securities that have
not been registered under the Securities Act of 1933, but which may be traded
between certain institutional investors, including investment companies. The
Trust's Board of Trustees is responsible for developing guidelines and
procedures for determining the liquidity of restricted securities and monitoring
the Advisors' implementation of the guidelines and procedures.
SECURITIES LENDING -- In order to generate additional income, the Fund may lend
securities which it owns pursuant to agreements requiring that the loan be
continuously secured by collateral consisting of cash, securities of the
<PAGE>
17
U.S. Government or its agencies equal to at least 100% of the market value of
the securities lent. The Fund continues to receive interest on the securities
lent while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market.
U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the
U.S. Government, including, among others, the Federal Farm Credit Bank, the
Federal Housing Administration and the Small Business Administration, and
obligations issued or guaranteed by instrumentalities of the U.S. Government,
including, among others, the Federal Home Loan Mortgage Corporation, the Federal
Land Banks and the U.S. Postal Service. Some of these securities are supported
by the full faith and credit of the U.S. Treasury (e.g., GNMA securities),
others are supported by the right of the issuer to borrow from the Treasury
(e.g., Federal Farm Credit Bank securities), while still others are supported
only by the credit of the instrumentality (e.g., FNMA securities). Guarantees of
principal by agencies or instrumentalities of the U.S. Government may be a
guarantee of payment at the maturity of the obligation so that in the event of a
default prior to maturity there might not be a market and thus no means of
realizing on the obligation prior to maturity. Guarantees as to the timely
payment of principal and interest do not extend to the value or yield of these
securities nor to the value of the Fund's shares.
U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes
and bonds issued by the U.S. Treasury and separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book-entry system known as Separately Traded Registered Interest and
Principal Securities ("STRIPS").
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable
or floating rates of interest, and may involve a conditional or unconditional
demand feature. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
WARRANTS -- Instruments giving holders the right, but not the obligation, to buy
shares of a company at a given price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery
basis transactions involve the purchase of an instrument with payment and
delivery taking place in the future. Delivery of and payment for these
securities may occur a month or more after the date of the purchase commitment.
The Fund will maintain with the custodian a separate account with liquid high
grade debt securities or cash in an amount at least equal to these commitments.
The interest rate realized on these securities is fixed as of the purchase date
and no interest accrues to
<PAGE>
18
the Fund before settlement. These securities are subject to market fluctuation
due to changes in market interest rates and it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed. Although a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring securities for its portfolio, the Fund may
dispose of a when-issued security or forward commitment prior to settlement if
it deems appropriate.
ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do
not bear any interest, but instead are issued at a deep discount from par. The
value of a zero coupon obligation increases over time to reflect the interest
accreted. Such obligations will not result in the payment of interest until
maturity, and will have greater price volatility than similar securities that
are issued at par and pay interest periodically.
<PAGE>
A-1
APPENDIX
I. BOND RATINGS
CORPORATE BONDS
The following are descriptions of Standard & Poor's Corporation ("S&P's") and
Moody's Investors Service, Inc. ("Moody's") corporate bond ratings.
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree. Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories.
Bonds which are rated BBB are considered to be medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Debt rated BB, B, CCC, CC and C is regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
Bonds which are rated Aaa by Moody's are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Bonds rated Aa by
Moody's are judged by Moody's to be of high quality by all standards. Together
with bonds rated Aaa, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Debt rated Baa is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times
<PAGE>
A-2
over the future. Uncertainty of position characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Bonds
which are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal and interest. Bonds
which are rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings. Bonds which
are rated C are the lowest rated class of bonds and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
II. COMMERCIAL PAPER AND SHORT-TERM RATINGS
The following descriptions of commercial paper ratings have been published by
S&P, Moody's, Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps ("Duff")
and IBCA Limited ("IBCA"), respectively.
Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+ and 1. Issues rated A-1+ are those with an "overwhelming degree" of
credit protection. Those rated A-1 reflect a "very strong" degree of safety
regarding timely payment. Those rated A-2 reflect a safety regarding timely
payment but not as high as A-1.
Commercial paper issues rated Prime-1 and Prime-2 by Moody's are judged by
Moody's to have superior ability and strong ability for repayment, respectively.
The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by
Fitch. Paper rated Fitch-1 is regarded as having the strongest degree of
assurance for timely payment. The rating Fitch-2 (Very Good Grade) is the second
highest commercial paper rating assigned by Fitch which reflects an assurance of
timely payment only slightly less in degree than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper
rated Duff-1 is regarded as having very high certainty of timely payment with
excellent liquidity factors which are supported by ample asset protection. Risk
factors are minor. Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound liquidity factors and
company fundamentals. Risk factors are small.
The designation A1 by IBCA indicates that the obligation is supported by a very
strong capacity for timely repayment. Those obligations rated A1+ are supported
by the highest capacity for timely repayment. Obligations rated A2 are supported
by a strong capacity for timely repayment, although such capacity may be
susceptible to adverse changes in business, economic or financial conditions.
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
<TABLE>
<S> <C> <C>
STI CLASSIC VARIABLE TRUST ORGANIZATIONAL OVERVIEW
* INVESTMENT ADVISOR
STI Capital Management, N.A. P.O. Box 3808
Orlando, FL 32802
* DISTRIBUTOR
SEI Financial Services Company 680 E. Swedesford Road
Wayne, PA 19087-1658
* ADMINISTRATOR
SEI Fund Resources 680 E. Swedesford Road
Wayne, PA 19087-1658
* TRANSFER AGENT
Federated Services Company Federated Investors
Tower
Pittsburgh, PA
15222-3779
* CUSTODIAN
The Bank of New York One Wall Street
New York, NY 10286
* LEGAL COUNSEL
Morgan, Lewis & Bockius LLP 2000 One Logan Square
Philadelphia, PA 19103
* INDEPENDENT AUDITORS
Arthur Andersen, LLP 1601 Market Street
Philadelphia, PA 19103
</TABLE>
<PAGE>
DISTRIBUTOR
SEI Financial Services
Company
-- - - - - - - - - -
PROSPECTUS
INTERNATIONAL EQUITY FUND
INVESTMENT ADVISOR
STI CAPITAL MANAGEMENT, N.A.
NOVEMBER 4, 1996
[LOGO]
<PAGE>
STI CLASSIC VARIABLE TRUST
INVESTMENT ADVISOR:
STI CAPITAL MANAGEMENT, N.A.
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of the
Trust and should be read in conjunction with the Trust's International Equity
Fund prospectus dated November 4, 1996. Prospectuses may be obtained through
the Distributor, SEI Financial Services Company, 680 E. Swedesford Road, Wayne,
Pennsylvania 19087-1658.
TABLE OF CONTENTS
PAGE
THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
DESCRIPTION OF PERMITTED INVESTMENTS . . . . . . . . . . . . . . . . . . . . B-2
STRIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . B-9
INVESTMENT ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-11
THE ADMINISTRATOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-12
THE DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-12
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . . . . . . . . . . . . . . . .B-13
COMPUTATION OF YIELD . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-15
CALCULATION OF TOTAL RETURN. . . . . . . . . . . . . . . . . . . . . . . . .B-16
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . .B-16
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . .B-17
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-17
FUND TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-19
TRADING PRACTICES AND BROKERAGE. . . . . . . . . . . . . . . . . . . . . . .B-19
DESCRIPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . .B-21
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .B-21
LIMITATION OF TRUSTEES' LIABILITY. . . . . . . . . . . . . . . . . . . . . .B-21
November 4, 1996
<PAGE>
THE TRUST
STI Classic Variable Trust (the "Trust") is an open-end management investment
company established under Massachusetts law as a Massachusetts business trust
under a Declaration of Trust dated April 18, 1995. The Declaration of Trust
permits the Trust to offer separate series ("Funds") of units of beneficial
interest ("shares"). Each share of each Fund represents an equal proportionate
interest in that portfolio. Shares of the Trust are issued and redeemed only in
connection with investments in and payments under variable annuity contracts and
variable life insurance policies of various life insurance companies. This
Statement of Additional Information relates to the International Equity Fund
(the "Fund").
DESCRIPTION OF PERMITTED INVESTMENTS
VARIABLE RATE MASTER DEMAND NOTES
The Fund may invest in variable rate master demand notes which may or may not be
backed by bank letters of credit. These notes permit the investment of
fluctuating amounts at varying market rates of interest pursuant to direct
arrangements between the Fund, as lender, and the borrower. Such notes provide
that the interest rate on the amount outstanding varies on a daily, weekly or
monthly basis depending upon a stated short-term interest rate index. Both the
lender and the borrower have the right to reduce the amount of outstanding
indebtedness at any time. There is no secondary market for the notes and it is
not generally contemplated that such instruments will be traded. The quality
of the note or the underlying credit must, in the opinion of the Advisor, be
equivalent to the ratings applicable to permitted investments for the Fund. The
Advisor will monitor on an ongoing basis the earning power, cash flow and
liquidity ratios of the issuers of such instruments and will similarly monitor
the ability of an issuer of a demand instrument to pay principal and interest on
demand.
STRIPS
The Fund may invest in Separately Traded Interest and Principal Securities
("STRIPS"), which are component parts of U.S. Treasury Securities traded through
the Federal Book-Entry System. The Advisor will only purchase STRIPS that it
determines are liquid or, if illiquid, do not violate the Fund's investment
policy concerning investments in illiquid securities.
U.S. GOVERNMENT AGENCY SECURITIES
Certain investments of the Fund may include U.S. Government Agency Securities.
Agencies of the United States Government which issue obligations consist of,
among others, the Export Import Bank of the United States, Farmers Home
Administration, Federal Farm Credit Bank, Federal Housing Administration,
Government National Mortgage Association ("GNMA"), Maritime Administration,
Small Business Administration, and The Tennessee Valley Authority. Obligations
of instrumentalities of the United States Government include securities issued
by, among others, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Intermediate Credit Banks, Federal
B-2
<PAGE>
Land Banks, Federal National Mortgage Association ("FNMA") and the United States
Postal Service as well as government trust certificates. Some of these
securities are supported by the full faith and credit of the United States
Treasury (E.G., GNMA securities), others are supported by the right of the
issuer to borrow from the Treasury (E.G., FHLMC securities) and still others are
supported only by the credit of the instrumentality (E.G., FNMA securities).
Guarantees of principal by agencies or instrumentalities of the U.S. Government
may be a guarantee of payment at the maturity of the obligation so that in the
event of a default prior to maturity there might not be a market and thus no
means of realizing the value of the obligation prior to maturity.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. Repurchase agreements are
agreements by which a person (E.G., a Fund) obtains a security and
simultaneously commits to return the security to the seller (a primary
securities dealer as recognized by the Federal Reserve Bank of New York or a
national member bank as defined in Section 3(d)(1) of the Federal Deposit
Insurance Act, as amended) at an agreed upon price (including principal and
interest) on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the underlying security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation is
in effect secured by the value of the underlying security.
Repurchase agreements are considered to be loans by the 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 Advisor monitors
compliance with this requirement). Under all repurchase agreements entered into
by the Fund, the 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.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a when-issued basis, in which case delivery
and payment normally take place within 45 days after the date of commitment to
purchase. The Fund will only make commitments to purchase obligations on a
when-issued basis with the intention of actually acquiring the securities, but
may sell them before the settlement date. When-issued securities are subject to
market fluctuation, and no interest accrues on these securities to the purchaser
during this period. The payment obligation and the interest rate that will be
received on these securities are each fixed at the time the purchaser enters
into the commitment. Purchasing when-issued securities entails leveraging and
can
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involve a risk that the yields available in the market when the delivery takes
place may actually be higher than those obtained in the transaction itself. In
that case there could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the Custodian, and the Fund will
maintain high quality, liquid assets in an amount at least equal in value to the
Fund's 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.
RESTRICTED SECURITIES
Restricted Securities are securities that may not be sold to the public without
registration under the Securities Act of 1933 (the "1933 Act") absent an
exemption from registration. Permitted investments for the Fund includes
restricted securities, and the Fund may invest up to 15% of its total assets in
illiquid securities, subject to the Fund's investment limitations on the
purchase of illiquid securities. Restricted Securities, including securities
eligible for re-sale under 1933 Act Rule 144A, that are determined to be liquid
are not subject to this limitation. This determination is to be made by the
Fund's Advisor pursuant to guidelines adopted by the Board of Trustees. Under
these guidelines, the Advisor will consider the frequency of trades and quotes
for the security, the number of dealers in, and potential purchasers for, the
securities, dealer undertakings to make a market in the security, and the nature
of the security and of the marketplace trades. In purchasing such Restricted
Securities, the Advisor intends to purchase securities that are exempt from
registration under Rule 144A under the 1933 Act.
SECURITIES LENDING
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 Advisor to be of good standing and when, in the judgment of the Advisor,
the consideration which can be earned currently from such securities loans
justifies the attendant risk. Any loan may be terminated by either party upon
reasonable notice to the other party. The Fund may use the Distributor or a
broker-dealer affiliate of the Advisor as a broker in these transactions.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES
The Fund may invest in futures contracts and options on futures. Although
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery. Closing out an open
futures position is done by taking an opposite position ("buying" a contract
which has previously been "sold" or "selling" a contract which has previously
been "purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with or for the account of a broker or custodian to
initiate and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Deposit requirements on futures
contracts customarily range upward from less than 5% of the value of the
contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy the required margin, payment of additional
"variation" margin will be required. Conversely, changes in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Fund expects to earn
interest income on its margin deposits.
Traders in futures contracts and related options may be broadly classified as
either "hedgers" or "speculators." Hedgers use the futures markets primarily to
offset unfavorable changes in the value of securities otherwise held or expected
to be acquired for investment purposes. Speculators are less inclined to own
the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
and related options only for bona fide hedging purposes.
Regulations of the Commodity Futures Trading Commission applicable to the Fund
require that the futures transactions and related options constitute bona fide
hedging transactions, except that the Fund may enter into such transactions for
other than bona fide hedging purposes if the aggregate initial margin and
premiums required to establish such positions do not exceed five percent of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into. The
Fund will only sell futures contracts to protect securities they own against
price declines or purchase contracts to protect against an increase in the price
of securities they intend to purchase. As evidence of this hedging interest,
the Fund expects that approximately 75% of its futures contract purchases will
be "completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Fund upon sale of open futures
contracts.
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Although techniques other than the sale and purchase of futures contracts and
options on futures contracts could be used to control the Fund's exposure to
market fluctuations, the use of futures contracts may be a more effective means
of hedging this exposure. While the Fund will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no
assurance that a liquid 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 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 futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge it.
The Fund will minimize the risk that it will be unable to close out a futures
contract by entering into futures contracts only if they are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts can be substantial, due both to
the low margin deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small price movement in
a futures contract may result in an immediate and substantial loss (or gain) to
the Fund. For example, if at the time of purchase, 10% of the value of the
futures contract is deposited as margin, a subsequent 10% decrease in the value
of the futures contract would result in a total loss of the margin deposit,
before any deduction for the transaction costs, if the account were then closed
out. A 15% decrease would result in a loss equal to 150% of the original margin
deposit if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
However, because the Fund will be engaged in futures transactions only for
hedging purposes, the Advisor does not believe that the 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
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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.
OPTIONS
The Fund will not engage in option writing strategies for speculative purposes.
A call option gives the purchaser of such option the right to buy, and the
writer, in this case the Fund, 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.
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 Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. The Fund may realize a net gain or loss from
a closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security. Conversely, a gain resulting from a
decline in the market value of the underlying security.
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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.
FOREIGN INVESTMENTS
The Fund will invest primarily in certain obligations or securities of foreign
issuers. Possible investments 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 and Yankee Certificates of
Deposit, and investments in Canadian Commercial Paper, and foreign securities.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other income,
possible seizure, nationalization, or expropriation of foreign deposits, the
possible establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements than
those applicable to domestic branches of U.S. banks.
By investing in foreign securities, the 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.
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securities. Shares of the Fund, when included in appropriate amounts in a
portfolio otherwise consisting of domestic securities, may provide a source of
increased diversification. The Fund seeks increased diversification by
combining securities from various countries and geographic areas that offer
different investment opportunities and are affected by different economic
trends. The international investments of the Fund may reduce the effect that
events in any one country or geographic area will have on its investment
holdings. Of course, negative movement by a Fund's investments in one foreign
market represented in its portfolio may offset potential gains from the Fund's
investments in another country's markets.
INVESTMENT COMPANY SHARES
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 Shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees.
OTHER INVESTMENTS
The Trust is not prohibited from investing in obligations of banks which are
clients of SEI Corporation ("SEI"), the parent company of the Administrator and
the Distributor. However, the purchase of shares of the Trust by such banks or
by their customers will not be a consideration in determining which bank
obligations the Trust will purchase. The Trust will not purchase obligations
issued by the Advisor.
Investors will receive written notification at least thirty days prior to any
change in the Fund's investment objective.
INVESTMENT LIMITATIONS
The following are fundamental policies of the International Equity Fund and
cannot be changed with respect to the Fund without the consent of the holders of
a majority of the Fund's outstanding shares.
The Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer.
2. Invest in companies for the purpose of exercising control.
3. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding one-third of the value of total assets. Any borrowing
will be done from a bank and, to the extent that such borrowing exceeds 5%
of the value of the Fund's assets, asset coverage of at least 300% is
required. In the event that such asset coverage shall at any time fall
below 300%, the Fund shall, within three days thereafter or such longer
period as the Securities and Exchange Commission ("SEC") may prescribe by
rules and regulations, reduce the amount of its
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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 a Fund's total
assets will be repaid before making additional investments and any interest
paid on such borrowings will reduce income.
4. Make loans, except that (a) the Fund may purchase or hold debt instruments
in accordance with its investment objective and policies; (b) the Fund may
enter into repurchase agreements, and (c) the Fund may engage in securities
lending as described in the Prospectus and in this Statement of Additional
Information.
5. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed 10% of
the Fund's total assets, taken at current value at the time of the
incurrence of such loan, except as permitted with respect to securities
lending.
6. Purchase or sell real estate, real estate limited partnership interests,
commodities or commodities contracts and interests in a pool of securities
that are secured by interests in real estate. However, subject to the
permitted investment spectrum, the Fund may purchase marketable securities
issued by companies which own or invest in real estate, commodities or
commodities contracts, and commodities contracts relating to financial
instruments, such as financial futures contracts and options on such
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. Issue senior securities (as defined in the 1940 Act) except in connection
with permitted borrowings as described above or as permitted by rule,
regulation or order of the SEC.
NON-FUNDAMENTAL POLICIES
The Fund may not purchase or retain securities of an issuer if, to the knowledge
of the Trust, an officer, trustee, partner or director of the Trust or any
investment advisor of the Trust owns beneficially more than 1/2 of 1% of the
shares or securities of such issuer and all such officers, trustees, partners
and directors owning more than 1/2 of 1% of such shares or securities together
own more than 5% of such shares or securities.
The Fund may not invest in warrants except that the Fund may invest in warrants
in an amount not exceeding 5% of the Fund's net assets as valued at the lower of
cost or market value. Included in that
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amount, but not to exceed 2% of the Fund's net assets, may be warrants not
listed on the New York Stock Exchange or American Stock Exchange.
The Fund may not invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of the Fund's assets. An illiquid security is a security which
cannot be disposed of promptly (within seven days), and in the usual course of
business without a loss, and includes repurchase agreements maturing in excess
of seven days, time deposits with a withdrawal penalty, non-negotiable
instruments and instruments for which no market exists.
The Fund may invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
The Fund may write or purchase puts, calls, options or combinations thereof,
except that the Fund may write covered call options with respect to any or all
parts of the Fund securities and engage in futures transactions, and the Fund
may purchase putable securities. The Fund may sell options previously purchased
and enter into closing transactions with respect to covered call options.
The Fund may not invest in securities of issuers which together with
predecessors have a record of less than three years continuous operation or
equity securities of issuers which are not readily marketable if such
investments will exceed 5% of the Fund's total assets.
With the exception of the limitations on liquidity standards, the foregoing
percentages will apply at the time of the purchase of a security and shall not
be considered violated unless an excess occurs or exists immediately after and
as a result of a purchase of such security.
INVESTMENT ADVISOR
STI Capital Management, N.A. (the "Advisor") has entered into an advisory
agreement with the Trust (the "Advisory Agreement"). The Advisory Agreement
provides that the Advisor shall not be protected against any liability to the
Trust or its Shareholders by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard of its obligations or duties thereunder.
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of the Fund (including amounts payable to an Advisor but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by certain states, the Advisor and/or the
Administrator will bear the amount of such excess. The Advisor will not be
required to bear expenses of the Trust to an extent which would result in 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
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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 Advisor, or by the Advisor on 90
days' written notice to the Trust.
THE ADMINISTRATOR
The Trust and SEI Fund Resources (the "Administrator") have entered into an
Administration Agreement (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 Administrator, a Delaware business trust, has its principal business offices
at 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658. SEI Financial
Management Corporation ("SFM"), a wholly-owned subsidiary of SEI Corporation
("SEI"), is the owner of all beneficial interest in the Administrator. SEI and
its 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 to the
following other institutional mutual funds: The Achievement Funds Trust; The
Advisors' Inner Circle Fund; The Arbor Fund; ARK Funds; Bishop Street Funds;
CoreFunds, Inc.; CrestFunds, Inc.; CUFUND; FMB Funds, Inc.; First American
Funds, Inc.; First American Investment Funds, Inc.; Inventor Funds, Inc.;
Marquis Funds-Registered Trademark-; Monitor Funds; Morgan Grenfell Investment
Trust; The PBHG Funds, Inc.; The Pillar Funds; Rembrandt Funds-Registered
Trademark-; 1784 Funds-Registered Trademark-; SEI Asset Allocation Trust; SEI
Daily Income Trust; SEI Institutional Investments Trust; SEI Index Funds; SEI
Institutional Managed Trust; SEI International Trust; SEI Liquid Asset Trust;
SEI Tax Exempt Trust; Stepstone Funds; STI Classic Funds; and Turner Funds.
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement").
The Distribution Agreement is renewable annually and may be terminated by the
Distributor, the Qualified Trustees (as defined in the Distribution Agreement),
or by a majority vote of the outstanding securities of the Trust upon not more
than 60 days' written notice by either party. No compensation is paid to the
Distributor under the Distribution Agreement.
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TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees and executive officers of the Trust and their dates of birth and their
principal occupations for the last five years are set forth below. Unless
otherwise noted, the principal business address for each officer listed below is
680 East Swedesford Road, Wayne Pennsylvania 19087-1658.
DANIEL S. GOODRUM (7/11/26) - Trustee - 48 Cayuga Road, Fort Lauderdale,
Florida 33308. Chairman & CEO, SunBank/South Florida, N.A., 1985-1991;
Chairman, Audit Committee and Director, Holy Cross Hospital; Executive
Committee Member and Director, Honda Classic Foundation; Director, Broward
Community College Foundation.
WILTON LOONEY (4/18/19) - Trustee - 2999 Circle 75 Parkway, Atlanta, Georgia
30339. President, Genuine Parts Company, 1961-1964; Chairman of the Board,
1964-1990; Honorary Chairman of the Board, 1990 to present. Rollins, Inc.; RPC
Energy Services, Inc.
CHAMPNEY A. MCNAIR (10/30/24) - Trustee - 1405 Trust Co. of Georgia Building,
Atlanta, Georgia 30303. Director and Chairman of Investment Committee and
member of Executive Committee, Cotton States Life and Health Insurance Company;
Director and Chairman of Investment Committee and member of Executive Committee,
Cotton States Mutual Insurance Company; Chairman, Trust Company of Georgia
Advisory Council.
F. WENDELL GOOCH (12/3/32) - Trustee - P.O. Box 190, Paoli, Indiana 47454.
President, Orange County Publishing Co., Inc., since October 1981. Publisher of
the Paoli News and the Paoli Republican and Editor of the Paoli Republican since
January 1981, President, H & W Distribution, Inc. since July 1984. Current
Trustee on the Board of Trustees for the SEI Family of Funds and The Capitol
Mutual Funds. Executive Vice President, Trust Department, Harris Trust and
Savings Bank and Chairman of the Board of Directors of The Harris Trust Company
of Arizona before January 1981.
T. GORDY GERMANY (11/28/25) - Trustee - 17 Windy Point, Alexander City, Alabama
35010. Retired President, Chairman, and CEO of Crawford & Company; held these
positions, 1973-1987. Member of the Board of Directors, 1970-1990, joined
company in 1948; spent entire career at Crawford, currently serves on Boards of
Norrell Corporation and Mercy Health Services, the latter being the holding
company of St. Joseph's Hospitals.
DR. BERNARD F. SLIGER (9/30/24) - Trustee - Florida State University, The Gus A.
Stavros Center, 250 South Woodward Avenue, Tallahassee, Florida 32306-4035.
Currently on sabbatical leave from Florida State University (1991-92); now
serves as visiting professor at the University of New Orleans. President of
Florida State University, 1976-91; previous 4 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
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Academic Affairs and Vice Chancellor. Member of Board of Directors of Federal
Reserve Bank of Atlanta, 1983-1988.
JESSE HALL (9/26/29) - Trustee* - 988 Winall Down Road, NE, Atlanta, Georgia
30318. Executive Vice President, SunTrust Banks, Inc., 1985-1994; Director of
Crawford & Company since 1979; Member, Atlanta Estate Planning Council, 1988-
1993.
DAVID G. LEE (4/16/52) - President, Chief Executive Officer - Senior Vice
President of the Administrator and Distributor since 1993. Vice President of
the Administrator and Distributor (1991-1993). President, GW Sierra Trust Funds
before 1991.
STEPHEN G. MEYER (7/12/65) - Controller, Chief Financial Officer - Vice
President & Controller of SEI Corporation since 1994. Director, Internal Audit
and Risk Management, SEI Corporation, 1992-1994. Senior Associate, Coopers &
Lybrand, 1990-1992. Internal Audit, Vanguard Group of Investment Prior to 1992.
RICHARD W. GRANT (10/25/45) - Secretary - 2000 One Logan Square, Philadelphia,
Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law firm). Counsel
to the Trust, Administrator and Distributor.
SANDRA K. ORLOW (10/18/53) - Vice President, Assistant Secretary - Vice
President and Assistant Secretary of the Administrator and Distributor since
1983.
KEVIN P. ROBINS (4/15/61) - Vice President, Assistant Secretary - Senior Vice
President & General Counsel of SEI, the Administrator and the Distributor since
1994. Vice President of SEI, the Administrator and the Distributor, 1992-1994.
Associate, Morgan, Lewis & Bockius LLP (law firm) prior to 1992.
KATHRYN L. STANTON (11/19/58) - Vice President, Assistant Secretary - Vice
President, Assistant Secretary of SEI, the Administrator and Distributor since
1994. Associate, Morgan, Lewis & Bockius LLP (law firm), 1989-1994.
JOSEPH M. LYDON (9/27/59) - Vice President, Assistant Secretary - Director of
Business Administration of Fund Resources of SEI April 1995. Vice President of
Fund Group, Dremen Value Management, LP; President of Dremen Financial
Services, Inc. prior to 1995.
TODD CIPPERMAN (01/14/66) - Vice President, Assistant Secretary - Vice President
and Assistant Secretary of SEI, the Administrator and the Distributor since
1995. Associate, Dewey Ballantine (law firm), 1994-1995. Associate, Winston &
Strawn (law firm), 1991-1994.
BARBARA A. NUGENT (06/18/56) - Vice President, Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor
since 1996. Associate, Drinker, Biddle &
B-14
<PAGE>
Reath (law firm). Assistant Vice President/Administration, Delaware Service
Company, Inc., 1992-1993. Assistant Vice President of Operations, Delaware
Service Company, Inc., 1988-1992.
MARC CAHN (06/19/57) - Vice President, Assistant Secretary - Vice President and
Assistant Secretar of SEI, the Administrator and the Distributor since 1996.
Associate General Counsel, Barclays Bank PLC, 1995-1996. ERISA counsel, First
Fidelity Bancorporation, 1994-1995. Associate, Morgan, Lewis & Bockius LLP (law
firm), 1989-1994.
JOHN H. GRADY, JR. (6/1/61) - Assistant Secretary - 1800 M Street, N.W.
Washington, DC 20036. Partner, Morgan, Lewis & Bockius LLP (law firm) since
1995. Associate, Morgan, Lewis & Bockius LLP, 1993-1995. Associate, Ropes &
Gray (law firm), 1988-1993.
- -------------------------
* Jesse S. Hall may be deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
For the period from the commencement of operations to the fiscal year ended
December 31, 1995, the Trustees received the following compensation from the
Trust:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION OR
AGGREGATE RETIREMENT
COMPENSATION BENEFITS ESTIMATED TOTAL COMPENSATION
NAME OF PERSON AND POSITION FROM ACCRUED AS ANNUAL FROM REGISTRANT AND FUND COMPLEX
REGISTRANT PART OF FUND BENEFITS UPON PAID TO DIRECTORS FOR FYE 95
FOR FYE 95 EXPENSES RETIREMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
T. Gordy Germany, Trustee . . . . . . . $ 500.00 $ 0 $ 0 $ 10,375 for services on 2 boards
F. Wendell Gooch, Trustee . . . . . . . $ 500.00 $ 0 $ 0 $ 10,375 for services on 2 boards
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel S. Goodrum, Trustee. . . . . . . $ 500.00 $ 0 $ 0 $ 10,375 for services on 2 boards
- ------------------------------------------------------------------------------------------------------------------------------------
Jesse S. Hall, Trustee. . . . . . . . . $ 500.00 $ 0 $ 0 $ 10,375 for services on 2 boards
- ------------------------------------------------------------------------------------------------------------------------------------
Wilton Looney, Trustee. . . . . . . . . $ 500.00 $ 0 $ 0 $ 12,250 for services on 2 boards
- ------------------------------------------------------------------------------------------------------------------------------------
Champney McNair, Trustee. . . . . . . . $ 500.00 $ 0 $ 0 $ 10,375 for services on 2 boards
- ------------------------------------------------------------------------------------------------------------------------------------
Bernard F. Sliger, Trustee. . . . . . . $ 500.00 $ 0 $ 0 $ 10,375 for services on 2 boards
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPUTATION OF YIELD
The current yield of the Fund will be calculated daily based upon the seven days
ending on the date of calculation ("base period"). The yield is computed by
determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing shareholder account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing such net change by the value
of the account at the beginning of the same period to obtain the base period
return and multiplying the result by (365/7). Realized and unrealized gains and
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<PAGE>
losses are not included in the calculation of the yield. The effective
compound yield of the Fund is determined by computing the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, according to the following formula: Effective Yield = [Base
Period Return + 1) 365/7] - 1. The current and the effective yields reflect
the reinvestment of net income earned daily on portfolio assets.
The yield of the Fund fluctuates, and the annualization of a week's dividend is
not a representation by the Trust as to what an investment in the Fund will
actually yield in the future. Actual yields will depend on such variables as
asset quality, average asset maturity, the type of instruments the Fund invests
in, changes in interest rates on money market instruments, changes in the
expenses of the Fund and other factors.
CALCULATION OF TOTAL RETURN
From time to time, the 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 Advisor in
advertisements and/or sales literature for the Trust. The SEI Funds Evaluation
database tracks the total return of numerous tax-exempt pension accounts. The
range of returns in these accounts determines the percentile rankings. SunTrust
Bank's investment advisory affiliates, STI Capital Management, N.A. 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's database includes research
data on over 1,000 investment managers responsible for over $450 billion in
assets.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Funds may be made on any day the New
York Stock Exchange ("NYSE") is open for business. Currently, the NYSE is
closed on the days the following holidays are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
It is currently the Trust's policy to pay for all redemptions in cash. The
Trust retains the right, however, to alter this policy to provide for
redemptions in whole or in part by a distribution in-kind of readily marketable
securities held by the Fund in lieu of cash. Shareholders may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. A Shareholder will at all times be
B-16
<PAGE>
entitled to aggregate cash redemptions from the 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 a Fund's securities is not reasonably practicable, or
for such other periods as the Securities and Exchange Commission has by order
permitted. The Trust also reserves the right to suspend sales of shares of the
Fund for any period during which the NYSE, an Advisor, the Administrator and/or
the Custodian are not open for business.
Certain state securities laws may require those financial institutions providing
certain distribution services to the Trust to register as dealers pursuant to
state law.
DETERMINATION OF NET ASSET VALUE
The securities of the 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.
TAXES
FEDERAL INCOME TAX
In order to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended ("Code"), the Fund must
distribute annually to its Shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
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) the Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of stocks or securities held for less than three months; (iii)
at the close of each quarter of 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 to any one issuer, to an amount that does
not exceed 5% of the value of the Fund's assets and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (iv) 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
B-17
<PAGE>
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.
Notwithstanding the Distribution Requirement described above, which only
requires the Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital
gains (the excess of net long-term capital gains over net short-term capital
loss), the Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year 98% of its ordinary
income for that year and 98% of its capital gain net income for the one-year
period ending on October 31 of that calendar year, plus certain other amounts.
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 a
long-term capital gain or loss if the shares have been held for more than twelve
months and otherwise will be generally treated as a short-term capital gain or
loss. If shares on which a net capital gain distribution has been received are
subsequently sold or redeemed and such shares have been held for six months or
less, any loss recognized will be treated as a long-term capital loss to the
extent of the long-term capital gain distribution.
STATE TAXES
The Fund is not liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by the Fund
to Shareholders and the ownership of shares may be subject to state and local
taxes.
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 securities. Tax conventions between
certain countries and the United States may reduce or eliminate these taxes.
Foreign countries generally do not impose taxes on capital gains with respect to
investments by foreign investors.
If the Fund meets the distribution requirement and if more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible to, and will,
file an election with the Internal Revenue Service that will enable
Shareholders, in effect, to receive the benefit of the foreign tax credit
with respect to any foreign and U.S. possessions income taxes paid by the
Fund. Pursuant to the election, the Fund will treat those taxes as dividends
paid to its Shareholders. Each Shareholder will be required to include a
proportionate share of those taxes in gross income as income received from a
foreign source and must treat the amount so included as if the Shareholder
had paid the foreign tax directly. The Shareholder may then either deduct the
taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the Shareholders' federal income tax. If the
B-18
<PAGE>
Fund makes the election, it will report annually to its Shareholders the
respective amounts per share of the Fund's income from sources within, and taxes
paid to, foreign countries and U.S. possessions.
The Fund's transactions in foreign currencies and forward foreign currency
contracts will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (I.E.,
may effect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to
Shareholders. These provisions also may require the Fund to mark-to-market
certain types of the positions in its portfolio (I.E., treat them as if they
were closed out) which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the 90%
and 98% distribution requirements for avoiding income and excise taxes. The
Fund will monitor its transactions, will make the appropriate tax elections, and
will make the appropriate entries in the books and records when it acquires any
foreign currency or forward foreign currency contract in order to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company and minimize the imposition of income and excise taxes.
FUND TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Trustees, the Advisor is responsible for placing the orders
to execute transactions for the Fund. In placing orders, it is the policy of
the Trust to seek to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved. While the Advisor generally seeks reasonably competitive spreads or
commissions, the Trust will not necessarily be paying the lowest spread or
commission available.
TRADING PRACTICES AND BROKERAGE
The Trust selects brokers or dealers to execute transactions for the purchase or
sale of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have brokers
or dealers provide transactions at best price and execution for the Trust. Best
price and execution includes many factors, including the price paid or received
for a security, the commission charged, the promptness and reliability of
execution, the confidentiality and placement accorded the order and other
factors affecting the overall benefit obtained by the account on the
transaction. The Trust's determination of what are reasonably competitive rates
is based upon the professional knowledge of its trading department as to rates
paid and charged for similar transactions throughout the securities industry.
In some instances, the Trust pays a minimal share transaction cost when the
transaction presents no difficulty. Some trades are made on a net basis where
the Trust either buys securities directly from the dealer or sells them to the
dealer. In these instances, there is no direct commission charged but there is
a spread (the difference between the buy and sell price) which is the equivalent
of a commission.
B-19
<PAGE>
The Trust may allocate out of all commission business generated by all of the
funds and accounts under management by the Advisor, brokerage business to
brokers or dealers who provide brokerage and research services. These
research services include 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 Advisor in connection with its investment
decision-making process with respect to one or more funds and accounts
managed by it, and may not be used exclusively with respect to the fund or
account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher
commissions may be paid to broker-dealers who provide brokerage and research
services than to broker-dealers who do not provide such services if such
higher commissions are deemed reasonable in relation to the value of the
brokerage and research services provided. Although transactions are directed
to broker-dealers who provide such brokerage and research services, the Trust
believes that the commissions paid to such broker-dealers are not, in
general, higher than commissions that would be paid to broker-dealers not
providing such services and that such commissions are reasonable in relation
to the value of the brokerage and research services provided. In addition,
portfolio transactions which generate commissions or their equivalent are
directed to broker-dealers who provide daily portfolio pricing services to
the Trust. Subject to best price and execution, commissions used for pricing
may or may not be generated by the funds receiving the pricing service.
The Advisor may place a combined order for two or more accounts or funds engaged
in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in
a manner deemed equitable to each account or fund. It is believed that the
ability of the accounts to participate in volume transactions will generally be
beneficial to the accounts and funds. Although it is recognized that, in some
cases, the joint execution of orders could adversely affect the price or volume
of the security that a particular account or trust may obtain, it is the opinion
of the Advisor and the Trust's Board of Trustees that the advantages of
combined orders outweigh the possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Funds, at the request of the Distributor, give consideration to sales of shares
of the Trust as a factor in the selection of brokers and dealers to execute
Trust portfolio transactions.
It is expected that the Trust may execute brokerage or other agency
transactions through the Distributor or an affiliate of the Advisor, both of
which are registered broker-dealers, for a commission in conformity with the
1940 Act, the 1934 Act and rules promulgated by the SEC. Under these
provisions, the Distributor or an affiliate of the Advisor is permitted to
receive and retain compensation
B-20
<PAGE>
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 the Advisor to receive and retain such
compensation. These rules further require that commissions paid to the
Distributor by the Trust for exchange transactions not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." In addition, the Trust may direct commission business to one or more
designated broker-dealers in connection with such broker-dealer's provision of
services to the Trust or payment of certain Trust expenses (e.g., custody,
pricing and professional fees). The Trustees, including those who are not
"interested persons" of the Trust, have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares and classes of shares of 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 advisors, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses
B-21
<PAGE>
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-22
