<PAGE>
PROSPECTUS
HOW TO READ THIS PROSPECTUS
The STI Classic Variable Trust is a mutual fund family that offers shares in a
number of separate investment portfolios (Funds). The Funds have individual
investment goals and strategies. 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).
This prospectus gives you important information about the Growth and Income and
Quality Growth Stock Funds that you should know before investing. Please read
this prospectus in conjunction with the Contract prospectus and keep it for
future reference.
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT RISK AND RETURN THAT IS COMMON TO EACH OF THE
FUNDS. FOR MORE DETAILED INFORMATION ABOUT EACH FUND, PLEASE SEE:
<TABLE>
<S> <C>
1 RISK/RETURN INFORMATION 7 THE INVESTMENT ADVISER AND PORTFOLIO
MANAGERS
2 GROWTH AND INCOME FUND
8 PURCHASING AND SELLING FUND SHARES
4 QUALITY GROWTH STOCK FUND
9 DIVIDENDS AND DISTRIBUTIONS
6 MORE INFORMATION ABOUT RISK
9 TAXES
6 MORE INFORMATION ABOUT FUND
INVESTMENTS 10 HOW TO OBTAIN MORE INFORMATION
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[GRAPHIC] FUND SUMMARY [GRAPHIC] FUND FEES AND EXPENSES
[GRAPHIC] INVESTMENT STRATEGY [GRAPHIC] INVESTMENT ADVISER
[GRAPHIC WHAT ARE THE RISKS OF INVESTING? [GRAPHIC] PURCHASING FUND SHARES
[GRAPHIC PERFORMANCE INFORMATION
</TABLE>
JANUARY 1, 2000
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
PROSPECTUS 1
RISK/RETURN INFORMATION COMMON TO THE FUNDS
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities. Before you invest,
you should know a few things about investing in mutual funds.
Each Fund has its own investment goal and strategies for reaching that goal. The
Adviser invests Fund assets in a way that the Adviser believes will help the
Fund achieve its goal. Still, investing in the Funds involves risks, and there
is no guarantee that a Fund will achieve its goal. The Adviser's judgments about
the markets, the economy, or companies may not anticipate actual market
movements, economic conditions or company performance, and these judgments may
affect the return on your investment. In fact, no matter how good a job the
Adviser does, you could lose money on your investment in the Fund, just as you
could with other investments. A Fund share is not a bank deposit, and it is not
insured or guaranteed by the FDIC or any government agency. The investment
objective of each Fund is nonfundamental and may be changed without shareholder
approval.
The value of your investment in a Fund is based on the market prices of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Fund owns and the markets in which they trade. The
effect on a Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.
<PAGE>
2 PROSPECTUS
GROWTH AND INCOME FUND
[GRAPHIC] FUND SUMMARY
INVESTMENT GOALS
PRIMARY Long-term capital appreciation
SECONDARY Current income
- --------------------------------------------------------------------------------
INVESTMENT FOCUS Equity securities
- --------------------------------------------------------------------------------
SHARE PRICE VOLATILITY Moderate
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGY Attempts to identify securities of companies
with market capitalizations of at least
$1 billion with attractive valuation and/or
above average earnings momentum relative
either to their sectors or the market
as a whole
- --------------------------------------------------------------------------------
INVESTOR PROFILE Investors who are looking for capital
appreciation potential and income with less
volatility than the equity markets as a whole
- --------------------------------------------------------------------------------
[GRAPHIC] INVESTMENT STRATEGY
The Growth and Income Fund invests primarily in equity securities,
including common stock and listed American Depository Receipts (ADRs), of
domestic and foreign companies with market capitalizations of at least $1
billion. However, the average market capitalization can vary throughout a full
market cycle and will be flexible to allow the Adviser to capture market
opportunities. The Adviser uses a quantitative screening process to identify
companies with attractive fundamental profiles. The portfolio management team
selects stocks of companies with strong financial quality and above average
earnings momentum in seeking to secure the best relative values in each economic
sector.
[GRAPHIC] WHAT ARE THE RISKS OF INVESTING IN THIS FUND?
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate drastically from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
Investing in foreign countries poses additional risks since political
and economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily affect the U.S. economy or
similar issuers located in the United States. In addition, investments in
foreign countries are generally denominated in a foreign currency. As a result,
changes in the value of those currencies compared to the U.S. dollar may affect
(positively or negatively) the value of a Fund's investments. These currency
movements may happen separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country.
[GRAPHIC] PERFORMANCE INFORMATION
As of December 31, 1999, the Growth and Income Fund had not commenced
operations and did not have a performance history.
<PAGE>
PROSPECTUS 3
GROWTH AND INCOME FUND
[GRAPHIC] FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay indirectly if you
buy and hold Fund shares. This table does not, however, include any separate
account or contract expenses, fees or charges.
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Advisory Fees 0.90%
Other Expenses* 0.30%
----
Total Annual Fund Operating Expenses 1.20%
</TABLE>
* OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT YEAR.
- --------------------------------------------------------------------------------
EXAMPLE
- --------------------------------------------------------------------------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C>
$122 $381
</TABLE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
Every mutual fund has operating expenses to pay for professional advisory,
shareholder, distribution, administration and custody services. The Fund's
estimated expenses in the table above are shown as a percentage of the Fund's
net assets. These expenses are deducted from Fund assets. The table shows the
highest estimated expenses that could be currently charged to the Fund. For more
information about these fees, see "Investment Adviser."
<PAGE>
4 PROSPECTUS
QUALITY GROWTH STOCK FUND
[GRAPHIC] FUND SUMMARY
INVESTMENT GOAL Long-term capital appreciation with nominal
dividend income
- --------------------------------------------------------------------------------
INVESTMENT FOCUS U.S. common stocks of growth companies
- --------------------------------------------------------------------------------
SHARE PRICE VOLATILITY Moderate
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGY Attempts to identify companies that have
above-average growth potential and uses a low
portfolio turnover strategy
- --------------------------------------------------------------------------------
INVESTOR PROFILE Investors who want to increase the value of
their investment
- --------------------------------------------------------------------------------
[GRAPHIC] INVESTMENT STRATEGY
The Quality Growth Stock Fund invests primarily in a diversified portfolio
of common stocks of large, mid- and small cap high quality financially strong
U.S. growth companies. In selecting investments for the Fund, the Adviser
focuses on high quality companies as demonstrated by their balance sheets,
earnings, management, and products. Many of these companies have a history of
stable or rising dividend payout policies. The Adviser seeks to maximize
long-term capital appreciation by using a low turnover rate (generally 50% or
less) strategy.
[GRAPHIC] WHAT ARE THE RISKS OF INVESTING IN THIS FUND?
Since it purchases common stocks, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the stock
markets have moved in cycles, and the value of the Fund's securities may
fluctuate drastically from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
The Fund may use hedging techniques such as the purchase of put options, short
sales `against the box,' the sale of stock index futures contracts and equity
swaps. By using these techniques, the Fund will attempt to reduce its exposure
to price declines without realizing substantial capital gains. Although the Fund
may utilize such strategies in lieu of selling appreciated securities, the
Fund's exposure to losses during stock market declines may be higher than that
of other funds that do not follow a general policy of avoiding sales of highly
appreciated securities.
The Fund is also subject to the risk that common stocks of U.S. growth companies
may underperform other segments of the equity market or the equity markets as a
whole.
The small to mid-sized capitalization companies the Fund invests in may be more
vulnerable to adverse business or economic events than larger, more established
companies. In particular, these small companies may have limited product lines,
markets and financial resources, and may depend upon a relatively small
management group. Therefore, small cap and mid-cap stocks may be more volatile
than those of larger companies. These securities may be traded over the counter
or listed on an exchange.
[GRAPHIC] PERFORMANCE INFORMATION
As of December 31, 1999, the Quality Growth Stock Fund had not commenced
operations and did not have a performance history.
<PAGE>
PROSPECTUS 5
QUALITY GROWTH STOCK FUND
[GRAPHIC] FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay indirectly if you
buy and hold Fund shares. This table does not, however, include any separate
account or contract expenses, fees or charges.
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Advisory Fees 1.00%
Other Expenses* 0.30%
----
Total Annual Fund Operating Expenses 1.30%
</TABLE>
* OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT YEAR.
- --------------------------------------------------------------------------------
EXAMPLE
- --------------------------------------------------------------------------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C>
$132 $412
</TABLE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
Every mutual fund has operating expenses to pay for professional
advisory, shareholder, distribution, administration and custody services. The
Fund's estimated expenses in the table above are shown as a percentage of the
Fund's net assets. These expenses are deducted from Fund assets. The table shows
the highest estimated expenses that could be currently charged to the Fund. For
more information about these fees, see "Investment Adviser."
<PAGE>
6 PROSPECTUS
MORE INFORMATION ABOUT RISK
[GRAPHIC] MORE INFORMATION ABOUT RISK
EQUITY RISK
BOTH FUNDS
Equity securities include public and privately issued equity securities, common
and preferred stocks, warrants, rights to subscribe to common stock and
convertible securities, as well as instruments that attempt to track the price
movement of equity indices. Investments in equity securities and equity
derivatives in general are subject to market risks that may cause their prices
to fluctuate over time. The value of securities convertible into equity
securities, such as warrants or convertible debt, 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 mutual fund invests
will cause a fund's net asset value to fluctuate. An investment in a portfolio
of equity securities may be more suitable for long-term investors who can bear
the risk of these share price fluctuations.
FOREIGN SECURITY RISKS
GROWTH AND INCOME FUND
Investments in securities of foreign companies or governments can be more
volatile than investments in U.S. companies or governments. Diplomatic,
political, or economic developments, including nationalization or appropriation,
could affect investments in foreign countries. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets. In
addition, the value of securities denominated in foreign currencies, and of
dividends from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign companies or
governments generally are not subject to uniform accounting, auditing, and
financial reporting standards comparable to those applicable to domestic U.S.
companies or governments. Transaction costs are generally higher than those in
the U.S. and expenses for custodial arrangements of foreign securities may be
somewhat greater than typical expenses for custodial arrangements of similar
U.S. securities. Some foreign governments levy withholding taxes against
dividend and interest income. Although in some countries a portion of these
taxes are recoverable, the non-recovered portion will reduce the income received
from the securities comprising the portfolio.
MORE INFORMATION ABOUT FUND INVESTMENTS
This prospectus describes the Funds' primary strategies, and the Funds will
normally invest in the types of securities described in this prospectus.
However, in addition to the investments and strategies described in this
prospectus, each Fund also may invest in other securities, use other strategies
and engage in other investment practices. These investments and strategies, as
well as those described in this prospectus, are described in detail in the
Statement of Additional Information (SAI).
The investments and strategies described in this prospectus are those that the
Funds use under normal conditions. During unusual economic or market conditions,
or for temporary defensive or liquidity purposes, each Fund may invest up to
100% of its assets in cash, money market instruments, repurchase agreements and
short-term obligations. A Fund will do so only if the Adviser believes that the
risk of loss outweighs the opportunity for capital gains or higher income. Of
course, a Fund cannot guarantee that it will achieve its investment goal.
<PAGE>
PROSPECTUS 7
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS
[GRAPHIC] INVESTMENT ADVISER
The Investment Adviser makes investment decisions for the Funds and
continuously reviews, supervises and administers each Fund's respective
investment program. The Board of Trustees supervises the Adviser and establishes
policies that the Adviser must follow in its management activities.
Trusco Capital Management, Inc., (Trusco), 50 Hurt Plaza, Suite 1400, Atlanta,
Georgia 30303, serves as the Adviser to the Funds. As of July 1, 1999, Trusco
had approximately $30 billion in assets under management.
The Funds had not commenced operations as of December 31, 1999.
The Adviser may use its affiliates as brokers for Fund transactions.
PORTFOLIO MANAGERS
Mr. Jeffrey E. Markunas, CFA, has served as lead portfolio manager of the Growth
and Income Fund since it began operating in January 2000. Since 1992, he has
served as senior Vice President and Director of Equity Management for Crestar
Asset Management Company. Additionally, he was named Senior Vice President of
Trusco in January 1999. Mr. Markunas has more than 17 years of investment
experience.
Mr. Jonathan Mote, CFA, CFP, has served as a Portfolio Manager of Trusco since
August 1998. He has managed the Quality Growth Stock Fund since it began
operating in January 2000. Prior to joining Trusco, Mr. Mote served as a
portfolio manager with SunTrust Banks. He has more than 14 years of investment
experience.
<PAGE>
8 PROSPECTUS
PURCHASING AND SELLING FUND SHARES
[GRAPHIC] HOW TO PURCHASE FUND SHARES
Generally, you may not purchase Fund shares directly. Rather, fund shares are
sold to insurance companies for their separate accounts. Separate accounts are
used by insurance companies to fund variable annuity and variable life insurance
contracts. As a result, you as a customer of an insurance company may purchase
Fund shares through these contracts. An insurance company purchases and redeems
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, repayments and
benefit payments to the terms of the Contract at the Fund's net asset value per
share calculated as of that same day. Please refer to the Contract prospectus
for information on how to make investments and redemptions.
WHEN CAN YOU PURCHASE SHARES?
Shares are offered continuously and may be purchased on any day that the New
York Stock Exchange is open for business (a Business Day).
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after we receive your purchase order. We calculate each
Fund's NAV once each Business Day at the regularly scheduled close of normal
trading on the New York Stock Exchange (normally, 4:00 p.m. Eastern time). So,
to receive the current Business Day's NAV, generally we must receive your
purchase order (from your insurance company) before 4:00 p.m. Eastern time.
HOW THE FUNDS CALCULATE NAV
In calculating NAV for the Fund, we generally value a Fund's portfolio at market
price. If market prices are unavailable or we think that they are unreliable,
fair value prices may be determined in good faith using methods approved by the
Board of Trustees. Some Funds hold portfolio securities that are listed on
foreign exchanges. These securities may trade on weekends or other days when the
Funds do not calculate NAV. As a result, the NAV of these Funds' shares may
change on days when you cannot purchase or sell Fund shares.
NET ASSET VALUE
NAV for one Fund share is the value of that share's portion of all of the net
assets of the Fund.
HOW TO SELL YOUR FUND SHARES
You may sell (sometimes called "redeem") your shares on any Business Day by
contacting your insurance company. All redemption requests will be processed and
payments will be made within seven days after tender. Your insurance company
will give you information about how to sell your shares. The sale price of each
share will be the next NAV determined after we receive your request from your
insurance company. Your insurance company or retirement plan sponsor may have
different cutoff times for determining NAV. Please refer to the Contract
prospectus for information on how to make investments and redemptions.
<PAGE>
PROSPECTUS 9
DIVIDENDS AND DISTRIBUTIONS
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Trust may suspend your right to sell your shares if the NYSE restricts
trading, the SEC declares an emergency or for other reasons. More information
about this is in our SAI.
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes its income quarterly. Each Fund makes distributions of
capital gains, if any, at least annually. Dividends are paid in the form of
additional shares.
THE "RECORD DATE"
If you own Fund shares on a Fund's record date, you will be entitled to receive
the distribution.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax issues
that affect the Funds and their insurance company shareholders. This summary is
based on current tax laws, which may change. For more information about the tax
consequences of an investment in an insurance contract, see the attached
Contract prospectus.
The Funds expect that they will not have to pay income taxes if they distribute
all of their income gains. Net income and realized capital gains that the Funds
distribute are not currently taxable when left to accumulate within a variable
annuity or variable life insurance contract. For information on federal income
taxation of a life insurance company with respect to its receipt of
distributions from the Funds and federal income taxation of owners of variable
annuity or variable life insurance contracts, refer to the Contract prospectus.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
<PAGE>
10 PROSPECTUS
HOW TO OBTAIN MORE INFORMATION
INVESTMENT ADVISER
Trusco Capital Management, Inc.
50 Hurt Plaza
Suite 1400
Atlanta, GA 30303
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Funds is available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Our SAI dated January 1, 2000, includes detailed information about the STI
Classic Variable Trust. The SAI is on file with the SEC and is incorporated by
reference into this prospectus. This means that the SAI, for legal purposes, is
a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list each Fund's holdings and contain information from the Fund's
managers about strategies and recent market conditions and trends and their
impact on Fund performance. The reports also contain detailed financial
information about the Funds.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE:
Call 1-800-874-4770
BY MAIL:
Write to us c/o SEI Investments
Distribution Co. Oaks, Pennsylvania 19456
FROM THE SEC: You can also obtain documents, and other information about the STI
Classic Variable Trust, from the SEC's website ("http://www.sec.gov"). You may
review and copy documents at the SEC Public Reference Room in Washington, DC
(for information call 1-800-SEC-0330). You may request documents by mail from
the SEC, upon payment of a duplicating fee, by writing to: Securities and
Exchange Commission, Public Reference Section, Washington, DC 20549-6009. The
Funds' Investment Company Act registration number is 811-09032.
<PAGE>
STI CLASSIC VARIABLE TRUST
GROWTH AND INCOME FUND
QUALITY GROWTH STOCK FUND
INVESTMENT ADVISER:
TRUSCO CAPITAL MANAGEMENT, INC.
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of the
Growth and Income Fund and the Quality Growth Stock Fund (the "Funds") and
should be read in conjunction with the Fund's prospectus dated January 1, 2000.
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-14
THE INVESTMENT ADVISER.................................................B-16
THE ADMINISTRATOR......................................................B-16
THE DISTRIBUTOR........................................................B-17
THE CUSTODIAN..........................................................B-17
INDEPENDENT PUBLIC ACCOUNTANTS........................................B-17
LEGAL COUNSEL..........................................................B-17
TRUSTEES AND OFFICERS OF THE TRUST.....................................B-17
COMPUTATION OF YIELD...................................................B-20
CALCULATION OF TOTAL RETURN............................................B-21
PURCHASE AND REDEMPTION OF SHARES......................................B-21
NET ASSET VALUE--PRICING OF PORTFOLIO SECURITIES.......................B-22
TAXES ..............................................................B-22
FUND TRANSACTIONS......................................................B-24
TRADING PRACTICES AND BROKERAGE........................................B-24
DESCRIPTION OF SHARES..................................................B-26
SHAREHOLDER LIABILITY..................................................B-26
LIMITATION OF TRUSTEES' LIABILITY......................................B-27
</TABLE>
January 1, 2000
<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 ("Funds") of
units of beneficial interest ("shares"). Each share of each Fund represents an
equal proportionate interest in that portfolio. Shares of the Trust are issued
and redeemed only in connection with investments in and payments under variable
annuity contracts and variable life insurance policies of various life insurance
companies. This Statement of Additional Information relates to the Growth and
Income Fund and Quality Growth Stock Fund. These series are collectively
referred to herein as the "Funds."
DESCRIPTION OF PERMITTED INVESTMENTS
AMERICAN DEPOSITARY RECEIPTS (ADRS), EUROPEAN DEPOSITARY RECEIPTS (EDRS) AND
GLOBAL DEPOSITORY RECEIPTS (GDRS)
ADRs, EDRs, and GDRs are securities, typically issued by a U.S. financial
institution or a non-U.S. financial institution in the case of an EDR or GDR (a
"depositary"). The institution has ownership interests in a security, or a pool
of securities, issued by a foreign issuer and deposited with the depositary.
ADRs, EDRs and GDRs 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. 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 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.
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.
BANK OBLIGATIONS
Bank obligations are short-term obligations issued by U.S. and foreign banks,
including bankers' acceptances, certificates of deposit, custodial receipts, and
time deposits. Eurodollar and Yankee Bank
B-2
<PAGE>
Obligations are U.S. dollar-denominated certificates of deposit or time deposits
issued outside the U.S. by foreign branches of U.S. banks or by foreign banks.
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.
COMMON AND PREFERRED STOCKS
Common and preferred stocks represent units of ownership in a corporation.
Owners of common stock typically are entitled to vote on important matters.
Owners of preferred stock ordinarily do not have voting rights, but are entitled
to dividends at a specified rate. Preferred stock has a prior claim to common
stockholders with respect to dividends.
CONVERTIBLE SECURITIES
Convertible securities are securities issued by corporations that are
exchangeable for a set number of another security at a prestated price. The
market value of a convertible security tends to move with the market value of
the underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call option
provisions.
CUSTODIAL RECEIPTS
The custodian arranges for the issuance of the certificates or receipts
evidencing ownership and maintains the register. Receipts include Treasury
Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS"). TRs, TIGRs and CATS are
sold as zero coupon securities.
DEBT SECURITIES
Debt securities represent money borrowed that obligates the issuer (E.G., a
corporation, municipality, government, government agency) to repay the borrowed
amount at maturity (when the obligation is due and payable) and usually to pay
the holder interest at specific times (E.G., bonds, notes, debentures).
B-3
<PAGE>
DOLLAR ROLLS
Dollar rolls are transactions in which securities are sold for delivery in the
current month and the seller contracts to repurchase substantially similar
securities on a specified future date. Any difference between the sale price and
the purchase price (plus interest earned on the cash proceeds of the sale) is
applied against the past interest income on the securities sold to arrive at an
implied borrowing rate.
Dollar rolls may be renewed prior to cash settlement and initially may involve
only a firm commitment agreement by the Fund to buy a security.
If the broker-dealer to whom the Fund sells the security becomes insolvent, the
Fund's right to repurchase the security may be restricted. Other risks involved
in entering into dollar rolls include the risk that the value of the security
may change adversely over the term of the dollar roll and that the security the
Fund is required to repurchase may be worth less than the security that the Fund
originally held. To avoid any leveraging concerns, the Fund will place U.S.
Government or other liquid, high grade assets in a segregated account in an
amount sufficient to cover its repurchase obligation.
HEDGING TECHNIQUES
Hedging in an investment strategy designed to offset investment risks. Hedging
activities include, among other things, the use of options and futures. There
are risks associated with hedging activities, including: (1) the success of a
hedging strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets, and movements in interest rates;
(2) there may be an imperfect or no correlation between the changes in market
value of the securities held by a Fund and the prices of futures and option on
futures; (3) there may not be a liquid secondary market for a futures contract
or option; and (4) trading restrictions or limitations may be imposed by an
exchange, and government regulations may restrict trading in futures contracts
and options.
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 the Fund to investment
risks that differ in some respects from those related to investments in
obligations of U.S. domestic issuers. Such risks include future adverse
political and economic developments, the possible imposition of withholding
taxes on interest or other income, possible seizure, nationalization, or
expropriation of foreign deposits, the possible establishment of exchange
controls or taxation at the source, greater fluctuations in value due to changes
in exchange rates, or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal and interest on such
obligations. Such investments may also entail higher custodial fees and sales
commissions than domestic investments. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of
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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.
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
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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.
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
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invested in the contract. However, because the Funds will be engaged in futures
transactions only for hedging purposes, the Adviser 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.
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.
INVESTMENT GRADE OBLIGATIONS
Investment grade obligations are debt obligations rated BBB by S&P or Baa by
Moody's, or their unrated equivalents. These securities are deemed to have
speculative characteristics.
LOAN PARTICIPATIONS
Loan participations are interest in loans to U.S. corporations which are
administered by the lending bank or agent for a syndicate of lending banks. In a
loan participation, the borrower corporation is the issuer of the participation
interest except to the extent the Fund derives its rights from the intermediary
bank. Because the intermediary bank does not guarantee a loan participation, a
loan participation is subject to the credit risks associated with the underlying
corporate borrower.
In the event of bankruptcy or insolvency of the corporate borrower, a loan
participation may be subject to certain defenses that can be asserted by the
borrower as a result of improper conduct by the
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intermediary bank. In addition, in the event the underlying corporate borrower
fails to pay principal and interest when due, the Fund may be subject to delays,
expenses, and risks that are greater than those that would have been involved if
the Fund had purchased a direct obligation of the borrower. Under the terms of a
Loan Participation, the Fund may be regarded as a creditor of the intermediary
bank (rather than of the underlying corporate borrower), so that the Fund may
also be subject to the risk that the intermediary bank may become insolvent.
The secondary market for loan participations is limited and any such
participation purchased by the Fund may be regarded as illiquid.
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.
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 United States
Government. Obligations of Fannie Mae and FHLMC are not backed by the full faith
and credit of the United States Government but are considered to be of high
quality since they are considered to be instrumentalities of the United States.
The market value and interest yield of these mortgage-backed securities can vary
due to market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of federally insured
mortgage loans with a maximum maturity of 30 years. However, due to scheduled
and unscheduled principal payments on the underlying loans, these securities
have a shorter average maturity and, therefore, less principal volatility than a
comparable 30-year bond. Since prepayment rates vary widely, it is not possible
to accurately predict the average maturity of a particular mortgage-backed
security. The scheduled monthly interest and principal payments relating to
mortgages in the pool will be "passed through" to investors. Government
mortgage-backed securities differ from conventional bonds in that principal is
paid back to the certificate holders over the life of the loan rather than at
maturity. As a result, there will be monthly scheduled payments of principal and
interest. In addition, there may be unscheduled principal payments representing
prepayments on the underlying mortgages. Although these securities may offer
yields higher than those available from other types of U.S. Government
securities, mortgage-backed securities may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of
these securities likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
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DETERMINING MATURITIES OF MORTGAGE-BACKED SECURITIES
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
Adviser believes that the estimated average life is the most appropriate measure
of the maturity of a mortgage-backed security. Accordingly, in order to
determine whether such security is a permissible investment for the Funds, it
will be deemed to have a remaining maturity equal to its average life as
estimated by the Adviser. An average life estimate is a function of an
assumption regarding anticipated prepayment patterns. The assumption is based
upon current interest rates, current conditions in the relevant housing markets
and other factors. The assumption is necessarily subjective, and thus different
market participants could produce somewhat different average life estimates with
regard to the same security. There can be no assurance that the average life as
estimated by the Adviser will be the actual average life.
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.
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 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 or expiration date or both. A Fund may realize a net gain or loss from a
closing purchase transaction depending upon whether the net amount of the
original premium received on the call option
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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.
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 Adviser.
Investors will receive written notification at least thirty days prior to any
change in a Fund's investment objective.
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
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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 Adviser 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.
RESTRICTED SECURITIES
Restricted Securities are securities that may not be sold to the public without
registration under the Securities Act of 1933 (the "1933 Act") absent an
exemption from registration. Permitted investments for the Fund include
Restricted Securities, and the Fund may invest up to 15% of its net assets in
illiquid securities, subject to the Fund's investment limitations on the
purchase of illiquid securities. Restricted Securities, including securities
eligible for re-sale under Rule 144A of the 1933 Act, that are determined to be
liquid are not subject to this limitation. This determination is to be made by
the Fund's Adviser pursuant to guidelines adopted by the Board of Trustees.
Under these guidelines, the Adviser will consider the frequency of trades and
quotes for the security, the number of dealers in, and potential purchasers for,
the securities, dealer undertakings to make a market in the security, and the
nature of the security and of the marketplace trades. In purchasing such
Restricted Securities, the Adviser intends to purchase securities that are
exempt from registration under Rule 144A of the 1933 Act.
SECURITIES LENDING
Each Fund may lend securities pursuant to agreements which require that the
loans be continuously secured by collateral at all times equal to 100% of the
market value of the loaned securities which consists of: cash, securities of the
U.S. Government or its agencies, or any combination of cash and such securities.
Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for a Fund exceed one-third of the value of the
Fund's total assets taken at fair market value. A Fund will continue to receive
interest on the securities lent while simultaneously earning interest on the
investment of the cash collateral in U.S. Government securities. However, a Fund
will normally pay lending fees to such broker-dealers and related expenses from
the interest earned on invested collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. However, loans are made only to borrowers deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned currently from such securities loans justifies
the attendant risk. Any loan may be terminated by either party upon reasonable
notice to the
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other party. The Funds may use the Distributor or a broker-dealer affiliate of
the Adviser as a broker in these transactions.
SHORT-TERM OBLIGATIONS
Short-term obligations are debt obligations maturing (becoming payable) in 397
days or less, including commercial paper and short-term corporate obligations.
Short-term corporate obligations are short-term obligations issued by
corporations.
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 Adviser believes present minimal credit risks, and the Adviser would
use its best efforts to initially determine and continue to monitor the
financial strength of the sellers of the options by evaluating their financial
statements and such other information as is available in the marketplace. It
may, however be difficult to monitor the financial strength of the writers
because adequate current financial information may not be available. In the
event that any writer is unable to honor a put for financial reasons, 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 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.
STRIPS
Separately Traded Interest and Principal Securities ("STRIPS") which are
component parts of U.S. Treasury Securities traded through the Federal
Book-Entry System. The Adviser will purchase only
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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 Adviser 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 United States 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 United States Government
include securities issued by, among others, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Fannie Mae and the United States Postal Service as well as
government trust certificates. Some of these securities are supported by the
full faith and credit of the United States Treasury (E.G., GNMA), others are
supported by the right of the issuer to borrow from the Treasury and still
others are supported only by the credit of the instrumentality (E.G., Fannie
Mae). 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.
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 the Fund, as
lender, and the borrower. Such notes provide that the interest rate on the
amount outstanding varies on a daily, weekly or monthly basis depending upon a
stated short-term interest rate index. Both the lender and the borrower have the
right to reduce the amount of outstanding indebtedness at any time. There is no
secondary market for the notes and it is not generally contemplated that such
instruments will be traded. The quality of the note or the underlying credit
must, in the opinion of the Adviser, be equivalent to the ratings applicable to
permitted investments for a Fund. The Adviser 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.
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
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yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself. In that case there could
be an unrealized loss at the time of delivery.
Segregated accounts will be established with the Custodian, and the Funds will
maintain cash or liquid securities in an amount at least equal in value to a
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.
ZERO COUPON OBLIGATIONS
Zero coupon obligations are debt obligations that do not bear any interest, but
instead are issued at a deep discount from face value or par. The value of a
zero coupon obligation increases over time to reflect the interest accumulated.
Such obligations will not result in the payment of interest until maturity, and
will have greater price volatility than similar securities that are issued at
face value or par and pay interest periodically.
Investors will receive written notification at least thirty days prior to any
change in a Fund's investment objective. The phrase "principally invests" as
used in the prospectus means that the Fund invests at least 65% of its assets in
the securities as described in the sentence. Each tax-exempt fund invests at
least 80% of its total assets in securities with income exempt from federal
income and alternative minimum taxes.
INVESTMENT LIMITATIONS
The following are fundamental policies of 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-14
<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 a 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. 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 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. 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.
B-15
<PAGE>
THE INVESTMENT ADVISER
Trusco Capital Management, Inc. (the "Adviser") has entered into an advisory
agreement with the Trust (the "Advisory Agreement"). The Advisory Agreement
provides that the Adviser 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 Adviser but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by certain states, the Adviser and/or the
Administrator will bear the amount of such excess. The Adviser will not be
required to bear expenses of the Trust to an extent which would result in 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 Adviser, or
by the Adviser on 90 days' written notice to the Trust.
THE ADMINISTRATOR
The Trust and SEI Investments Mutual Funds Services (the "Administrator") are
parties to an Administration Agreement (the "Administration Agreement") dated
August 18, 1995. The Administration Agreement provides that the Administrator
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the matters to which the Administration
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Administrator in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder. The Administration Agreement shall remain in effect for a period of
five years after the date of the Agreement and shall continue in effect for
successive periods of two years subject to review at least annually by the
Trustees of the Trust unless terminated by either party on not less than 90
days' written notice.
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"), is the owner of all
beneficial interest in the Administrator. SEI Investments and its subsidiaries
and affiliates, including the Administrator, are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information
services to financial institutions, institutional investors, and money managers.
The Administrator and its affiliates also serve as administrator or
sub-administrator to the following other mutual funds: The Achievement Funds
Trust, The Advisors' Inner Circle Fund, Alpha Select Funds, Amerindo Funds,
Inc., The Arbor Fund,
B-16
<PAGE>
ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784 Funds-Registered
Trademark-, CNI Charter Funds, CUFUND, The Expedition Funds, First American
Funds, Inc., First American Investment Funds, Inc., First American Strategy
Funds, Inc., HighMark Funds, Huntington Funds, The Nevis Fund, Inc., Oak
Associates Funds, The Parkstone Advantage Fund, The PBHG Funds, Inc., PBHG
Insurance Series Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Index Funds, SEI Institutional International
Trust, SEI Institutional International Investments Trust, SEI Institutional
Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI Classic
Funds, TIP Funds and UAM Funds, Inc. II.
For its administrative services, the Administrator is entitled to a fee, which
is calculated daily and paid monthly, at an annual rate of: .12% of the first $1
billion of average aggregate net assets, .09% on the next $4 billion of average
aggregate net assets, .07% of the next $3 billion of average aggregate net
assets, .065% of the next $2 billion of average aggregate net assets, and .06%
thereafter.
THE DISTRIBUTOR
SEI Investments Distribution Co. (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.
THE CUSTODIAN
SunTrust Bank, Atlanta, 303 Peachtree Street N.E., 14th Floor, Atlanta, GA 30308
serves as the custodian for the all of the Funds.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP serves as independent public accountants for the Funds.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP serves as legal counsel to the Funds.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees supervise the management and affairs of the Trust. The Trustees
have approved contracts with certain companies that provide the Trust with
essential management services. The Trustees and Executive Officers of the Trust,
their respective dates of birth, and their principal occupations for the last
B-17
<PAGE>
five years are set forth below. Each may have held other positions with the
named companies during that period. The business address of each Trustee and
each Executive Officer is SEI Investments Company, Oaks, Pennsylvania 19456.
Certain officers of the Trust also serve as officers of some or all of the
following: The Achievement Funds Trust, The Advisors' Inner Circle Fund,
Alpha Select Funds, The Arbor Fund, ARK Funds, Armada Funds, Bishop Street
Funds, Boston 1784 Funds-Registered Trademark-, CNI Charter Funds, CUFUND,
The Expedition Funds, First American Funds, Inc., First American Investment
Funds, Inc., First American Strategy Funds, Inc., HighMark Funds, Huntington
Funds, The Nevis Fund, Inc., Oak Associates Funds, The Parkstone Advantage
Fund, The Pillar Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund,
Inc., SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds,
SEI Institutional International Trust, SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, STI Classic Funds, and TIP Funds, each of which is an open-end
management investment company managed by SEI Investments Mutual Funds
Services or its affiliates and distributed by SEI Investments Distribution
Co. 19456.
DANIEL S. GOODRUM (7/11/26) - Trustee* - Chairman & CEO, SunBank/South Florida,
N.A., 1985- 1991; Chairman, Audit Committee and Director, Holy Cross Hospital;
Executive Committee Member and Director, Honda Classic Foundation; Director,
Broward Community College Foundation.
WILTON LOONEY (4/18/19) - Trustee* - President, Genuine Parts Company,
1961-1964; Chairman of the Board, 1964-1990; Honorary Chairman of the Board,
1990 to present. Director, Rolling, Inc.; Director, RPC Energy Services, Inc.
CHAMPNEY A. MCNAIR (10/30/24) - Trustee* - Director and Chairman of Investment
Committee and member of Executive Committee, Cotton States Life and Health
Insurance Company; Director and Chairman of Investment Committee and member of
Executive Committee, Cotton States Mutual Insurance Company; Chairman, Trust
Company of Georgia Advisory Council.
F. WENDELL GOOCH (12/3/32) - Trustee - President, Orange County Publishing Co.,
Inc., since October 1981. Publisher of the Paoli News and the Paoli Republican
and Editor of the Paoli Republican since January, 1981. President, H & W
Distribution, Inc. since July 1984. Current Trustee on the Board of Trustees for
the SEI Family of Funds and The Capitol Mutual Funds. Executive Vice President,
Trust Department, Harris Trust and Savings Bank and Chairman of the Board of
Directors of The Harris Trust Company of Arizona before January 1981. Trustee,
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 and STI
Classic Funds.
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;
B-18
<PAGE>
spent 19 years as faculty member and administrator at Louisiana State University
and served as Head of Economics Department, member and Chairman of the Graduate
Council, Dean of Academic Affairs and Vice Chancellor. Member of Board of
Directors of Federal Reserve Bank of Atlanta, 1983-1988.
JONATHAN T. WALTON (3/28/30) - Trustee - Retired. Executive Vice President, NBD
Bank, N.A. and NBD Bancorp, October 1956 to March 1995. Trustee, W.K. Kellogg
Trust.
WILLIAM H. CAMMACK (11/24/29) - Trustee* - Chairman & Director, SunTrust
Equitable Securities Corporation, January 1998-present. Chairman and CEO,
Equitable Asset Management, Inc., December 1993-present. Chairman and CEO,
Equitable Trust Company, June 1991-present. Chairman, Equitable Securities
Corporation, July 1972-January 1998.
MARK NAGLE (10/20/59) - President, Controller, Treasurer and Chief Financial
Officer - President of the Administrator and Senior Vice President of SEI
Investments Mutual Funds Services Operations Group since 1998. Vice President of
the Administrator and Vice President of Fund Accounting and Administration of
SEI Investments Mutual Funds Services, 1996-1998. Vice President of the
Distributor since December 1997. Senior Vice President, Fund Administration,
BISYS Fund Services, September 1995-November 1996. Senior Vice President and
Site Manager, Fidelity Investments 1981- September 1995.
LINDA GAVALIS (6/5/64) - Vice President and Assistant Secretary - Vice President
and Assistant Secretary of the Administrator and the Distributor since 1998.
Assistant General Counsel and Director of Arbitration, Philadelphia Stock
Exchange, 1989-1998.
KATHY HEILIG (12/21/58) - Vice President and Assistant Secretary - Treasurer of
SEI Investments Company since 1997. Assistant Controller of SEI Investments
Company since 1995. Vice President of SEI Investments Company since 1991.
JAMES R. FOGGO (DOB 02/14/66) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI Investments since 1998. Vice President
and Assistant Secretary of the Administrator and the Distributor since May 1999.
Associate, Paul Weiss, Rifkind, Wharton & Garrison (law firm), 1998. Associate,
Baker & McKenzie (law firm), 1995-1998. Associate, Battle Fowler L.L.P. (law
firm), 1993-1995.
LYNDA J. STRIEGEL (10/30/48) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of the Administrator and the Distributor since
1998. Senior Asset Management Counsel, Barnett Banks, Inc., 1997-1998. Partner,
Groom and Nordberg, Chartered, 1996-1997. Associate General Counsel, Riggs Bank,
N.A., 1991-1995.
KEVIN P. ROBINS (4/15/61) - Vice President, Assistant Secretary - Senior Vice
President & General Counsel of SEI, the Administrator and the Distributor since
1994.
RICHARD W. GRANT (10/25/45) - Secretary -1701 Market Street, Philadelphia,
Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law firm); Counsel to
the Trust, Administrator and Distributor, since 1989.
B-19
<PAGE>
JOHN H. GRADY, JR. (6/1/61) - Assistant Secretary - 1701 Market Street,
Philadelphia, Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law
firm) since 1995, counsel to the Trust, Administrator and Distributor.
- --------------------
* Messrs. Looney, Goodrum, McNair, and Cammack may be deemed to be
"interested persons" of the Trust as defined in the Investment Company Act
of 1940.
The Trustees and officers of the Trust own, in the aggregate, less than 1% of
the outstanding shares of the Trust.
For the fiscal year ended December 31, 1998, the Trust paid the following
amounts of 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 98 EXPENSES RETIREMENT FOR FYE 98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William H. Cammack, Trustee $0 $0 $0 $ 0 for services on 2 boards
- ------------------------------------------------------------------------------------------------------------------------------
T. Gordy Germany, Trustee $17,500 $0 $0 $17,500 for services on 2
boards
- ------------------------------------------------------------------------------------------------------------------------------
F. Wendell Gooch, Trustee $17,500 $0 $0 $17,500 for services on 2
boards
- ------------------------------------------------------------------------------------------------------------------------------
Daniel S. Goodrum, Trustee $16,000 $0 $0 $16,000 for services on 2
boards
- ------------------------------------------------------------------------------------------------------------------------------
Wilton Looney, Trustee $19,000 $0 $0 $19,000 for services on 2
boards
- ------------------------------------------------------------------------------------------------------------------------------
Champney McNair, Trustee $16,000 $0 $0 $16,000 for services on 2
boards
- ------------------------------------------------------------------------------------------------------------------------------
Bernard F. Sliger, Trustee $17,500 $0 $0 $17,500 for services on 2
boards
- ------------------------------------------------------------------------------------------------------------------------------
Jonathan T. Walton, Trustee $10,500 $0 $0 $10,500 for services on 2
boards
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPUTATION OF YIELD
A Fund may advertise 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
B-20
<PAGE>
as a percentage of the investment. In particular, yield will be calculated
according to the following formula:
Yield = 2[(a-b/cd + 1)TO THE POWER OF 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 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)TO THE POWER OF 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.
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 Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
It is currently the Trust's policy to pay for all redemptions in cash. The Trust
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of readily marketable securities held
by the 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 New York Stock Exchange ("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 Adviser, the Administrator and/or the Custodian are not open
for business.
B-21
<PAGE>
NET ASSET VALUE--PRICING OF PORTFOLIO SECURITIES
The net asset value per share of the Funds is determined at the close of regular
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
B-22
<PAGE>
outstanding voting securities of such issuer; and (iii) 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 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 regulated
investment companies.
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 stock or securities. Tax conventions between
certain countries and the United States may reduce or eliminate these taxes.
Foreign countries generally do not impose taxes on capital gains with respect to
investments by foreign investors.
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 stock or
securities of foreign corporations, the Fund will be eligible to, and will, file
an election with the Internal Revenue Service that will enable Shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to any
foreign and U.S. possessions income taxes paid by the Fund. Pursuant to the
election, the Fund will treat those taxes as dividends paid to its Shareholders.
Each Shareholder will be required to include a proportionate share of those
taxes in gross income as income received from a foreign source and must treat
the amount so included as if the Shareholder had paid the foreign tax directly.
The Shareholder may then either deduct the taxes deemed paid by him or her in
computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against the Shareholders'
Federal income tax. In no
B-23
<PAGE>
event shall a Shareholder be allowed a foreign tax credit with respect to shares
in the Fund if such shares are held by the Shareholder for 15 days or less
during the 30-day period beginning on the date which is 15 days before the date
on which such shares become ex-dividend with respect to such dividend. If a Fund
makes the election, the Fund will report annually to its Shareholders the
respective amounts per share of the Fund's income from sources within, and taxes
paid to, foreign countries and U.S. possessions.
The Fund's transactions in foreign currencies and forward foreign currency
contracts will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (I.E.,
may effect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to
Shareholders. These provisions also may require the Fund to mark-to-market
certain types of the positions in its portfolio (I.E., treat them as if they
were closed out) which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the 90%
and 98% distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions, will make the appropriate tax elections, and will
make the appropriate entries in the books and records when it acquires any
foreign currency or forward foreign currency contract in order to mitigate the
effect of these rules and prevent disqualification of the Fund as a RIC and
minimize the imposition of income and excise taxes.
FUND TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Trustees, the Adviser 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 Adviser generally seeks reasonably competitive spreads or commissions, the
Trust will not necessarily be paying the lowest spread or commission available.
The money market securities in which the 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 Adviser
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Trust will primarily consist of dealer spreads
and underwriting commissions.
TRADING PRACTICES AND BROKERAGE
The Trust selects brokers or dealers to execute transactions for the purchase or
sale of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary
B-24
<PAGE>
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 Adviser, 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 Adviser in connection
with its investment decision-making process with respect to one or more funds
and accounts managed by it, and may not be used exclusively with respect to the
fund or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher
commissions may be paid to broker-dealers who provide brokerage and research
services than to broker-dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to broker-dealers
who provide such brokerage and research services, the Trust believes that the
commissions paid to such broker-dealers are not, in general, higher than
commissions that would be paid to broker-dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In addition, portfolio transactions which
generate commissions or their equivalent are directed to broker-dealers who
provide daily portfolio pricing services to the Trust. Subject to best price and
execution, commissions used for pricing may or may not be generated by the funds
receiving the pricing service.
The Adviser may place a combined order for two or more accounts or funds engaged
in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in a
manner deemed equitable to each account or fund. It is believed that the ability
of the accounts to participate in volume transactions will generally be
beneficial to the accounts and funds. Although it is recognized that, in some
cases, the joint execution of orders could adversely affect the price or volume
of the security that a particular account or the Funds may obtain, it is the
opinion of the Adviser and the Trust's Board of Trustees that the advantages of
combined orders outweigh the possible disadvantages of separate transactions.
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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 Adviser, both of which are
registered broker-dealers, for a commission in conformity with the 1940 Act, the
1934 Act and rules promulgated by the SEC. Under these provisions, the
Distributor or an affiliate of the Adviser is permitted to receive and retain
compensation for effecting portfolio transactions for the Trust on an exchange
if a written contract is in effect between the Distributor and the Trust
expressly permitting the Distributor or an affiliate of the Adviser to receive
and retain such compensation. These rules further require that commissions paid
to the Distributor by the Trust for exchange transactions not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." In addition, the Trust may direct commission business to one or more
designated broker dealers in connection with such broker-dealer's provision of
services to the Trust or payment of certain Trust expenses (E.G., custody,
pricing and professional fees). The Trustees, including those who are not
"interested persons" of the Trust, have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of the 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.
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LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisers, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with the Trust
unless it is determined in the manner provided in the Declaration of Trust that
they have not acted in good faith in the reasonable belief that their actions
were in the best interests of the Trust. However, nothing in the Declaration of
Trust shall protect or indemnify a Trustee against any liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
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