<PAGE>
STI CLASSIC VARIABLE TRUST
SMALL CAP 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 above-referenced 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 Oaks, Pennsylvania
19456, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT
CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISOR OR ANY OF ITS AFFILIATES OR
CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
OCTOBER 20, 1997
<PAGE>
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 Investments Distribution Co. (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
<TABLE>
<S> <C>
Expense Summary........................................................... 3
The Trust................................................................. 4
Investment Objective...................................................... 4
Investment Policies and Strategies........................................ 4
General Investment Policies and
Strategies.............................................................. 5
Investment Risks.......................................................... 5
Investment Limitations.................................................... 6
Performance Information................................................... 7
Purchase and Redemption of Fund
Shares.................................................................. 7
Net Asset Value........................................................... 8
Dividends and Distributions............................................... 8
Tax Information........................................................... 8
STI Classic Variable Trust Information.................................... 9
The Trust................................................................. 9
Board of Trustees......................................................... 10
Investment Advisor........................................................ 10
Portfolio Manager......................................................... 10
Banking Laws.............................................................. 11
Distribution.............................................................. 11
Administration............................................................ 11
Transfer Agent and Dividend Disbursing Agent.............................. 12
Custodian................................................................. 12
Legal Counsel............................................................. 12
Independent Public Accountants............................................ 12
Other Information......................................................... 12
Voting Rights............................................................. 12
Reporting................................................................. 13
Shareholder Inquiries..................................................... 13
Description of Permitted Investments...................................... 13
Addresses................................................................. A-1
</TABLE>
<PAGE>
3
EXPENSE SUMMARY
Below is a summary of the estimated annual operating expenses for the Fund.
Actual expenses may vary.
FUND EXPENSES (AS A PERCENTAGE OF FUND ASSETS)
(NET OF VOLUNTARY REDUCTIONS AND REIMBURSEMENTS)
<TABLE>
<S> <C>
Management Fees......................... .00%
Other Expenses(1)....................... 1.20%
---
Total Fund Operating Expenses(2)........ 1.20%
</TABLE>
- ------------
(1) Other Expenses are based on estimated amounts for the current year.
(2) Absent voluntary reductions and reimbursements, management fees, other
expenses and total fund operating expenses expressed as a percentage of
average net assets would be 1.15%, 1.75%, and 2.90%, respectively.
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
An investor would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each time period:... $ 12 $ 37
</TABLE>
THE EXAMPLE IS BASED UPON 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. Information about the actual
performance of the Fund will be contained in the Trust's Annual Report to
Shareholders, which may be obtained without charge when available.
<PAGE>
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 Small Cap Equity Fund represents an
undivided, proportionate interest in the Fund.
INVESTMENT OBJECTIVE
THE SMALL CAP EQUITY FUND seeks to provide capital appreciation with a secondary
goal of achieving current income.
There can be no assurance that the Fund will achieve its investment objective.
The Fund's investment objective is non-fundamental and may be changed without
investor approval.
INVESTMENT POLICIES AND STRATEGIES
The Small Cap Equity Fund invests substantially all, and under normal market
conditions at least 65%, of its assets in the equity securities of smaller
companies (I.E., companies with market capitalizations of less than $1 billion)
which, in the Advisor's opinion, are undervalued for above-average capital
growth. Any remaining assets may be invested in the equity securities of
companies with larger market capitalizations which the Advisor believes are also
undervalued. The Fund may also invest in U.S. dollar denominated equity
securities of foreign issuers (including American Depositary Receipts). Equity
securities include common stock, preferred stock, warrants and rights to
subscribe to common stock and, in general, any security that is convertible into
or exchangeable for common stock.
In order to meet liquidity needs, or for temporary defensive purposes, the Fund
may invest all or a portion of its assets in common stocks of larger, more
established companies, fixed income securities, repurchase agreements, cash or
money market securities. Fixed income securities will only be purchased if they
are rated investment grade or better by one or more nationally recognized
statistical ratings organizations("NRSROs"). Investment grade bonds include
securities rated at least BBB by Standard & Poor's Corporation ("S&P") or Baa by
Moody's Investor's Services, Inc. ("Moody's"). Money market securities will only
be purchased if they have been given one of the two top ratings by two or more
NRSROs, or if not rated, determined to be of comparable quality by the Fund's
Advisor. To the extent the Fund is engaged in temporary defensive investing, the
Fund may not be pursuing its investment objective.
The Fund may engage in options transactions for hedging purposes only. The Fund
will not invest more than 20% of its total assets in unsponsored ADR facilities.
The Fund's annual turnover rate may exceed 100%. This rate of turnover, if
continued, will likely result in higher brokerage commissions, higher levels of
realized capital gains and additional taxes than if the turnover rate was lower.
See "Tax Information."
<PAGE>
5
GENERAL INVESTMENT POLICIES AND STRATEGIES
In the event that a security owned by the Fund is downgraded below the stated
rating categories, the Advisor will review and take appropriate action with
regard to the security.
The Fund may purchase securities issued by money market mutual funds. 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.
The Fund may purchase securities on a "when-issued" basis and reserves the right
to engage in standby commitments.
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.
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.
The Fund intends to comply in all material respects with current insurance laws
and regulations applicable to separate accounts investing in the Fund. This
operating policy is non-fundamental and can be changed by the Trustees at any
time.
For additional information regarding permitted investments, see "Description of
Permitted Investments" in this Prospectus and in the Statement of Additional
Information.
INVESTMENT RISKS
AMERICAN DEPOSITARY RECEIPTS
American Depositary Receipts ("ADRs") are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer and deposited with
the depositary. ADRs may be available through "sponsored" or "unsponsored"
facilities.
EQUITY SECURITIES
Investments in equity securities 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.
Investments in small capitalization companies involve greater risk than is
customarily associated with larger, more established companies due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and the frequent lack of depth of management. The
securities of small companies are often traded over-the-counter and may not be
traded in volumes typical on a national
<PAGE>
6
securities exchange. Consequently, the securities of smaller companies may have
limited market stability and may be subject to more abrupt or erratic market
movements than securities of larger, more established growth companies or the
market averages in general.
FIXED INCOME SECURITIES
The market value of the Fund's fixed income investments (I.E., bonds, debt
instruments, debentures) 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 an 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 portfolio securities are not likely to 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 portfolio securities by the U.S. Government or its
agencies or instrumentalities guarantee only the payment of principal and
interest on the guaranteed securities, and do not guarantee the securities'
yield or value or the yield or value of the Fund's shares.
FOREIGN SECURITIES
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks and considerations include differences in accounting, auditing and
financial reporting standards, generally higher commission rates on foreign
portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations, limited
publicly available information regarding foreign issuers, less liquidity of
securities, possible seizure, nationalization and expropriation of the foreign
issuer or foreign deposits, political instability which could affect U.S.
investment in foreign countries and potential restrictions of the flow of
international capital and currencies. Foreign companies may also be subject to
less government regulation than U.S. companies. Moreover, the dividends payable
on the foreign securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to 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.
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 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.
<PAGE>
7
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 or
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 yield and total return. 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 to
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
<PAGE>
8
investments and redemptions. Shares of the 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 asset 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 outstanding
Shares of the Fund. 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 from net investment income (exclusive of capital gains) are declared
and paid quarterly 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 accrued 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.
The net asset value of Shares of the Fund will be reduced by the amount of any
dividend or distribution. Dividends and distributions are paid in the form of
additional Shares of the Fund.
TAX INFORMATION
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. For more information about the tax
consequences of an investment in a Contract, see the attached prospectus for
that Contract.
The Fund intends to qualify separately each year as a "regulated investment
company" ("RIC") as defined under Subchapter M of the Internal Revenue Code (the
"Code". The requirements for qualification may cause the Fund to restrict the
extent of its transactions in options.
<PAGE>
9
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 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 may be subject to foreign taxes on
its investments in foreign securities. 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 Owners of Contracts. Federal income taxation of Owners of Contracts
is discussed in Federal Tax Matters located in the separate STI Classic Variable
Annuity prospectus.
Certain additional tax information appears in the Statement of Additional
Information.
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 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
<PAGE>
10
legal expenses, expenses of preparing prospectuses, proxy solicitation material
and reports to shareholders, costs of custodial services and registering the
Shares under federal securities laws, pricing, insurance expenses, litigation
and other extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
BOARD OF TRUSTEES
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described below, certain
companies provide essential management services to the Trust.
INVESTMENT ADVISOR
STI Capital Management, N.A. ("STI Capital") serves as the Advisor to the Fund.
As of December 31, 1996, STI Capital had discretionary management authority with
respect to assets of approximately $11.5 billion. The principal business address
of STI Capital is P.O. Box 3808, Orlando, Florida 32802.
The Advisor is an indirect wholly-owned subsidiary of SunTrust Banks, Inc.
("SunTrust"), a southeastern regional bank holding company with assets of $52.5
billion as of December 31, 1996. SunTrust ranks among the twenty-five largest
U.S. banking companies. Operating in Florida, Georgia, Alabama and Tennessee,
SunTrust provides a wide range of personal and corporate banking, trust, and
investment services through more than 600 locations in the four-state area.
Total discretionary assets under management with SunTrust Banks, Inc. equalled
approximately $53.4 billion as of December 31, 1996.
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. STI CLASSIC VARIABLE TRUST FUNDS ARE NOT DEPOSITS, ARE
NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND ARE
NOT ENDORSED OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS OF SUNTRUST
BANKS, INC. OR ANY OF ITS AFFILIATES. 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 MORE OR LESS THAN THEIR ORIGINAL
COST. THERE IS NO GUARANTEE THAT THE STI CLASSIC VARIABLE TRUST SMALL CAP EQUITY
FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. The Advisor may execute brokerage or
other agency transactions on behalf of the Fund through affiliates of the
Advisor.
For the services provided and expenses incurred pursuant to the Advisory
Agreement, STI Capital is entitled to receive advisory fees computed daily and
paid monthly at the annual rate of 1.15% of the average daily net assets of the
Fund. For the period since inception to the fiscal year end, the Trust paid no
advisory fees.
From time to time, the Advisor may voluntarily waive advisory fees payable by
the Fund. Voluntary reductions of fees may be terminated at any time.
PORTFOLIO MANAGER
Mr. Brett Barner, CFA, has been responsible for the day-to-day management of the
Small Cap Equity Fund since it commenced operations. Mr. Barner has been a
portfolio manager with STI Capital since 1990.
<PAGE>
11
BANKING LAWS
Banking laws and regulations, including the Glass-Steagall Act as presently
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 STI Classic Variable
Trust 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 STI Classic
Variable Trust. If the Advisor was prohibited from providing services to the STI
Classic Variable Trust, the Board of Trustees would consider selecting other
qualified firms. Any new investment advisory agreement would be subject to
investor 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 STI Classic
Variable Trust. 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.
DISTRIBUTION
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Investments Company ("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.
With respect to the Fund, the Distributor may, from time to time and at its own
expense, provide promotional incentives, in the form of cash or other
compensation, to financial institutions whose representatives have sold or are
expected to sell significant amounts of the Fund.
ADMINISTRATION
SEI Fund Resources (the "Administrator"), a wholly-owned subsidiary of SEI, and
the Trust are parties to an Administration Agreement (the "Administration
Agreement"). Under the terms of the Administration Agreement, 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.
<PAGE>
12
For its administrative services, the Administrator is entitled to a fee, which
is calculated daily and paid monthly, at an annual rate of .10% of the average
aggregate daily net assets on the first $1 billion, .07% of the assets in excess
of $1 billion but less than $5 billion, .05% of the assets in excess of $5
billion but less than $8 billion, .045% of the assets in excess of $8 billion
but less than $10 billion, and .04% of the assets in excess of $10 billion. From
time to time, the Administrator may voluntarily waive 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.
CUSTODIANS
SunTrust Bank, Park Place, P.O. Box 105504, Atlanta, Georgia, 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 ACCOUNTANT
The independent public accountant to the Trust is Arthur Andersen, LLP,
Philadelphia, Pennsylvania.
OTHER INFORMATION
VOTING RIGHTS
Each Share held entitles the investor 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 investors 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 investors at a special meeting
called upon written request of investors owning at least 10% of the outstanding
shares of the Trust. In the event that such a meeting is requested, the Trust
will provide appropriate assistance and information to the investors 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.
<PAGE>
13
REPORTING
The Trust issues unaudited financial information semi-annually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to investors 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
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 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.
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
<PAGE>
14
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
or cash equivalents 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 1940 Act.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933
(the "1933 Act") or an exemption from registration. Rule 144A securities are
securities that have not been registered under the 1933 Act 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 for
monitoring the Advisor's implementation of the guidelines and procedures. 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.
RIGHTS -- Rights are instruments giving shareholders the right to purchase
shares of newly-issued common stock below the public offering price before thay
are offered to the public.
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 or cash equivalents 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. Time deposits are considered to be illiquid
securities.
<PAGE>
15
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 FHLMC, the Federal Land Banks and the U.S. Postal
Service. Some of these securities are supported by the full faith and credit of
the U.S. Treasury, others are supported by the right of the issuer to borrow
from the Treasury, while still others are supported only by the credit of the
instrumentality. 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") and Coupon Under Book Entry Safekeeping
("CUBES").
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 cash or cash
equivalents in an amount at least equal to these commitments. The interest rate
realized on these securities is fixed as of the purchase date and no interest
accrues to the Fund before settlement. These securities are subject to market
fluctuation due to changes in market interest rates and it is possible that the
market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. Although the
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.
<PAGE>
A-1
<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 Investments Distribution Co. Oaks, PA 19456
* ADMINISTRATOR
SEI Fund Resources Oaks, PA 19456
* TRANSFER AGENT
Federated Services Company Federated Investors Tower
Pittsburgh, PA 15222-3779
* CUSTODIAN
SunTrust Bank, Atlanta Park Place
P.O. Box 105504
Atlanta, GA 30348
* LEGAL COUNSEL
Morgan, Lewis & Bockius LLP 2000 One Logan Square
Philadelphia, PA 19103
* INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP 1601 Market Square
Philadelphia, PA 19103
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
STI CLASSIC VARIABLE TRUST
SMALL CAP EQUITY FUND
INVESTMENT ADVISOR:
STI CAPITAL MANAGEMENT, N.A.
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of the
Trust and the above-referenced Fund and should be read in conjunction with the
Fund's prospectus dated October 20, 1997. A prospectus may be obtained through
the Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania 19456.
TABLE OF CONTENTS
PAGE
THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-2
DESCRIPTION OF PERMITTED INVESTMENTS . . . . . . . . . . . . . . . . . . . .B-2
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .B-6
INVESTMENT ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-7
THE ADMINISTRATOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-8
THE DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-9
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . . . . . . . . . . . . . . . .B-9
COMPUTATION OF YIELD . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-11
CALCULATION OF TOTAL RETURN. . . . . . . . . . . . . . . . . . . . . . . . .B-12
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . .B-12
NET ASSET VALUE - PRICING OF PORTFOLIO SECURITIES. . . . . . . . . . . . . .B-13
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-13
FUND TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-15
TRADING PRACTICES AND BROKERAGE. . . . . . . . . . . . . . . . . . . . . . .B-15
DESCRIPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . .B-17
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .B-17
LIMITATION OF TRUSTEES' LIABILITY. . . . . . . . . . . . . . . . . . . . . .B-17
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-19
OCTOBER 20, 1997
<PAGE>
THE TRUST
STI Classic Variable Trust (the "Trust") is a diversified, open-end management
investment company established under Massachusetts law as a Massachusetts
business trust under a Declaration of Trust dated April 18, 1995. The
Declaration of Trust permits the Trust to offer separate series of units of
beneficial interest ("Shares"). The Trust currently offers Shares of the
Investment Grade Bond Fund, Capital Growth Fund, Value Income Stock Fund,
Mid-Cap Equity Fund, International Equity Fund and Small Cap Equity Fund. This
Statement of Additional Information relates to the Small Cap Equity Fund (the
"Fund").
DESCRIPTION OF PERMITTED INVESTMENTS
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. While there is no
limitation on the percentage of the Fund's assets that may be comprised of
STRIPS, the Advisor will monitor the level of such holdings to avoid the risk of
impairing Investors' redemption rights and of deviations in the value of the
shares of the Fund.
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 such obligations consist
of, among others, the Export Import Bank of the United States, Farmers Home
Administration, Federal Farm Credit Bank, Federal Housing Administration,
Government National Mortgage Association ("GNMA"), Maritime Administration,
Small Business Administration and The Tennessee Valley Authority. Obligations
of instrumentalities of the United States Government include securities issued
by, among others, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks,
Fannie Mae and the United States Postal Service as well as government trust
certificates. Some of these securities are supported by the full faith and
credit of the United States Treasury (E.G., GNMA securities); others are
supported by the right of the issuer to borrow from the Treasury and still
others are supported only by the credit of the instrumentality (E.G., Fannie Mae
securities). Guarantees of principal by agencies or instrumentalities of the
U.S. Government may be a guarantee of payment at the maturity of the obligation
so that in the event of a default prior to maturity, there might not be a market
and thus no means of realizing 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., the Fund) obtains a security and
simultaneously commits to return the security to the seller (a primary
securities dealer as recognized by the Federal Reserve Bank of New York or a
national
B-2
<PAGE>
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 are treated as unsecured creditors and required to return
the underlying security to the seller's estate.
FOREIGN SECURITIES
The Fund may invest in American Depositary Receipts. 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. securities. Shares of the Fund,
when included in amounts in a portfolio otherwise consisting of domestic
securities, may provide a source of increased diversification. 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 the 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.
B-3
<PAGE>
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 include
Restricted Securities, and the Fund may invest up to 15% of its net assets in
illiquid securities, subject to the Fund's investment limitations on the
purchase of illiquid securities. Restricted Securities, including securities
eligible for re-sale under Rule 144A of the 1933 Act, 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 of 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 or cash equivalents. 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 that Advisor, the
consideration which can be earned currently from such securities loans justifies
the attendant risk. Any loan may be terminated by either party upon reasonable
notice to the other party. The Fund may use the Distributor or a broker-dealer
affiliate of the Advisor as a broker in these transactions.
OPTIONS
The Fund may write put and call options on a covered basis only, and will not
engage in option writing strategies for speculative purposes. A put option
gives the purchaser of such option the right to sell, and the writer, in this
case the Fund, the obligation to buy the underlying security at the exercise
price during the option period. A call option gives the purchaser of such
option the right to buy, and the writer, in this case 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
B-4
<PAGE>
against payment of the exercise price. This obligation is terminated upon the
expiration of the option period or at such earlier time in which the writer
effects a closing purchase transaction. A closing purchase transaction is one
in which the Fund, when obligated as a writer of an option, terminates its
obligation by purchasing an option of the same series as the option previously
written.
A closing purchase transaction cannot be effected with respect to an option once
the option writer has received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. The Fund may realize a net gain or loss from
a closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security.
If a call option expires unexercised, the Fund will realize a short-term capital
gain in the amount of the premium on the option, less the commission paid. Such
a gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between the cost of the underlying security, and the
proceeds of the sale of the security plus the amount of the premium on the
option, less the commission paid.
The market value of a call option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means that the
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected,
the Fund would be required to continue to hold a security which it might
otherwise wish to sell, or deliver a security it would want to hold. Options
written by the Fund will normally have expiration dates between one and nine
months from the date written. The exercise price of a call option may be below,
equal to or above the current market value of the underlying security at the
time the option is written.
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 Investors would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees.
B-5
<PAGE>
OTHER INVESTMENTS
The Trust is not prohibited from investing in obligations of banks which are
clients of SEI Investments Company ("SEI Investments"), the parent company of
the Administrator and the Distributor. However, the purchase of shares of the
Fund by such banks or by their customers will not be a consideration in
determining which bank obligations the Fund will purchase. The Fund will not
purchase obligations issued by the Advisors.
Investors will receive written notification at least thirty days prior to any
change in the Fund's investment objective.
INVESTMENT LIMITATIONS
The following are fundamental policies of the Fund and cannot be changed 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 (the "SEC") may prescribe
by rules and regulations, reduce the amount of its borrowings to such an
extent that the asset coverage of such borrowings shall be at least 300%.
This borrowing provision is included solely to facilitate the orderly sale
of portfolio securities to accommodate heavy redemption requests if they
should occur and is not for investment purposes. All borrowings in excess
of 5% of the value of the Fund's total assets will be repaid before making
additional investments and any interest paid on such borrowings will reduce
income.
4. Make loans, except that (a) the Fund may purchase or hold debt instruments
in accordance with its investment objective and policies; (b) the Fund may
enter into repurchase agreements, and (c) the Fund may engage in securities
lending as described in the 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.
B-6
<PAGE>
6. Purchase or sell real estate, real estate limited partnership interests,
commodities or commodities contracts (except for financial futures
contracts) and interests in a pool of securities that are secured by
interests in real estate. However, subject to their permitted investment
spectrum, the Fund may invest in companies which invest in real estate
commodities or commodities contracts.
7. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Trust may obtain short-term credits
as necessary for the clearance of security transactions.
8. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a security.
9. Purchase securities of other investment companies unless permitted by the
Investment Company Act of 1940 (the "1940 Act") and the rules and
regulations thereunder. Under these rules and regulations, the Fund is
generally prohibited from acquiring the securities of other investment
companies if, as a result of such acquisition, the Fund owns more than 3%
of the total voting stock of the company; securities issued by any one
investment company represent more than 5% of the total assets of the Fund;
or securities (other than treasury stock) issued by all investment
companies represent more than 10% of the total assets of the Fund.
10. Issue senior securities (as defined in the 1940 Act) except in connection
with permitted borrowings as described above or as permitted by rule,
regulation or order of the SEC.
NON-FUNDAMENTAL POLICIES
The Fund may not purchase or hold illiquid securities, I.E., securities that
cannot be disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in more
than seven days) if, in the aggregate, more than 15% of its net assets would be
invested in illiquid securities.
With the exception of the limitations on liquidity standards, the foregoing
percentages will apply at the time of the purchase of a security and shall not
be considered violated unless an excess occurs or exists immediately after and
as a result of a purchase of such security.
INVESTMENT ADVISOR
The Trust and STI Capital Management, N.A. (the "Advisor") have entered into an
advisory agreement (the "Advisory Agreement") dated August 18, 1995. The
Advisory Agreement provides that the Advisor shall not be protected against any
liability to the Trust or its Investors by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard of its obligations or duties thereunder.
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of the Fund (including amounts payable to the Advisor but excluding
interest, taxes, brokerage, litigation, and other
B-7
<PAGE>
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 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") are parties to an
Administrative Agreement (the "Administrative Agreement") dated August 18,
1995. The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the matters to which the
Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Administrator
in the performance of its duties or from reckless disregard by it of its
duties and obligations thereunder. The Administration Agreement shall remain
in effect for a period of five years after the date of the Agreement and
shall continue in effect for successive periods of two years subject to
review at least annually by the Trustees of the Trust unless terminated by
either party on not less than 90 days' written notice to the other party.
The Administrator, a Delaware business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI
Investments"), is the owner of all beneficial interest in the Administrator.
SEI Investments and its subsidiaries and affiliates, including the
Administrator, are leading providers of funds evaluation services, trust
accounting systems, and brokerage and information services to financial
institutions, institutional investors, and money managers. The Administrator
and its affiliates also serve as administrator to the following other mutual
funds: The Achievement Funds Trust, The Advisors' Inner Circle Fund, The
Arbor Fund, ARK Funds, Bishop Street Funds, Boston 1784 Funds-Registered
Trademark-,CoreFunds, Inc., CrestFunds, Inc., CUFUND, The Expedition Funds,
FMB Funds, Inc., First American Funds, Inc., First American Investment Funds,
Inc., First American Strategy Funds, Inc., HighMark Funds, Marquis
Funds-Registered Trademark-, Monitor Funds, Morgan Grenfell Investment Trust,
The PBHG Funds, Inc., The Pillar Funds, Profit Funds Investment Trust,
Rembrandt Funds-Registered Trademark-, Santa Barbara Group of Mutual Funds,
Inc., SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds,
SEI Institutional Investments Trust, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI
Classic Funds, and TIP Funds.
B-8
<PAGE>
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary
of SEI Investments, 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.
With respect to the Fund, the Distributor may, from time to time and at its
own expense, provide promotional incentives, in the form of cash or other
compensation, to financial institutions whose representatives have sold or
are expected to sell significant amounts of these Funds.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under
the laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees and executive officers of the Trust and their dates of birth and
their principal occupations for the last five years are set forth below.
Unless otherwise noted, the principal business address for each officer
listed below is Oaks, Pennsylvania 19456.
DANIEL S. GOODRUM (7/11/26) - Trustee. Chairman & CEO, SunBank/South
Florida, N.A., 1985-1991; Chairman Audit Committee and Director, Holy Cross
Hospital; Executive Committee Member and Director, Honda Classic Foundation;
Director, Broward Community College Foundation.
WILTON LOONEY (4/18/19) - Trustee. President of Genuine Parts Company,
1961-1964; Chairman of the Board, 1964-1990; Honorary Chairman of the Board,
1990 to present; Director, Rollins, Inc.; Director, RPC Energy Services, Inc.
CHAMPNEY A. MCNAIR (10/30/24) - Trustee. Director and Chairman of Investment
Committee and member of Executive Committee, Cotton States Life and Health
Insurance Company; Director and Chairman of Investment Committee and member of
Executive Committee, Cotton States Mutual Insurance Company; Chairman, Trust
Company of Georgia Advisory Council.
F. WENDELL GOOCH (12/3/32) - Trustee. 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. 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.
B-9
<PAGE>
DR. BERNARD F. SLIGER (9/30/24) - Trustee. Currently on sabbatical leave
from Florida State University (1991-92); now serves as visiting professor at
the University of New Orleans; President of Florida State University,
1976-91; previous four years EVP and Chief Academic Officer; during
educational career, taught at Florida State, Michigan State, Louisiana State
and Southern University; spent 19 years as faculty member and administrator
at Louisiana State University and served as Head of Economics Department,
member and Chairman of the Graduate Council, Dean of Academic Affairs and
Vice Chancellor; Member of Board of Directors of Federal Reserve Bank of
Atlanta, 1983-1988.
JESSE HALL (9/26/29) - Trustee*. 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.
CAROL ROONEY (5/8/64) - Controller, Chief Financial Officer - A Director of SEI
Fund Resources since 1992.
RICHARD W. GRANT (10/25/45) - Secretary - 2000 One Logan Square, Philadelphia,
Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law firm); Counsel
to the Trust, Administrator and Distributor.
SANDRA K. ORLOW (10/18/53) - Vice President, Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor
since 1983.
KEVIN P. ROBINS (4/15/61) - Vice President, Assistant Secretary - Senior Vice
President & General Counsel of SEI, the Administrator and the Distributor since
1994; Vice President of SEI, the Administrator and the Distributor, 1992-1994.
KATHRYN L. STANTON (11/19/58) - Vice President, Assistant Secretary - Vice
President, Assistant Secretary of SEI, the Administrator and Distributor since
1994; Associate, Morgan, Lewis & Bockius LLP (law firm), 1989-1994.
JOSEPH M. LYDON (9/27/59) - Vice President - Director of Business Administration
of Fund Resources, SEI since 1995; Vice President of Fund Group and Vice
President of the Adviser, Dremen Value Management and President of Dremen
Financial Services, Inc. prior to 1995.
TODD CIPPERMAN (2/14/66) - Vice President, Assistant Secretary - Vice President
and Assistant Secretary of SEI, the Administrator and the Distributor since
1995; Associate, Dewey Ballantine (law firm), 1994-1995; Associate, Winston &
Strawn (law firm), 1991-1994.
BARBARA A. NUGENT (6/18/56) - Vice President, Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor;
Associate, Drinker Biddle & Reath (law firm), 1994-1996; Assistant Vice
President/Administration, Delaware Service Company, Inc., 1981-1994.
B-10
<PAGE>
MARC H. CAHN (6/19/57) - Vice President, Assistant Secretary - Vice President
and Assistant Secretary of SEI, the Administrator and Distributor; Associate
General Counsel, Barclays Bank PLC, 1995-1996; Counsel for First Fidelity
Bancorporation prior to 1995.
JOHN H. GRADY, JR. (6/1/61) - Assistant Secretary - 1800 M Street, N.W.
Washington, DC 20036. Partner, Morgan, Lewis & Bockius LLP (law firm) since
1995; Associate, Morgan, Lewis & Bockius LLP, 1993-1995; Associate, Ropes & Gray
(law firm), 1988-1993.
- ---------------------
* Jesse S. Hall may be deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
The Trustees and officers of the Trust own, in the aggregate, less than 1% of
the outstanding shares of the Trust.
For the fiscal year end December 31, 1996, the Trust paid the following amounts
to Trustees and Officers of the Trust:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Aggregate Pension
Compensation or Retirement Total Compensation from
From Registrant Benefits Registrant and Fund Complex
for Fiscal Accrued as Estimated Annual Paid to Directors for Fiscal
Name of Person, Position Year Ended Part of Fund Benefits Upon Year Ended
1996 Expenses Retirement 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel S. Goodrum, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- -----------------------------------------------------------------------------------------------------------------------
Wilton Looney, Trustee $16,000 N/A N/A $16,000 for service on two
boards
- -----------------------------------------------------------------------------------------------------------------------
Champney A. McNair, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- -----------------------------------------------------------------------------------------------------------------------
F. Wendell Gooch, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- -----------------------------------------------------------------------------------------------------------------------
T. Gordy Germany, $13,500 N/A N/A $13,500 for service on two
Trustee boards
- -----------------------------------------------------------------------------------------------------------------------
Dr. Bernard F. Sliger, $13,500 N/A N/A $13,500 for service on two
Trustee boards
- -----------------------------------------------------------------------------------------------------------------------
Jesse S. Hall, Trustee $13,500 N/A N/A $13,500 for service on two
boards
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPUTATION OF YIELD
The current yield of the Fund will be calculated daily based upon the thirty
days ending on the date of calculation ("base period"). The yield is computed
by determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing shareholder account having a balance of one share at
B-11
<PAGE>
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing such net change by the value
of the account at the beginning of the same period to obtain the base period
return and multiplying the result by (365/7). Realized and unrealized gains and
losses are not included in the calculation of the yield. The effective compound
yield of the 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 Fund may advertise a 30-day yield. In particular, yield will be calculated
according to the following formula:
Yield = (2 (a-b/cd + 1)(6) - 1) where a = dividends and interest earned during
the period; b = expenses accrued for the period (net of reimbursement); c = the
current daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
CALCULATION OF TOTAL RETURN
From time to time, the 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 affiliate, STI Capital Management, N.A. acting as the
investment advisor for the Fund, has been in the top 1% of the SEI Funds
Evaluation database for equity managers over the past ten years. SEI's database
includes research data on over 1,000 investment managers responsible for over
$450 billion in assets.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Fund may be made on any day the New
York Stock Exchange ("NYSE") is open for business. Currently, the NYSE is
closed on the days the following holidays are observed: New Year's Day,
Presidents' Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
B-12
<PAGE>
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. Investors may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. A Investor will at all times be entitled to aggregate cash
redemptions from the Fund during any 90-day period of up to the lesser of
$250,000 or 1% of the Trust's net assets.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the NYSE is restricted, or during the existence of an emergency (as determined
by the SEC by rule or regulation) as a result of disposal or valuation of the
Fund's securities is not reasonably practicable, or for such other periods as
the SEC has by order permitted. The Trust also reserves the right to suspend
sales of shares of the Fund for any period during which the NYSE, the Advisor,
the Administrator and/or, the Custodian are not open for business.
NET ASSET VALUE - PRICING OF PORTFOLIO SECURITIES
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
The following is a summary of certain Federal income tax considerations
generally affecting the Fund and its Investors. No attempt is made to
present a detailed explanation of the Federal tax treatment of the Fund or
its Investors, and the discussion here and in the Fund's prospectus is not
intended as a substitute for careful tax planning. Further, this discussion
does not address the tax considerations affecting any Contract Owner.
Federal income tax considerations affecting such Owners is discussed in the
prospectus and the statement of additional information for such Contract.
FEDERAL INCOME TAX
This discussion of Federal income tax considerations is based on the Internal
Revenue Code, as amended ("Code"), and the regulations issued thereunder, in
effect on the date of this Statement of Additional Information. New
legislation, as well as administrative changes or court decisions may change
the conclusions expressed herein, and may have a retroactive effect with
respect to the transactions contemplated herein.
In order to qualify for treatment as a regulated investment company ("RIC")
under the Code, the Fund must distribute annually to its Investors 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
B-13
<PAGE>
plus net short-term capital gain) (the "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 RICs and other
securities, with such other securities limited, in respect to any one issuer, to
an amount that does not exceed 5% of the value of the Fund's assets and that
does not represent more than 10% of the outstanding voting securities of such
issuer; and (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
than U.S. Government securities or the securities of other RICs) 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. Requirement (ii)
no longer applies for tax years beginning after August 5, 1997.
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. The Fund intends to make sufficient distributions prior to the end
of each calendar year to avoid liability for Federal excise tax applicable to
regulated investment companies.
Any gain or loss recognized on a sale or redemption of Shares of the Fund by a
Investor 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 distributions.
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 Investors 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.
B-14
<PAGE>
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 may, file
an election with the Internal Revenue Service that will enable Investors, in
effect, to receive the benefit of the foreign tax paid with respect to any
foreign and U.S. possessions income taxes paid by the Fund. The Fund does
not expect to be able to meet the requirement to make such an election.
FUND TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Trustees, the Advisor is responsible for placing the orders
to execute transactions for the Fund. In placing orders, it is the policy of
the Trust to seek to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved. While the Advisor generally seeks reasonably competitive spreads or
commissions, the Trust will not necessarily be paying the lowest spread or
commission available.
The money market securities in which the Fund invests are traded primarily in
the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, the Advisor
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Trust will primarily consist of dealer spreads
and underwriting commissions.
TRADING PRACTICES AND BROKERAGE
The Trust selects brokers or dealers to execute transactions for the purchase or
sale of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have brokers
or dealers provide transactions at best price and execution for the Trust. Best
price and execution includes many factors, including the price paid or received
for a security, the commission charged, the promptness and reliability of
execution, the confidentiality and placement accorded the order and other
factors affecting the overall benefit obtained by the account on the
transaction. The Trust's determination of what are reasonably competitive rates
is based upon the professional knowledge of its trading department as to rates
paid and charged for similar transactions throughout the securities industry.
In some instances, the Trust pays a minimal share transaction cost when the
transaction presents no difficulty. Some trades are made on a net basis where
the Trust either buys securities directly from the dealer or sells them to the
dealer. In these instances, there is no direct commission charged but there is
a spread (the difference between the buy and sell price) which is the equivalent
of a commission.
B-15
<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 rendering advice, either directly or through publications or
writings, about the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, securities or industries; providing information on economic factors and
trends; assisting in determining portfolio strategy; providing computer software
used in security analyses; and providing portfolio performance evaluation and
technical market analyses. Such services are used by the Advisor in connection
with its investment decision-making process with respect to one or more funds
and accounts managed by it, and may not be used exclusively with respect to the
fund or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher
commissions may be paid to broker-dealers who provide brokerage and research
services than to broker-dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to
broker-dealers who provide such brokerage and research services, the Trust
believes that the commissions paid to such broker-dealers are not, in general,
higher than commissions that would be paid to broker-dealers not providing such
services and that such commissions are reasonable in relation to the value of
the brokerage and research services provided. In addition, portfolio
transactions which generate commissions or their equivalent are directed to
broker-dealers who provide daily portfolio pricing services to the Trust.
Subject to best price and execution, commissions used for pricing may or may not
be generated by the funds receiving the pricing service.
The Advisor may place a combined order for two or more accounts or funds engaged
in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in
a manner deemed equitable to each account or fund. It is believed that the
ability of the accounts to participate in volume transactions will generally be
beneficial to the accounts and funds. Although it is recognized that, in some
cases, the joint execution of orders could adversely affect the price or volume
of the security that a particular account or the Fund may obtain, it is the
opinion of the Advisor and the Trust's Board of Trustees that the advantages of
combined orders outweigh the possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Fund, at the
request of the Distributor, give consideration to sales of shares of the Trust
as a factor in the selection of brokers and dealers to execute Trust portfolio
transactions.
It is expected that the Trust may execute brokerage or other agency transactions
through the Distributor or an affiliate of the Advisor, both of which are
registered broker-dealers, for a commission in conformity with the 1940 Act, the
1934 Act and rules promulgated by the SEC. Under these provisions, the
Distributor or an affiliate of the Advisor is permitted to receive and retain
compensation for effecting portfolio transactions for the Trust on an exchange
if a written contract is in effect between the
B-16
<PAGE>
Distributor and the Trust expressly permitting the Distributor or an affiliate
of an Advisor to receive and retain such compensation. These rules further
require that commissions paid to the Distributor by the Trust for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In addition, the Trust
may direct commission business to one or more designated broker-dealers in
connection with such broker/dealer's provision of services to the Trust or
payment of certain Trust expenses (E.G., custody, pricing and professional
fees). The Trustees, including those who are not "interested persons" of the
Trust, have 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 of the Fund, each of which represents an equal proportionate interest in
the Fund with each other share. Shares are entitled upon liquidation to a PRO
RATA share in the net assets of the Fund. Investors have no preemptive rights.
The Declaration of Trust provides that the Trustees of the Trust may create
additional series of shares. 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 Investor held personally liable for the
obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisors, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with the Trust
unless it is determined in the manner provided in the Declaration of Trust that
they have not acted in good faith in the reasonable belief that their actions
were in the best interests of the Trust.
B-17
<PAGE>
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-18
<PAGE>
APPENDIX
I. BOND RATINGS
*CORPORATE BONDS
The following are descriptions of Standard & Poor's Corporation ("S&P") 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 a 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.
B-19
<PAGE>
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 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 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+ (Exceptionally Strong Credit Quality) 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-1 (Very
Strong Credit Quality) is the second highest commercial paper rating assigned by
Fitch which reflects an assurance of timely payment only slightly less in degree
than issues rated F-1+.
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.
B-20
