<PAGE>
STI CLASSIC VARIABLE TRUST
INVESTMENT GRADE BOND FUND
CAPITAL GROWTH FUND
VALUE INCOME STOCK FUND
MID-CAP EQUITY FUND
INTERNATIONAL EQUITY FUND
SMALL CAP EQUITY FUND
INVESTMENT ADVISOR TO THE FUNDS:
STI CAPITAL MANAGEMENT, N.A. (THE "ADVISOR")
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 Funds (each a
"Fund" and, collectively, the "Funds"). The Funds are 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 Funds 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.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE
SHARES OR 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 ANY BANK AND
ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY GOVERNMENTAL AGENCY. INVESTING IN THE FUNDS INVOLVES RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
MAY 1, 1998
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2
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Trust's Statement of
Additional Information relating to the Funds 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.
Throughout this Prospectus, the Investment Grade Bond Fund, which invests
primarily in bonds and other fixed income instruments, may be referred to as the
"Bond Fund" and the Capital Growth, Value Income Stock, Mid-Cap Equity,
International Equity and Small Cap Equity Funds may be referred to as the
"Equity Funds."
TABLE OF CONTENTS
<TABLE>
<S> <C>
Expense Summary........................................................... 3
The Trust................................................................. 5
Funds and Investment Objectives........................................... 5
Investment Policies and Strategies........................................ 5
General Investment Policies and
Strategies.............................................................. 9
Investment Risks.......................................................... 10
Investment Limitations.................................................... 11
Performance Information................................................... 12
Purchase and Redemption of Fund
Shares.................................................................. 12
Net Asset Value........................................................... 12
Dividends and Distributions............................................... 12
Tax Information........................................................... 13
STI Classic Variable Trust Information.................................... 13
The Trust................................................................. 13
Board of Trustees......................................................... 14
Investment Advisor........................................................ 14
Portfolio Managers........................................................ 14
Banking Laws.............................................................. 15
Distribution.............................................................. 15
Administration............................................................ 16
Transfer Agent and Dividend Disbursing Agent.............................. 16
Custodian................................................................. 16
Legal Counsel............................................................. 16
Independent Public Accountants............................................ 16
Other Information......................................................... 16
Voting Rights............................................................. 16
Reporting................................................................. 17
Shareholder Inquiries..................................................... 17
Description of Permitted Investments...................................... 17
Addresses................................................................. A-1
</TABLE>
<PAGE>
3
EXPENSE SUMMARY
Below is a summary of the estimated annual operating expenses for each Fund.
Actual expenses may vary.
FUND EXPENSES (AS A PERCENTAGE OF FUND ASSETS)
(NET OF VOLUNTARY REDUCTIONS AND REIMBURSEMENTS)(1)
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL FUND OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
- ---------------------------------------- ------------ ------------ ---------------------
<S> <C> <C> <C>
Investment Grade Bond Fund.............. 0.00% .75% .75%
Capital Growth Fund..................... .70% .45% 1.15%
Value Income Stock Fund................. .52% .43% .95%
Mid-Cap Equity Fund..................... .53% .62% 1.15%
International Equity Fund............... 0.00% 1.60% 1.60%
Small Cap Equity Fund(2)................ 0.00% 1.20% 1.20%
</TABLE>
- ------------
(1) Absent voluntary reductions and reimbursements, Advisory Fees, Other
Expenses and Total Fund Operating Expenses expressed as a percentage of
average net assets of each Fund would be: Investment Grade Bond Fund --
.74%, .84% and 1.58%; Capital Growth Fund -- 1.15%, .45% and 1.60%; Value
Income Stock Fund -- .80%, .43% and 1.23%; Mid-Cap Equity Fund -- 1.15%,
.62% and 1.77%; International Equity Fund -- 1.25%, 1.68% and 2.93%; and
Small Cap Equity Fund -- 1.15%, 1.24% and 2.39%.
(2) Other Expenses are based on estimated amounts for the current year.
EXAMPLE
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:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Grade Bond Fund.............. $ 8 $ 24 $ 42 $ 93
Capital Growth Fund..................... $ 12 $ 37 $ 63 $ 140
Value Income Stock Fund................. $ 10 $ 30 $ 53 $ 117
Mid-Cap Equity Fund..................... $ 12 $ 37 $ 63 $ 140
International Equity Fund............... $ 16 $ 50 $ 87 $ 190
Small Cap Equity Fund................... $ 12 $ 38 -- --
</TABLE>
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF THE FUNDS AND SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Trust.
<PAGE>
4
FINANCIAL HIGHLIGHTS
The following information has been audited by Arthur Andersen LLP, the Trust's
independent public accountants, whose report thereon was unqualified. This
information should be read in conjunction with the Trust's financial statements
and notes thereto, which are included in the Trust's Statement of Additional
Information and which appear, along with the Report of Arthur Andersen LLP, in
the Trust's 1997 Annual Report to Shareholders. Additional performance
information regarding each Fund is contained in the Trust's Annual Report to
Shareholders and is available upon request and without charge by calling
1-800-453-6038.
For a Share Outstanding Throughout Each Period Ended December 31,
<TABLE>
<CAPTION>
NET REALIZED
AND
NET ASSET NET UNREALIZED DISTRIBUTIONS
VALUE INVESTMENT GAINS FROM NET DISTRIBUTIONS NET ASSET
BEGINNING INCOME (LOSSES) ON INVESTMENT FROM REALIZED VALUE END TOTAL
OF PERIOD (LOSS) INVESTMENTS INCOME CAPITAL GAINS OF PERIOD RETURN
--------- ---------- ------------ ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE INCOME STOCK FUND
1997...................... $12.41 $0.28 $3.02 $(0.28) $(0.22) $15.21 26.82%
1996...................... $10.67 $0.23 $1.74 $(0.23) $ -- $12.41 18.64%
1995 (1).................. $10.00 $0.06 $0.67 $(0.06) $ -- $10.67 7.31%*
MID-CAP EQUITY FUND(A)
1997...................... $11.86 $(0.01) $2.64 $(0.01) $(0.51) $13.97 22.23%
1996...................... $10.27 $0.06 $1.59 $(0.06) $ -- $11.86 16.05%
1995 (1).................. $10.00 $0.05 $0.27 $(0.05) $ -- $10.27 3.19%*
CAPITAL GROWTH FUND
1997...................... $13.06 $0.10 $4.63 $(0.10) $(0.42) $17.27 36.54%
1996...................... $10.66 $0.12 $2.40 $(0.12) $ -- $13.06 23.75%
1995 (1).................. $10.00 $0.04 $0.66 $(0.04) $ -- $10.66 6.96%*
INVESTMENT GRADE BOND FUND
1997...................... $9.92 $0.58 $0.27 $(0.58) $ -- $10.19 8.84%
1996...................... $10.25 $0.54 $(0.33) $(0.54) $ -- $ 9.92 2.29%
1995 (1).................. $10.00 $0.13 $0.25 $(0.13) $ -- $10.25 3.68%*
INTERNATIONAL EQUITY FUND
1997...................... $10.16 $0.03 $1.68 $ -- $ -- $11.87 16.84%
1996(2)................... $10.00 $0.01 $0.16 $(0.01) $ -- $10.16 1.70%*
SMALL CAP EQUITY FUND
1997 (3).................. $10.00 $0.03 $(0.23) $(0.03) $ -- $ 9.77 (2.05)%*
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
RATIO OF NET EXPENES TO INCOME (LOSS)
INVESTMENT AVERAGE NET TO AVERGE NET
RATIO OF INCOME ASSETS ASSETS
NET ASSETS EXPENSES (LOSS) TO (EXCLUDING (EXCLUDING PORTFOLIO AVERAGE
END OF TO AVERAGE AVERAGE NET WAIVERS AND WAIVERS AND TURNOVER COMMISSION
PERIOD (000) NET ASSETS ASSETS REIMBURSEMENTS) REIMBURSMENTS) RATE RATE(4)
------------ ---------- ------------ --------------- --------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE INCOME STOCK FUND
1997...................... $72,747 0.95% 2.09% 1.23% 1.81% 104.84% $0.0536
1996...................... $31,216 0.95% 2.45% 1.95% 1.45% 79.80% $0.0540
1995 (1).................. $ 4,015 0.95% 2.98% 5.72% (1.79)% 7.17% N/A
MID-CAP EQUITY FUND(A)
1997...................... $23,913 1.15% (0.07)% 1.77% (0.69)% 138.98% $0.0322
1996...................... $14,294 1.15% 0.58% 2.79% (1.06)% 139.60% $0.0530
1995 (1).................. $ 3,409 1.15% 2.22% 6.34% (2.97)% 13.29% N/A
CAPITAL GROWTH FUND
1997...................... $61,877 1.15% 0.70% 1.60% 0.25% 195.86% $0.0503
1996...................... $25,189 1.15% 1.15% 2.43% (0.13)% 148.48% $0.0530
1995 (1).................. $ 3,778 1.15% 1.69% 6.18% (3.34)% 8.05% N/A
INVESTMENT GRADE BOND FUND
1997...................... $ 9,902 0.75% 5.81% 1.58% 4.98% 219.22% N/A
1996...................... $ 8,039 0.75% 5.54% 2.78% 3.51% 303.30% N/A
1995 (1).................. $ 3,115 0.75% 5.04% 6.05% (0.26)% 108.55% N/A
INTERNATIONAL EQUITY FUND
1997...................... $13,847 1.60% 0.41% 2.93% (0.92)% 99.14% $0.0248
1996(2)................... $ 995 1.60% 1.83% 31.39% (27.96)% --% $0.0620
SMALL CAP EQUITY FUND
1997 (3).................. $ 7,563 1.20% 1.62% 2.66% 0.16% 4.11% $0.0320
</TABLE>
(1) Commenced operations on October 2, 1995. All ratios for the period have been
annualized.
(2) Commenced operations on November 7, 1996. All ratios for the period have
been annualized.
(3) Commenced operations on October 22, 1997. All ratios for the period have
been annualized.
(4) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Returns are for the period indicated and have not been annualized.
(A) During the fiscal year ended December 31, 1996, the Aggressive Growth Fund
changed its name to the Mid-Cap Equity Fund.
Amounts designated as "--" are either $0 or rounded to $0.
<PAGE>
5
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 each Fund represents an undivided,
proportionate interest in that Fund.
FUNDS AND INVESTMENT OBJECTIVES
BOND FUND:
THE INVESTMENT GRADE BOND FUND seeks to provide as high a level of total return
through current income and capital appreciation as is consistent with the
preservation of capital primarily through investment in investment grade fixed
income securities.
EQUITY FUNDS:
THE CAPITAL GROWTH FUND seeks to provide capital appreciation by investing
primarily in a portfolio of common stocks, warrants and securities convertible
into common stock which in the Advisor's opinion are undervalued in the
marketplace at the time of purchase.
THE VALUE INCOME STOCK FUND seeks to provide current income with the secondary
goal of achieving capital appreciation by investing primarily in equity
securities.
THE MID-CAP EQUITY FUND seeks to provide capital appreciation by investing
primarily in a diversified portfolio of common stocks, preferred stocks and
securities convertible into common stock of small to mid-size companies with
above-average growth of earnings. Current income will not be an important
criterion of investment selection and any such income should be considered
incidental.
THE INTERNATIONAL EQUITY FUND seeks to provide long term capital appreciation by
investing primarily in a diversified portfolio of equity securities of foreign
issuers.
THE SMALL CAP EQUITY FUND seeks to provide capital appreciation with a secondary
goal of achieving current income.
There can be no assurance that a Fund will achieve its investment objective. The
investment objectives of each Fund are nonfundamental and may be changed without
investor approval.
INVESTMENT POLICIES AND STRATEGIES
INVESTMENT GRADE BOND FUND
The Investment Grade Bond Fund will invest exclusively in investment grade
obligations rated in one of the four highest rating categories by a nationally
recognized statistical rating organization ("NRSRO") or, if unrated, determined
by the Advisor to be of comparable quality at the time of purchase, including
corporate debt obligations; mortgage-backed securities, collateralized mortgage
obligations ("CMOs") and asset-backed securities; obligations issued or
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities; custodial receipts involving U.S. Treasury obligations;
securities of the government of Canada and its provincial and local governments;
securities issued or guaranteed by foreign governments, their political
subdivisions, agencies or instrumentalities; obligations of supranational
entities and sponsored American Depositary Receipts ("ADRs") that are traded on
exchanges or listed on Nasdaq. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in corporate and government bonds and
debentures.
<PAGE>
6
The Fund may purchase mortgage-backed securities issued or guaranteed as to the
payment of principal and interest by the U.S. Government or its agencies or
instrumentalities or, subject to a limit of 25% of the Fund's assets,
mortgage-backed securities issued by private issuers. These mortgage-backed
securities may be backed or collateralized by fixed, adjustable or floating rate
mortgages. The Fund may also invest in asset-backed securities which consist of
securities backed by company receivables, truck and auto loans, leases, credit
card receivables and home equity loans.
In order to reduce interest rate risk, and subject to a general limit of 25% of
the Fund's assets, the Fund may purchase floating or variable rate securities.
Some floating or variable rate securities will be subject to interest rate
"caps" or "floors." It may also buy securities on a when-issued basis, medium
term notes, putable securities and zero coupon securities. The Fund may also
invest up to 10% of its assets in restricted securities. The Fund may also
engage in futures and options transactions.
Under normal market conditions, it is anticipated that the Fund's average
weighted maturity will range from 4 to 10 years. In the case of mortgage-related
securities and asset-backed securities, maturity will be determined based on the
expected average life of the security. The Fund may shorten its average weighted
maturity to as little as 90 days if deemed appropriate for temporary defensive
purposes. By so limiting the maturity of its investments, the Fund expects that
its net asset value will experience less price movement in response to changes
in interest rates than the net asset values of mutual funds investing in similar
credit quality securities with longer maturities.
The Fund's portfolio turnover rate for the fiscal year ended December 31, 1997
was 219%. This rate of turnover, if continued, will likely result in higher
brokerage commissions and higher levels of realized capital gains than if the
turnover rate was lower. See "Tax Information."
CAPITAL GROWTH FUND
The Capital Growth Fund invests primarily in a diversified portfolio of common
stocks, warrants, and securities convertible into common stocks which, in the
Advisor's opinion, are undervalued in the marketplace at the time of purchase.
In selecting securities for the Fund, the Advisor will evaluate factors believed
to affect capital appreciation such as the issuer's background, industry
position, historical returns on equity and experience and qualifications of the
management team. Dividend and interest income is incidental to growth of
capital. The Advisor will rotate the Capital Growth Fund's holdings between
various market sectors based on economic analysis of the overall business cycle.
Under normal conditions, at least 65% of the total assets of the Capital Growth
Fund will be invested in common stocks.
All of the common stocks in which the Fund invests are traded on registered
exchanges or on the over-the-counter market in the United States. Assets of the
Capital Growth Fund not invested in the securities described above may be
invested in U.S. dollar denominated equity securities of foreign issuers
(including sponsored ADRs that are traded on exchanges or listed on Nasdaq),
pay-in-kind securities and bonds. The bonds that the Capital Growth Fund may
purchase may be rated in any rating category or may be unrated, provided that no
more than 10% of the Fund's total assets will be invested in bonds rated below
the fourth highest rating category by an NRSRO or unrated securities of
comparable quality. In addition, the Fund may invest up to 10% of its assets in
restricted securities and may purchase securities on a when-issued basis.
The Fund's turnover rate for the fiscal year ended December 31, 1997 was 196%.
This rate of turnover, if continued, will likely result in higher brokerage
commissions and higher levels of realized capital gains than if the turnover
rate was lower. See "Tax Information."
VALUE INCOME STOCK FUND
The Value Income Stock Fund seeks to provide current income by structuring its
investments in an attempt to maintain the Fund's yield at a level above the
average dividend yield of the securities comprising the S&P 500 Stock Index.
Achieving such a yield will be the Fund's primary consideration when purchasing
securities. A secondary objective of the Fund will be capital appreciation.
<PAGE>
7
The Fund will invest at least 80% of its total assets in equity securities.
Investments will consist primarily of common stocks, and, under normal market
conditions, at least 65% of the Fund's assets will be invested in common stocks
issued by corporations which have a history of paying regular dividends,
although there can be no assurance that such corporations will continue to pay
dividends. Other equity securities in which the Fund may invest are convertible
debt securities, preferred stocks and warrants which are convertible into or
exchangeable for common stocks; and U.S. dollar denominated equity securities of
foreign issuers (including sponsored ADRs that are traded on exchanges or listed
on Nasdaq). All of the common stocks in which the Fund invests are traded on
registered exchanges such as the New York or American Stock Exchanges or on the
over-the-counter market in the United States (i.e., Nasdaq). The Fund may also
purchase debt securities (corporate debt obligations and U.S. Treasury
obligations) which may be rated in any rating category or may be unrated,
provided that no more than 10% of the Fund's total assets will be invested in
bonds rated below the fourth highest rating category by an NRSRO or unrated
securities of comparable quality. The Fund may also invest in futures and
options and may purchase securities on a when-issued basis.
The Fund will invest primarily in stocks of companies operating in all aspects
of the U.S. and world economies that have a market capitalization of at least
$500 million or more, that the Advisor believes possess fundamentally favorable
long-term characteristics. However, stocks of companies with smaller market
capitalizations and stocks that are out of favor in the financial community and
in which little opportunity for price appreciation is recognized by the
financial community may also be purchased if the Advisor believes they are
undervalued.
The Fund's turnover rate for the fiscal year ended December 31, 1997 was 105%.
This rate of turnover, if continued, will likely result in higher brokerage
commissions and higher levels of realized capital gains than if the turnover
rate was lower. See "Tax Information."
MID-CAP EQUITY FUND
The Mid-Cap Equity Fund invests primarily in a diversified portfolio of common
stocks, preferred stocks, and securities convertible into common stocks of small
to mid-size companies (i.e., $50 million to $1 billion and $500 million to $5
billion, respectively, as measured by their market capitalization), with
above-average growth of earnings. Under normal conditions, at least 80% of the
total assets of the Fund will be invested in equity securities, and as a
non-fundamental policy, the Fund will invest at least 65% of its assets in
mid-size companies. Current income will not be an important criterion of
investment selection and any such income should be considered incidental. In
selecting securities for the Fund, the Advisor will evaluate factors such as the
issuer's background, industry position, historical returns on equity and
experience and qualifications of the management team.
Most of the common stocks in which the Fund invests are traded on registered
exchanges or in the over-the-counter market in the United States. Assets of the
Fund not invested in the securities described above may be invested in U.S.
dollar denominated equity securities of foreign issuers (including sponsored
ADRs that are traded on exchanges or listed on Nasdaq), securities issued by
mutual funds, repurchase agreements, warrants and bonds. The bonds that the Fund
may purchase, including any variable or floating rate instruments, must be rated
in at least the sixth highest rating category by an NRSRO, provided that this
requirement shall not apply to the Fund's purchase of bonds issued by the
government of Canada or by various supranational entities, and provided further
that no more than 10% of the Fund's total assets will be invested in bonds rated
below the fourth highest rating category by an NRSRO. The Fund may invest up to
10% of its assets in restricted securities and may purchase securities on a
when-issued basis.
The Fund's turnover rate for the fiscal year ended December 31, 1997 was 139%.
This rate of turnover, if continued, will likely result in higher brokerage
commissions and higher levels of realized capital gains than if the turnover
rate was lower. See "Tax Information."
<PAGE>
8
INTERNATIONAL EQUITY FUND
The Fund, under normal market conditions will invest at least 65% of its assets
in equity securities of foreign issuers consisting of common and preferred
stocks, warrants, options and securities convertible into common stock.
Securities of foreign issuers purchased by the Fund may be purchased in foreign
markets, on United States registered exchanges, the over-the-counter market or
in the form of sponsored or unsponsored ADRs traded on registered exchanges or
listed on Nasdaq, or sponsored or unsponsored European Depositary Receipts
("EDRs").
The Fund may enter into forward foreign currency contracts as a hedge against
possible variations in foreign exchange rates. A forward foreign currency
contract is a commitment to purchase or sell a specified currency, at a
specified future date, at a specified price. The Fund may enter into forward
foreign currency contracts to hedge a specific security transaction or to hedge
a portfolio position. The Fund also may purchase and write put and call options
on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter
markets) to manage the portfolios exposure to changes in dollar exchange rates.
The Fund expects to be fully invested in the investments described above, but
may invest up to 35% of its total assets in bonds and debentures issued by
non-U.S. or U.S. companies, securities issued or guaranteed by foreign or U.S.
governments and foreign and U.S. commercial paper. The Fund may invest in
futures contracts, including stock index futures contracts, and options on
futures contracts. The bonds that the Fund may purchase may be rated in any
rating category or may be unrated provided that no more than 10% of the Fund's
total assets will be rated below BBB by Standard & Poor's Corporation ("S&P") or
below Baa by Moody's Investor Service, Inc. ("Moody's") or securities not rated
by S&P or Moody's of comparable quality. When investing in bonds, the Fund may
seek capital gains by taking advantage of price appreciation caused by interest
rate and credit quality changes. The Fund may also purchase shares of closed-end
investment companies that invest in the securities of issuers in a single
country or region. The Fund is also permitted to acquire floating and variable
rate securities, purchase securities on a when-issued basis, purchase restricted
securities and purchase illiquid securities.
The Fund will invest in the foreign issues of at least three different countries
outside the United States. A foreign issue is one the issuer of which (1) is
organized under the laws of a specific country, (2) for which the principal
securities trading market is in a specific country or (3) derives a significant
proportion (at least 50 percent) of its revenues or profits from goods produced
or sold, investments made, or services performed in a specific country or which
have at least 50 percent of its assets situated in that country. The Fund will
invest primarily in developed countries (for example, Japan, Canada and the
United Kingdom). In addition, the Fund may invest in securities of issuers whose
principal activities are in countries with emerging markets. The Fund defines an
emerging market country as any country the economy and market of which the World
Bank or the United Nations considers to be emerging or developing.
SMALL CAP EQUITY FUND
The Small Cap Equity Fund invests substantially all, and under normal market
conditions at least 65%, of its assets in the equity securities of smaller
companies (I.E., companies with market capitalizations of less than $1 billion)
which, in the Advisor's opinion, are undervalued for above-average capital
growth. Any remaining assets may be invested in the equity securities of
companies with larger market capitalizations which the Advisor believes are also
undervalued. The Fund may also invest in U.S. dollar denominated equity
securities of foreign issuers (including ADRs). 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 NRSROs. Investment grade
bonds include securities rated at
<PAGE>
9
least BBB by S&P or Baa by 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 may purchase securities on a "when-issued" basis and reserves the right
to engage in standby commitments.
GENERAL INVESTMENT POLICIES AND STRATEGIES
For temporary defensive purposes during periods when the Advisor determines that
market conditions warrant, each Fund except for the Small Cap Equity Fund (see
above for the temporary defensive policies of the Small Cap Equity Fund), may
invest up to 100% of its assets in money market instruments consisting of
securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities, custodial receipts involving U.S.
Treasury obligations, repurchase agreements, certificates of deposit, bankers'
acceptances, and time deposits issued by banks or savings and loan associations
and commercial paper rated in the highest rating category, and may hold a
portion of its assets in cash. A Fund may not be pursuing its investment
objective when it is engaged in temporary defensive investing.
In the event that a security owned by a Fund is downgraded below the stated
rating categories, the Advisor will review and take appropriate action with
regard to the security.
Each Fund may purchase securities issued by money market mutual funds. A Fund's
purchase of shares of other investment companies is limited by the Investment
Company Act of 1940 (the "1940 Act") and will ordinarily result in an additional
layer of charges and expenses.
Each Fund may engage in securities lending and will limit such practice to
33 1/3% of its total assets (including the value of the collateral).
Each Fund may borrow money for temporary or emergency purposes in an amount not
to exceed one-third of the value of its total assets. No Fund may purchase
additional securities while its outstanding borrowings exceed 5% of its assets.
It is a non-fundamental policy of each Fund to invest no more than 15% of its
net assets in illiquid securities. 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 Equity Funds may invest in money market instruments for liquidity purposes.
Each 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.
<PAGE>
10
INVESTMENT RISKS
ZERO COUPON OBLIGATIONS
Zero coupon obligations are sold at original issue discount and do not make
periodic payments. Zero coupon obligations may be subject to greater
fluctuations in value due to interest rate changes than interest bearing
obligations. A Fund will be required to include the imputed interest in zero
coupon obligations in its current income. Because each Fund distributes all of
its net investment income to investors, a Fund may have to sell portfolio
securities to distribute the income attributable to these obligations and
securities at a time when the Advisor would not have chosen to sell such
obligations or securities and which only result in a taxable gain or loss.
FOREIGN SECURITIES AND FOREIGN CURRENCY CONTRACTS
Investing in the securities of foreign companies and the utilization of forward
foreign currency contracts 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, political instability
which could affect U.S. investment in foreign countries and potential
restrictions of the flow of international capital and currencies. Foreign
companies may also be subject to less government regulation than U.S. companies.
Moreover, the dividends payable on the foreign securities may be subject to
foreign withholding taxes, thus reducing the net amount of income available for
distribution to the Fund's investors. Further, foreign securities often trade
with less frequency and volume than domestic securities and, therefore, may
exhibit greater price volatility. Changes in foreign exchange rates will affect,
favorably or unfavorably, the value of those securities which are denominated or
quoted in currencies other than the U.S. dollar.
By entering into forward foreign currency contracts, the International Equity
Fund will seek to protect the value of its investment securities against a
decline in the value of a currency. However, these forward foreign currency
contracts will not eliminate fluctuations in the underlying prices of the
securities. Rather, they simply establish a rate of exchange which one can
obtain at some future point in time. Although such contracts tend to minimize
the risk of loss due to a decline in the value of the hedged currency, also,
they tend to limit any potential gain which might result should the value of
such currency increase.
The International Equity Fund's investments in emerging markets can be
considered speculative, and therefore may offer higher potential for gains and
losses than investments in developed markets of the world. With respect to any
emerging country, there is the greater potential for nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments (including war) which
could affect adversely the economies of such countries or investments in such
countries. In addition, it may be difficult to obtain and enforce a judgment in
the courts of such countries. The economies of developing countries generally
are heavily dependent upon international trade and, accordingly, have been and
may continue to be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade.
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 a Fund invests will cause the net asset value of the Fund to
fluctuate.
Investments in small capitalization companies involve greater risk than is
customarily associated with larger, more established companies due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and the frequent lack of depth of management. The
securities of small companies are often traded over-the-counter and may not be
traded in volumes typical on a national
<PAGE>
11
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.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are subject to prepayment of the underlying
mortgages. During periods of declining interest rates, prepayment of mortgages
underlying these securities can be expected to accelerate. When the
mortgage-backed securities held by a Fund are prepaid, the Fund must reinvest
the proceeds in securities the yield of which reflects prevailing interest
rates, which may be lower than the prepaid security.
FIXED INCOME SECURITIES
The market value of a 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 a 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 a 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 a Fund's shares.
There is a risk that the current interest rate on floating and variable rate
instruments may not accurately reflect existing market interest rates.
INVESTMENT LIMITATIONS
The following investment limitations constitute fundamental policies of each
Fund. Fundamental policies cannot be changed with respect to a Fund without the
consent of the holders of a majority of the Fund's outstanding shares. The term
"majority of the outstanding shares" means the vote of (i) 67% or more of a
Fund's shares present at a meeting, if more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of a
Fund's outstanding shares, whichever is less.
Each Fund may not:
1. Purchase securities of any issuer (except securities issued or
guaranteed by the United States, its agencies or instrumentalities and
repurchase agreements involving such securities) if as a result more than
5% of the total assets of a Fund would be invested in the securities of
such issuer; provided, however, that a Fund may invest up to 25% of its
total assets without regard to this restriction as permitted by
applicable law.
2. Purchase any securities which would cause more than 25% of the total
assets of a Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry,
provided that this limitation does not apply to investments in
obligations issued or guaranteed by the U.S. Government, 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
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12
considered a separate industry; and (iii) supranational entities will be
considered to be a separate industry.
The foregoing percentages will apply at the time of the purchase of a security.
Additional investment limitations are set forth in the Statement of Additional
Information.
PERFORMANCE INFORMATION
From time to time, the Funds may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. The yield of a Fund refers to the annualized income generated by an
investment in that Fund over a specified 30-day period. The yield is calculated
by assuming that the income generated by the investment during that period is
generated over one year and is shown as a percentage of the investment.
The total return of a 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 a 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.
Each Fund may periodically compare its performance to other mutual funds tracked
by mutual fund rating services, to broad groups of comparable mutual funds or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each Fund cannot be purchased directly, but only through a Contract
offered through an insurance company separate account. Please refer to the
prospectus for the Contract for information on how to make investments and
redemptions. Shares of the Funds are sold in a continuous offering to separate
accounts of insurance companies to fund Contracts.
The separate accounts purchase and redeem Shares of each 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 each Fund's Shares is determined at the
regularly-scheduled close of normal trading on the NYSE (normally 4:00 p.m.,
Eastern time), each business day. Net asset value per share is calculated for
purchases and redemptions of Shares of each Fund by dividing the value of total
Fund assets, less liabilities (including Trust expenses, which are accrued
daily), by the total number of Shares of that Fund outstanding. Values of assets
in each 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
on each business day and paid monthly by the Bond Fund. Dividends from net
investment income (exclusive of capital gains) are
<PAGE>
13
declared and paid quarterly by each Equity Fund, except the International Equity
Fund. Dividends for the International Equity Fund are declared and paid
annually. Each Fund's net realized capital gains (including net short-term
capital gains) are distributed at least annually. Net income for dividend
purposes consists of (i) interest accrued and original issue discount earned on
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 Funds will be reduced by the amount of any
dividend or distribution. Dividends and distributions are paid in the form of
additional Shares of the same Fund.
TAX INFORMATION
The following discussion is only a brief summary of the federal income tax
consequences to the Funds and their 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.
Each 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").
As a RIC, each 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, each 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 a Fund will determine its federal income tax liability with
respect to distributions from that Fund pursuant to the special rules of
Subchapter L of the Code.
Although the Trust intends that it and the Funds 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 or Funds incurring such
liability will be adversely affected. In addition, Funds investing in foreign
securities may be subject to foreign taxes. These taxes would reduce the
investment performance of such Funds.
Each 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 each 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 a 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 a 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 a 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.
<PAGE>
14
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, the
Trustees of the Trust were to conclude that separate funds should be established
for variable life and variable annuity separate accounts, variable life
insurance policyowners and variable annuity contractowners would no longer have
the economies of scale resulting from a larger combined fund. The Trust pays its
expenses, including fees of its service providers, audit and legal expenses,
expenses of preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering the Shares under
federal and state securities laws, pricing, insurance expenses, litigation and
other extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
BOARD OF TRUSTEES
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described below, certain
companies provide essential management services to the Trust.
INVESTMENT ADVISOR
STI Capital Management, N.A. ("STI Capital" or the "Advisor") serves as the
Advisor to the Funds. As of December 31, 1997, STI Capital had discretionary
management authority with respect to assets of approximately $13.7 billion. The
principal business address of the Advisor 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 $58
billion as of December 31, 1997. SunTrust ranks among the twenty five largest
U.S. banking companies. Its three principal subsidiaries--operating in Florida,
Georgia, and Tennessee--provide a wide range of personal and corporate banking,
trust, and investment services through more than 600 locations in the
three-state area. Total discretionary assets under management with SunTrust
Banks, Inc. equalled approximately $67.4 billion as of December 31, 1997.
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 Funds it advises and continuously reviews,
supervises and administers its Funds' 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. INVESTMENTS IN THE FUNDS INVOLVE RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL VALUES WILL
FLUCTUATE AND SHARES AT REDEMPTION MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. THERE IS NO GUARANTEE THAT ANY STI CLASSIC VARIABLE TRUST FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to all Funds, the Advisor may
execute brokerage or other agency transactions through affiliates of the
Advisor.
For the services provided and expenses incurred pursuant to the Advisory
Agreement, STI Capital is entitled to receive advisory fees computed daily and
paid monthly at the annual rate of .74%, 1.15%, .80%, 1.15%, 1.25% and 1.15% of
the average daily net assets 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, respectively.
From time to time, the Advisor may voluntarily waive advisory fees payable by a
Fund. Currently, the Advisor has agreed to voluntary reductions in its fees at
the amounts set forth in the Expense Summary. Voluntary reductions of fees may
be terminated at any time.
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15
PORTFOLIO MANAGERS
Mr. L. Earl Denney has been responsible for the day-to-day management of the
Investment Grade Bond Fund since its inception. Mr. Denney has served as
Managing Director of STI Capital since 1983.
Mr. Anthony Gray has been responsible for the day-to-day management of the
Capital Growth Fund since its inception. Mr. Gray has served as Chief Executive
Officer and Chief Investment Officer of STI Capital since 1980.
Mr. Mills Riddick has been responsible for the day-to-day management of the
Value Income Stock Fund since its inception. Mr. Riddick has served as Managing
Director of STI Capital from 1989.
Mr. Elliott A. Perny has been responsible for the day-to-day management of the
Mid-Cap Equity Fund since October 1, 1996. Mr. Perny has served as Managing
Director of STI Capital since 1992 and has served as a portfolio manager with
STI Capital since 1982.
Mr. Ned Dau has been responsible for the day-to-day management of the
International Equity Fund since May 1, 1997. Prior to joining STI Capital, he
was an international equity analyst for American Express Financial Advisors from
1995 to 1997 and the Principal Financial Group from 1992 to 1995.
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.
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 each may perform the services for the STI Classic Variable
Trust contemplated by their agreements described in this Prospectus without
violation of applicable banking laws or regulations. However, future changes in
legal requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent the Advisors from continuing to perform services for 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 agreements 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 Investments"), distributes the Funds' 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.
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16
With respect to each of the Funds, 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.
ADMINISTRATION
SEI Fund Resources (the "Administrator") 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.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .12% of the Trust's average aggregate daily net
assets on the first $1 billion, .09% of the assets in excess of $1 billion but
less than $5 billion, .07% of the assets in excess of $5 billion but less than
$8 billion, .065% of the assets in excess of $8 billion but less than $10
billion, and .06% 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.
CUSTODIAN
The Bank of New York, One Wall Street, New York, New York serves as Custodian of
the assets of each Fund. The Custodian holds cash, securities and other assets
of the Trust as required by the 1940 Act.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, serves as legal counsel
to the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants to the Trust are Arthur Andersen LLP,
Philadelphia, Pennsylvania.
OTHER INFORMATION
VOTING RIGHTS
Each Share held entitles the investor of record to one vote. Each Fund will vote
separately on matters relating solely to that 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.
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17
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 their 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.
ASSET-BACKED SECURITIES -- Asset-backed securities are securities secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the U.S. Government or
its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts and for a
certain period by a letter of credit issued by a financial institution (such as
a bank or insurance company) unaffiliated with the issuers of such securities.
The purchase of asset-backed securities raises risk considerations peculiar to
the financing of the instruments underlying such securities. For example, there
is a risk that another party could acquire an interest in the obligations
superior to that of the holders of the asset-backed securities. There also is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on those securities. Asset-backed
securities entail prepayment risk, which may vary depending on the type of
asset, but is generally less than the prepayment risk associated with
mortgage-backed securities. In addition, credit card receivables are unsecured
obligations of the card holder.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time
drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used
by corporations to finance the shipment and storage of goods. Maturities are
generally six months or less.
CERTIFICATES OF DEPOSIT -- Certificates of deposit are interest bearing
instruments with a specific maturity. They are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
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.
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18
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics similar to both fixed
income and equity securities. Because of the conversion feature, the market
value of a convertible security tends to move with the market value of the
underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
CORPORATE DEBT OBLIGATIONS -- Debt instruments issued by corporations with
maturities exceeding 270 days. Such instruments may include putable corporate
bonds and zero coupon bonds.
CUSTODIAL RECEIPTS -- Interests in separately traded interest and principal
component parts of U.S. Treasury obligations that are issued by banks or
brokerage firms and are created by depositing U.S. Treasury obligations into a
special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGERs"), and
Certificates of Accrual on Treasury Securities ("CATS").
Receipts are sold as zero coupon securities which means that they are sold at a
substantial discount and redeemed at face value at their maturity date without
interim cash payments of interest or principal. This discount is accreted over
the life of the security, and such accretion will constitute the income earned
on the security for both accounting and tax purposes. Because of these features,
such securities may be subject to greater interest rate volatility than interest
paying investments. See "Zero Coupon Obligations."
EUROPEAN DEPOSITARY RECEIPTS ("EDRs") -- EDRs are securities, typically issued
by a non-U.S. financial institution, that evidence ownership interests in a
security or a pool of securities issued by either a U.S. or foreign issuer. EDRs
may be available for investment through "sponsored" or "unsponsored" facilities.
See also "ADRs."
FORWARD FOREIGN CURRENCY CONTRACTS -- A forward foreign currency contract
involves an obligation to purchase or sell a specific currency amount at a
future date, agreed upon by the parties, at a price set at the time of the
contract. A Fund may also enter into a contract to sell, for a fixed amount of
U.S. dollars or other appropriate currency, the amount of foreign currency
approximating the value of some or all of a Fund's securities denominated in
such foreign currency.
At the maturity of a forward contract, a Fund may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader,
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. A Fund may realize a gain or loss from currency transactions.
A Fund may purchase and write put and call options on foreign currencies (traded
on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currency written by a 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 a Fund, the Fund will establish a segregated account with its
custodian bank consisting of cash or liquid securities in an amount equal to the
amount the Fund would be required to pay upon exercise of the put.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. A Fund may use futures
contracts and related options for bona fide hedging purposes, to offset changes
in the value of securities held or expected to be acquired, to minimize
fluctuations in foreign currencies, or to gain exposure to a particular market
or instrument. A Fund will minimize the risk that it will be unable to close out
a futures contract by only entering into futures contracts which are traded on
national futures exchanges.
<PAGE>
19
Stock index futures are futures contracts for various stock indices that are
traded on registered securities exchanges. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates, (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures, (3) there may not be a liquid secondary market
for a futures contract or option, (4) trading restrictions or limitations may be
imposed by an exchange, and (5) government regulations may restrict trading in
futures contracts and futures options.
ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be
disposed of within seven days at approximately the price at which they are being
carried on a Fund's books. An illiquid security includes a demand instrument
with a demand notice period exceeding seven days, where there is no secondary
market for such security, and repurchase agreements with durations (or
maturities) over seven days in length.
MEDIUM TERM NOTES -- Periodically or continuously offered corporate or agency
debt that differs from traditionally underwritten corporate bonds only in the
process by which they are issued.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional thirty-year fixed rate mortgages, graduated payment
mortgages, and adjustable rate mortgages. During periods of declining interest
rates, prepayment of mortgages underlying mortgage-backed securities can be
expected to accelerate. Prepayment of mortgages which underlie securities
purchased at a premium often results in capital losses, while prepayment of
mortgages purchased at a discount often results in capital gains. Because of
these unpredictable prepayment characteristics, it is often not possible to
predict accurately the average life or realized yield of a particular issue.
GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are GNMA, Fannie Mae and FHLMC. Fannie Mae and FHLMC obligations are
not backed by the full faith and credit of the U.S. Government as GNMA
certificates are, but Fannie Mae securities are supported only by the credit of
the instrumentality and FHLMC securities are supported by the instrumentalities'
right to borrow from the U.S. Treasury. GNMA, Fannie Mae and FHLMC each
guarantees timely distributions of interest to certificate holders. GNMA and
Fannie Mae also each guarantees timely distributions of scheduled principal.
FHLMC has in the past guaranteed only the ultimate collection of principal of
the underlying mortgage loan; however, FHLMC now issues mortgage-backed
securities (FHLMC Gold PCs) which also guarantee timely payment of monthly
principal reductions. Government and private guarantees do not extend to the
securities' value, which is likely to vary inversely with fluctuations in
interest rates.
PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by
a non-governmental entity, such as a trust. These securities include
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs") that are rated in one of the top two rating categories.
While they are generally structured with one or more types of credit
enhancement, private pass-through securities typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): CMOs are debt obligations or
multiclass pass-through certificates issued by agencies or instrumentalities of
the U.S. Government or by private originators or investors in mortgage loans. In
a CMO, series of bonds or certificates are usually issued in multiple classes.
Principal and interest paid on the underlying mortgage assets may be allocated
among the several classes of a series of a CMO in a variety of ways. Each class
of a CMO, often referred to as a "tranche," is issued with a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal payments on the
<PAGE>
20
underlying mortgage assets may cause CMOs to be retired substantially earlier
then their stated maturities or final distribution dates, resulting in a loss of
all or part of any premium paid.
REMICS: A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code and invests in certain mortgages principally secured by
interests in real property. Investors may purchase beneficial interests in
REMICs, which are known as "regular" interests, or "residual" interests.
Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by
Fannie Mae or FHLMC represent beneficial ownership interests in a REMIC trust
consisting principally of mortgage loans or Fannie Mae, FHLMC or GNMA-guaranteed
mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC
guarantees the timely payment of interest, and also guarantees the payment of
principal as payments are required to be made on the underlying mortgage
participation certificates. Fannie Mae REMIC Certificates are issued and
guaranteed as to timely distribution of principal and interest by Fannie Mae.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments and is thus termed an interest-only class ("IO"), while
the other class may receive all of the principal payments and thus is termed the
principal-only class ("PO"). The value of IOs tends to increase as rates rise
and decrease as rates fall; the opposite is true of POs. SMBs are extremely
sensitive to changes in interest rates because of the impact thereon of
prepayment of principal on the underlying mortgage securities. The market for
SMBs is not as fully developed as other markets; SMBs therefore may be illiquid.
RISK FACTORS: Due to the possibility of prepayments of the underlying mortgage
instruments, mortgage-backed securities generally do not have a known maturity.
In the absence of a known maturity, market participants generally refer to an
estimated average life. An average life estimate is a function of an assumption
regarding anticipated prepayment patterns, based upon current interest rates,
current conditions in the relevant housing markets and other factors. The
assumption is necessarily subjective, and thus different market participants can
produce different average life estimates with regard to the same security. There
can be no assurance that estimated average life will be a security's actual
average life.
OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities
established through the joint participation of several governments, and include
the Asian Development Bank, the Inter-American Development Bank, International
Bank for Reconstruction and Development (World Bank), African Development Bank,
European Economic Community, European Investment Bank and the Nordic Investment
Bank.
OPTIONS ON CURRENCIES -- A Fund may purchase and write put and call options on
foreign currencies (traded on U.S. and foreign exchanges or over-the-counter
markets) to manage the Fund's exposure to changes in dollar exchange rates. Call
options on foreign currency written by a 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 a Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash or
liquid securities in an amount equal to the amount the Fund would be required to
pay upon exercise of the put.
PAY-IN-KIND SECURITIES -- Pay-in-kind securities are bonds or preferred stock
that pay interest or dividends in the form of additional bonds or preferred
stock.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price on an agreed upon date within a number of days
from the date of purchase. The custodian will hold the security as collateral
for the repurchase agreement. A Fund bears a risk of loss in the event the other
party defaults on its obligations and the Fund is delayed or prevented from
exercising its right to dispose of the collateral or if the Fund realizes a loss
on the sale of the collateral. A Fund will enter into repurchase agreements only
with financial institutions deemed to present minimal risk of bankruptcy during
the term of the agreement based on established guidelines. Repurchase agreements
are considered loans under the 1940 Act.
<PAGE>
21
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933
or an exemption from registration. Rule 144A securities are securities that have
not been registered under the Securities Act of 1933 but which may be traded
between certain institutional investors including investment companies. The
Trust's Board of Trustees is responsible for developing guidelines and
procedures for determining the liquidity of restricted securities, and 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 they
are offered to the public.
SECURITIES LENDING -- In order to generate additional income, a Fund may lend
securities which it owns pursuant to agreements requiring that the loan be
continuously secured by collateral consisting of cash, securities of the U.S.
Government or its agencies equal to at least 100% of the market value of the
securities lent. A Fund continues to receive interest on the securities lent
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
STANDBY COMMITMENTS AND PUTS -- Securities subject to standby commitments or
puts permit the holder thereof to sell the securities at a fixed price prior to
maturity. Securities subject to a standby commitment or put may be sold at any
time at the current market price. However, unless the standby commitment or put
was an integral part of the security as originally issued, it may not be
marketable or assignable; therefore, the standby commitment or put would only
have value to the Fund owning the security to which it relates. In certain
cases, a premium may be paid for a standby commitment or put, which premium will
have the effect of reducing the yield otherwise payable on the underlying
security. A Fund will limit standby commitment or put transactions to
institutions believed to present minimal credit risk.
TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market. Time deposits are considered to be illiquid
securities.
U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the
U.S. Government, including, among others, the Federal Farm Credit Bank, the
Federal Housing Administration and the Small Business Administration, and
obligations issued or guaranteed by instrumentalities of the U.S. Government,
including, among others, 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 a Fund's shares.
U.S. GOVERNMENT SUBSIDIARY CORPORATIONS -- Securities of wholly-owned
corporations of the U.S. Government (within the Department of Housing and Urban
Development) which are secured by the full faith and credit of the U.S.
Government (E.G., GNMA).
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
<PAGE>
22
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.
A Fund will maintain with the custodian a separate account with liquid
securities or cash in an amount at least equal to these commitments. The
interest rate realized on these securities is fixed as of the purchase date and
no interest accrues to a Fund before settlement. These securities are subject to
market fluctuation due to changes in market interest rates and it is possible
that the market value at the time of settlement could be higher or lower than
the purchase price if the general level of interest rates has changed. Although
a Fund generally purchases securities on a when-issued or forward commitment
basis with the intention of actually acquiring securities for its portfolio, a
Fund may dispose of a when-issued security or forward commitment prior to
settlement if it deems appropriate.
ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do
not bear any interest, but instead are issued at a deep discount from par. The
value of a zero coupon obligation increases over time to reflect the interest
accreted. Such obligations will not result in the payment of interest until
maturity, and will have greater price volatility than similar securities that
are issued at par and pay interest periodically.
<PAGE>
<TABLE>
<S> <C> <C>
STI CLASSIC FUNDS ORGANIZATIONAL OVERVIEW
A-1
* 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
The Bank of New York One Wall Street
New York, NY 10286
* LEGAL COUNSEL
Morgan, Lewis & Bockius LLP 2000 One Logan Square
Philadelphia, PA 19103
* INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP 1601 Market Street
Philadelphia, PA 19103
</TABLE>
<PAGE>
STI CLASSIC VARIABLE TRUST
INVESTMENT ADVISOR:
STI CAPITAL MANAGEMENT, N.A.
This Statement of Additional Information is not a prospectus. It is intended
to provide additional information regarding the activities and operations of the
Trust and should be read in conjunction with the Trust's prospectus dated May 1,
1998. Prospectuses may be obtained through the Distributor, SEI Investments
Distribution Co., Oaks, Pennsylvania 19456.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE TRUST.................................................................. B-2
DESCRIPTION OF PERMITTED INVESTMENTS....................................... B-2
INVESTMENT LIMITATIONS..................................................... B-10
THE INVESTMENT ADVISOR..................................................... B-11
THE ADMINISTRATOR.......................................................... B-12
THE DISTRIBUTOR............................................................ B-13
TRUSTEES AND OFFICERS OF THE TRUST......................................... B-13
COMPUTATION OF YIELD....................................................... B-15
CALCULATION OF TOTAL RETURN................................................ B-15
PURCHASE AND REDEMPTION OF SHARES.......................................... B-16
NET ASSET VALUE--PRICING OF PORTFOLIO SECURITIES........................... B-17
TAXES...................................................................... B-17
FUND TRANSACTIONS.......................................................... B-18
TRADING PRACTICES AND BROKERAGE............................................ B-19
DESCRIPTION OF SHARES...................................................... B-21
SHAREHOLDER LIABILITY...................................................... B-21
5% AND 25% SHAREHOLDERS.................................................... B-22
LIMITATION OF TRUSTEES' LIABILITY.......................................... B-23
YEAR 2000.................................................................. B-23
EXPERTS.................................................................... B-23
APPENDIX................................................................... A-1
FINANCIAL STATEMENTS....................................................... F-8
</TABLE>
May 1, 1998
<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"). Each share of each Fund represents an equal
proportionate interest in that series. Shares of the Trust are issued and
redeemed only in connection with investments in and payments under variable
annuity contracts and variable life insurance policies of various life insurance
companies. This Statement of Additional Information relates to the Investment
Grade Bond Fund, Capital Growth Fund, Value Income Stock Fund, Mid-Cap Equity
Fund, International Equity Fund, and Small Cap Equity Fund. These various series
are collectively referred to herein as the "Funds."
DESCRIPTION OF PERMITTED INVESTMENTS
VARIABLE RATE MASTER DEMAND NOTES
Variable rate master demand notes may or may not be backed by bank letters
of credit. These notes permit the investment of fluctuating amounts at varying
market rates of interest pursuant to direct arrangements between a Fund, as
lender, and the borrower. Such notes provide that the interest rate on the
amount outstanding varies on a daily, weekly or monthly basis depending upon a
stated short-term interest rate index. Both the lender and the borrower have the
right to reduce the amount of outstanding indebtedness at any time. There is no
secondary market for the notes and it is not generally contemplated that such
instruments will be traded. The quality of the note or the underlying credit
must, in the opinion of the Advisor, be equivalent to the ratings applicable to
permitted investments for a Fund. The Advisor will monitor on an ongoing basis
the earning power, cash flow and liquidity ratios of the issuers of such
instruments and will similarly monitor the ability of an issuer of a demand
instrument to pay principal and interest on demand.
STRIPS
Separately Traded Interest and Principal Securities ("STRIPS") are component
parts of U.S. Treasury Securities and are traded through the Federal Book-Entry
System. The Advisor will purchase only STRIPS that it determines are liquid or,
if illiquid, do not violate a Fund's investment policy concerning investments in
illiquid securities. While there is no limitation on the percentage of a Fund's
assets that may be comprised of STRIPS, the Advisor will monitor the level of
such holdings to avoid the risk of impairing investors' redemption rights and of
deviations in the value of the shares of the Funds.
U.S. GOVERNMENT AGENCY SECURITIES
Agencies of the U.S. Government which issue U.S. Government Agency
Securities 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 U.S. 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 U.S. Treasury (E.G., GNMA), others are supported by the right of
the issuer to borrow from the U.S. Treasury and still others are supported only
by the credit of the instrumentality (E.G., Fannie Mae). 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.
B-2
<PAGE>
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities issued or guaranteed by U.S.
Government agencies or instrumentalities such as GNMA, Fannie Mae, and FHLMC.
Obligations of GNMA are backed by the full faith and credit of the U.S.
Government. Obligations of Fannie Mae and FHLMC are not backed by the full faith
and credit of the U.S. Government but are considered to be of high quality since
they are considered to be instrumentalities of the United States. The market
value and interest yield of these mortgage-backed securities can vary due to
market interest rate fluctuations and early prepayments of underlying mortgages.
These securities represent ownership in a pool of federally insured mortgage
loans with a maximum maturity of 30 years. However, due to scheduled and
unscheduled principal payments on the underlying loans, these securities have a
shorter average maturity and, therefore, less principal volatility than a
comparable 30-year bond. Since prepayment rates vary widely, it is not possible
to accurately predict the average maturity of a particular mortgage-backed
security. The scheduled monthly interest and principal payments relating to
mortgages in the pool will be "passed through" to investors. Government
mortgage-backed securities differ from conventional bonds in that principal is
paid back to the certificate holders over the life of the loan rather than at
maturity. As a result, there will be monthly scheduled payments of principal and
interest. In addition, there may be unscheduled principal payments representing
prepayments on the underlying mortgages. Although these securities may offer
yields higher than those available from other types of U.S. Government
securities, mortgage-backed securities may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of
these securities likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
A Fund may also invest in privately issued mortgage-backed securities. Two
principal types of mortgage-backed securities are collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"),
which are rated in one of the two highest categories by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"). CMOs are
securities collateralized by mortgages, mortgage pass-throughs, mortgage
pay-through bonds (bonds representing an interest in a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued with
a number of classes or series which have different expected maturities.
Investors purchasing such CMOs are credited with their portion of the scheduled
payments of interest and principal on the underlying mortgages plus all
unscheduled prepayments of principal based on a predetermined priority schedule.
Accordingly, the CMOs in the longer maturity series are less likely than other
mortgage pass-throughs to be prepaid prior to their stated maturity. Although
some of the mortgages underlying the CMOs may be supported by various types of
insurance, and some CMOs may be backed by GNMA certificates or other mortgage
pass-throughs issued or guaranteed by U.S. Government agencies or
instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
DETERMINING MATURITIES OF MORTGAGE-BACKED SECURITIES
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
Advisor believes that the estimated average life is the most appropriate measure
of the maturity of a mortgage-backed security. Accordingly, in order to
determine whether such security is a permissible investment for the Funds, it
will be deemed to have a remaining maturity equal to
B-3
<PAGE>
its average life as estimated by the Advisor. An average life estimate is a
function of an assumption regarding anticipated prepayment patterns. The
assumption is based upon current interest rates, current conditions in the
relevant housing markets and other factors. The assumption is necessarily
subjective, and thus different market participants could produce somewhat
different average life estimates with regard to the same security. There can be
no assurance that the average life as estimated by the Advisor will be the
actual average life.
ASSET-BACKED SECURITIES
Asset-backed securities include company receivables, truck and auto loans,
leases, and credit card receivables. These issues may be traded over-the-counter
and typically have a short-intermediate maturity structure depending on the
paydown characteristics of the underlying financial assets which are passed
through to the security holder.
REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a person (E.G., a Fund)
obtains a security and simultaneously commits to return the security to the
seller (a primary securities dealer as recognized by the Federal Reserve Bank of
New York or a national member bank as defined in Section 3(d)(1) of the Federal
Deposit Insurance Act, as amended) at an agreed upon price (including principal
and interest) on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the underlying security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
Repurchase agreements are considered to be loans by a Fund for purposes of
its investment limitations. The repurchase agreements entered into by a 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 a Fund, the Custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, a Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
the sale including accrued interest are less than the resale price provided in
the agreement including interest. In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, a Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if a Fund is treated as an unsecured creditor and required to return
the underlying security to the seller's estate.
STANDBY COMMITMENTS AND PUTS
The purpose of engaging in transactions involving puts is to maintain
flexibility and liquidity to permit a Fund to meet redemptions and remain as
fully invested as possible in debt securities. The right to put securities
depends on the writer's ability to pay for the securities at the time the put is
exercised. Put transactions by the Funds are generally limited to institutions
which the Advisor believes present minimal credit risks, and the Advisor would
use its best efforts to initially determine and continue to monitor the
financial strength of the sellers of the options by evaluating their financial
statements and such other information as is available in the marketplace. It
may, however be difficult to monitor the financial strength of the writers
because adequate current financial information may not be available. In the
event that any writer is unable to honor a put for financial reasons, a Fund
would be a general creditor (I.E., on a parity with all other unsecured
creditors) of the writer. Furthermore, particular provisions of the contract
between a Fund and the writer may excuse the writer from repurchasing the
securities; for example, a change in the published rating of the underlying
securities or any similar event that has an adverse effect on the issuer's
credit or a provision in the contract that the put will not be exercised except
in certain
B-4
<PAGE>
special cases, for example, to maintain portfolio liquidity. A Fund could,
however, at any time sell the underlying portfolio security in the open market
or wait until the portfolio security matures, at which time it should realize
the full par value of the security.
The securities purchased subject to a put, may be sold to third persons at
any time, even though the put is outstanding, but the put itself, unless it is
an integral part of the security as originally issued, may not be marketable or
otherwise assignable. Therefore, the put would have value only to a Fund. Sale
of the securities to third parties or lapse of time with the put unexercised may
terminate the right to put the securities. Prior to the expiration of any put
option, a Fund could seek to negotiate terms for the extension of such an
option. If such a renewal cannot be negotiated on terms satisfactory to a Fund,
the Fund could, of course, sell the portfolio security. The maturity of the
underlying security will generally be different from that of the put. There will
be no limit to the percentage of portfolio securities that a Fund may purchase
subject to a standby commitment or put, but the amount paid directly or
indirectly for all standby commitments or puts which are not integral parts of
the security as originally issued held in a Fund will not exceed 1/2 of 1% of
the value of the total assets of such Fund calculated immediately after any such
put is acquired.
OBLIGATIONS OF SUPRANATIONAL AGENCIES
Obligations of supranational agencies include those issued or guaranteed by
the Asian Development Bank, Inter-American Development Bank, International Bank
for Reconstruction and Development (World Bank), African Development Bank,
European Coal and Steel Community, European Economic Community, European
Investment Bank and Nordic Investment Bank.
WHEN-ISSUED SECURITIES
For securities purchased on a when-issued basis, delivery and payment
normally take place within 45 days after the date of commitment to purchase. A
Fund will only make commitments to purchase obligations on a when-issued basis
with the intention of actually acquiring the securities, but may sell them
before the settlement date. The when-issued securities are subject to market
fluctuation, and no interest accrues on these securities to the purchaser during
this period. The payment obligation and the interest rate that will be received
on these securities are each fixed at the time the purchaser enters into the
commitment. Purchasing when-issued securities entails leveraging and can involve
a risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the Custodian, and a Fund will
maintain cash or liquid securities in an amount at least equal in value to the
Fund's commitments to purchase when-issued securities. If the value of these
assets declines, a Fund will place additional liquid securities in the account
on a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
SECURITIES LENDING
Each Fund may lend securities pursuant to agreements which require that the
loans be continuously secured by collateral, at all times equal to 100% of the
market value of the loaned securities, which consists of: cash, securities of
the U.S. Government or its agencies, or any combination of cash and such
securities. Such loans will not be made if, as a result, the aggregate amount of
all outstanding securities loans for a Fund exceed one-third of the value of the
Fund's total assets (including the value of the collateral) taken at fair market
value. A Fund will continue to receive interest on the securities lent while
simultaneously earning interest on the investment of the cash collateral in U.S.
Government securities. However, a Fund will normally pay lending fees to such
broker-dealers and related expenses from the interest earned on invested
collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail
B-5
<PAGE>
financially. However, loans are made only to borrowers deemed by the Advisor to
be of good standing and when, in the judgment of the Advisor, the consideration
which can be earned currently from such securities loans justifies the attendant
risk. Any loan may be terminated by either party upon reasonable notice to the
other party. The Funds may use the Distributor or a broker-dealer affiliate of
the Advisor as a broker in these transactions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with or for the account of a broker or custodian to
initiate and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Deposit requirements on futures contracts
customarily range upward from less than 5% of the value of the contract being
traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy the required margin, payment of
additional "variation" margin will be required. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on their margin deposits.
Traders in futures contracts and related options may be broadly classified
as either "hedgers" or "speculators." Hedgers use the futures markets primarily
to offset unfavorable changes in the value of securities otherwise held or
expected to be acquired for investment purposes. Speculators are less inclined
to own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Funds intend to use futures contracts
and related options only for bona fide hedging purposes.
Regulations of the Commodity Futures Trading Commission applicable to the
Funds require that the futures transactions and related options constitute bona
fide hedging transactions, except that the International Equity Fund may enter
into such transactions for other than bona fide hedging purposes if the
aggregate initial margin and premiums required to establish such positions do
not exceed five percent of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into. The Funds will only sell futures contracts to
protect securities they own against price declines or purchase contracts to
protect against an increase in the price of securities they intend to purchase.
As evidence of this hedging interest, each Fund expects that approximately 75%
of its futures contract purchases will be "completed," that is, equivalent
amounts of related securities will have been purchased or are being purchased by
the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
and options on futures contracts could be used to control the Funds' exposure to
market fluctuations, the use of futures contracts may be a more effective means
of hedging this exposure. While the Funds will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities.
B-6
<PAGE>
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
a Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, the Funds may be required to make delivery of the instruments
underlying futures contracts they hold. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge it.
The Funds will minimize the risk that they will be unable to close out a
futures contract by entering into futures contracts only if they are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts can be substantial, due both
to the low margin deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small price movement in a
futures contract may result in immediate and substantial loss (or gain) to a
Fund. For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. However,
because the Funds will be engaged in futures transactions only for hedging
purposes, the Advisor does not believe that the Funds will generally be subject
to the risks of loss frequently associated with futures transactions. The Funds
presumably would have sustained comparable losses if, instead of the futures
contract, they had invested in the underlying financial instrument and sold it
after the decline. The risk of loss from the purchase of options is less as
compared with the purchase or sale of futures contracts because the maximum
amount at risk is the premium paid for the option.
Utilization of futures transactions by the Funds does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the fund securities being hedged. It is also
possible that the Funds could both lose money on futures contracts and
experience a decline in value of its fund securities. There is also the risk of
loss by the Funds of margin deposits in the event of the bankruptcy of a broker
with whom the Funds have an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
OPTIONS
A Fund may write call options on a covered basis only, and will not engage
in option writing strategies for speculative purposes. A call option gives the
purchaser of such option the right to buy, and the writer, in this case the
Fund, the obligation to sell the underlying security at the exercise price
during the option period. The advantage to a Fund of writing covered calls is
that the Fund receives a premium which is
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<PAGE>
additional income. However, if the security rises in value, the Fund may not
fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction is one in which a Fund, when
obligated as a writer of an option, terminates its obligation by purchasing an
option of the same series as the option previously written.
A closing purchase transaction cannot be effected with respect to an option
once the option writer has received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable a Fund
to write another call option on the underlying security with either a different
exercise price, expiration date or both. A Fund may realize a net gain or loss
from a closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security. Conversely, a gain resulting from a
decline in the market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term
capital gain in the amount of the premium on the option, less the commission
paid. Such a gain, however, may be offset by depreciation in the market value of
the underlying security during the option period. If a call option is exercised,
a Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between the cost of the underlying security, and the
proceeds of the sale of the security plus the amount of the premium on the
option, less the commission paid.
The market value of a call option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.
The Funds will write call options only on a covered basis, which means that
a Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, a
Fund would be required to continue to hold a security which it might otherwise
wish to sell, or deliver a security it would want to hold. Options written by a
Fund will normally have expiration dates between one and nine months from the
date written. The exercise price of a call option may be below, equal to or
above the current market value of the underlying security at the time the option
is written.
FOREIGN INVESTMENTS
Foreign investments include equity securities of foreign entities,
obligations of foreign branches of U.S. banks and of foreign banks, including,
without limitation, European Certificates of Deposit, European Time Deposits,
European Bankers' Acceptances, Canadian Time Deposits and Yankee Certificates of
Deposit, and investments in Canadian Commercial Paper, foreign securities, and
American Depositary Receipts ("ADRs"). These instruments may subject a Fund to
investment risks that differ in some respects from those related to investments
in obligations of U.S. domestic issuers. Such risks include future adverse
political and economic developments, the possible imposition of withholding
taxes on interest or other income, possible seizure, nationalization, or
expropriation of foreign deposits, the possible establishment of exchange
controls or taxation at the source, greater fluctuations in value due to changes
in exchange
B-8
<PAGE>
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, a 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 a Fund that
invests in foreign securities, when included in appropriate amounts in a
portfolio otherwise consisting of domestic securities, may provide a source of
increased diversification. Each Fund seeks increased diversification by
combining securities from various countries and geographic areas that offer
different investment opportunities and are affected by different economic
trends. The international investments of the Fund may reduce the effect that
events in any one country or geographic area will have on its investment
holdings. Of course, negative movement by a Fund's investments in one foreign
market represented in its portfolio may offset potential gains from a Fund's
investments in another country's markets.
RESTRICTED SECURITIES
Restricted securities are securities that may not be sold to the public
without registration under the Securities Act of 1933 (the "1933 Act") absent an
exemption from registration. Permitted investments for a Fund include Restricted
Securities, and a 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
resale 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 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.
INVESTMENT COMPANY SHARES
Investment companies typically incur fees that are separate from those fees
incurred directly by a Fund. A Fund's purchase of such investment company
securities results in the layering of expenses, such that Investors would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees.
OTHER INVESTMENTS
The Trust is not prohibited from investing in obligations of banks which are
clients of SEI Investments Company ("SEI Investments"), the parent company of
the Administrator and the Distributor. However, the purchase of shares of the
Trust by such banks or by their customers will not be a consideration in
determining which bank obligations the Trust will purchase. The Trust will not
purchase obligations issued by the Advisor.
Investors will receive written notification at least thirty days prior to
any change in a Fund's investment objective.
B-9
<PAGE>
THE EURO
On January 1, 1999, the European Monetary Union (EMU) plans to implement a
new currency unit, the Euro, which is expected to reshape financial markets,
banking systems and monetary policies in Europe and other parts of the world.
The countries initially expected to convert or tie their currencies to the Euro
include Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal and Spain. Implementation of this plan will mean that
financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in Euros.
Approximately 46% of the stock exchange capitalization of the total European
market may be reflected in Euros, and participating governments will issue their
bonds in Euros. Monetary policy for participating countries will be uniformly
managed by a new central bank, the European Central Bank (ECB).
Although it is not possible to predict the impact of the Euro implementation
plan on a Fund, the transition to the Euro may change the economic environment
and behavior of investors, particularly in European markets. For example,
investors may begin to view those countries participating in the EMU as a single
entity, and the Adviser may need to adapt its investment strategy accordingly.
The process of implementing the Euro also may adversely affect financial markets
world-wide and may result in changes in the relative strength and value of the
U.S. dollar or other major currencies, as well as possible adverse tax
consequences. The transition to the Euro is likely to have a significant impact
on fiscal and monetary policy in the participating countries and may produce
unpredictable effects on trade and commerce generally. These resulting
uncertainties could create increased volatility in financial markets world-wide.
HIGH-YIELD SECURITIES
High-yield, lower rated bonds involve greater risk of default or price
declines than investments in investment grade securities (E.G., securities rated
BBB or higher by S&P or Baa or higher by Moody's) due to changes in the issuer's
creditworthiness. Further, the market for high risk, high-yield securities may
be thinner and less active, causing market volatility and limited liquidity in
the secondary market. This may limit the ability of a Fund to sell these
securities at their fair market value either to meet redemption requests or in
response to changes in the economy or the financial markets. Market prices for
high-risk, high-yield securities may also be affected by investors' perception
of the issuer's credit quality, the outlook for economic growth and legislative
and regulatory developments. Thus, prices for these securities may move
independently of interest rates and the overall bond market.
INVESTMENT LIMITATIONS
The following are fundamental policies of each Fund and cannot be changed
with respect to a Fund without the consent of the holders of a majority of a
Fund's outstanding shares.
A Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer.
2. Invest in companies for the purpose of exercising control.
3. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding one-third of the value of total assets. Any borrowing
will be done from a bank and, to the extent that such borrowing exceeds 5%
of the value of the Fund's assets, asset coverage of at least 300% is
required. In the event that such asset coverage shall at any time fall below
300%, the Fund shall, within three days thereafter or such longer period as
the Securities and Exchange Commission ("SEC") may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. This borrowing
provision is included solely to facilitate the orderly sale of portfolio
securities to accommodate heavy redemption requests if they should occur and
is not for investment purposes. All borrowings in excess of 5% of the value
of a Fund's total assets will be repaid before making additional investments
and any interest paid on such borrowings will reduce income.
B-10
<PAGE>
4. Make loans, except that (a) a Fund may purchase or hold debt instruments in
accordance with its investment objective and policies; (b) a Fund may enter
into repurchase agreements; and (c) the Investment Grade Bond Fund and the
Value Income Stock Fund may engage in securities lending as described in the
Prospectus and in this Statement of Additional Information.
5. Pledge, mortgage or hypothecate assets except to secure temporary borrowings
permitted by (3) above in aggregate amounts not to exceed 10% of the Fund's
total assets, taken at current value at the time of the incurrence of such
loan, except as permitted with respect to securities lending.
6. Purchase or sell real estate, real estate limited partnership interests,
commodities or commodities contracts (except for financial futures
contracts) and interests in a pool of securities that are secured by
interests in real estate (except that the Investment Grade Bond Fund may
purchase mortgage-backed and other mortgage-related securities, including
collateralized obligations and REMICs). However, subject to its permitted
investment spectrum, a Fund may purchase marketable securities issued by
companies which own or invest in real estate, commodities or commodities
contracts, and commodities contracts relating to financial instruments, such
as financial futures contracts (except the International Equity Fund) and
options on such contracts.
7. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Trust may obtain short-term credits as
necessary for the clearance of security transactions.
8. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a security.
9. Except for the International Equity Fund, purchase securities of other
investment companies except for money market funds and CMOs and REMICs
deemed to be investment companies unless as permitted by the Investment
Company Act of 1940 (the "1940 Act") and the rules and regulations
thereunder. Under these rules and regulations, a Fund is prohibited from
acquiring the securities of other investment companies if, as a result of
such acquisition, the Fund owns more than 3% of the total voting stock of
the company; securities issued by any one investment company represent more
than 5% of the total assets of a 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 POLICY
No Fund may 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.
THE INVESTMENT ADVISOR
The Trust and STI Capital Management, N.A. (the "Advisor") have entered into
an advisory agreement with the Trust (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 any Fund (including amounts payable to the Advisor but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by certain states, the Advisor and/or the
Administrator will bear the amount of such excess. The Advisor will not be
required to bear expenses of the Trust
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to an extent which would result in a Fund's inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code.
The continuance of the Advisory Agreement, after the first two years, must
be specifically approved at least annually (i) by the vote of the Trustees, and
(ii) by the vote of a majority of the Trustees who are not parties to the
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 Funds, by a majority of the outstanding shares of the Funds, 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.
For the period from commencement of operations to the fiscal years ended
December 31, 1997 and 1996, the Trust paid the following advisory fees:
<TABLE>
<CAPTION>
FEES PAID FEES WAIVED FEES REIMBURSED
------------------ ------------------- ------------------
FUND 1997 1996 1997 1996 1997 1996
- ---------------------------------------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Investment Grade Bond Fund.............. $ 0 $ 0 $ 62,794 $ 43,428 $ 7,738 $ 75,378
Capital Growth Fund..................... $310,665 $ 0 $197,598 $139,019 $ 0 $ 15,315
Value Income Stock Fund................. $274,723 $ 0 $151,040 $117,840 $ 0 $ 29,252
Mid-Cap Equity Fund..................... $ 99,442 $ 0 $117,543 $ 93,734 $ 0 $ 39,742
International Equity Fund............... $ 0 $ 0 $ 99,955 $ 650 $ 6,242 $ 14,878
Small Cap Equity Fund................... $ 0 * $ 13,804 * $ 3,681 *
</TABLE>
- ------------------------
* Not in operation.
THE ADMINISTRATOR
The Trust and SEI Fund Resources (the "Administrator") are parties to an
administration agreement (the "Administration Agreement") dated August 18, 1995,
as amended November 19, 1997. 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 three years after the date of the Agreement subject to review at
least annually by the Trustees of the Trust unless terminated by either 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 or sub-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, Oak Associates Funds, The PBHG
Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, 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, TIP Funds, and TIP institutional Funds.
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For the fiscal years ended December 31, 1997 and 1996, the Funds paid the
following administrative fees:
<TABLE>
<CAPTION>
FEES PAID FEES WAIVED
------------------- -----------------
FUND 1997 1996 1997 1996
- ---------------------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
Investment Grade Bond Fund.............. $ 62,500 $ 62,500 $ 0 $ 0
Capital Growth Fund..................... $ 62,500 $ 62,500 $ 0 $ 0
Value Income Stock Fund................. $ 62,500 $ 62,500 $ 0 $ 0
Mid-Cap Equity Fund..................... $ 62,500 $ 62,500 $ 0 $ 0
International Equity Fund............... $ 75,000 $ 11,066 $ 0 $ 0
Small Cap Equity Fund................... $ 11,815 * $ 0 *
</TABLE>
- ------------------------
* Not in operation.
THE DISTRIBUTOR
SEI Investment Distribution Company (the "Distributor"), a wholly-owned
subsidiary of SEI Investments, distributes the Trust's Shares to the separate
accounts, which purchase and redeem these shares at the net asset value without
sales or redemption charges.
The Trust reserves the right to reject a purchase order when the Trust
determines that it is not in the best interest of the Trust to accept such
order.
With respect to the Trust, 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, their respective dates of birth,
and their principal occupations for the last five years are set forth below.
Each may have held other positions with the named companies during that period.
Unless otherwise noted, the business address of each Trustee and each Executive
Officer is SEI Investments Company, Oaks, Pennsylvania 19456. Certain officers
of the Trust also serve as officers of some or all of the following: The
Achievement Funds Trust, The Advisors' Inner Circle Fund, 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, Oak Associates Funds, The PBHG
Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, 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, TIP Funds and TIP Institutional Funds, each of which is an
open-end management investment company managed by SEI Fund Resources or its
affiliates and, except for Santa Barbara Group of Mutual Funds, Inc.,
distributed SEI Investments Distribution Co.
DANIEL S. GOODRUM (7/11/26)--Trustee*--Chairman & CEO, SunBank/South
Florida, N.A., 1985-1991; Chairman, Audit Committee and Director, Holy Cross
Hospital; Executive Committee Member and Director, Honda Classic Foundation;
Director, Broward Community College Foundation.
WILTON LOONEY (4/18/19)--Trustee*--President, 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.
F. WENDELL GOOCH (12/3/32)--Trustee--Retired. President, Orange County
Publishing Co., Inc., 1981-1997, publisher of the Paoli News and the Paoli
Republican and Editor of the Paoli Republican, 1981-1997, President, H & W
Distribution, Inc., 1984-1997. Current Trustee on the Board of Trustees for
B-13
<PAGE>
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.
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.
T. GORDY GERMANY (11/28/25)--Trustee--Retired President, Chairman, and CEO
of Crawford & Company; held these positions, 1973-1987; member of the Board of
Directors, 1970-1990, joined company in 1948; spent entire career at Crawford,
currently serves on Boards of Norrell Corporation and Mercy Health Services, the
latter being the holding company of St. Joseph's Hospitals.
DR. BERNARD F. SLIGER (9/30/24)--Trustee--Currently on sabbatical leave from
Florida State University (1991-92); now serves as visiting professor at the
University of New Orleans. President of Florida State University, 1976-91;
previous 4 years EVP and Chief Academic Officer; during educational career,
taught at Florida State, Michigan State, Louisiana State and Southern
University; spent 19 years as faculty member and administrator at Louisiana
State University and served as Head of Economics Department, member and Chairman
of the Graduate Council, Dean of 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.
CAROL ROONEY (5/8/64)--Controller, Treasurer, Chief Financial Officer. A
Director of SEI Fund Resources since 1992.
RICHARD W. GRANT (10/25/45)--Secretary--Partner, Morgan, Lewis & Bockius LLP
(law firm); Counsel to the Trust, Administrator and Distributor.
SANDRA K. ORLOW (10/18/53)--Vice President and Assistant Secretary--Vice
President and Assistant Secretary of SEI Investments, the Administrator and
Distributor since 1983.
KEVIN P. ROBINS (4/15/61)--Vice President and Assistant Secretary--Senior
Vice President and General Counsel of SEI Investments, the Administrator and the
Distributor since 1994. Assistant Secretary of SEI Investments since 1992;
Secretary of the Administrator and Distributor since 1994. Vice President,
General Counsel and Assistant Secretary of the Administrator and Distributor,
1992-1994. Associate, Morgan, Lewis & Bockius LLP (law firm), 1988-1992.
KATHRYN L. STANTON (11/19/58)--Vice President and Assistant Secretary--Vice
President, Assistant Secretary of SEI Investments, the Administrator and
Distributor since 1994; Associate, Morgan, Lewis & Bockius LLP (law firm),
1989-1994.
TODD CIPPERMAN (2/14/66)--Vice President and Assistant Secretary--Vice
President and Assistant Secretary of SEI Investments, the Administrator and the
Distributor since 1995; Associate, Dewey Ballantine (law firm), 1994-1995;
Associate, Winston & Strawn (law firm), 1991-1994.
JOHN H. GRADY, JR. (6/1/61)--Assistant Secretary--1800 M Street, N.W.
Washington, DC 20036. Partner, Morgan, Lewis & Bockius LLP (law firm) since
1995; Associate, Morgan, Lewis & Bockius LLP, 1993-1995; Associate, Ropes & Gray
(law firm), 1988-1993.
- ------------------------
* Daniel S. Goodrum, Wilton Looney, Champney A. McNair, and Jesse S. Hall may be
deemed to be "interested persons" of the Trust as defined in the Investment
Company Act of 1940.
B-14
<PAGE>
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 ended December 31, 1997, the Trust paid the following
amounts to the Trustees and Officers of the Trust:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS ESTIMATED TOTAL COMPENSATION FROM
COMPENSATION ACCRUED AS ANNUAL REGISTRANT AND FUND
NAME OF PERSON FROM REGISTRANT PART OF FUND BENEFITS UPON COMPLEX PAID TO DIRECTORS
AND POSITION FOR FYE 97 EXPENSES RETIREMENT FOR FYE 97
- ---------------------------------------- ---------------- -------------- -------------- ----------------------------------
<S> <C> <C> <C> <C>
T. Gordy Germany, Trustee............... $2,500 $ 0 $ 0 $16,875 for services on 2 boards
F. Wendell Gooch, Trustee............... $2,500 $ 0 $ 0 $16,875 for services on 2 boards
Daniel S. Goodrum, Trustee.............. $2,500 $ 0 $ 0 $16,875 for services on 2 boards
Jesse S. Hall, Trustee.................. $2,500 $ 0 $ 0 $16,875 for services on 2 boards
Wilton Looney, Trustee.................. $2,500 $ 0 $ 0 $18,250 for services on 2 boards
Champney McNair, Trustee................ $2,500 $ 0 $ 0 $15,875 for services on 2 boards
Bernard F. Sliger, Trustee.............. $2,500 $ 0 $ 0 $16,875 for services on 2 boards
</TABLE>
COMPUTATION OF YIELD
A Fund may advertise its yield. These figures will be based on historical
earnings and are not intended to indicate future performance. The yield of a
Fund refers to the annualized income generated by an investment in such 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 a one
year period and is shown as a percentage of the investment. 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.
Actual yield will depend on such variables as asset quality, average asset
maturity, the type of instruments in which a Fund invests, changes in interest
rates on money market instruments, changes in the expenses of the Fund and other
factors.
CALCULATION OF TOTAL RETURN
From time to time, a Fund may advertise its total return. The total return
of a Fund refers to the average compounded rate of return to a hypothetical
investment 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. 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.
B-15
<PAGE>
SunTrust Bank's investment advisory affiliate, STI Capital Management, N.A.,
acting as the investment advisor for the Funds, STI has been in the top 1% of
the SEI Funds Evaluation database for equity managers over the past ten years.
SEI Investment's database includes research data on over 1,000 investment
managers responsible for over $450 billion in assets.
For the 30-day period ended December 31, 1997, yields on the Funds were as
follows:
<TABLE>
<CAPTION>
FUND YIELD
- ---------------------------------------- -----
<S> <C>
Investment Grade Bond Fund.............. 5.57%
Capital Growth Fund..................... 0.72%
Value Income Stock Fund................. 1.94%
Mid-Cap Equity Fund..................... 0%
International Equity Fund............... 0%
Small Cap Equity Fund................... 0%
</TABLE>
Based on the foregoing, the average annual total returns for the Funds from
commencement of operations through December 31, 1997 was as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------
FUND ONE YEAR SINCE INCEPTION
- ---------------------------------------- ----------- ---------------
<S> <C> <C>
Investment Grade Bond Fund.............. 8.84% 6.60%
Capital Growth Fund..................... 36.54% 30.14%
Value Income Stock Fund................. 26.82% 23.77%
Mid-Cap Equity Fund..................... 22.23% 18.48%
International Equity Fund............... 16.84% 16.21%
Small Cap Equity Fund................... * (10.09%)
</TABLE>
- ------------------------
*Not a full year of operations
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares of the Funds may be made on any day the
New York Stock Exchange ("NYSE") is open for business. Currently, the NYSE is
closed on the days the following holidays are observed: New Year's Day,
Presidents' Day, Martin Lurther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and
Christmas Day.
It is currently the Trust's policy to pay for all redemptions in cash. The
Trust retains the right, however, to alter this policy to provide for
redemptions in whole or in part by a distribution in-kind of readily marketable
securities held by the Funds in lieu of cash. Investors may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. An Investor will at all times be entitled to aggregate cash
redemptions from all Funds of the Trust during any 90-day period of up to the
lesser of $250,000 or 1% of the Trust's net assets.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the NYSE is restricted, or during the existence of an emergency (as determined
by the SEC by rule or regulation) as a result of disposal or valuation of a
Fund's securities is not reasonably practicable, or for such other periods as
the SEC has by order permitted. The Trust also reserves the right to suspend
sales of shares of a Fund for any period during which the NYSE, the Advisor, the
Administrator and/or the Custodian are not open for business.
B-16
<PAGE>
NET ASSET VALUE--PRICING OF PORTFOLIO SECURITIES
The net asset value per share of the Funds is determined at the
regularly-scheduled close of normal trading on the NYSE (normally 4:00 p.m.,
Eastern time), each business day the NYSE is open. Net asset value per share is
calculated for purchases and redemptions of Shares of each Fund by dividing the
value of total Fund assets, less liabilities (including Trust expenses, which
are accrued daily), by the total number of Shares of that Fund outstanding. The
net asset value per share of each Fund is determined each business day at the
close of business.
The securities of the Funds are valued by the Administrator pursuant to
valuations provided by an independent pricing service. The pricing service
relies primarily on prices of actual market transactions as well as trader
quotations. However, the service may also use a matrix system to determine
valuations of fixed income securities, which system considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
TAXES
The following is a summary of certain Federal income tax considerations
generally affecting the Funds and their Investors. No attempt is made to present
a detailed explanation of the Federal tax treatment of a Fund or its Investors,
and the discussion here and in the Trust'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 (the "Code), and the regulations issued
thereunder, in effect on the date of this Statement of Additional Information.
New legislation, as well as administrative changes or court decisions may change
the conclusions expressed herein, and may have a retroactive effect with respect
to the transactions contemplated herein.
In order to qualify for treatment as a regulated investment company ("RIC")
under the Code, the Funds must distribute annually to its Shareholders at least
the sum of 90% of its net investment income excludable from gross income plus
90% of its investment company taxable income (generally, net investment income
plus net short-term capital gain) (the "Distribution Requirement") and also must
meet several additional requirements. Among these requirements are the
following: (i) at least 90% of a Fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of stock or securities, or certain
other income, (ii) at the close of each quarter of a Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other 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 a Fund's assets and that does
not represent more than 10% of the outstanding voting securities of such issuer;
and (iv) at the close of each quarter of a Fund's taxable year, not more than
25% of the value of its assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer, or of
two or more issuers engaged in same or similar businesses if a Fund owns at
least 20% of the voting power of such issuers.
Notwithstanding the Distribution Requirement described above, which only
requires a Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital
gains (the excess of net long-term capital gains over net short-term capital
loss), a Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by
B-17
<PAGE>
the end of any calendar year 98% of its ordinary income for that year and 98% of
its capital gain net income for the on-year period ending on October 31 of that
calendar year, plus certain other amounts. The Funds intend to make sufficient
distributions prior to the end of each calendar year to avoid liability for the
Federal excise tax applicable to RICs.
Any gain or loss recognized on a sale or redemption of Shares of a Fund by
an 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
A 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 Funds
to Investors and the ownership of shares may be subject to state and local
taxes.
FOREIGN TAXES
Dividends and interests received by a 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 U.S. may reduce or eliminate these taxes. Foreign
countries generally do not impose taxes on capital gains with respect to
investments by foreign investors.
A Fund's transactions in foreign currencies and forward foreign currency
contracts will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (I.E.,
may effect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to
Shareholders. These provisions also may require the Fund to mark-to-market
certain types of the positions in its portfolio (I.E., treat them as if they
were closed out) which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the 90%
and 98% distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions, make the appropriate tax elections, and make the
appropriate entries in the books and records when it acquires any foreign
currency or forward foreign currency contract in order to mitigate the effect of
these rules and prevent disqualification of the Fund as a RIC and minimize the
imposition of income and excise taxes.
If a 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, a 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 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 a 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.
B-18
<PAGE>
The money market securities in which the Funds invest are traded primarily
in the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, the Advisor
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Trust will primarily consist of dealer spreads
and underwriting commissions.
TRADING PRACTICES AND BROKERAGE
The Trust selects brokers or dealers to execute transactions for the
purchase or sale of portfolio securities on the basis of its judgment of their
professional capability to provide the service. The primary consideration is to
have brokers or dealers provide transactions at best price and execution for the
Trust. Best price and execution includes many factors, including the price paid
or received for a security, the commission charged, the promptness and
reliability of execution, the confidentiality and placement accorded the order
and other factors affecting the overall benefit obtained by the account on the
transaction. The Trust's determination of what are reasonably competitive rates
is based upon the professional knowledge of its trading department as to rates
paid and charged for similar transactions throughout the securities industry. In
some instances, the Trust pays a minimal share transaction cost when the
transaction presents no difficulty. Some trades are made on a net basis where
the Trust either buys securities directly from the dealer or sells them to the
dealer. In these instances, there is no direct commission charged but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission.
The Trust may allocate, out of all commission business generated by all of
the funds and accounts under management by the Advisor, brokerage business to
brokers or dealers who provide brokerage and research services. These research
services include rendering advice, either directly or through publications or
writings, about the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, securities or industries; providing information on economic factors and
trends; assisting in 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
B-19
<PAGE>
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 Funds may obtain, it is the opinion of the Advisor and the
Trust's Board of Trustees that the advantages of combined orders outweigh the
possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Funds, at
the request of the Distributor, give consideration to sales of shares of the
Trust as a factor in the selection of brokers and dealers to execute Trust
portfolio transactions.
It is expected that the Trust may execute brokerage or other agency
transactions through the Distributor or an affiliate of the Advisor, both of
which are registered broker-dealers, for a commission in conformity with the
1940 Act, the 1934 Act and rules promulgated by the SEC. Under these provisions,
the Distributor or an affiliate of the Advisor is permitted to receive and
retain compensation for effecting portfolio transactions for the Trust on an
exchange if a written contract is in effect between the Distributor and the
Trust expressly permitting the Distributor or an affiliate of the Advisor to
receive and retain such compensation. These rules further require that
commissions paid to the Distributor by the Trust for exchange transactions not
exceed "usual and customary" brokerage commissions. The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time." In addition, the Trust may direct commission business to one or
more designated broker dealers in connection with such broker-dealer's provision
of services to the Trust or payment of certain Trust expenses (E.G., custody,
pricing and professional fees). The Trustees, including those who are not
"interested persons" of the Trust, have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
For the fiscal year ended December 31, 1997, the Funds paid the following
brokerage commissions with respect to portfolio transactions:
<TABLE>
<CAPTION>
TOTAL $
AMOUNT OF
BROKERAGE
TOTAL $ COMMISSIONS TOTAL $
AMOUNT OF PAID TO AMOUNT OF
BROKERAGE AFFILIATED BROKERED
COMMISSIONS BROKERS IN TRANSACTIONS
PORTFOLIO PAID FY 97 FY 97 IN FY 97
- ---------------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
Investment Grade Bond Fund.............. $ 383 $ 383 $ 27,686,424
Capital Growth Fund..................... 160,630 2,094 265,805,130
Value Income Stock Fund................. 183,900 1,817 192,519,449
Mid-Cap Equity Fund..................... 64,319 788 78,348,638
International Equity Fund............... 73,036 0 24,173,236
Small Cap Equity Fund................... 9,824 74 21,141,642
<CAPTION>
TOTAL
TOTAL $ BROKERAGE
AMOUNT % OF TOTAL COMMISSIONS
BROKERED % OF TOTAL BROKERED PAID TO SFS IN
TRANSACTIONS BROKERAGE TRANSACTIONS CONNECTION
EFFECTED COMMISSIONS EFFECTED WITH
THROUGH PAID TO THROUGH REPURCHASE
AFFILIATED AFFILIATED AFFILIATED AGREEMENT
BROKERS IN BROKERS FOR BROKERS FOR TRANSACTIONS
PORTFOLIO FY 97 FY 97 LAST YEAR FOR FY 97
- ---------------------------------------- --------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Investment Grade Bond Fund.............. $ 27,686,424 100% 100% $ 383
Capital Growth Fund..................... 100,907,270 1% 38% 2,094
Value Income Stock Fund................. 68,804,608 1% 36% 1,817
Mid-Cap Equity Fund..................... 41,694,684 1% 53% 788
International Equity Fund............... 0 0 0 0
Small Cap Equity Fund................... 15,299,943 1% 72% 74
</TABLE>
B-20
<PAGE>
For the fiscal year ended December 31, 1996, the Funds paid the following
brokerage fees:
<TABLE>
<CAPTION>
TOTAL $ AMOUNT OF
TOTAL $ AMOUNT OF BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS PAID TO AFFILIATES IN
PORTFOLIO PAID IN 1996 1996
- ---------------------------------------- ---------------------- -----------------------
<S> <C> <C>
Investment Grade Bond Fund.............. $ 332 $ 332
Capital Growth Fund..................... 48,683 1,051
Value Income Stock Fund................. 68,004 773
Mid-Cap Equity Fund..................... 35,536 547
International Equity Fund............... 1,565 0
Small Cap Equity Fund................... * *
</TABLE>
- ------------------------
* Not in operation.
For the period from the commencement of operations to the fiscal years ended
December 31, 1997 and 1996, the portfolio turnover rate for each of the Funds
was as follows:
<TABLE>
<CAPTION>
TURNOVER RATE
------------------------
FUND 1997 1996
- ---------------------------------------- ----- -----
<S> <C> <C>
Investment Grade Bond Fund.............. 219% 303%
Capital Growth Fund..................... 196% 148%
Value Income Fund....................... 105% 80%
Mid-Cap Equity Fund..................... 139% 140%
International Equity Fund............... 99% 0%
Small Cap Equity Fund................... 4% *
</TABLE>
- ------------------------
* Not in operation.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of the Funds each of which represents an equal proportionate interest in
that Fund with each other share. Shares are entitled upon liquidation to a PRO
RATA share in the net assets of the Funds. Shareholders 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.
B-21
<PAGE>
5% AND 25% SHAREHOLDERS
As of February 9, 1998, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% or 25%
or more of the shares of the Funds. Persons who owned of record or beneficially
more than 25% of a Fund's outstanding shares may be deemed to control the Fund
within the meaning of the 1940 Act. The Trust believes that most of the shares
of the Funds were held for the record owner's fiduciary, agency or custodial
customers.
<TABLE>
<S> <C> <C>
INVESTMENT GRADE BOND FUND
Glenbrook Life and Annuity Company ............................... 1,018,073 99%
Attn: Olga Prohny
Financial Control Unit
3100 Sanders Road, Suite N4A
Northbrook, IL 60062-7155
CAPITAL GROWTH FUND
Glenbrook Life and Annuity Company ............................... 3,728,926 100%
Attn: Olga Prohny
Financial Control Unit
3100 Sanders Road, Suite N4A
Northbrook, IL 60062-7155
VALUE INCOME STOCK FUND
Glenbrook Life and Annuity Company ............................... 4,968,108 100%
Attn: Olga Prohny
Financial Control Unit
3100 Sanders Road, Suite N4A
Northbrook, IL 60062-7155
MID-CAP EQUITY FUND
Glenbrook Life and Annuity Company ............................... 1,772,437 100%
Attn: Olga Prohny
Financial Control Unit
3100 Sanders Road, Suite N4A
Northbrook, IL 60062-7155
INTERNATIONAL EQUITY FUND
Glenbrook Life and Annuity Company ............................... 1,194,927 100%
Attn: Olga Prohny
Financial Control Unit
3100 Sanders Road, Suite N4A
Northbrook, IL 60062-7155
SMALL CAP EQUITY FUND
Allstate Life Insurance Company .................................. 501,290 56%
Attn: Deborah Bukowy
Investment Operations Equity Unit
3075 Sanders Road, Suite G4A
Northbrook, IL 60062-7127
</TABLE>
B-22
<PAGE>
<TABLE>
<S> <C> <C>
Glenbrook Life and Annuity Company ............................... 397,419 44%
Attn: Olga Prohny
Financial Control Unit
3100 Sanders Road, Suite N4A
Northbrook, IL 60062-7155
</TABLE>
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for
his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisors, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his willful misfeasance, bad faith, gross negligence or reckless disregard
of his duties.
YEAR 2000
The Trust depends on the smooth functioning of computer systems in almost
every aspect of its business. Like other mutual funds, businesses and
individuals around the world, the Trust could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Trust has asked its service providers whether they expect to have
their computer systems adjusted for the year 2000 transition, and received
assurances from each that its system is expected to accommodate the year 2000
without material adverse consequences to the Trust. The Trust and its
shareholders may experience losses if these assurances prove to be incorrect or
as a result of year 2000 computer difficulties experienced by issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others with which the Trust does business.
EXPERTS
The financial statements in this Statement of Additional Information have
been audited by Arthur Andersen LLP, independent public accountants to the
Trust, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
B-23
<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.
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
A-1
<PAGE>
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 degree of 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.
A-2
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
VALUE INCOME STOCK FUND
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
VALUE
SHARES (000)
--------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 89.6%
BASIC MATERIALS -- 14.1%
Allegheny Teledyne 29,300 $ 758
Armstrong World Industries 3,400 254
B.F. Goodrich 21,900 907
Consolidated Papers 10,300 550
Eastman Chemical 11,600 691
Engelhard 40,100 697
Georgia Pacific 8,100 492
Georgia Pacific (Timber Group)* 8,100 184
Hercules 16,000 801
International Flavors & Fragrances 14,000 721
Nalco Chemical 17,300 684
PPG Industries 10,600 606
Reynolds Metals 18,300 1,098
Union Camp 12,000 644
Weyerhaeuser 14,100 692
Worthington Industries 27,500 454
-----------
10,233
-----------
CAPITAL GOODS -- 13.1%
AMP 17,700 743
Cooper Industries 13,400 657
Federal Signal 25,100 543
Foster Wheeler 8,000 217
General Signal 16,500 696
Johnson Controls 15,500 740
Mallinckrodt 23,700 901
National Service Industries 15,000 743
Pall 44,100 912
Tecumseh Products, Cl A 11,100 541
Tenneco 35,800 1,414
Thomas & Betts 19,600 926
Tomkins PLC ADR 27,600 528
-----------
9,561
-----------
COMMUNICATION SERVICES -- 5.2%
Alltel 18,400 756
BellSouth 9,400 529
Frontier 22,000 529
GTE 15,300 799
Harris 13,100 601
Southern New England Telecommunications 11,700 589
-----------
3,803
-----------
<CAPTION>
--------------------------------------------------------------------------
VALUE
SHARES (000)
--------------------------------------------------------------------------
<S> <C> <C>
CONSUMER CYCLICALS -- 12.9%
American Greetings, Cl A 20,400 $ 798
Echlin 23,000 832
Genuine Parts 22,300 757
H & R Block 17,800 798
ITT Industries 37,700 1,183
J.C. Penney 14,900 899
May Department Stores 19,200 1,012
McGraw-Hill 9,700 718
Mercantile Stores 5,400 329
Sears Roebuck 18,000 814
Shaw Industries 48,400 563
TRW 12,200 651
-----------
9,354
-----------
CONSUMER STAPLES -- 15.2%
Anheuser Busch 17,500 770
CPC International 7,000 756
Crown Cork & Seal 23,400 1,173
Food Lion, Cl A 67,300 568
Giant Food, Cl A 15,400 519
Hormel Foods 18,200 596
Kelly Services, Cl A 5,900 177
Kimberly-Clark 24,900 1,228
McCormick 19,000 532
Philip Morris 17,200 779
R.R. Donnelley & Sons 19,400 723
Rubbermaid 36,500 912
Seagram 27,200 879
Sonoco Products 21,400 742
Whitman 26,600 693
-----------
11,047
-----------
ENERGY -- 6.7%
Amoco 8,500 724
Kerr-McGee 13,700 867
Mobil 11,700 845
Murphy Oil 12,600 683
Scana 25,000 748
Unocal 27,100 1,052
-----------
4,919
-----------
FINANCIALS -- 11.0%
American Financial Group 14,500 585
American General 14,300 773
AmSouth Bancorp 8,300 451
BankBoston 4,600 432
Beneficial 9,100 756
</TABLE>
F-8
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
VALUE
SHARES (000)
--------------------------------------------------------------------------
<S> <C> <C>
Cigna 4,200 $ 727
Crestar Financial 8,700 496
Hibernia, Cl A 27,400 515
Jefferson-Pilot 6,800 530
Magna Group 9,800 448
Safeco 14,800 722
TIG Holdings 15,500 514
Union Planters 9,000 611
Willis Corroon Public Limited 35,400 436
-----------
7,996
-----------
HEALTH CARE -- 4.4%
American Home Products 10,100 773
C.R. Bard 25,500 798
Pharmacia Upjohn ADR 44,200 1,619
-----------
3,190
-----------
TRANSPORTATION -- 0.9%
Illinois Central 19,600 668
-----------
UTILITIES -- 6.1%
Enron 34,700 1,442
Pacificorp 26,700 729
Questar 13,200 589
Sonat 20,600 942
Southern 28,400 735
-----------
4,437
-----------
Total Common Stock
(Cost $59,701) 65,208
-----------
<CAPTION>
--------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 9.4%
Morgan Stanley
6.580%, dated 12/31/97, matures 01/02/98,
repurchase price $6,841,600 (collateralized by
FNMA obligations: market value $7,393,466) $ 6,839 $ 6,839
-----------
Total Repurchase Agreement
(Cost $6,839) 6,839
-----------
Total Investments -- 99.0%
(Cost $66,540) 72,047
-----------
OTHER ASSETS AND LIABILITIES, NET -- 1.0% 700
-----------
NET ASSETS:
Portfolio Shares (unlimited authorization -- no
par value) based on 4,781,817 outstanding
shares of beneficial interest 60,287
Accumulated net realized gain on investments 6,728
Net unrealized appreciation on investments 5,507
Undistributed net investment income 225
-----------
Total Net Assets -- 100.0% $ 72,747
-----------
-----------
Net Asset Value, Offering and Redemption Price Per
Share $ 15.21
-----------
-----------
</TABLE>
* NON-INCOME PRODUCING SECURITY
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
PLC-- PUBLIC LIMITED CORPORATION
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-9
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
MID-CAP EQUITY FUND
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 90.9%
CAPITAL GOODS -- 17.4%
Allied Waste Industries* 22,700 $ 529
Danka Business Systems ADR 10,400 166
Fisher Scientific International 5,200 248
Herman Miller 4,700 256
Perkin Elmer 3,900 277
Philip Services* 19,200 276
Sawtek* 18,200 480
Solectron* 11,600 482
Sundstrand 7,300 368
U.S. Filter* 29,300 877
Watsco 8,000 197
-----------
4,156
-----------
COMMUNICATION SERVICES -- 2.1%
LCI International* 16,200 498
-----------
CONSUMER CYCLICALS -- 15.4%
Barnes & Noble* 6,100 204
Dollar General 12,296 446
Harley-Davidson 16,000 438
International Speedway* 9,900 233
Men's Wearhouse* 12,200 424
Office Depot* 17,100 409
Ralph Lauren* 12,600 306
Royal Caribbean Cruises 5,700 304
Saks Holdings* 13,500 279
Staples* 9,000 250
West Marine* 17,300 387
-----------
3,680
-----------
CONSUMER STAPLES -- 12.2%
BJ's Wholesale Club* 10,700 336
Cracker Barrel Old Country Stores 12,900 431
Dial 17,100 356
Hannaford Brothers 5,500 239
Interstate Bakeries 8,400 314
Papa John's International* 10,800 377
Samsonite* 17,900 566
Wendy's International 12,400 298
-----------
2,917
-----------
ENERGY -- 5.8%
Anadarko Petroleum 7,100 431
EEX 30,400 276
Valero Energy 10,100 318
Western Atlas* 5,000 370
-----------
1,395
-----------
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
FINANCIALS -- 12.9%
Colonial Bancgroup 9,500 $ 327
Dime Bancorp 7,800 236
First Security 10,425 437
First Virginia Banks 3,900 202
Hartford Life, Cl A 9,400 426
Hibernia, Cl A 14,400 271
North Fork Bancorporation 8,400 282
PMI Group 3,000 217
Trustmark 8,300 384
Union Planters 4,500 306
-----------
3,088
-----------
HEALTH CARE -- 10.1%
Acuson Corp* 21,000 348
Allergan 5,050 169
Biogen* 6,300 229
DePuy* 8,800 253
Jones Medical Industries 5,100 195
Medpartners* 19,300 432
Teva Pharmaceuticals ADR 3,600 170
Vencor* 7,300 178
Watson Pharmaceuticals* 13,400 435
-----------
2,409
-----------
TECHNOLOGY -- 14.0%
ADC Telecommunications* 12,200 509
Atmel* 9,500 176
Fiserv* 7,900 388
Flextronics International* 12,100 417
Harbinger* 11,200 315
Kemet* 13,000 252
Networks Associates* 13,083 692
Teradyne* 18,900 605
-----------
3,354
-----------
UTILITIES -- 1.0%
Southwest Gas 13,100 245
-----------
Total Common Stock
(Cost $19,476) 21,742
-----------
<CAPTION>
--------------------------------------------------------------------------
SHARES/FACE
AMOUNT (000) VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BOND -- 1.0%
Lam Research, CV to 11.3935 shares (A) 5.000%,
09/01/02 $ 290 241
-----------
Total Convertible Bond
(Cost $290) 241
-----------
</TABLE>
F-10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SHARES/FACE
AMOUNT (000) VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 8.6%
Morgan Stanley
6.180%, dated 12/31/97, matures 01/02/98,
repurchase price $2,060,818 (collateralized by
U.S. Treasury Note: market value $2,114,829) $2,060 $ 2,060
-----------
Total Repurchase Agreement
(Cost $2,060) 2,060
-----------
Total Investments -- 100.5%
(Cost $21,826) 24,043
-----------
Other Assets and Liabilities, Net -- (-0.5%) (130)
-----------
NET ASSETS:
Portfolio Shares (unlimited authorization -- no
par value) based on 1,711,185 outstanding
shares of beneficial interest 19,413
Accumulated net realized gain on investments 2,283
Net unrealized appreciation on investments 2,217
-----------
Total Net Assets -- 100.0% $ 23,913
-----------
-----------
Net Asset Value, Offering and Redemption Price Per
Share $ 13.97
-----------
-----------
</TABLE>
* NON-INCOME PRODUCING SECURITY
ADR--AMERICAN DEPOSITORY RECEIPT
CL--CLASS
CV--CONVERTIBLE
(A)--PRIVATE PLACEMENT SECURITY
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-11
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
SMALL CAP EQUITY FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 92.1%
BASIC MATERIALS -- 9.3%
Norrell 1,800 $ 35
Columbus McKinnon 2,100 51
Commonwealth Industries 4,900 71
General Chemical Group 4,000 107
H.B. Fuller 2,100 104
Jannock Limited 5,200 67
Lilly Industries, CL A 5,400 111
Texas Industries 3,500 158
-----------
704
-----------
CAPITAL GOODS -- 15.9%
A.M. Castle 3,000 69
American Woodmark 2,500 55
DT Industries 2,300 78
Fluke 2,600 68
Kaman 5,300 87
Nash Finch 3,800 72
Regal Beloit 7,400 219
Toro 1,400 60
Valmont Industries 4,000 78
Watts Industries, CL A 5,100 144
Wausau-Mosinee Paper 3,100 62
Zurn Industries 6,700 210
-----------
1,202
-----------
CONSUMER CYCLICALS -- 24.9%
Ameron 1,100 70
Angelica 4,100 93
Belden 2,100 74
Brown Group 6,700 90
Bush Industries 3,700 96
Guilford Mills 6,500 178
Hardinge 1,300 49
Harman International 4,100 174
K2 6,900 157
Libbey 4,100 155
LSI Industries 2,900 53
Movado Group 4,700 108
Rock Tenn, CL A 3,500 72
Smith (A.O.) 1,700 71
Sotheby's Holdings, CL A 8,600 159
Springs Industries, CL A 2,800 146
Standard Register 4,000 139
-----------
1,884
-----------
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER STAPLES -- 12.5%
ABM Industries 2,400 $ 73
Banta 5,200 140
Bowne & Company 2,200 88
Chemed 1,400 58
Earthgrains 1,500 71
Furon 3,800 79
Ingles Markets, CL A 4,800 68
John H. Harland 6,800 143
Universal Foods 4,100 173
York Group 2,100 51
-----------
944
-----------
ENERGY -- 4.7%
Giant Industries 7,600 144
Quaker State 14,900 212
-----------
356
-----------
FINANCIALS -- 8.0%
Banco Latinamericano de Exportaciones 1,700 70
Klamath First Bancorp 2,400 52
Lawyers Title 1,600 50
National Bancorp of Alaska 400 51
Seacoast Banking of Florida 1,300 50
Student Loan 1,100 54
Westcorp 4,600 78
Westerfed Financial 3,500 90
Willis Corroon Public Limited 9,200 113
-----------
608
-----------
HEALTH CARE -- 4.5%
Invacare 3,200 70
London International Group 5,300 70
Vital Signs 5,500 107
West Company 3,100 92
-----------
339
-----------
TECHNOLOGY -- 3.6%
Innovex 3,500 80
Interface 6,500 189
-----------
269
-----------
TRANSPORTATION -- 5.0%
Knightsbridge Tankers Limited* 2,400 68
Pittston Burlington 5,100 134
Sea Containers 4,500 144
</TABLE>
F-12
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Western Star Truck Holdings 1,600 $ 36
-----------
382
-----------
UTILITIES -- 3.7%
Northwest Natural Gas 2,400 74
Nui 3,000 86
TNP Enterprises 2,100 70
United Water Resources 2,600 51
-----------
281
-----------
Total Common Stock
(Cost $7,035) 6,969
-----------
PREFERRED STOCK -- 1.4%
BASIC MATERIALS -- 1.4%
Coeur D'Alene Mines, CV to 0.8260 shares,
Callable 03/15/99 @ 21.622 8,500 103
-----------
Total Preferred Stock
(Cost $140) 103
-----------
<CAPTION>
--------------------------------------------------------------------------
FACE AMOUNT MARKET
(000) VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 8.5%
Lehman Brothers
5.580%, dated 12/31/97, matures 01/02/98,
repurchase price $642,332 (collateralized by
U.S. Treasury Note: market value $660,241) $ 642 $ 642
-----------
Total Repurchase Agreements
(Cost $642) 642
-----------
Total Investments -- 102.0%
(Cost $7,817) 7,714
-----------
OTHER ASSETS AND LIABILITIES, NET -- (-2.0%)
(151 )
-----------
NET ASSETS:
Portfolio Shares (unlimited authorization -- no
par value) based on 774,297 outstanding shares
of beneficial interest 7,646
Accumulated net realized gain on investments 20
Net unrealized depreciation on investments (103 )
-----------
Total Net Assets -- 100.0% $ 7,563
-----------
-----------
Net Asset Value, Offering and Redemption Price Per
Share $ 9.77
-----------
-----------
</TABLE>
* NON-INCOME PRODUCING SECURITY
CL -- CLASS
CV -- CONVERTIBLE
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-13
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 88.3%
BASIC MATERIALS -- 3.2%
Aluminum Company of America 1,900 $ 134
Betzdearborn 6,000 366
Hercules 5,800 290
Imperial Chemical Industries ADR 5,200 338
Morton International 9,100 313
Praxair 11,700 526
-------------
1,967
-------------
CAPITAL GOODS -- 14.0%
Allied Signal 24,800 966
Allied Waste Industries* 5,400 126
Avery Dennison 1,200 54
Boeing 7,000 343
Emerson Electric 4,100 231
General Dynamics 3,000 259
General Electric 21,200 1,556
Honeywell 9,500 651
Lockheed Martin 3,800 374
Molten Metal Technology* 5,600 1
Nokia ADR 3,500 245
Sundstrand 2,500 126
Tenneco 3,000 118
Textron 9,000 563
Tyco International 22,820 1,028
United Technologies 13,700 998
USA Waste Services* 10,500 412
U.S. Filter* 3,000 90
W.W. Grainger 5,100 496
-------------
8,637
-------------
COMMUNICATION SERVICES -- 1.5%
Dover 10,000 361
Ericsson Telephone ADR 4,300 160
MCI Communications 9,300 398
-------------
919
-------------
CONSUMER CYCLICALS -- 15.5%
American Stores 8,500 175
Carnival 13,600 753
Cendant 16,706 574
Chevron 4,000 308
Chrysler 9,500 334
Costco* 8,900 397
Dayton-Hudson 3,000 202
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
Dollar General 4,000 $ 145
Ecolab 4,300 238
Federated Department Stores* 12,800 551
Gannett 11,600 717
Hasbro 9,000 283
Hilton Hotels 8,600 256
Home Depot 10,850 639
Interpublic Group 7,000 349
Lear* 6,800 323
Limited 6,300 161
Lowe's 6,000 286
Masco 5,200 265
Mattel 7,000 261
New York Times, Cl A 8,500 562
Office Depot* 11,700 280
Sherwin-Williams 13,200 366
Staples* 12,000 333
Tandy 9,000 347
Wal-Mart Stores 13,000 513
-------------
9,618
-------------
CONSUMER STAPLES -- 11.6%
American Standard* 7,000 268
Avon Products 6,900 423
CVS 16,700 1,070
Colgate-Palmolive 4,000 294
ConAgra 10,000 328
International Home Foods* 3,000 84
JP Foodservice* 5,000 185
Kellogg 9,000 447
PepsiCo 9,000 328
Philip Morris 19,700 893
Ralston Purina 5,900 548
Rite Aid 7,700 452
Safeway* 10,700 677
Sara Lee 10,300 580
Walgreen 10,000 314
Wendy's International 11,300 272
-------------
7,163
-------------
ENERGY -- 6.5%
Baker Hughes 7,000 305
British Petroleum ADR 5,000 398
Diamond Offshore Drilling 1,800 87
EVI* 5,800 300
Halliburton 9,100 473
Mobil 8,300 599
</TABLE>
F-14
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
Schlumberger 1,300 $ 105
Texaco 10,400 565
Transocean Offshore 5,800 279
Unilever ADR 7,800 487
Union Pacific Resources Group 6,901 167
Unocal 7,000 272
-------------
4,037
-------------
FINANCIALS -- 15.2%
American International Group 9,600 1,044
Banc One 5,560 302
BankAmerica 8,500 620
BankBoston 5,000 470
Barnett Banks 11,000 791
Chase Manhattan Bank 10,900 1,194
Conseco 5,900 268
CoreStates Financial 3,000 240
Equifax 7,000 248
FHLMC 8,400 352
First Commerce 5,000 336
First Security 4,000 168
First Union 6,800 348
General Re 2,300 488
Household International 4,400 561
Jefferson-Pilot 5,000 389
MBNA 7,000 191
Nationsbank 4,000 243
PNC Bank 5,000 285
Quick & Reilly Group 2,700 116
Travelers 6,499 350
Washington Mutual 6,420 410
-------------
9,414
-------------
HEALTH CARE -- 11.0%
Abbott Laboratories 8,000 525
American Home Products 13,900 1,063
Baxter International 13,200 666
Becton Dickinson 8,200 410
Bergen Brunswig, Cl A 11,000 463
Beverly Enterprises* 7,700 100
Boston Scientific* 7,847 360
Bristol-Myers Squibb 9,200 871
Eli Lilly 2,500 174
Healthsouth* 26,402 733
Medpartners* 14,300 320
Merck 3,000 319
Pfizer 2,000 149
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
Pharmerica* 3,504 $ 36
Tenet Healthcare* 6,300 209
Warner Lambert 3,100 384
-------------
6,782
-------------
TECHNOLOGY -- 8.9%
Bell & Howell* 5,000 121
Ceridian* 1,500 69
Cisco Systems* 12,000 669
Compaq Computer 3,962 224
EMC Corporation Mass* 8,000 219
First Data 13,100 383
IBM 9,100 952
Intel 10,400 731
Lucent Technologies 4,193 335
Microsoft* 6,500 840
Motorola 1,800 103
Oracle* 4,850 108
3Com* 2,600 91
Xerox 9,400 694
-------------
5,539
-------------
TRANSPORTATION -- 0.8%
Burlington Northern Santa Fe 2,300 214
Continental Airlines, Cl B* 1,500 72
Delta Air Lines 1,600 190
-------------
476
-------------
UTILITIES -- 0.1%
Sonat 2,000 92
-------------
Total Common Stock
(Cost $48,418) 54,644
-------------
PREFERRED STOCKS -- 1.6%
CONSUMER STAPLES -- 0.6%
Ralston Purina, CV to 1.6394 shares 5,000 348
-------------
FINANCIAL -- 0.4%
Newell Financial, CV to 0.9865 shares, Callable
12/01/01 @ 51.580 (C) 5.250%, 12/31/49 5,000 256
-------------
TECHNOLOGY -- 0.6%
Microsoft, Ser A, CV to 1 share 4,000 360
-------------
Total Preferred Stocks
(Cost $879) 964
-------------
</TABLE>
F-15
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
CAPITAL GROWTH FUND -- CONCLUDED
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SHARES/FACE
AMOUNT (000) VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS -- 1.6%
Hewlett Packard, CV to 5.4300 shares, Callable
10/14/00 @ 59.029 (A) (B) (C) 0.000%, 10/14/17 $ 1,500 $ 786
Office Depot, CV to 29.2635 shares, Callable
12/11/98 @ 64.116 (A) (C) 0.000%, 12/11/07 300 212
-------------
Total Convertible Bonds
(Cost $1,003) 998
-------------
REPURCHASE AGREEMENT -- 13.1%
Morgan Stanley 6.580%, dated 12/31/97, matures
01/02/98, repurchase price $8,139,257
(collateralized by various FMAC and FNMA
obligations: total market value $8,307,918) 8,136 8,136
-------------
Total Repurchase Agreement
(Cost $8,136) 8,136
-------------
Total Investments -- 104.6%
(Cost $58,436) 64,742
-------------
<CAPTION>
--------------------------------------------------------------------------
VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
OTHER ASSETS AND LIABILITIES -- (-4.6%)
Investment securities purchased payable $ (3,972)
Other assets and liabilities, net 1,107
-------------
Total Other Assets and Liabilities (2,865)
-------------
NET ASSETS:
Portfolio Shares (unlimited authorization -- no
par value) based on 3,582,558 outstanding
shares of beneficial interest 47,669
Accumulated net realized gain on investments 7,842
Net unrealized appreciation on investments 6,306
Undistributed net investment income 60
-------------
Total Net Assets -- 100.0% $ 61,877
-------------
-------------
Net Asset Value, Offering and Redemption Price Per
Share $ 17.27
-------------
-------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
CV -- CONVERTIBLE
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
FMAC -- FEDERAL MORTGAGE ACCEPTANCE CORPORATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
(A) -- ZERO COUPON BOND
(B) -- PRIVATE PLACEMENT SECURITY
(C) -- PUT AND DEMAND FEATURES EXIST REQUIRING THE ISSUER TO REPURCHASE THE
INSTRUMENT PRIOR TO MATURITY.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-16
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT GRADE BOND FUND
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
FACE AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 39.2%
U.S. Treasury Bonds
7.500%, 11/15/16 $ 550 $ 642
8.125%, 08/15/19 1,100 1,376
6.125%, 11/15/27 375 385
U.S. Treasury Notes
5.875%, 11/30/01 500 502
7.250%, 08/15/04 250 270
5.875%, 11/15/05 700 704
-----------
Total U.S. Treasury Obligations
(Cost $3,670) 3,879
-----------
CORPORATE OBLIGATIONS -- 45.9%
FINANCIALS -- 28.0%
Aristar
6.750%, 05/15/99 500 504
General Motors Acceptance
7.125%, 05/01/01 300 308
General Motors Acceptance, MTN
6.250%, 01/16/01 100 100
6.750%, 11/04/04 200 203
Great Western Financial
8.600%, 02/01/02 100 107
Homeside Lending, MTN
6.875%, 05/15/00 335 339
Korea Development Bank
7.125%, 09/17/01 150 122
RHG Finance
8.875%, 10/01/05 200 226
Salomon
6.500%, 03/01/00 350 352
Service International
7.375%, 04/15/04 250 263
SunAmerica
6.200%, 10/31/99 250 251
-----------
2,775
-----------
INDUSTRIAL -- 13.9%
American Home Products
7.700%, 02/15/00 125 129
7.900%, 02/15/05 300 326
Bausch & Lomb
6.750%, 12/15/04 150 151
Ikon Capital, MTN
6.150%, 09/22/99 100 100
6.730%, 06/15/01 150 152
Lockheed Martin
6.550%, 05/15/99 50 50
<CAPTION>
--------------------------------------------------------------------------
FACE AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------
<S> <C> <C>
Philip Morris
7.250%, 09/15/01 $ 300 $ 308
7.500%, 04/01/04 150 157
-----------
1,373
-----------
UTILITIES -- 4.0%
AT&T Capital, MTN 6.410%, 08/13/99 250 250
General Electric Capital, Callable 05/01/00 @
100 (A) (B) 6.660%, 05/01/18 150 152
-----------
402
-----------
Total Corporate Obligations
(Cost $4,508) 4,550
-----------
U.S. Government Agency Mortgage-Backed Bonds
(8.7%)
FHLMC
7.500%, 09/01/03 244 250
FNMA
7.000%, 10/01/03 599 608
-----------
Total U.S. Government Agency Mortgage-Backed Bonds
(Cost $853) 858
-----------
BANK NOTE -- 1.8%
Capital One
6.530%, 11/26/99 175 175
-----------
Total Bank Note
(Cost $175) 175
-----------
REPURCHASE AGREEMENT -- 2.8%
Lehman Brothers
5.580%, dated 12/31/97, matures 01/02/98,
repurchase price $277,329 (collateralized by
U.S. Treasury Note: market value $285,061) 277 277
-----------
Total Repurchase Agreement
(Cost $277) 277
-----------
Total Investments (98.4%)
(Cost $9,483) 9,739
-----------
OTHER ASSETS AND LIABILITIES, NET -- 1.6% 163
-----------
</TABLE>
F-17
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
INVESTMENT GRADE BOND FUND -- CONCLUDED
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
FACE AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS:
Portfolio Shares (unlimited authorization -- no
par value) based on 971,816 outstanding shares
of beneficial interest $ 9,662
Accumulated net realized loss on investments (16)
Net unrealized appreciation on investments 256
-----------
Total Net Assets -- 100.0% $ 9,902
-----------
-----------
Net Asset Value, Offering and Redemption
Price Per Share $ 10.19
-----------
-----------
</TABLE>
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
MTN -- MEDIUM TERM NOTE
(A) -- VARIABLE RATE SECURITY. THE RATE REPORTED ON THE STATEMENT OF NET ASSETS
IS THE RATE IN EFFECT ON DECEMBER 31, 1997.
(B) -- PUT AND DEMAND FEATURES EXIST REQUIRING THE ISSUER TO REPURCHASE THE
INSTRUMENT PRIOR TO MATURITY.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-18
<PAGE>
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
FOREIGN COMMON STOCKS -- 92.3%
ARGENTINA -- 0.6%
YPF Sociedad Anonima, Cl D, ADR 2,500 $ 85
-----------
AUSTRALIA -- 4.3%
Australian & New Zealand Banking Group 18,700 124
QBE Insurance 40,811 184
Telstra Installment Receipts 139,000 293
-----------
601
-----------
AUSTRIA -- 0.5%
Boehler-Uddeholm 1,250 73
-----------
CANADA -- 1.0%
Suncor 4,000 137
-----------
CZECH REPUBLIC -- 0.6%
SPT Telecom* 750 80
-----------
DENMARK -- 0.8%
Sydbank 2,000 114
-----------
FINLAND -- 3.3%
Cultor, Series 2 2,000 108
Finnlines 700 28
Metra, Cl B 2,200 52
Nokia ADR 1,800 126
UPM-Kymmene 1,600 32
Valmet 8,500 117
-----------
463
-----------
FRANCE -- 8.3%
Accor 1,195 222
AXA 2,900 224
Credit Local de France 1,250 145
Elf Aquitaine 1,800 209
Isis 500 55
Lyonnaise des Eaux 700 77
Technip 2,100 222
-----------
1,154
-----------
GERMANY -- 5.9%
Bayer 7,300 271
Buderus 225 101
Commerzbank 1,300 51
Hoechst 3,400 118
Veba 1,500 102
Volkswagen 300 168
-----------
811
-----------
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
GREECE -- 1.1%
Greek Telecom 7,544 $ 155
-----------
HONG KONG -- (1.8%)
Asia Satellite 24,000 41
HSBC Holdings 6,465 159
National Mutual Asia 46,000 46
-----------
246
-----------
INDONESIA -- 0.1%
Modern Photo Film, F 62,000 18
-----------
ISRAEL -- 4.7%
ECI Telecom 8,700 222
Israel Chemicals 81,000 110
Technomatrix Technologies Limited* 4,300 145
Teva Pharmaceuticals ADR 3,800 180
-----------
657
-----------
ITALY -- 4.7%
Banca Popolare di Milano 25,800 162
ENI 24,600 140
Istituto Bancario san Paolo di Torino 22,100 211
Saipem 26,500 139
-----------
652
-----------
JAPAN -- 6.4%
Canon 6,000 140
Fuji Photo Film 4,000 153
Honda Motor 6,000 220
Sony 400 36
Sony ADR 1,200 109
TDK 1,000 75
Terumo 10,000 147
-----------
880
-----------
NETHERLANDS -- 5.6%
Akzo 1,000 172
Gist Brocade 7,600 189
Hollandsche Beton Groep 3,110 58
Ing Groep 5,498 232
Phillips Electronics 2,000 120
-----------
771
-----------
NEW ZEALAND -- 0.2%
Fletcher Challenge Building 14,219 29
-----------
NORWAY -- 1.6%
Union Bank of Norway 6,050 215
-----------
</TABLE>
F-19
<PAGE>
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
INTERNATIONAL EQUITY FUND -- CONCLUDED
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
PANAMA -- 0.9%
Banco Latinamericano de Exportaciones 2,900 $ 120
-----------
PERU -- 0.8%
CPT Telefoncia del Peru 3,000 70
Credicorp 2,200 40
-----------
110
-----------
PORTUGAL -- 0.4%
Banco Espirito Santo 1,800 54
-----------
SINGAPORE -- 0.6%
Elec & Eltek International 18,700 86
-----------
SOUTH AFRICA -- 0.9%
Rembrandt Group 7,900 58
Sasol 6,000 63
-----------
121
-----------
SPAIN -- 2.4%
Repsol 4,200 179
Telefonica de Espana 5,200 149
-----------
328
-----------
SWEDEN -- 6.0%
Astra, Cl A 5,000 87
Castellum AB* 10,800 107
Gettinge, Cl B 6,700 106
Haldex AB 8,900 132
Munters 8,700 75
Skandia Forsakrings 4,100 193
Volvo, Cl B 4,800 129
-----------
829
-----------
SWITZERLAND -- 8.1%
Asea Brown Boveri Group 105 132
Nestle 175 262
Novartis 185 300
Swiss Bank 725 225
<CAPTION>
--------------------------------------------------------------------------
SHARES VALUE (000)
--------------------------------------------------------------------------
<S> <C> <C>
Zurich Insurance 415 $ 198
-----------
1,117
-----------
UNITED KINGDOM -- 20.7%
Avis Europe 78,000 222
Bank of Ireland 19,630 301
Bass 19,800 307
BTP 28,900 170
Caradon 55,015 160
Compass Group 16,000 195
FKI 51,000 161
Gallaher Group 16,700 89
Imperial Tobacco Group 9,000 57
LucasVarity 62,500 221
Morgan Crucible 16,200 122
National Westminster 3,000 50
Powerscreen International 1,000 10
Reckit & Colman 5,742 90
Siebe 10,800 212
Smith & Nephew 55,500 164
SmithKline Beecham 20,012 205
Storehouse 34,700 135
-----------
2,871
-----------
Total Foreign Common Stocks
(Cost $12,264) 12,777
-----------
FOREIGN PREFERRED STOCKS -- 1.2%
GERMANY -- 1.2%
Man 750 170
-----------
Total Foreign Preferred Stocks
(Cost $184) 170
-----------
Total Investments -- 93.5%
(Cost $12,448) $ 12,947
-----------
-----------
</TABLE>
*NON-INCOME PRODUCING SECURITY
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-20
<PAGE>
THIS PAGE LEFT INTENTIONALLY BLANK.
F-21
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES (000)
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FUND
------------
<S> <C>
Assets:
Investments at Market Value (Cost $12,448).......................... $ 12,947
Cash and Foreign Currency........................................... 809
Receivables for Investment Securities Sold.......................... 32
Receivables for Portfolio Shares Sold............................... 49
Other Assets........................................................ 41
------------
Total Assets.................................................... 13,878
------------
Liabilities:
Accrued Expenses.................................................... 31
------------
Total Liabilities................................................... 31
------------
Net Assets:
Portfolio Shares (Unlimited Authorization -- No Par Value) Based on
1,166,998 Outstanding
Shares of Beneficial Interest..................................... 13,215
Undistributed Net Investment Income................................. 32
Accumulated Net Realized Gain on Investments........................ 113
Accumulated Net Realized Loss on Foreign Currency Transactions...... (12)
Net Unrealized Appreciation on Investments.......................... 499
------------
Total Net Assets................................................ $ 13,847
------------
------------
Net Asset Value, Offering and Redemption Price Per Share.............. $ 11.87
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-22
<PAGE>
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER
31, 1997
<TABLE>
<CAPTION>
SMALL CAP INVESTMENT
VALUE INCOME MID-CAP EQUITY FUND CAPITAL GRADE BOND INTERNATIONAL
STOCK FUND EQUITY FUND (1) GROWTH FUND FUND EQUITY FUND
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Interest Income....................... $ 208 $ 88 $ 8 $ 261 $ 557 $ 40
Dividend Income....................... 1,412 115 26 558 -- 131
Less: Foreign Taxes Withheld.......... -- -- -- -- -- (10)
------------ ----------- ----- ------------ --- -----
Total Investment Income............... 1,620 203 34 819 557 161
------------ ----------- ----- ------------ --- -----
Expenses:
Investment Advisory Fees.............. 426 217 13 508 63 100
Less: Investment Advisory Fees
Waived.............................. (151) (118) (13) (198) (63) (100)
Less: Reimbursement from Advisor...... -- -- (4) -- (8) (6)
Administrator Fees.................... 63 63 12 63 63 75
Custody Fees.......................... 37 14 1 29 -- 11
Transfer Agent Fees................... 26 9 1 21 2 11
Professional Fees..................... 63 23 1 51 5 8
Trustee Fees.......................... 6 2 -- 5 1 1
Registration Fees..................... 8 1 2 7 -- 7
Printing Expenses..................... 23 3 1 18 (2) 4
Pricing Fees.......................... 2 1 -- 2 -- 13
Insurance and Other Fees.............. -- -- -- -- 1 --
Amortization of Deferred Organization
Costs............................... 2 2 -- 2 2 4
------------ ----------- ----- ------------ --- -----
Total Expenses.................... 505 217 14 508 64 128
------------ ----------- ----- ------------ --- -----
Net Investment Income (Loss).... 1,115 (14) 20 311 493 33
------------ ----------- ----- ------------ --- -----
Net Realized Gain on Securities
Sold................................ 6,730 2,335 20 7,858 24 113
Net Realized Loss on Foreign Currency
Transactions........................ -- -- -- -- -- (12)
Net Unrealized Appreciation
(Depreciation) on Investments....... 4,177 1,514 (103) 4,911 220 484
------------ ----------- ----- ------------ --- -----
Net Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency................ 10,907 3,849 (83) 12,769 244 585
------------ ----------- ----- ------------ --- -----
Increase (Decrease) in Net Assets from
Operations............................. $ 12,022 $ 3,835 $ (63) $ 13,080 $ 737 $ 618
------------ ----------- ----- ------------ --- -----
------------ ----------- ----- ------------ --- -----
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) The Small Cap Equity Fund commenced operations on October 22, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
A-23
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (000)
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS
<TABLE>
<CAPTION>
VALUE INCOME STOCK FUND MID-CAP EQUITY FUND
----------------------------- -----------------------------
01/01/97- 01/01/96- 01/01/97- 01/01/96-
12/31/97 12/31/96 12/31/97 12/31/96
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investment Activities:
Net Investment Income (Loss)...... $ 1,115 $ 361 $ (14) $ 47
Net Realized Gain (Loss) on
Investments and Foreign Currency
Transactions.................... 6,730 1,122 2,335 702
Net Unrealized Appreciation
(Depreciation) on Investments... 4,177 1,133 1,514 637
------------- ------------- ------------- -------------
Increase in Net Assets Resulting
from Operations................. 12,022 2,616 3,835 1,386
------------- ------------- ------------- -------------
Distributions to Shareholders:
Net Investment Income............. (1,121) (355) (13) (47)
Capital Gains..................... (904) -- (736) --
------------- ------------- ------------- -------------
Total Distributions............... (2,025) (355) (749) (47)
------------- ------------- ------------- -------------
Capital Transactions:
Proceeds from Shares Issued....... 32,879 24,660 9,159 9,578
Reinvestment of Cash
Distributions................... 2,025 355 749 47
Cost of Shares Repurchased........ (3,370) (75) (3,375) (79)
------------- ------------- ------------- -------------
Increase in Net Assets from
Capital Transactions............ 31,534 24,940 6,533 9,546
------------- ------------- ------------- -------------
Total Increase in Net Assets...... 41,531 27,201 9,619 10,885
------------- ------------- ------------- -------------
Net Assets:
Beginning of Period............... 31,216 4,015 14,294 3,409
------------- ------------- ------------- -------------
End of Period..................... $ 72,747 $ 31,216 $ 23,913 $ 14,294
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares Issued and Redeemed:
Shares Issued..................... 2,358 2,116 708 877
Shares Issued in Lieu of Cash
Distributions................... 138 30 55 4
Shares Redeemed................... (230) (6) (257) (7)
------------- ------------- ------------- -------------
Net Share Transactions............ 2,266 2,140 506 874
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-24
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL
EQUITY FUND CAPITAL GROWTH FUND INVESTMENT GRADE BOND FUND EQUITY FUND
------------- ----------------------------- ----------------------------- -----------------------------
10/22/97*- 01/01/97- 01/01/96- 01/01/97- 01/01/96- 01/01/97- 11/07/96*-
12/31/97 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 20 $ 311 $ 139 $ 493 $ 325 $ 33 $ 1
20 7,858 1,357 24 (40) 101 1
(103) 4,911 1,199 220 (34) 484 14
------ ------------- ------------- ------------- ------ ------------- ---
(63) 13,080 2,695 737 251 618 16
------ ------------- ------------- ------------- ------ ------------- ---
(20) (312) (138) (493) (325) (1) (1)
-- (1,300) -- -- -- 12,992 979
------ ------------- ------------- ------------- ------ ------------- ---
(20) (1,612) (138) (493) (325) -- --
------ ------------- ------------- ------------- ------ ------------- ---
7,626 27,091 18,759 4,194 5,002 (1) (1)
20 1,612 139 493 325 12,235 980
-- (3,483) (44) (3,068) (329) 12,852 995
------ ------------- ------------- ------------- ------ ------------- ---
7,646 25,220 18,854 1,619 4,998 995 --
------ ------------- ------------- ------------- ------ ------------- ---
7,563 36,688 21,411 1,863 4,924 1 1
------ ------------- ------------- ------------- ------ ------------- ---
-- 25,189 3,778 8,039 3,115 (758) --
------ ------------- ------------- ------------- ------ ------------- ---
$ 7,563 $ 61,877 $ 25,189 $ 9,902 $ 8,039 $ 13,847 $ 995
------ ------------- ------------- ------------- ------ ------------- ---
------ ------------- ------------- ------------- ------ ------------- ---
772 1,771 1,567 421 506 1,136 98
2 100 11 49 33 -- --
-- (216) (4) (309) (33) (67) --
------ ------------- ------------- ------------- ------ ------------- ---
774 1,655 1,574 161 506 1,069 98
------ ------------- ------------- ------------- ------ ------------- ---
</TABLE>
* Commencement of Operations
Amounts designated as "--" are either $0 or have been rounded to $0.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-25
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS FOR THE PERIODS ENDED THROUGH DECEMBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET NET REALIZED AND
INVESTMENT UNREALIZED GAINS
NET ASSET VALUE INCOME (LOSSES) DISTRIBUTIONS FROM DISTRIBUTIONS FROM
BEGINNING OF PERIOD (LOSS) ON INVESTMENTS NET INVESTMENT INCOME REALIZED CAPITAL GAINS
------------------- ---------- ---------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
VALUE INCOME STOCK FUND
1997 $12.41 $ 0.28 $ 3.02 $(0.28) $(0.22)
1996 10.67 0.23 1.74 (0.23) --
1995(1) 10.00 0.06 0.67 (0.06) --
MID-CAP EQUITY FUND(A)
1997 $11.86 $(0.01) $ 2.64 $(0.01) $(0.51)
1996 10.27 0.06 1.59 (0.06) --
1995(1) 10.00 0.05 0.27 (0.05) --
SMALL CAP EQUITY FUND
1997(3) $10.00 $ 0.03 $(0.23) $(0.03) $ --
CAPITAL GROWTH FUND
1997 $13.06 $ 0.10 $ 4.63 $(0.10) $(0.42)
1996 10.66 0.12 2.40 (0.12) --
1995(1) 10.00 0.04 0.66 (0.04) --
INVESTMENT GRADE BOND FUND
1997 $ 9.92 $ 0.58 $ 0.27 $(0.58) $ --
1996 10.25 0.54 (0.33) (0.54) --
1995(1) 10.00 0.13 0.25 (0.13) --
INTERNATIONAL EQUITY FUND
1997 $10.16 $ 0.03 $ 1.68 $ -- $ --
1996(2) 10.00 0.01 0.16 (0.01) --
</TABLE>
(1) Commenced operations on October 2, 1995. All ratios for the period have
been annualized.
(2) Commenced operations on November 7, 1996. All ratios for the period have
been annualized.
(3) Commenced operations on October 22, 1997. All ratios for the period have
been annualized.
(4) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
* Returns are for the period indicated and have not been annualized.
(a) During the fiscal year ended December 31, 1996, the Aggressive Growth
Fund changed its name to the Mid-Cap Equity Fund.
Amounts designated as "--" are either $0 or rounded to $0.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-26
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO OF
EXPENSES TO RATIO OF
AVERAGE NET NET INVESTMENT
RATIO OF ASSETS INCOME (LOSS)
RATIO OF NET INVESTMENT (EXCLUDING TO AVERAGE NET
NET ASSET NET ASSETS EXPENSES TO INCOME (LOSS) TO WAIVERS ASSETS PORTFOLIO AVERAGE
VALUE END TOTAL END OF AVERAGE NET AVERAGE NET AND (EXCLUDING WAIVERS TURNOVER COMMISSION
OF PERIOD RETURN PERIOD (000) ASSETS ASSETS REIMBURSEMENTS) AND REIMBURSEMENTS) RATE RATE(4)
- --------- ------- ------------ ------------ ---------------- ----------------- -------------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$15.21 26.82% $72,747 0.95% 2.09% 1.23% 1.81% 104.84% $0.0536
12.41 18.64 31,216 0.95 2.45 1.95 1.45 79.80 0.0540
10.67 7.31* 4,015 0.95 2.98 5.72 (1.79) 7.17 n/a
$13.97 22.23% $23,913 1.15% (0.07)% 1.77% (0.69)% 138.98% $0.0322
11.86 16.05 14,294 1.15 0.58 2.79 (1.06) 139.60 0.0530
10.27 3.19* 3,409 1.15 2.22 6.34 (2.97) 13.29 n/a
$ 9.77 (2.05)%* $ 7,563 1.20% 1.62% 2.66% 0.16% 4.11% $0.0320
$17.27 36.54% $61,877 1.15% 0.70% 1.60% 0.25% 195.86% $0.0503
13.06 23.75 25,189 1.15 1.15 2.43 (0.13) 148.48 0.0530
10.66 6.96* 3,778 1.15 1.69 6.18 (3.34) 8.05 n/a
$10.19 8.84% $ 9,902 0.75% 5.81% 1.58% 4.98% 219.22% n/a
9.92 2.29 8,039 0.75 5.54 2.78 3.51 303.30 n/a
10.25 3.68* 3,115 0.75 5.04 6.05 (0.26) 108.55 n/a
$11.87 16.84% $13,847 1.60% 0.41% 2.93% (0.92)% 99.24% $0.0248
10.16 1.70* 995 1.60 1.83 31.39 (27.96) -- 0.0620
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
1. ORGANIZATION
The STI Classic Variable Trust (the "Trust") was organized as a
Massachusetts business trust under a Declaration of Trust dated April 18, 1995.
The Trust is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company with six funds: the Value Income Stock
Fund, the Mid-Cap Equity Fund, the Small Cap Equity Fund, the Capital Growth
Fund, the International Equity Fund (collectively "the Equity Funds") and the
Investment Grade Bond Fund. The assets of each Fund are segregated, and a
shareholder's interest is limited to the Fund in which shares are held. The
Fund's prospectus provides a description of each Fund's investment objective
policies and strategies.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Trust. These policies are in conformity with generally accepted accounting
principles.
SECURITY VALUATION -- Investments in equity securities that are traded on a
national securities exchange (or reported on the NASDAQ national market
system) are valued at the last quoted sales price, if readily available for
such equity securities, on each business day. If there is no such reported
sale, these securities, and unlisted securities for which market quotations
are readily available, are valued at the most recently quoted bid price.
Foreign securities in the International Equity Fund are valued based upon
quotations from the primary market in which they are traded.
Debt obligations exceeding sixty days to maturity for which market
quotations are readily available are valued at the most recently quoted bid
price. Debt obligations with sixty days or less until maturity may be valued
either at the most recently quoted bid price or at their amortized cost.
FEDERAL INCOME TAXES -- It is each Fund's intention to qualify as a
regulated investment company for Federal income tax purposes and distribute
all of its taxable income and net capital gains. Accordingly, no provisions
for Federal income taxes are required.
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the trade date of the security purchase or sale. Dividend
income is recognized on ex-dividend date, and interest income is recognized
on an accrual basis and includes, where applicable, the pro rata
amortization of premium or accretion of discount. The cost used in
determining net realized capital gains and losses on the sale of securities
are those of the specific securities sold, adjusted for the accretion and
amortization of purchase discounts and premiums during the applicable
holding period. Purchase discounts and premiums on securities held by the
Investment Grade Bond and the Equity Funds are accreted and amortized to
maturity using the scientific interest method, which approximates the
effective interest method.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the custodian bank until the repurchase agreements
mature. Provisions of the repurchase agreements ensure that the market value
of the collateral, including accrued interest thereon, is sufficient in the
event of default of the counterparty. If the counterparty defaults and the
value of the collateral declines or if the counterparty enters an insolvency
proceeding, realization of the collateral by the Funds may be delayed or
limited.
NET ASSET VALUE PER SHARE -- The net asset value per share of each Fund is
calculated on each business day. In general, it is computed by dividing the
assets of each Fund, less its liabilities, by the number of outstanding
shares of the respective class of the Fund. The offering price per share for
the shares of the Investment Grade Bond and Equity Funds is the net asset
value per share.
FOREIGN CURRENCY TRANSACTIONS -- With respect to the International Equity
Fund, the books and records are maintained in U.S. dollars. Foreign currency
amounts are translated into U.S. dollars on the following basis:
- market value of investment securities, assets and liabilities at the
current rate of exchange; and
- purchases and sales of investment securities, income, and expenses at the
relevent rates of exchange prevailing on the respective dates of such
transactions.
The International Equity Fund does not isolate the portion of gains and
losses on investments in equity securities that is due to changes in the
foreign exchange rates from that which is due to change in market prices of
equity securities.
F-28
<PAGE>
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The International Equity Fund reports certain foreign currency-related
transactions as components of realized gains for financial reporting
purposes, whereas such components are treated as ordinary income for Federal
income tax purposes.
OTHER -- Distributions from net investment income for the Investment Grade
Bond Fund are declared daily and paid monthly to shareholders. Distributions
from net investment income for the Value Income Stock Fund, the Mid-Cap
Equity Fund, the Small Cap Equity Fund and the Capital Growth Fund are
declared and paid quarterly to shareholders. Distributions from net
investment income for the International Equity Fund are declared and paid
annually to shareholders. Any net realized capital gains are distributed to
shareholders at least annually. Expenses related to a specific Fund are
charged to that Fund. Other operating expenses of the Trust are pro-rated to
the Funds on the basis of relative net assets.
RECLASSIFICATION OF COMPONENTS OF NET ASSETS -- The timing and
characterization of certain income and capital gains distributions are
determined annually in accordance with federal tax regulations which may
differ from generally accepted accounting principles. As a result, net
investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from
distributions during such period. These book/ tax differences may be
temporary or permanent in nature. To the extent these differences are
permanent, they are charged or credited to paid-in-capital or accumulated
net realized gain, as appropriate, in the period that the differences arise.
Accordingly, the following permanent differences, primarily attributable to
a net operating loss in the Mid-Cap Equity Fund and the classification of
short-term capital gains and ordinary income for tax purposes related to the
other funds, have been reclassified to/ from the following accounts:
<TABLE>
<CAPTION>
UNDISTRIBUTED
ACCUMULATED NET INVESTMENT
REALIZED GAIN INCOME
(000) (000)
--------------- -----------------
<S> <C> <C>
Value Income Stock Fund........... $ (225) $ 225
Mid-Cap Equity Fund............... (27) 27
Capital Growth Fund............... (60) 60
</TABLE>
These reclassifications have no effect on net assets or net asset values per
share.
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that effect the reported amount of assets
and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements, and reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from these
estimates.
3. ADMINISTRATION AND DISTRIBUTION AGREEMENTS
The Trust and SEI Fund Resources (the "Administrator") are parties to an
administration agreement (the "Administration Agreement") dated August 18, 1995
as amended November 19, 1997. Under the terms of the Administration Agreement
the Administrator is entitled to a fee, subject to a minimum, (expressed as a
percentage of the combined average daily net assets of the Trust and the STI
Classic Funds) of: .12% up to $1 billion, .09% on the next $4 billion, .07% on
the next $3 billion, .065% on the next $2 billion, and .06% for over $10
billion.
The Trust and Federated Services Company are parties to a Transfer Agency
servicing agreement dated August 2, 1995 under which Federated Services Company
provides transfer agency services to the Trust.
The Trust and SEI Investments Distribution Co. ("the Distributor") are parties
to a Distribution Agreement dated August 2, 1995. The Distributor receives no
fees for its services under this agreement.
4. INVESTMENT ADVISORY AGREEMENT
Investment advisory services are provided to the Trust by STI Capital
Management, N.A. ("STI Capital"). Under the terms of the investment advisory
agreements, STI Capital is entitled to receive a fee from the Fund, computed
daily and paid monthly, at an annual rate of .74%, 1.15%, .80%, 1.15%, 1.15% and
1.25% of the average daily net assets of the Investment Grade Bond Fund, Capital
Growth Fund, Value Income Stock Fund, Mid-Cap Equity Fund, Small Cap Equity Fund
and International Equity Fund, respectively. STI Capital has voluntarily agreed
to waive all or a portion of its fees (and to reimburse Funds' expenses) in
order to limit operating expenses. Fee waivers and expense reimbursements are
voluntary and may be terminated at any time.
SunTrust Bank, Atlanta acts as Custodian for all the Funds except the
International Equity Fund which has a custodian agreement with the Bank of New
York. Fees of the Custodian are paid on the basis of net assets. The
F-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STI CLASSIC VARIABLE TRUST FUNDS DECEMBER 31, 1997
4. INVESTMENT ADVISORY AGREEMENT (CONTINUED)
Custodian plays no role in determining the investment policies of the Trust or
which securities are to be purchased or sold in the Funds.
5. ORGANIZATIONAL COSTS AND TRANSACTIONS WITH AFFILIATES
The Trust incurred organization costs of approximately $55,566. These costs
have been deferred in the accounts of the Funds and are being amortized on a
straight line basis over a period of sixty months commencing with operations.
The costs include legal fees of approximately $44,153 for organizational work
performed by a law firm of which two officers of the Trust are partners. In the
event any of the initial shares of the Trust are redeemed by any holder thereof
during the period that the Trust is amortizing its organizational costs, the
redemption proceeds payable to the holder thereof by the Trust will be reduced
by the unamortized organizational cost in the same ratio as the number of
initial shares being redeemed bears to the number of initial shares outstanding
at the time of redemption.
Certain officers of the Trust are also officers of the Administrator and/or the
Distributor. Such officers are paid no fees by the Trust for serving as officers
of the Trust.
6. INVESTMENT TRANSACTIONS
The cost of security purchases and the proceeds from security sales,
excluding short-term investments, for the period ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
U.S. GOVT. U.S. GOVT.
PURCHASES SALES PURCHASES SALES
(000) (000) (000) (000)
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Value Income Stock Fund............ $ 75,585 $ 51,313 $ -- $ --
Mid-Cap Equity Fund................ 29,295 24,286 -- --
Small Cap Equity Fund.............. 7,395 241 -- --
Capital Growth Fund................ 99,913 78,380 -- --
Investment Grade Bond Fund......... 7,439 6,010 11,789 11,576
International Equity Fund.......... 18,768 7,145 -- --
</TABLE>
At December 31, 1997, the total cost of securities and the net realized gains or
losses on securities sold for Federal income tax purposes was not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation for securities held by the
Investment Grade Bond and Equity Funds at December 31, 1997 was as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION/
SECURITIES SECURITIES DEPRECIATION
(000) (000) (000)
----------- ----------- -------------
<S> <C> <C> <C>
Value Income Stock Fund....... $ 6,482 $ (975) $ 5,507
Mid-Cap Equity Fund........... 3,304 (1,087) 2,217
Small Cap Equity Fund......... 225 (328) (103)
Capital Growth Fund........... 7,081 (775) 6,306
Investment Grade Bond Fund.... 284 (28) 256
International Equity Fund..... 992 (493) 499
</TABLE>
7. CONCENTRATION OF CREDIT RISK
The Investment Grade Bond Fund invests primarily in investment grade
obligations rated at least BBB or better by S & P or Baa or better by Moody's.
Changes by recognized rating agencies in the ratings of any fixed income
security or in the ability of an issuer to make payments of interest and
principal may affect the value of these investments.
8. CONSENT OF SOLE SHAREHOLDER
On October 20, 1997, the sole shareholder of the Small Cap Equity Fund (the
"Fund") approved the following appointments: SEI Fund Resources to serve as
administrator of the Fund, STI Capital Management, N.A. to serve as investment
advisor to the assets of the Fund and SEI Investments Distribution Co. to serve
as distributor of the shares of the Fund.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of
STI Classic Variable Trust:
We have audited the accompanying statements of net assets of the Value Income
Stock, Mid-Cap Equity, Small Cap Equity, Capital Growth, Investment Grade Bond
and International Equity Funds of STI Classic Variable Trust (the "Trust") as of
December 31, 1997, and the related statements of operations, changes in net
assets, and financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and the application of
alternative auditing procedures with respect to unsettled securites
transactions. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Value
Income Stock, Mid-Cap Equity, Small Cap Equity, Capital Growth, Investment Grade
Bond and International Equity Funds of STI Classic Variable Trust as of December
31, 1997, the results of their operations, changes in their net assets, and
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA
January 30, 1998
F-31
